• 16th June 2017

    Economics

    Week in Perspective - 16 June 2017

    Market Roundup

    A further post-election fall in the value of the pound to below $1.27 helped limit losses for the FTSE 100 on Monday.

    The blue-chip index was marginally down as rating agency Moody’s warned that the indecisive election result was negative for the UK’s credit outlook.

    Johnson Matthey was the biggest gainer, up 2% on broker talk of a possible break-up.

    On Tuesday, Centrica fell 1.8% amid ongoing uncertainty about possible energy price caps while BAE Systems was down 1.1%. The FTSE 100 was off 0.2%.

    The blue-chip index lost another 0.4% on Wednesday on the back of falls for commodity stocks.

    And GKN was down 1.3% due to fears for US car demand.

    Weak official data for retail sales saw Next plunge 6.1% on Thursday.

    Other retailers were also down: Marks and Spencer dived 4.7% while Kingfisher was off 2.8%.

    Amid fears of economic slowdown, the more domestic focused FTSE 250 index lost 2.1%, its worst day in a year. The FTSE 100 was off 0.7%.

    British Airways owner IAG was down 3.4% after confirming it faces an £80m bill for its recent IT systems failure.

    UK shares were up in early trading on Friday.

    Company Focus:Ashtead

     

    Ashtead reported a 7% rise in full-year profits on Tuesday and surprised investors with a 22% dividend increase.

    The construction equipment hire firm announced a final dividend of 22.75p, taking the full-year payment to 27.5p.

    Pre-tax profits for the year ending April were £793.4m on revenues that were 10% up at nearly £3.2bn.

    Geoff Drabble, Ashtead chief executive, said: “The reported results were impacted favourably by weaker sterling but, with 13% growth in group rental revenue at constant exchange rates, we have good momentum.”

    The FTSE 100 group, which hires out diggers and tools, spent £1.1bn on capex last year and indicated it will spend a similar amount this financial year.

    Ashtead has benefited from the construction recovery in the US, which appears to be following a more sustainable path than in recent cycles. The American Rental Association has upped its growth expectations to 4.7% CAGR (compound annual growth rate) for 2016 to 2021.

    Economic Roundup

    A worrying picture of the UK economy was painted in news this week following the election.

    A survey of 700 members of the Institute of Directors (IoD) found 57% of respondents were quite or very pessimistic about the economy over the next year, with just 20% optimistic.

    The results were significantly worse than in May’s survey, when 37% of respondents were pessimistic and 34% were optimistic.

    “It’s hard to overstate what a dramatic impact the current political uncertainty is having on business leaders,” said Stephen Martin, IoD director general.

    On Tuesday the Office for National Statistics (ONS) reported a further rise in consumer inflation (CPI) to 2.9%. The headline CPI rate is now expected to top 3% later this year. The rise was attributed partly to steep increases in the cost of package holidays as well as computer games and equipment - which are usually imported.

    However, producer input inflation declined from 15.6% in April to 11.6% in May, with output price inflation steady at 3.6%.

    Capital Economics, a think tank, said: “This supports our view that the drop in the pound has fed through faster than expected - rather than by a larger amount.”

    “As a result we think CPI will peak at just above 3% this year…and is likely to drop back fairly quickly in 2018.”

    The ONS also reported that the real value of wages, taking into account inflation, is falling at the fastest pace in three years.

    Annual pay growth before inflation was just 2.1% in the three months to April compared to a year earlier. Excluding bonuses the figure was even lower at 1.7%. Economists fear the squeeze on household incomes will hit consumer spending.

    Retail sales were down by more than expected in May, according to the latest ONS data. Retail sales, excluding fuel, fell 1.6% last month after a 2.2% rise in April. Including fuel, the monthly decline was 1.2%. Year on year, sales were up 0.9% - the weakest growth in four years.

    Chris Williamson, economist at IHS Markit, said the economy faces an “inevitable slowdown” due to rising inflation, falling wages and weak spending.

    Meanwhile, interest rates in the US were increased by 0.25% to a range of 1% to 1.25%.

    And the Bank of England’s Monetary Policy Committee (MPC), in a surprisingly close vote of five to three, kept UK rates unchanged at 0.25%. The three dissenters wanted an immediate rate rise to counter surging inflation.

