Conservatives win large majority
Garry White, Chief Investment Commentator, looks at the market-moving events that have shaped equity markets last week (9 – 13 December 2019).
A convincing victory for the Conservative Party in the UK general election provided a fillip for UK shares, while potential progress in trade negotiations between the US and China was positive for many overseas markets.
The FTSE 100 was up 3.4% over the week by mid-session on Friday, with the more domestically-orientated midcap FTSE 250 up 4.2% to a record high.
UK general election
Voters put their faith in Boris Johnson as leave-favouring voters coalesced around the Conservative Party mantra of “get Brexit done”. Labour was handed a crushing defeat as they lost former strongholds in the North of England, the Midlands and Wales, and leader Jeremy Corbyn faces pressure to quit.
It was the largest Conservative majority since 1987, partly as a result of the ‘remain’ vote being split between Labour and the Liberal Democrats in many constituencies. The Lib Dems failed to improve their overall number of MPs and leader Jo Swinson, who lost her seat, resigned as leader of her party. The main other winner overnight was the Scottish National Party. It won more than three-quarters of the Scottish seats, paving the way for renewed calls for another independence referendum.
The Conservative majority removes some political uncertainty as it effectively puts an end to the argument about whether the UK should change its mind about leaving the EU. In all likelihood, the UK now looks set to formally leave the EU on 31 January 2020. Even though uncertainty remains over upcoming UK-EU negotiations on the future relationship and the shape of any free-trade agreement, the election result could be an important first step towards greater clarification.
Although a Conservative majority was widely seen as the most likely outcome ahead of the polls, the initial market reaction was significant – largely due to the margin of the victory and that the breathing space the Prime Minister now enjoys. He should, ultimately, be in a position of flexibility in terms of the transitional timetable for the UK’s departure from the EU, reducing the risk of a ‘no-deal’ Brexit.
In addition, the next Budget, expected in February, could be 'fiscally loose', offering heavy spending plans in areas such as infrastructure, and therefore stimulatory for the domestic economy.
The pound rallied more than 2% versus the dollar overnight to $1.34, the highest level since May 2018. There were upward moves, some in double digits, in UK domestic shares including housebuilders and banks. Meanwhile, utilities climbed as lingering unease over potential price controls and nationalisation under a Labour-led government evaporated.
Many larger companies saw a muted reaction with notable overseas earners such as GlaxoSmithKline and Diageo falling because of the currency move. For big dollar earners, progress on a phase one US-China trade deal is likely to be more important than UK domestic matters.
The 15 December deadline when the US is due to impose another round of tariffs on Chinese goods is fast approaching. However, Donald Trump tweeted that the administration was “getting VERY close to a BIG DEAL with China” and reports suggest an offer to roll back some tariffs had been made. This caused US markets to hit another record and Asian markets saw gains. The round of tariffs – on an estimated $156bn worth of annual Chinese imports – will fall on a wide range of consumer goods, heightening the stakes. The list of affected products includes smartphones, tablets, make-up brushes, children's books and clothing.
The US, Mexico and Canada finalised a trade deal that will replace the 25-year-old North American Free Trade Agreement (Nafta). Representatives from the three countries signed the pact in Mexico. They met hours after Democrats in Congress said they would support the deal after the White House agreed to strengthen the labour and environmental rules.
UK GDP was flat in the three months ending October, the Office for National Statistics (ONS) said. There were increases across the services sector, offset by falls in manufacturing with factories continuing the weak performance seen since April. The ONS also reported a 1.3% drop in industrial production in the 12 months ending October, and a 2.1% drop in construction output in the same period.
The US Federal Reserve kept interest rates unchanged, as expected, and its “dot plot” of individual members’ future projections indicated, on balance, no rate hike in 2020. John Redwood takes a look at inflation and the markets here.
The European Central Bank (ECB) has left its key interest rate benchmarks and stimulus programs unchanged. The decision is the ECB's first for new president Christine Lagarde. As falling global car sales prove a major problem for the European economy, Christine Lagarde starts her tenure as head of the European Central Bank. What lies in store? John Redwood takes a look here.
Soaring pork prices are stoking inflation in China. A 110.2% increase in the price of pork led to a further rise in China’s consumer prices in November, as African swine fever continued to hit the country’s pig population. The consumer price index rose to 4.5% from a year earlier, up from 3.8% in October.
