You may have seen the news that Apple had $200bn wiped off the value of its stock on Wednesday/Thursday last week.
It followed reports China had banned government workers from using iPhones, and that state companies and other state-backed organisations would be next.
Roughly $1 in every $5 of Apple revenue comes from China, so a market reaction was to be expected. However, a $200bn drop on a near-$3trn company was a fairly modest decline of 6.4%.
Spare a thought for investors in two FTSE firms, whose shares slumped 9.4% and 17.9% at the same time as Apple was making headlines.
The UK stocks (I’ll get to them shortly) were hit by a domestic event entirely unrelated to the US-China tech war. But they and Apple got me thinking about risk.
Geopolitical
Like the US-China tech war, Russia’s invasion of Ukraine is an example of geopolitical risk. Polymetal International was one notable victim of it.
The company was listed on the London Stock Exchange at £9.20 a share in 2011, and reached a high of around £20 in 2020, cementing its status as the FTSE 100‘s premier gold miner.
However, its mines are in Russia and Kazakhstan. The shares collapsed when Russian tanks rolled into Ukraine. They were trading in the £2 region when they were suspended and delisted from the London Stock Exchange last month.
Warning
In its London listing prospectus, Polymetal had detailed the many risks related to operating in Russia, including a government that at times acts arbitrarily and sometimes outside the law.
It warned that Polymetal “is suitable only for sophisticated investors who fully appreciate the significance of the risks involved.”
Just because a company has FTSE 100 blue-chip status, it isn’t necessarily ‘safe’ for novice investors.
Risk assessment
UK companies are required by the Financial Reporting Council’s code to provide shareholders with ongoing assessments of ‘principal risks and uncertainties’ in their annual reports.
As an example, easyJet introduced “epidemics/pandemics” as a principal risk into its 2010 report.
The world had just seen its most severe pandemic event in decades (H1N1 swine flu) — subsequently to be dwarfed by Covid-19.
Ironically, easyJet dropped epidemics/pandemics from its principal risks the very year before Covid struck. Companies’ risk assessments aren’t always bang on.
CMA
The UK firms whose share prices plunged last Thursday appear to have been blindsided by the event that hit them.
One of the companies was FTSE 250-listed Pets At Home, the owner of retail stores, pet grooming salons, and vet practices. This stock dropped 9.4%.
The other was CVS Group, a pure-play vet company. It’s a top 10 stock on the FTSE AIM market, and its shares plummeted 17.9%.
The trigger for the falls was an announcement by the UK’s powerful Competition and Markets Authority (CMA) that it was launching an investigation into competition, prices and practices in the veterinary services market
Didn’t see it coming
CVS Group had intensive contact with the CMA as recently as last year. Under pressure from the regulator, it sold a vet chain it had recently acquired. And this wasn’t the only M&A activity in the sector the regulator intervened in.
At the time, CVS said it was disappointed by the CMA’s view on its acquisition, but took solace from clear guidelines on how the regulator assesses local competition in veterinary care.
Having experienced the CMA’s rigorous and effective policing of the market at first hand, I don’t think CVS can be blamed for failing to see the launch of a wholesale investigation of the sector as a principal risk. Pets At Home didn’t identify it either.
Ignore risk?
A major war on European soil that probably most of us had imagined would never happen again after World War II.
A pandemic event on a scale not seen for 100 years.
A butterfly effect that can hit companies out of the blue, depending on how the CMA flaps its wings in an office in London.
Should we just ignore risk and hope for the best?
Risk/reward
I wouldn’t get too hung up on risk.
Nevertheless, the principal risks and uncertainties section in a company’s annual report often provides useful insights into a business’s lower impact but higher probability risks.
These enable a more informed assessment of the risk/reward balance on offer at the prevailing stock price.
I’ll aim to give you some pointers on the kinds of risk I’m talking about in a future article — when I’m not distracted by a new development in the US-China tech war, a new Covid-19 variant, and a new CMA investigation!