     

    Company announcements that caught our attention this week

    14/6/2017  Bellway House price data from the Halifax and Nationwide suggest that the property market is slowing. However, in a trading update covering February to the beginning of June, housebuilder Bellway sounded upbeat. The group is confident it will be able to report volume growth of around 10% for the current financial year. Coupled with guidance that its average selling price is about £260,000 (an increase of 2.7% over last year) pre-tax profits now look set to increase to about £547m. Despite increasing land investment, Bellway’s year-end net debt is expected to be less than £50m. The value of its order book has risen by 6% year on year to £900m. The expected gross margin on acquired land remains above historical industry norms.
         
    14/6/2017 BAT The weak pound is expected to boost first-half profits at British American Tobacco (BAT). In a trading update on Wednesday, the FTSE 100 company said it expects first-half earnings per share to benefit from a currency translation tailwind of 14%. First-half revenue has benefited from good pricing, it added. “We expect our market share to continue to grow, driven by the Global Drive Brands [Dunhill, Kent, Lucky Strike and Pall Mall],” it stated. Profit growth is likely to be weighted to the second half of the year because of the timing of shipments. Full-year volume is expected to outperform the market, which BAT forecasts will be down 4%.

       

    Key company diary dates

    Mon 19 June Bonmarche Holdings Final results
    Tue 20 June Wolseley Quarterly results
    Wed 21 June
    Hornby Final results
    Thu 22 June Chemring Group Interim results

    Economic highlights over the next week

    Wed 21 June Public sector borrowing
    The government borrowed £10.4bn to balance the books in April, according to Office for National Statistics figures. This was £1.2bn more than in April 2016 and the highest April borrowing figure since 2014.
       
    Thu 22 June
    CBI industrial trends survey
    The last industrial trends survey from the Confederation for British Industry (CBI) was the strongest since February 2015. The survey’s industrial orders balance rose to nine in May from four in April. A figure above zero indicates order volume is expected to increase.
       
    Fri 23 June Mortgage approvals The number of mortgages approved for house purchases fell to 40,750 in April, according to British Bankers Association (BBA) data. This was 0.3% lower than approval numbers in March and the lowest since November 2016.

    Index movements*

    Index Value % change
    FTSE 100 7,419.36
    -0.41
    FTSE 250 19,553.66
    -0.96
    AIM 962.33 -1.68
    Dow Jones 21,359.90 0.84
    S&P 500 2,432.46 -0.06
    Hang Seng 25,565.34 -1.91
    Nikkei 225 19,831.82 -0.39

    Currency movements*

    Currency Pair Value % change
    £:$ 1.28 -0.01
    £:€ 1.14 -0.01
    £:¥ 141.12 -0.01

    Best & worst performing sectors (rel. to FTSE 350)*

    Sector % Change
    Insurance 1.8
    Food & Beverages 1.7
    Oil & Gas 1.4
    Technology -1.5
    Retail -2.1
    Basic Resources -3.1

    Best & worst performing stocks*

     Company  % Change
     Smurfkit Kappa Group 7.5
    London Stock Exchange 6.2
    Direct Line 4.2
    Anglo American -6.3
    Fresnillo -6.4
    Next -7.2

     

    * Weekly movements up until close of business Thursday.

     

    Important Notes:

    Main source of information: Company Report and Accounts, Bloomberg

    The value of investments can fall and you may get back less than you invested. No investment is suitable in all cases and if you have any doubts as to an investment's suitability then you should contact us. We or a connected person may have positions in or options on the securities mentioned herein or may buy, sell or offer to make a purchase or sale of such securities from time to time. In addition we reserve the right to act as principal or agent with regard to the sale or purchase of any security mentioned in this document. For further information, please refer to our conflicts policy. If you invest in currencies other than your own, fluctuations in currency value will mean that the value of your investment will move independently of the underlying asset. The opinions expressed in this document are not necessarily the views held throughout Brewin Dolphin Ltd. The information contained in this document is believed to be reliable and accurate, but without further investigation cannot be warranted as to accuracy or completeness.

    Brewin Dolphin Ltd, a member of the London Stock Exchange, authorised and regulated by the Financial Conduct Authority. Registered office: 12 Smithfield Street London EC1A 9BD. Registered in England and Wales no 215876.

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