US Democratic Representatives announced impeachment charges against President Donald Trump, making him the fourth American president to face a formal effort to remove him from office. The Democratic-controlled House is almost certain to vote to impeach the president as soon as next week, setting up a trial in the Republican-led Senate early next year. However, at least 20 Senate Republicans would have to vote to remove him from office, and none so far have indicated they are considering such a move. However, the Senate trial will occur shortly before the presidential election kicks off with primaries in Iowa and New Hampshire.
The US will impose fresh sanctions on Iran’s biggest shipping group, IRISL, and its largest airline, Mahan Air, for allegedly helping Tehran to develop ballistic missiles.
An international panel of experts hired to advise Hong Kong's police watchdog in its investigation of allegations of police misconduct during huge pro-democracy protests have quit. The move came a month after a leaked statement from the group revealed they felt the city's police watchdog did not have the necessary powers to carry out a proper investigation.
Fashion retailer Ted Baker issued its third profit warning of the year, scrapped its dividend and announced the immediate departure of its chairman and chief executive. Profits this year are now expected to be just £5m “with a potential outcome of up to £10m dependent on Christmas trading and final year-end review”. Last year, pre-tax profits were £50.9m.
Costain shares plummeted after it issued its second profit warning of the year. The reduction in guidance followed an arbitration case over a Welsh motorway project. The ruling found the company shared responsibility for design information on the A465 road project with the Welsh government, a partial reversal of a previous decision. There had been design issues with the road with both sides blaming each other.
Power control component maker XP Power warned it had experienced some short-term disruption to shipments in the third quarter and annual revenues and adjusted profit will now be below market consensus.
Convenience store operator McColl’s warned that adjusted earnings for the year would be "marginally" below expectations, as the second half was hit by unseasonable weather and weaker consumer confidence.
Aim-listed home safety products supplier FireAngel warned that full-year revenues will be below previous market expectations, dragging the group to a larger annual loss.
This week, M&G announced a suspension in dealing in its M&G Property Portfolio Fund. The move echoes the series of suspensions in ‘bricks and mortar’ property funds in the aftermath of the EU referendum in 2016, when investors tried to withdraw money faster than the funds’ managers were able to dispose of assets. Rob Morgan looks at the issue here.
Edinburgh Investment Trust fired Invesco stock picker Mark Barnett as its manager, in a further blow to the former Neil Woodford protégé. The board of Edinburgh Investment Trust said it was sacking Mr Barnett over prolonged investment underperformance caused by a number of stock-specific issues in his portfolio.
Saudi Arabia’s Aramco's shares rose sharply on its debut in Riyadh, rising 10% above the IPO price on its first day of trading. Interestingly – or rather tellingly – the Saudi government itself invested into the IPO, taking 13.2% of the shares allocated to the institutional tranche. This would have cost the Saudi government institutions about $2bn. This means it is possible that the Saudi government will end up as the largest single investor in its own IPO. Its valuation hit the $2 trillion level initially demanded by Saudi’s de facto leader Mohammed bin Salman on its second day of trading.
Another SoftBank-backed start-up slashed its valuation ahead of an IPO. One Connect, the financial services unit of Chinese insurance giant Ping An, downsized its public offering in the US. The company reduced the number of shares on offer and cut the price range to $9 to $10 per share, according to a SEC filing. It now wants to raise up to $260m, almost half of the original $504m originally hoped.
Amazon is reportedly suing the US government, claiming that US President Donald Trump's "personal vendetta" against it prevented the internet giant from winning a $10bn contract to provide cloud computing to the Pentagon.
A multi-million-pound investment by Amazon in the UK takeaway delivery group Deliveroo could leave customers, restaurants and grocers facing higher prices and lower quality services, according to the Competition and Markets Authority (CMA). The two companies have five days to come up with proposals to counter the concerns or potentially face an in-depth investigation that could take six months.
IT infrastructure group Computacenter saw its shares surge after management said that results for 2019 would be "well ahead" of current market expectations in terms of profitability and earnings per share.
Huawei has now produced a phone with no US components. Garry White argues that the East-West split in technology is starting to become visible here.
US oil major Chevron will write down as much as $11bn of assets in the fourth quarter, more than half of it from its Appalachia natural gas assets, after it changed its assumptions about long-term energy prices. The shale boom in the US resulted in a plunge in natural gas prices, which may lead to many reservoirs becoming uncommercial, stranded assets. The group also said it will keep its 2020 capital budget at $20bn, the third consecutive year it hasn’t increased spending.
Shares in Tullow Oil slumped to a 20-year low after the company surprised investors by slashing its production forecast, scrapping its dividend and announcing that its chief executive and exploration director had left.
