War fears recede
Garry White, Chief Investment Commentator, looks at the market-moving events that have shaped equity markets last week (6 – 10 January 2020).
Concerns about a potential conflict between the US and Iran decreased over the week, as both sides tried to ease tensions following the assassination of Iran’s Major General Qasem Soleimani.
A host of retailers released Christmas trading updates, with winners including Next and Dunelm and poor trading seen at Superdry, Marks & Spencer, Hornby and Topps Tiles. Sales at supermarkets were subdued, but not as bad as some had feared.
The FTSE 100 fell 0.3% over the week by mid-session on Friday and the FTSE 250 lost 1.5%.
The House of Commons voted overwhelmingly in favour of Boris Johnson's Brexit deal, finally paving the way for the United Kingdom to leave the European Union later this month.
Ahead of his Budget scheduled for 11 March, Chancellor Sajid Javid claimed that the UK will undergo an infrastructure revolution. “We set out in our manifesto during the election how we can afford to invest more and take advantage of the record low interest rates that we are seeing, but do it in a responsible way,” Mr Javid said. "There will be up to an extra £100bn of investment in infrastructure over the next few years that will be transformative for every part of our country," he said.
The “phase one” trade deal between the US and China is expected to be signed in Washington on 15 January. A spokesman for China’s Vice Premier Liu He, head of the country’s US trade negotiating team, confirmed he will be in Washington on Monday next week ahead of the signing on Wednesday.
France's Economy Minister Bruno Le Maire told the US that any retaliation to the country's new digital services tax (DST) could “deeply and durably” damage relations. Washington has threatened to impose duties of up to 100% on imports of champagne, handbags and other French products worth $2.4bn after a government investigation found the French DST would harm American technology companies. As a result of the escalating dispute, Washington and Paris has set a two-week deadline to try and get some form of resolution.
US wine sellers urged the Trump White House to rethink tariffs on wine as part of its retaliation over subsidies to Airbus. US wine sellers are warning that their businesses will not survive if the tariffs go ahead. The industry said raising the tariffs, on top of an earlier increase, will lead to job losses and price increases in the US. "It is without hyperbole that I tell you that the proposed tariffs would be the greatest threat to the wine and spirits industry since Prohibition, in 1919," Benjamin Aneff, managing partner of Tribeca Wine Merchants, said.
Garry White argues that the biggest victim of US tariffs in 2020 could be the EU here.
The US trade deficit fell to a more than three-year low in November as imports declined further, weighed down by the Trump administration’s trade war with China. The Commerce Department said the trade deficit decreased 8.2% to $43.1bn, the smallest since October 2016.
Bank of England Governor Mark Carney said that the central bank could cut interest rates if it looks like weakness in the economy will persist.
There was some positive news on the UK economy. The UK services sector showed signs of stabilising in December. The IHS Markit-Chartered Institute of Procurement & Supply services purchasing managers' index (PMI) rose to 50.0 in December from 49.3 in November. This was above the earlier flash estimate of 49.0. Any reading over 50 shows growth. The services sector was helped by a return to improving order books, with the sharpest rise in new work recorded since July.
Markit also reported that its US Services PMI rose to 52.8 in December, up from 51.6 in November – and better than the ‘flash’ estimate of 52.2.
The US and Iran appeared to step back from the brink of possible war, as President Trump signalled that he would not retaliate militarily for Iran’s missile strikes on Iraqi bases housing US troops. No one was harmed in the strikes, but US forces in the region remain on high alert. President Trump seemed intent on de-escalating the crisis, which spiralled after he authorised the targeted killing last week of Iran’s top general Qasem Soleimani. Iran responded with its most direct assault on America since the 1979 seizure of the US Embassy in Tehran, firing more than a dozen missiles at two installations in Iraq.
John Redwood argues that the US is unlikely to start a Middle Eastern war despite the targeting of Iran’s General Soleimani here.
