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Hays caught up in wider sell-off

The group was two percentage points behind gross profit growth expectations, but wider market fears led to a large share price drop
October 18, 2018

Investors in recruitment companies, accustomed to a seemingly endless stream of positive updates on the jobs market, received a shock last week, when signs of slowing growth at Hays (HAS) prompted a sell-off, which also had a negative bearing on share prices for industry rivals Robert Walters (RWA) and PageGroup (PAGE).

IC TIP: Buy at 160p

Hays’ share price dropped 12 per cent following a broadly positive first-quarter trading update detailing overall gross profit growth of 9 per cent. The group achieved record performances in 10 of its regions, and net cash was up 33 per cent on the same point last year. Solid enough on the face of it, but the fact that profit growth fell short of consensus estimates didn't go unnoticed.

The market reaction was probably exacerbated by the timing of the announcement, unfortunate though it may have been. As analyst Barclays Equity Research notes, 11 October was a “bad day for bad news”. A rise in US benchmark 10-year bonds narrowed the equity risk premium, prompting a global sell-off in equities as investors took flight from risk assets. Rising interest rates eventually translate to a reduction in aggregate demand though the global economy – a clear negative for the jobs market. Closer to home, we're starting to witness the first signs of real wage growth; great for workers, less so for employers. 

Recruiters are seen as a bellwether of the broader economy. Paul Venables, finance director at Hays, maintains it is too early to tell whether the market reaction was bound up with a short-term correction or whether it will prefigure a sustained global sell-off in risk assets. And there's obviously a disconnect between equity markets and the real-world economy. “Our clients are confident and still hiring,” he said. The group increased headcount by 5 per cent in the period, while Page and Robert Walters saw increases of 10 per cent and 4 per cent, respectively.

The challenge facing the recruiters is that they often have relatively little visibility on forward earnings, typically only having an idea of business three to five weeks into the future. However, analyst Liberum said Hays’ slip in performance was “not a sign of things to come”. Jeremy Podger, global equities portfolio manager at Fidelity, said concerns over the market were “premature”. He added, however, that: “Going forward, we will be worrying about the third phase of the China tariffs."