Recruitment companies can be seen as bellwethers for the health of the global economy. Hiring activity is predicated on business sentiment, which feeds off the wider macroeconomic backdrop. Last year, the global stage was dominated by US-China trade war sabre rattling, anti-government protests in Hong Kong and the usual perpetual Brexit uncertainty. These macroeconomic anxieties culminated in profit warnings from both Robert Walters (RWA) and PageGroup (PAGE) in mid October. With a UK election, strikes in France and Australian bushfires subsequently coming along, these exacerbated already challenging trading conditions.
The last three months of 2019 saw Robert Walters’ net fee income growth swing negative, registering a 7 per cent constant currency drop to £94.2m. This came amid a sharp deterioration in the UK. Meanwhile, PageGroup saw a 0.4 per cent decline in gross profit to £206m in the same period, down from 2.1 per cent growth just three months earlier. Hays (HAS) was forced to issue its own warning in early January. After experiencing “markedly” slower growth in December, the group now expects operating profit for the first half of its 2020 financial year to come in at £100m, falling short of the £124m it posted a year earlier. SThree (STEM) has been a bright spot in the industry, pulling in a record £60m of adjusted operating profit in the 12 months to 30 November.
With all the recruiters having updated on how 2019 ended up, it’s worth taking a tour of some of their key markets, exploring what could lie ahead in 2020.
German recovery looking precarious
According to Germany’s Statistics Office, gross domestic product (GDP) grew by just 0.6 per cent in 2019, its lowest level since 2013 and well below the 10-year average. “The sentiment is that the golden economy is getting slightly tarnished,” says Robert Walters, chief executive of the eponymous company, and the economic slowdown has naturally had an impact on hiring activity.
Hays, for which Germany is its largest market, saw like-for-like net fees drop by 9 per cent in the three months to 31 December. As clients cut costs, the group came up against subdued business confidence across multiple sectors, in particular manufacturing and the automotive industry. Temporary and contracting recruitment account for more than four-fifths of Hays' net fees in Germany and a 10 per cent decline came amid lower assignment volumes and average hours worked per assignment.
It was not all bad news – Page saw net fee income from Germany increase by 16 per cent. Chief executive Steve Ingham says the group has benefited from its late entry to contract recruitment in the country, meaning it is more focused on resilient small- and medium-sized enterprises (SMEs) rather than large industrial clients. “Our poor timing has almost helped us and, as a result, we are taking market share.” SThree has benefited from a similar SME-centred strategy, compounded by its speciality in science, technology, engineering and mathematics (STEM) recruitment. Net fee income from the region rose by 9 per cent in 2019. The group notes that there is a shortage of specialist labour in Germany and expects supportive trading conditions in 2020.
Those hoping for a rally in the German economy in 2020 might be left disappointed. Business sentiment showed an unexpected fall in January, with the ifo Institute’s monthly business climate index dropping from 96.3 to 95.9, its first fall since August. This indicates that, overall, companies are feeling more pessimistic about the coming months. The picture is mixed, but there are signs that manufacturing may be stabilising. Companies in this industry report being more satisfied with their current situation than they have been since early 2017. But this renewed sense of optimism may be dashed as the US threatens to raise tariffs on cars imported from the EU. Indeed, a separate ifo survey has shown there is growing scepticism in the automotive industry that international orders will improve. While President Trump’s latest threat might be bluster, it remains to be seen whether the ‘phase one’ trade deal will produce any tangible benefits. Meanwhile, business confidence in Germany’s services sector fell sharply in January as companies reported feeling more pessimistic about the next six months.
It is still very early in 2020 and growth could yet pick up. But Clemens Fuest, president of the ifo Institute, says the data points to the German economy “starting the year in a cautious mood”.
A clearer path emerging in the UK
Brexit and election uncertainty has weighed on client and candidate confidence in the UK and all the listed recruiters took a hit in 2019. Alan Bannatyne, chief financial officer of Robert Walters, says that “missing the first Brexit deadline at the end of quarter one was bad. To then miss it again, really sapped the confidence out of business in quarter four”. The slowdown in Robert Walters' domestic business accelerated in the last three months of 2019 – net fee income from the UK plunged by almost a quarter to £20.7m, surpassing the 11 per cent decline three months earlier.
