• 10th February 2017

    Economics

    Week in Perspective - 10 February 2017

    Market Roundup

    Shares started the week on a downbeat note, with the FTSE 100 index slipping 0.2% on Monday.

    Housebuilders were lower ahead of the government’s housing white paper, with Persimmon off 1.7% and Taylor Wimpey down 1.6%.

    On Tuesday, BP slumped 4.1% after weaker than expected results, while Pearson gained 3.6% on speculation about further cost-cutting.

    Wednesday saw the blue-chip index virtually unchanged, but the FTSE 250 index hit a new record high.

    Housebuilders were on the up after Redrow produced strong results and with Tuesday’s housing white paper delivering no surprises. Redrow took on 4% with Persimmon adding 3%.

    Outsourcer Capita was also 3.4% ahead amid ongoing speculation about a private equity bid.

    The FTSE 100 was up 0.6% on Thursday. BT was off 0.9% on concerns about splitting off Openreach, its infrastructure arm.

    But British Airways owner IAG added 1.7% as it was urged to bid for Norwegian Air Shuttle.

    Meanwhile mid-cap Thomas Cook lost 7.7% after reporting a first-quarter loss and warning of an “uncertain political and economic outlook”. Rival Tui was down 2%.

    The market was up in early trading on Friday on better-than-expected UK trade and industrial output numbers.

    Company Focus: Redrow

    Housebuilder Redrow posted a very strong set of half-year results on Wednesday. Pre-tax profits were up 35% to £140m in the six months to 31 December, and the dividend was increased 50% to 6p a share.

    The company reported a 13% rise in completions, a 12% increase in average sales price and a 160 basis points’ improvement in operating margin.

    Net debt has reduced from £139m to £56m, giving the group gearing of 5%, which is more in line with its peers than previously.

    Current trading conditions remain positive with robust customer traffic and sales, resulting in a record order book of £897m.

    With confidence high, Redrow has set targets for 2019 of £1.9bn revenue, a 19.5% operating margin and 77p earnings per share.

    Despite the strong results, potential negatives for housebuilders could make life tougher in the coming year. These include a reduction in consumer confidence as inflation increases and possible interest rate rises. New mortgage interest tax relief rules, due to start in April, could force landlords to sell up, increasing the supply of houses on the market.

    Economic Roundup

    Is consumer confidence weakening? A British Retail Consortium/KPMG survey showed retail sales down by 0.6% in January on a like-for-like basis compared with the previous year.

    “After a strong end to the Christmas trading, year-on-year sales growth ground to a halt, compensated only by stronger furniture sales and a boost for some retailers from Chinese New Year,” said BRC chief executive Helen Dickinson.

    “Our survey suggests that 'caution' was top of new year shopping lists and the uptick in credit card lending at the end of the last year may be short lived. With the signs pointing to upward pressures on shop prices given rising import costs, all eyes will be on the impact of inflation on consumer spending.”

     

     

     

     

    House prices were down 0.9% in January compared to December, the first monthly decline since last August, according to Halifax. The annual rate of growth also eased to 5.7%.

    “House prices continue to be supported by an ongoing shortage of property for sale, low levels of housebuilding, and exceptionally low interest rates,” said Martin Ellis, Halifax housing economist.

    “Nonetheless, weaker economic growth and increasing pressure on spending power, along with affordability constraints, are expected to dampen housing demand, resulting in some downward pressure on annual house price growth during the year.”

    A Bank of England survey showed that businesses expect to give wage increases averaging 2.2% this year, below the consensus forecast for inflation of 2.7% and suggesting falling earnings in real terms.

    Surveyors expect residential rents to rise 25% over the next five years and house prices to increase by 20%, according to research by the Royal Institution of Chartered Surveyors (Rics).

    “The view is that both house prices and rents will over the medium term continue to grow at a faster pace than wages, putting even greater pressure on affordability,” said Rics’ chief economist Simon Rubinsohn.

    Growth in UK industrial production hit a six-year high in December, after a stronger than expected end to the year.