World leaders lined up to argue that Iran accidentally shot down a Ukrainian passenger plane which crashed outside Tehran with no survivors in the early hours of Wednesday morning. Prime Minister Boris Johnson said: “There is now a body of information that the flight was shot down by an Iranian surface to air missile. This may well have been unintentional.” This will come as a relief to Boeing, as the crash involved another one of its jets – a three-year-old 737-800. Tehran denied the plane was shot down.
The West would like now to enter negotiations with Iran for a better future relationship but would expect Iran to wind down its support for terrorist groups. John Redwood takes a look here.
Aramco shares fell to their lowest level since flotation last month, as the crisis in the Middle East escalated. The shares are down around 12% from their peak.
Topgolf International picked its partner banks for an IPO that could value the company at about $4bn. Topgolf operates driving ranges with group bays, electronic ball tracking, and food and drink. Certain venues host additional entertainment options including concert stages, shops, pools, and rooftop lounges. The listing will be in New York.
Chinese artificial intelligence (AI) company Megvii’s plans for a $500m Hong Kong IPO are back on track after its application was cleared by the city’s stock exchange. Megvii was blacklisted by the US in October and was also asked to provide more information in November by the Hong Kong Stock Exchange before it approved the flotation. Megvii, which is known for its facial recognition platform Face++, is aiming to be the first Chinese AI company to go public.
I-Mab Biopharma Co, a Chinese drug developer, has launched what is set to be the first US IPO by a Chinese biotech company in more than two years. Since 2004, only five Chinese biotech companies from the mainland have completed IPOs in the US.
A new year and a new profit warning from Aston Martin Lagonda. Management warned of a near 50% fall in core profit this year, as production volumes declined over its peak Christmas period. The James Bond carmaker blamed weak demand for a 7% fall in wholesale volumes in Europe. Aston will now introduce a cost-saving programme ahead of the rollout of its first luxury SUV, the DBX, with production still on track for the second quarter of this year. To find out more about the DBX, the success of which is essential to turn around the company’s fortunes, click here.
Troubled clothing group Superdry reduced its guidance after an “underwhelming” Christmas. It also noted that the decision to reduce discounts on the brand’s clothing has helped margins but hurt sales given the amount of industry discounting around Black Friday and Christmas.
A stock issue over the Christmas period led to a fall in Joules' sales, the retailer noted as it revealed profits for the full year will be "significantly below market expectations". Sales fell 4.5% in the seven weeks to 5 January. Joules said the drop was because of a "disappointing" online sales performance due to an internally-generated stock availability issue. The retailer added that the cause has "now been addressed".
US-listed lithium producer Livent Corp cut its fourth quarter and annual earnings outlook due to a downturn in prices of the battery metal.
A lobby group that represents tech titans including Alphabet’s Google, Facebook, Twitter and Amazon has written to the EU Commission as it draws up a Digital Services Act to establish new rules for the sector. The letter urged the EU not to hold them liable for all content on their platforms, but have accepted that their efforts to remove illegal or harmful content could be regulated by a new European watchdog.
Facebook said it was cracking down on “deepfake” videos in the run-up to the 2020 US presidential election. The social network said it will remove misleading manipulated media that has been edited in ways that “aren’t apparent to an average person and would likely mislead someone into thinking that a subject of the video said words that they did not actually say”.
Elon Musk’s SpaceX launched 60 of its own Starlink broadband satellites on a Falcon 9 rocket, making it the operator of the world’s largest commercial satellite constellation. The company aims to provide broadband from space and has now launched 182 satellites.
Shares in South Korea’s Samsung rose after the group revealed a smaller-than-expected 34% fall in fourth-quarter operating profits. The market interpreted this as a sign of a turnaround for the company in the coming year, helped by higher prices for memory chips and strong sales of its smartphones.
Shares in German battery maker Varta plunged after it revealed it had found products with batteries from Chinese manufacturers which infringed on its patents. “If they do not react immediately after the deadline, we will seek preliminary injunctions,” a Varta spokeswoman said.
