• 24th June 2016

    Economics

    Week in Perspective - 24 June 2016

    Market Roundup

    UK shares soared last Monday after polls showed the “Remain” camp taking a lead just days before the EU referendum. The FTSE 100 jumped by over 3% with financial stocks such as Hargreaves Lansdown and Lloyds reaping the benefits, as well as housing stocks including Taylor Wimpey and Barratt Developments. Some of these stocks had taken a pounding when the Leave camp had been stretching their lead in the polls. The FTSE 100 closed up over 3% and the pound also saw its best session since 2008, jumping over 2% against the US dollar to $1.47. 

    Tuesday saw another positive day as momentum continued ahead of Thursday’s vote, although the pound fell after another poll showed “Leave” edging ahead once again. Traders seemed to shrug off the news, however, and the FTSE 100 closed up marginally. In corporate news, Whitbread reported an improved sales number in the first quarter due to its Costa Coffee chain performing well. BHP Billiton announced it was aiming to cut another $600m in coal production costs by the end of the 2017 financial year. 

    Wednesday saw a final big push on markets ahead of the referendum, with hope and optimism helping drive financial stocks and miners up, pushing the benchmark FTSE 100 Index up by just over 0.5%. The optimism continued through Thursday as the voting in the EU referendum got under way, and the market had another strong day, rising over 1%. Royal Dutch Shell and Anglo American were among the biggest risers on the day. But AstraZeneca was slightly higher too after it relayed a decision about its FluMist influenza vaccine that is not going to be used this winter.

    As the result of the vote became clear on Friday morning, however, the FTSE 100 fell by nearly 7% in early trading and the pound fell to 30-year lows against the dollar. By 10am, the FTSE 100 had recovered some ground, and was 4.20% down compared to Thursday’s close. But, encouragingly, the index was still higher compared to the start of the week, thanks to some strong performances in the run up to Thursday’s vote. The pound, however, was still languishing, down nearly 10% against the US dollar, around 6.55% against the euro and down 6.5% compared to the Australian dollar.


    Company focus: Whitbread

    The hotel-to-coffee shop-to-restaurant group released a good trading update for the first quarter. A continued (expected) weak performance of Premier Inn was offset by better than expected trading at Costa, which benefitted from the diversification of its offer away from the high street and into other concession channels – such as self-service machines in Tesco stores. The UK hotel market over the past year has been weak. Previous years of a continued supply/demand imbalance allowed for strong pricing power and revenue growth. Supply has caught up with demand faster than expected due to a softer consumer environment and lower inbound tourism, particularly to London. As we’ve seen across the London hotel market, pricing performance has been weak in the aftermath of the terrorist attacks across Europe in the past year. 

    That said, group sales growth continues to impress thanks to the sustained roll-out programme of both Premier Inn and Costa. Total sales were up 8% year-on-year. While sentiment on the shares has been dampened over the last year as the halo of rapid and hugely profitable expansion fades, there is a highly cash generative underlying business model in place. This will give Whitbread the ability to throw off a significant amount of cash to shareholders should and when the estate expansion, and the capital this needs, slow.


    Economic Outlook

    The momentous decision by the UK to vote to leave the European Union, popularly known as Brexit, is a step into the unknown. At this stage the longer-term consequences for the markets, economy and British and European politics are difficult to predict. The country is likely to enter a long period of negotiation around the terms of the exit. 

    In the shorter term we can expect share, bond and currency markets to be extremely volatile – not just in the UK but globally. In the days leading up to the referendum, sterling and global stock markets strengthened in the mistaken belief that the UK would opt to remain in the EU. Now, as markets readjust to the new reality we can expect extreme turbulence in financial markets. 

    We know this might be a cause of concern for clients, though it is important to recognise that the volatility will not last and markets will find their feet again. In the meantime, our investment portfolios are well placed to weather the short-term volatility. We will also be seeking out opportunities thrown up by the turbulence and will be quick to react when growth opportunities emerge.

    UK government borrowing was higher than predicted in May according to the Office for National Statistics (ONS). Public sector net borrowing, excluding taxpayer-backed banks, was £9.7bn, higher than the £9.5bn forecast by economists. The figure follows from an April estimate that was revised upwards, from an initial forecast of £7.2bn to £8.2bn – a potentially worrying start to the year for Chancellor George Osborne after borrowing targets were missed last year. 

    Manufacturing in the UK continued to show signs of stability according to the latest CBI Industrial Trends survey. The order book balance rose to -2 in the three months to June, up from -8 in May and maintaining a trend of better figures since a February low of -17.  The survey of 482 manufacturers reported that total order books strength was led by the food and drink sector, and motor vehicles & transport. Output orders in particular gave manufacturers reason to cheer: 30% of businesses reported a rise in output volumes, and 19% a decrease, giving a balance of +11%. “While British manufacturers had a tricky start to the year, there are more positive signs as output and demand stabilise,” said Rain Newton-Smith, CBI Chief Economist.

