• 19th May 2017

    Economics

    Week in Perspective - 19 May 2017

    Market Roundup

    The week started positively with the FTSE 100 index adding 0.3% on Monday, led by miners as a weak dollar buoyed metal prices. Anglo American gained 3.2% while BHP Billiton took on 2.3%.

    Tuesday saw the FTSE 100 up 0.9% and breaking through 7,500 to a new record high.

    Vodafone rose 4% after the telecoms group forecast that it would deliver earnings growth and stronger cash flow. Kingfisher was also up 2.6% after positive broker comment.

    But Hargreaves Lansdown plunged 8.5% after US index fund manager launched a low-cost online service for UK investors.

    A nine-day run of gains for the FTSE 100 came to an end on Wednesday, with the blue-chip index shedding 0.3% amid political turmoil in the US. The US S&P 500 index dropped 1.2% while European indexes were also off by more than 1%.

    Thursday was another down day for UK shares, with the FTSE 100 off 0.9%.

    But Centrica added 3.9% as price cap fears receded after the Conservative’s election manifesto was published.

    UK shares were up in early trading on Friday.

    Company Focus: SSE

    Utility company SSE reported increased profits for the year on Wednesday, but hinted that a government price cap could be the catalyst for a dividend cut.

    The FTSE 100 firm made a £1.8bn profit before tax in the year to the end of March, up from £593m last year when its results were affected by accounting charges. Adjusted pre-tax profit - stripping out one-off items - rose by 2.1% to £1.55bn.

    Profit margin per dual-fuel household customer was around 6.9% compared with 6.2% the previous year, but customer numbers fell by 200,000.

    The group said that dividend cover for the next financial year would be “towards the bottom” of the expected range of around 1.2 to 1.4 times. Given the rising dividend and falling cover, adjusted earnings per share are likely to be lower in the coming year.

    Looking ahead to 2020, SSE said that it would target annual dividend increases that at least keep pace with inflation. However, the company warned of challenges ahead, not least the threat of a government capping of energy prices.

    Chief executive Alistair Phillips-Davies said: “We have been clear for some time that 2017/18 presents challenges, and the need to engage constructively with a new UK government as it takes forward energy policy will be a key priority for the year ahead and beyond.”

     

    Economic Roundup

     House prices fell by an average of 0.6% in March compared with February, according to Land Registry data, although the annual rate of increase was still 4.1%.

    In London, prices fell by 1.5% in March. The annual rate of increase in the capital was just 1.5%.

    And the buy-to-let sector is being hit by tax rises. Research by Connells, the estate agency, said that mortgage applications dropped to just 7% for buy-to-let purchases in April, down from an average of 13% for the past five years.

    The figures have been interpreted as a sign that smaller landlords, with just one or two properties, are exiting the market or choosing not to buy more. As well as facing a 3% stamp duty surcharge, tax relief on mortgage interest for buy-to-let properties is being reduced.

    Inflation hit 2.7% in April, its highest level in four years and up from 2.3% in March. The increase was mainly driven by higher air fares, said the Office for National Statistics.

    Meanwhile, real wage growth turned negative in the first quarter of the year. While wages were up 2.1% compared to a year ago, after adjusting for inflation earnings growth was minus 0.2% - the first such fall in nearly three years.

    The squeeze on pay is expected to worsen as inflation approaches 3% this year, It comes despite the unemployment rate dipping to 4.6% - its lowest since 1975.

    The employment rate has also hit fresh records. At 74.8% it is the highest since comparable records began in 1971, according to the ONS. Nearly 32m people are now in work.

    “The surprising feature of the labour market has been the lack of response of earnings growth to this apparent tightening of the market,” said Michala Marcussen, global head of economics at Societe Generale.

    Warmer weather and a late Easter encouraged shoppers back to the high street in April, with retail sales rebounding strongly after contracting in the first quarter of 2017.

