21 May 2015
Week in brief: BUSINESS AND THE CITY
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DEFLATION: For the first time for many years official government figures showed that the UK economy is in deflation, with the measuring basket of prices falling 0.1% in the last year (to end of April). This is caused by a range of factors, but in particular falling energy prices driven by the downward adjustment in the oil price, falling food prices as the supermarket trading wars show no signs of abatement, and a drop in transport costs – partially reflecting the downward movement in energy costs, but also due to fierce competition in most transportation areas. Economists think that this trend is likely to continue for a further period, and may even accelerate, as the strength of sterling since the election will further drive down the costs of imports. The key determinant is the oil price, which seems to have stabilised at the US$65/68 per barrel level. Any significant movement upwards will quickly feed through into rising costs in most sectors.
Deflation is generally felt to be bad news, not least for its associations with economic collapse, such as of the German Weimar republic in the early 1920’s. But in the reasonably soundly based UK economy there seems to be no reason why it should not be a boost – especially if it helps control pressure for wage rises.
PRAWN COCKTAIL OFFENSIVE: Following in the footsteps of Messrs Blair and Brown in the 1990’s, when the then opposition leaders pursued intensive conversations (and lunching) in the City and with business leaders to convey messages that New Labour was no threat to commerce, Yvette Cooper, a candidate for the Labour leadership, has declared that Labour must rebuild its links with business, and is beginning a series of low profile meetings with business leaders. Ms Cooper believes that to win the next, or indeed, any election, Labour cannot be seen as the enemy of business. She is also attempting to assume the mantle of the Blairist successor, and to differentiate herself against competing candidate Andy Burnham, the former Health Minister. Business leaders should not assume that the prawn cocktails will be coming their way for long though – Mr Burnham is seen as the leading candidate for the leadership, with strong support in the Labour party, especially among the trade unions.
TECHNOLOGY: Since 2012 Vodafone has been reporting falls in revenues in its mobile telephone business, a worrying trend given the phone giant’s continuing £7bn investment programme. But finally this seems to be paying off, with a rise in revenues in the last quarter in its newly issued results. The growth is in sales of 4G service packages and consequent use. 4G services are key to users of fast data transfer, a growth sector in both the business and the technology oriented younger user market. The bulk of this improvement is in Far Eastern emerging markets, fierce competition in Europe holding revenue growth back there. The improvement in volumes is not yet feeding through to the bottom line, with profits down 7%, but the Vodafone board feel the outlook now is good, with continuing take up likely in the 4G business over the next three years. This should feed straight through to net earnings.
COMMERCIAL PROPERTY: As reported here last week, British Land and Land Securities, the two largest quoted UK property companies, were imminently expected to announce strong results, reflecting the rapid recovery over the last two years of the commercial property market. They duly did so, even more so than forecast. British Land reported first with a 12% uplift in the value of their portfolio, and profits up 64%. BL has let practically all its space, with strong rental growth and continuing stability in funding costs, so the outlook continues very promising. Land Securities two days later reported even stronger growth with the property portfolio value at 14% higher than last year, and profits more than doubled. The analysts had been making precautionary noises about values rising too fast on anticipation of future rental growth, but were greatly cheered by the strong growth in rental income, with more to come. Not so good for tenants though….
ROLLS-ROYCE: The engine and specialist engineering business, already in the middle of a restructuring of its management structure and its aero engines business, estimated to result in the cutting of 2,500 jobs, has announced that it is also cutting activities in its marine engineering business. This is a direct result of the falling oil price which has led to retrenchment of many oil company activities and investment plans. Rolls Royce is particularly exposed to North Sea engineering, through activities in Norway and Aberdeen, and the cuts are expected to result in 600 job losses, half of them in Norway.
BABCOCK: Unlike Rolls-Royce (above), Babcock, another engineering company, seems to be withstanding the side effects of the downturn in the North Sea oil business. Babcock is active in many types of support and maintenance operations, including through its 2014 acquisition Avincis the provision and servicing of helicopters for transportation to oil and gas rigs in the North Sea. Pre-tax profits for the year ended March 2015 were up 43% to £313m. One slight straw in the wind though: the order book was at a record high of £20bn but the deal pipeline is reported 43% down.
OPPORTUNITY: The Bank of England is searching for a new face for the redesigned £20, due sometime soon. A person of social or artistic merit (and not too controversial) is sought. Don’t rush to apply though – a key qualification is that the chosen celebrity must be dead.
KEY MARKET INDICES: (at 19 May 2015; comments refer to change on week; $ is US$)
Bank rate: 0.5%, continues unchanged. 3 month rate 0.59%, (no change); 5 year rate 1.46% (modest decline). UK rates continue steady post the election
£/Euro: 1.39, steady
£/$: 1.56, steady
Euro/$: 1.12, steady
Gold oz: $1223.52, rising 5% over last week
Oil, Brent Crude: $66.27, slightly up but within recent patterns
London Stock Exchange: FTSE 100: 6992. FTSE 350: 3863
Key indicators are showing steady patterns at the moment; with no movements out of recent trading patterns. The FTSE 100 has a greater exposure to European businesses than the 350, and this reflects in a somewhat stronger performance by the 350.