    Eurozone consumer confidence unexpectedly dipped in June, falling to -7.3 from -7 in May. While economists had been expecting no change, the mood may have been affected by the EU referendum and the knock-on effect that a Brexit may have across the region. The survey is reported by the European Commission and measures the level of optimism that people in the euro area have about the economy – focusing on the current economic and financial situation as well as on expected developments.

    Meanwhile, the economic mood seemed to be more positive in the US, reflected in the buoyant state of the US housing market. According to the National Association of Realtors, sales of existing single-family homes climbed by 1.8% month-on-month, an annualised rate of 5.53m and the best level since February 2007. While sales of new homes in the US slipped 6% in May from April, the pace was still the second best for a month since the recession ended. Sales were up 551,000 in May said the Commerce Department, following on from a soaring 12.3% rise the previous month.


    Company announcements that caught our attention this week

    Date Company Comment
    22/06/2016 H&M The retail clothing giant reported a mixed set of first half results (to 31 May). Group sales increased by 7% in local currency in the first half of the year. Management stated that the sales increase in March and April was “significantly” below plan. Markdowns increased by 0.9% in the second quarter of 2016 compared to the second quarter in 2015 as spring clothes sold less well than expected due to the unfavourable weather. Furthermore, profitability was also negatively affected by a strong US dollar. Management reiterated its expansion plan: H&M plans to open 425 (net) new stores in 2016. It is also planning online launches in Canada and South Korea, taking the total number of countries where it offers e-commerce to 34. However, we believe sales will continue to disappoint due to the non-differentiated offer and the increase in inventory indicates further discounting is likely.
         
    22/06/2016 Tesco The nation’s biggest supermarket reported a set of first-quarter sales in line with consensus expectations. Like-for-like sales increased by 0.3% in the UK and Republic of Ireland. All other regions were also positive and group sales were up 0.9% (on a like-for-like basis). As we have seen in the rest of the sector, Tesco continues to cut prices focusing on “Every Day Low Prices” and as a result, the cost of a weekly shop is now 6% lower than it was in September 2014. No comment was made on profitability, although management stated that it is “comfortable” with the consensus view of earnings before interest and taxes of £1,176m vs £944m last year which would indicate an improvement.

       

    Key company diary dates

    Tue 28 June Ocado Interims
    Tue 28 June Carpetright Finals
    Wed 29 June  Dixons Carphone Finals
    Wed 29 June Stagecoach Group Finals
    Thu 30 June Serco Trading announcement

    Economic highlights over the next week

    Tue 28 June US GDP growth rate  According to the last estimate, the US economy grew at an annualised 0.8% on quarter in the first three months of this year. This was better than the 0.5% rise first predicted and should remain unchanged in this final estimate of first-quarter growth.
         
    Thu 30 June UK consumer confidence  Consumer confidence in the UK is measured by market research firm GfK and rose to -1 in May from -3 in April. While the index hit +7 in June and August of 2015 it may dip slightly in June due to the effects of the EU referendum. But is unlikely to plunge to July 2008’s record low of -39. 
         
    Thu 30 June UK GDP growth rate  Earlier estimates projected that UK growth in the first quarter of 2016 fell to 0.4% from 0.6% in the last quarter of 2015. With services sector activity tepid, and accounting for almost 80% of total GDP, this final estimate is not expected to challenge those readings.

    Index movements*

    Index Value % change
    FTSE 100 6,338.10 6.51
    FTSE 250 17,333.51 8.12
    AIM 726.92 2.49
    Dow Jones 18,011.07 1.57
    S&P 500 2,113.32

    1.70

    Hang Seng 20,868.34 4.14
    Nikkei 225 16,238.35 5.21

    Currency movements*

    Currency Pair Value % change
    £:$ 1.48 5.26
    £:€ 1.30 3.37
    £:¥ 156.52 7.06

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

    Sector % change
    Insurance 5.18
    Banks 4.90
    Financial Services 2.07
    Royal Bank Of Scotland Group 0.17
    Paddy Power Betfair 0.00
    Randgold Resources -0.07

    Best & worst performing stocks*

    Company % change
    Wolseley -0.75
    Anglo American -1.35
    WPP -1.92
    Aberdeen Asset Man. -2.52
    3i Group
    -2.67
    Admiral Group -3.00

    * 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. Past performance is not a guide to future performance and performance is shown before charges, which would reduce the illustrated performance. 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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