    Total retail sales excluding auto fuel increased by 2% compared with March, and were 4.5% higher than April last year, the ONS said. The pound jumped above $1.30 on the news.

    However, Keith Richardson of Lloyds Bank Commercial Banking warned: “A rise in sales supported by Easter can’t hide the fact that inflationary pressures, together with sluggish wage growth, are biting a chunk out of shoppers’ disposable income.”

    Growth in UK manufacturing is at a three-year high, according to a survey by the Confederation of British Industry. Of the 432 manufacturers surveyed, 41% said they increased their output in the three months to May, while only 12% said output was down.

    Rain Newton-Smith, CBI chief economist, said: “Robust demand at both home and abroad is reflected in strong order books, and output is picking up the pace. On the other side of the coin though, we have mounting cost pressures.”

     

     

     

     

    Company announcements that caught our attention this week

    16/5/2017  EasyJet Budget airline EasyJet’s half-year results were inevitably going to suffer from the timing of the Easter holidays and currency movements. In the winter season airlines are usually focused on trying not to lose too much money, as passenger demand, scheduling densities and destination options decline. In the six months to the end of March, EasyJet reported a loss of £212m. This compares with a loss of £21m in the same period a year ago, when Easter was in March and before the pound weakened in the wake of the Brexit vote. Revenue per seat fell 9.7% at constant currency - the bottom end of management’s guidance - while non-fuel costs per seat were flat in constant currency.  
         
    18/5/2017 Royal Mail Royal Mail announced a jump in pre-tax profits, but a closer reading of its full-year results gives reason for caution. Pre-tax profits were £335m in the year to 26 March, up from £267m the previous year, while revenues grew 1% to £9.8bn. However, the company’s preferred measure - adjusted operating profit before transformation costs - fell by 6%. Total letter revenue at Royal Mail’s UK unit dropped 5%. The group warned that it expects the decline in letters to reach the higher end of predictions due to business uncertainty. Parcel revenues in the UK rose 3%. Adding to the uncertainty for Royal Mail is the threat of strike action over plans to close its defined benefit pension scheme..

       

    Key company diary dates

    Tue 23 May Severn Trent Full-year results
    Wed 24 May Marks & Spencer Full-year results
    Wed 24 May Kingfisher Trading update
    Thu 25 May United Utilities Full-year results
    Fri 26 May Intertek Trading update

    Economic highlights over the next week

    Wed 24 May US interest rat minutes The Federal Reserve’s Open Market Committee (FOMC) opted to keep US interest rates on hold earlier this month, but a rate hike is widely expected in June. The minutes of the committee’s last meeting will be examined carefully for signs of what happens next.
         
    Thu 25 May UK GDP

    The Office for National Statistics (ONS) will release its second estimate of UK economic growth for the first quarter of 2017. Its initial estimate showed the economy growing 0.3% compared to the previous quarter. 

         
    Thu 25 May UK business investment Business investment decreased by 0.9% to £43.5bn in the fourth quarter of 2016.

    Index movements*

    Index Value % change
    FTSE 100 7,436.42
    0.67
    FTSE 250 19,691.64 -0.53
    AIM 971.66 -0.25
    Dow Jones 20,663.02 -1.23
    S&P 500 2,365.72 -1.20
    Hang Seng 25,136.52 0.04
    Nikkei 225 19,553.86 -2.04

    Currency movements*

    Currency Pair Value % change
    £:$ 1.30 0.01
    £:€ 1.17 -0.01
    £:¥ 144.42 -0.01

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

    Sector % change
    Telecoms 5.3
    Healthcare 2.4
    Retail 1.5
    Financial Services -1.4
    General Industrials -2.8
    Construction & Materials -4.1

    Best & worst performing stocks*

    Company % change
    Astrazeneca 8.3
    Vodafone Group 6.7
    Kingfisher 6.6
    easyJet -5.5
    Hargreaves Lansdown -5.7
    Provident Financial -5.7

     

    * 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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