    Industrial production expanded by 1.1% in December, bringing the annual increase to 4.3%, according to figures from the Office for National Statistics (ONS).

    However, ONS statistician Kate Davies was cautious, pointing out that December’s growth was driven by the “often volatile” pharmaceuticals industry, and growth was “broadly flat” over the fourth quarter as a whole.

    Meanwhile, the UK’s trade deficit narrowed in December thanks to exports to non-EU countries.

    The trade gap contracted to £3.3bn from a revised £3.6bn in November, according to ONS data. On a quarterly basis, the trade deficit narrowed to £8.6bn in the final three months of the year from £14.1bn previously, primarily due to a rise in exports of goods to non-EU countries.

    Some economists have predicted that the weak pound will improve the trade balance by boosting demand for exports and lowering demand for imports. But they also caution that in the shorter term the trade gap will worsen as the cost of imported goods increases.

     

     

     

    Company announcements that caught our attention this week

    Date Company Comment
    08/02/2017 Rio Tinto Rio Tinto announced full-year results that were slightly ahead of consensus, along with a $500m share buyback and a bigger-than-expected dividend. Full-year earnings for the year to 31 December were US$5.1bn, 5% ahead of analysts’ expectations. Free cash flow of $5.8bn was very strong, reflecting increased commodity prices, low capital expenditure and a management focus on reducing costs. A final dividend of 125 cents takes the total dividend to 170 cents. While this is down 21% year-on-year, it is well above guidance of at least 110 cents per share. The $500m buyback was broadly expected after the recovery in commodity prices last year.
         
    09/02/2017 Smith & Nephew Smith & Nephew, Europe’s biggest artificial hip and knee maker, has been trying to expand into new geographical and surgical areas. Results for the year to 31 December suggest that this strategy has had mixed success. Against flat revenues of $4.67bn, the medical technology company posted a pre-tax profit of US$1.06bn. But the overall picture is of a generally anaemic year with foreign exchange headwinds. Tough market conditions in China and the Gulf States shaved more than a percentage point off growth. The dividend is unchanged at 30.8 cents, though in sterling terms, it is up 20% to 24.8p.

       

    Key company diary dates

    Mon 13 Feb
    Reckitt Benckiser
    Full-year results
    Tue 14 Feb
    Rolls-Royce Full-year results
    Thu 16 Feb
    Shire Full-year results
    Thu 16 Feb Lancashire Holdings Quarterly results
    Fri 17 Feb  Essentra Full-year results

    Economic highlights over the next week

    Tue 14 Feb UK inflation Consumer price inflation was 1.6% in December, up from 1.2% in November and the highest CPI reading since July 2014. Many economists expect the January figure to be even higher.
         
    Wed 15 Feb
    US inflation

    Inflation in the US has been rising rapidly: consumer prices increased 2.1% in the year to December, following a 1.7% rise in November. Core inflation, excluding food and energy, rose 2.2% in December, up from 2.1% in November.

         
    Fri 17 Feb UK retail sales The volume of retail sales dropped by 1.9% in December compared with November, according to ONS data. Year-on-year volumes were up 4.3%. January’s figures are out on Friday.

    Index movements*

    Index Value % change
    FTSE 100 7,229.50
    1.24
    FTSE 250 18,627.59 2.02
    AIM 899.39
    1.05
    Dow Jones 20,172.40
    1.45
    S&P 500 2,307.87 1.18
    Hang Seng 23,525.14 1.47
    Nikkei 225 18,907.67
    -0.04

    Currency movements*

    Currency Pair Value % change
    £:$ 1.25 -0.06
    £:€ 1.17 1.28
    £:¥ 141.50 0.43

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

    Sector % change
    Healthcare 2.5
    Utilities 2.5
    Insurance 1.8
    Oil & Gas
    -2.9
    Construction & Materials -3.8
    Basic Resources -4.6

    Best & worst performing stocks*

    Company % change
    Randgold Resources 8.9
    Mediclinic International 7.9
    DCC 7.6
    Glencore -3.9
    Anglo American -6.0
    BHP Billiton -6.6

     

    * 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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