Oil saw its first weekly loss since November, as fears over a US-Iranian conflict receded. Brent crude future fell 4.8% over the week to trade at about $65.30 by mid-session on Friday.
Premier Oil gushed higher after it announced more than $800m of North Sea acquisitions and said production for the full year was at the upper end of its guidance.
Anglo American confirmed it was in advanced takeover talks with Sirius Minerals, which is developing a fertiliser mine in North Yorkshire. Anglo said a possible offer of 5.5p for each Sirius share would value the company at £386m. The future of the mine has been in doubt after Sirius Minerals was forced to pull plans to raise $500m which would have unlocked further funding for the project.
News from supermarkets this week indicated that subdued Christmas trading for the sector was widespread – but it was not as bad as some had feared.
Data from market researcher Kantar indicated that sales growth over the Christmas period at Britain’s biggest grocers slowed to the lowest rate in four years, with all the ‘Big Four’ losing market share over Christmas. “There was no sign of the post-election rush many had hoped for in the final weeks before Christmas, with shoppers carefully watching their budgets,” Fraser McKevitt, head of retail and consumer insight at Kantar, said. To read the full report click here.
Sales at Wm Morrison fell during the festive period in what it described as “challenging” trading conditions. The grocer reported a 1.7% fall in like-for-like sales – which strip out the impact of new store openings – excluding fuel, for the 22 weeks to 5 January. However, its shares rallied following the statement as some analysts had expected worse.
Tesco had the best Christmas of the larger grocers. Like-for-like sales at the UK’s biggest supermarket chain fell 0.2% in the 19 weeks to 4 January, while J Sainsbury’s fell 0.7% and Wm Morrison’s were down 1.7% over similar periods.
Lidl was the UK’s fastest-growing supermarket business over the festive period after the discount chain served up a double-digit increase in sales. Overall sales rose by 11% year-on-year during the four weeks to 29 December.
Christmas sales at Aldi topped £1bn for the first time, as the German-owned discount supermarket continued its rapid expansion in the UK. Sales in the UK in the four weeks to Christmas Eve rose by 7.9% year-on-year. Although impressive, this represented a slowdown from the 10% growth reported a year earlier. Significantly, the company did not report a like-for-like sales figure, so it is unclear how much of the growth was driven by new store openings.
This subdued trading backdrop may present difficulties for Walmart, which is trying to offload its Asda operation in the UK. This followed the blocking of its merger with J Sainsbury by the UK competition regulator. In December, the US-owned supermarket started a search for a new finance director to help with a potential IPO.
Last Friday, Next updated the market on Christmas trading, in which it raised its full-year guidance to City analysts. The high street stalwart saw total full-price sales between 27 October to 28 December rise 5.2%. That was 1.1% ahead of its own forecasts.
It was also a good Christmas for homeware retailer Dunelm, despite management deciding not to take part in Black Friday discounting. Like-for-like sales increased 5% in the second quarter while total growth, including the benefit of new stores, was 6.2% following the launch of its new digital platform.
Marks & Spencer shares fell sharply after it revealed Christmas sales were hit by rivals’ discounts as well as its own buying mistakes. A pickup in trade in M&S food halls helped the high street retailer deliver its first positive quarterly sales in three years, but the success of its resurgent food division was overshadowed by higher levels of waste, which eroded profitability. Clothing sales at M&S stores open for more than one year were down 1.7%.
JD Sports said it expected annual profit towards the upper end of the current market view thanks to stronger demand for its gym clothing and premium-branded fashion overseas.
Hobby group Hornby posted higher sales and profit margins over the Christmas period, keeping trading on track to meet City expectations for the rest of the year. The model train maker said sales and margins were ahead of the equivalent period last year as the company’s turnaround gathered steam.
Topps Tiles’ sales sank in the final quarter of last year, which management blamed on political and economic uncertainty in the run-up to the UK general election. Like-for-like retail revenue dropped 5.4% in the 13 weeks to 28 December.
Budget footwear retailer Shoezone suffered a slump in profit last year after it was forced to take a £2.9m hit on the value of 17 properties.