The US Army plans to fund construction of rare earth metals processing facilities, part of an urgent push by Washington to secure domestic supply of the minerals used to make military weapons and electronics, according to a government document seen by Reuters. This is the first investment into commercial scale rare earths mining by the US military since the Manhattan Project built the first atomic bomb in World War Two.
Shares in M&C Saatchi tumbled again as a boardroom bloodbath followed last week’s profit warning. Founder Lord Maurice Saatchi announced that he was stepping down as executive director and another three directors resigned from the board.
Airlines & travel
Airline profits are on course to fall faster than expected in 2019, as trade wars hit global commerce and broader confidence, according to trade body the International Air Transport Association (IATA). Cutting its full-year net profit forecast to $25.9bn, a 5.1% decline from 2018, IATA said an improvement in 2020 was contingent on a “truce” in global trade disputes. In June it had forecast $28bn in industry profits this year.
The US House of Representatives started an inquiry into the Boeing 737 Max plane, which has been grounded since March after two crashes. There was quite a revelation on the first day of the hearing after the Federal Aviation Administration (FAA) revealed it had conducted its own analysis after the first crash and concluded that it was more likely to crash than previous models of the 737 – and yet the plane continued to fly. The FAA will now establish a new division that aims to improve aircraft certification, as the agency is under increasing scrutiny for approving the jet.
Tui admitted the grounding of its fleet of Boeing 737 Max planes could cost up to €400m next year if it does not return to the skies by April. The world’s biggest tour operator said that if the global ban on the jet lasts beyond February next year it will not have time to get its fleet ready to fly from April for the summer season.
Total UK grocery sales growth slowed to 0.5% for the 12 weeks to 1 December 2019, according to market research group Kantar Worldpanel, as shoppers have been delaying their Christmas preparations. All four big supermarket groups – Tesco, Wm Morrison, J Sainsbury and Walmart’s Asda – lost market share and saw their sales decline, while discounters Lidl and Aldi saw sales rise by 9.3% and 6.2% year-on-year, and the Co-op achieved sales growth of 3.6%. Ocado shares benefitted from the analysis, as the data showed it continued to be the fastest-growing grocer, with sales in the latest 12-week period up 13.7% year-on-year.
Superdry founder Julian Dunkerton said he was "pleased with the progress" at the fashion retailer, despite swinging to a £4.2m interim loss. Sales dropped 11% as the company moved away from discounting and focussed on full-price sales to improve the brand’s positioning. Mr Dunkerton said reviving Superdry would "take two to three years" and vowed to stay at the company until 2021. He returned to the company in April after a lengthy campaign against the previous management.
Mothercare posted rising losses in the first half of the year. The baby-wear retailer also saw net debt rise to £24.5m, representing a 14.4% increase year-on-year. Last month, Mothercare appointed administrators for its 79 UK stores after management decided it was “not capable of returning to a level of structural profitability”.
Dixons Carphone reported a fall in interim profit, as mobile phone sales slumped, but maintained its full-year guidance. Domestic and international electricals sales and profits were forecast to improve over the full year as the unit benefited from cost savings programmes implemented in the first half.
Shares in sports retailer JD Sports fell after Pentland, the largest investor in the group, sold part of its stake.
Spain’s Inditex, which owns the Zara fast-fashion chain, posted a sharp rise in nine-month profits, as increased focus on its online platform helped cut costs.
JD Wetherspoon unveiled plans to invest more than £200m in its pub estate over the next four years. As well as enlarging its existing pubs across the UK and the Republic of Ireland, management plan to develop new pubs and hotels.
US investment banking behemoth Morgan Stanley plans to shed 1,500 roles or 2% of its global workforce. The news came at the end of one of the worst years for banking redundancies at the world's largest banks in recent memory. The size of the investment banking industry's workforce fell below 50,000 for the first time this year, according to research group Coalition.
The Trump administration is pressuring Japan to choose a US defence company to help develop a replacement for its F-2 fighter jets, amid concerns that the US may lose out on the contract to BAE Systems, the Financial Times reported.
Shares in construction equipment hire group Ashtead fell, despite the group reporting higher interim profits, as the company said that growth in the US was not as strong as in recent years. Ashtead earns the bulk of its profit in the US. Management said that conditions in the UK remained tough and it planned to “refocus” the division.
Property & construction
Construction group Balfour Beatty said its order book at the end of the year was expected to be more than £14bn, "significantly higher" than 2018's £12.6bn book.
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Garry White is Chief Investment Commentator at Charles Stanley & Co. Limited, which is authorised and regulated by the Financial Conduct Authority.