Page saw a less severe 4.8 per cent contraction to £31.9m. Gross profit from the ‘Personnel’ business, which focuses on clerical staff, dipped by 4 per cent amid low client confidence. Over at Michael Page, which concentrates on qualified professionals, lower senior candidate confidence drove a 5 per cent decline. Meanwhile, Hays saw particular paralysis in private sector hiring activity, which pushed net fees from the UK and Ireland down 4 per cent on a like-for-like basis in the second quarter. For SThree, the domestic decline across 2019 was worse at 9 per cent, with net fees from permanent hires in banking and finance plunging by 32 per cent.
A weak UK picture in 2019 was not unexpected, but with the parliamentary deadlock now broken, the Brexit limbo could soon be coming to an end. A post-election ‘Boris bounce’ could unlock spending and prompt an upswing in hiring activity. Deloitte’s most recent quarterly survey of UK chief financial officers (CFOs) suggested that there has been an “unprecedented” rise in business confidence post-election. Feeling more optimistic about their companies’ future prospects, 27 per cent of CFOs anticipate that hiring will increase this year. Brexit has also fallen to third on their list of concerns, having consistently ranked highest since the referendum.
However, the rebound in sentiment should not be overstated – it has seemingly yet to translate into significant action. In their latest report on the UK jobs market, KPMG and the Recruitment and Employment Confederation (REC) found that hiring conditions did improve slightly at end 2019. Permanent staff appointments rose for the first time in a year, albeit modestly, as some companies moved forward with previously delayed hiring plans. “With a new government in place and the path ahead looking more predictable, some businesses have decided that they have waited long enough,” says Neil Carberry, chief executive of REC. There hasn’t been a vast progression. Demand for staff rose at a “sluggish” pace thanks to both Brexit uncertainty and an already tight labour market. Candidate confidence to switch jobs has remained low, with the number of people available for new roles continuing to fall sharply. James Stewart, Vice chair at KPMG, cautions that “lingering uncertainty around the Brexit deal to be secured will continue to weigh on employers’ decision making… as well as job-seekers’ desires to seek new opportunities”.
One step forward, two steps back in Asia?
The Asian hiring market has been overshadowed by trade war uncertainties hitting China and anti-government protests in Hong Kong. Robert Walters has significant exposure to Hong Kong, deriving 10 per cent of its overall net fee income from the territory. Disruption there saw a slowdown across a number of financial services clients and caused net fees from the Asia Pacific region to dip 4 per cent in the fourth quarter. This compares with 3 per cent growth three months earlier. Headwinds in Hong Kong served to offset a more robust performance from its largest market in the region, Japan, where there is high demand for bilingual professionals.
Asia Pacific is Page’s second-largest region and gross profits fell by 7.9 per cent at constant currencies in the three months to 31 December. Mainland China registered a 7 per cent drop during the period, although Mr Ingham says this is more down to multinational companies deferring investment in new hires than lower demand from local Chinese clients. Page is the market leader in Hong Kong, where gross profits plunged by 27 per cent. Hays was similarly affected, with net fees from China and Hong Kong falling by 9 per cent and 10 per cent, respectively, at the end of last year.
SThree has escaped the brunt of these events with minimal exposure to Hong Kong and no footprint in China, although arguably its smaller presence there will be detrimental when the economic cycle eventually picks up.
Carrying over from the end of 2019, there was a feeling at the beginning of the year that US-China relations were on somewhat better footing, laying the groundwork for an improved global picture in 2020. The main development was the signing of a ‘phase one’ deal. While this détente is a boost for sentiment, its tangible benefits are perhaps more questionable. There could also be further trouble ahead as rhetoric ramps up regarding a new trade war front with Europe. That may perhaps pale in comparison to the impact of the burgeoning coronavirus epidemic that is rapidly spreading across China and beyond. The outbreak could potentially have a significant impact on the Chinese economy, providing a further setback to hiring activity in the region. Depending on how events pan out, it could be a short and sharp hit to the recruiters or something more prolonged. At the moment, it is simply too early to tell, although the initial reaction might well prove to be overdone.
Watch and wait or take a punt?
The key question for investors is whether this sector is just one to observe – a useful barometer of wider sentiment – or whether there are opportunities on offer. By and large, the recruiters’ shares were punished over the course of 2019 in the face of global uncertainty, picking up towards the end of the year. The scope for greater upside depends on the macroeconomic risks receding. While Brexit is a key factor, the trade war is viewed as a more pivotal catalyst. “In terms of Brexit we are still on the journey,” says Mr Walters. “The trade war affects everything – it is up to Donald.” For those more hesitant given the level of uncertainty involved, SThree could make for a solid play, having held up better than peers. Its STEM focus offers greater insulation from downturns in the cycle, but it is still well positioned to benefit should the backdrop improve.