Hoping to repeat the marketing and PR success of its vegetarian sausage roll in 2019, Greggs launched a vegetarian “steak” bake. Management said its 2019 results were strong and upgraded its full-year guidance. It also announced a £7m bonus for its staff. Like-for-like sales – which strip out the impact of store openings and closures – in outlets managed by the company rose 9.2%. Total sales in the year to 28 December grew 13.5%.
Impossible Foods, the private company known for its vegetarian Impossible Burger, will add meatless minced pork and sausages to it product range, as the company turns its focus to international expansion in 2020. Impossible Sausage will debut later in January at 139 Burger King restaurants. The company is expected to launch its IPO in the medium term.
Borden Dairy, one of America's oldest and largest dairy companies, became the second major milk producer to file for bankruptcy in the last two months. US milk consumption has fallen 6% since 2015. With the wholesale cost of milk rising due to fewer suppliers and retail milk prices weaker due to lower consumption, margins at milk processors such as Borden have been squeezed.
New car registrations in the UK last year fell to their lowest level since 2013, according to the Society of Motor Manufacturers and Traders (SMMT). This represented the third consecutive year of decline, and the SMMT expects a similar trend in 2020. This is being driven by weak consumer confidence and confusion over clean-air legislation.
Elon Musk’s electric vehicle maker Tesla opened its Shanghai factory, its first outside the US. The Chinese plant, which was completed in record time as it sped through approvals and construction, represents a cornerstone of Mr Musk’s plans to make Tesla a truly global carmaker. Its shares hit a record high this week, valuing the company at about $81bn compared with General Motors’ $51bn Ford’s $36bn and Fiat Chryslers’ $20bn valuation.
In sharp contrast to the travails facing Aston Martin, BMW’s Rolls-Royce vehicle unit saw a 25% leap in sales last year as it sold a record number of cars, driven mainly by the success of its three-tonne SUV. The luxury car company said it sold 5,152 vehicles last year – a quarter higher than the 4,107 it sold in 2018. This was thanks largely to the success of the Rolls-Royce Cullinan, which retails at around $400,000.
British luxury carmaker Bentley returned to profitability in 2019, helped by a 5% sales increase after a strong performance in Europe and the Americas, the Volkswagen-owned brand said.
Investors launched a €896m lawsuit against Daimler in a regional court in Stuttgart, accusing the carmaker of concealing its use of emissions-cheating software. The suit was filed on behalf of institutional investors who accuse Daimler of failing to inform investors about the risks and costs of using such devices, which amounts to a violation of capital-markets law. “This means that the plaintiffs bought the Daimler stock at too high a price, and it is our conviction that Daimler is liable to them for compensation of damages,” attorney Andreas Tilp said.
Ride-hailing company Uber Technologies has joined forces with South Korean’s Hyundai to develop electric air taxis, joining the global race to make small self-flying cars to ease urban congestion.
Airlines & travel
The release of a batch of internal messages has raised more questions about the safety of Boeing's 737 Max. In one of the communications, an employee said the plane was "designed by clowns who in turn are supervised by monkeys". In February 2018, a Boeing worker asked a colleague: "Would you put your family on a Max simulator-trained aircraft? I wouldn't."
Ryanair raised its full-year profit guidance after a stronger-than-expected Christmas and New Year. The airline, which is led by Michael O'Leary, now expects pre-tax profit to be between €950m and €1,050m. That is ahead of a previous estimate of €800m to €900m.
Norwegian Air Shuttle has been a lesson in the perils of management seeking growth at any cost. Norwegian is slowly emerging from a debt crisis brought on by years of aggressive growth, with upbeat news boosting its share price in Oslo this week. Its capacity reduction and optimisation of the route network have had a positive impact on profitability.
American Airlines reached a deal with Boeing to be compensated for damage from the grounding of the 737 Max aircraft last year. The US carrier didn’t disclose details but said it would receive compensation over several years. American said it would share $30m of the settlement with employees through its 2019 profit-sharing program.
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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.