25 June 2015
Week in Brief: BUSINESS AND THE CITY
WORKING HARDER: Or, at least, more efficiently. The Bank of England has several times in recent years expressed serious concerns over UK productivity – lack of, that is, compared with the USA and most of Europe – blaming factors from difficult commuting conditions to the banks propping up poorly managed businesses in the aftermath of the recession. Whatever the reason, output for every hour worked is estimated to be nearly 15% down post recession compared with output levels before. The Bank’s economists were especially concerned that with wage levels rising, a failure to match this in upturns in productivity would create inflationary pressures and limit tax yields.
However, over the last six months rises in remuneration seem to be matched by increases in hourly output. The man in the street, or woman in the office, might not be surprised that paying people more encourages them to work harder, but economists like to see proof of such theories and this is one that seems to be working out. Output is rising and the Bank is expecting this trend to continue.
The Bank also called this week for measures to further control bankers’ bonuses and to lengthen the clawback period on them to ten years. If this goes through, economists will doubtless be measuring the output of bankers to see what it does to their productivity.
EVERYTHING GOING: The government is well under way with its asset disposal programme following Mr Osborne’s return to the Treasury in May. Latest is another tranche of the residential mortgages which were bought from failing mortgage providers – principally Northern Rock – and housed in UK Asset Resolution, the government agency created to hold such items, and also the government shareholdings in Royal Bank of Scotland and Lloyds Banking Group. This is a good time to be selling the mortgages – all secured on individual dwellings but sold in wholesale tranches to banks and finance companies. House prices are rising, and defaults on mortgages have fallen fast, helped by continuing low interest rates. As employment and real wages rise, things should get better still, and there is plenty of demand among bankers and their kin to hold long-term, diverse, but reliable financial instruments. UK Asset Resolution had around £100bn of mortgages at the peak; the latest sale – at a premium to book value, thus showing a useful profit for the Treasury coffers, brings the total sold to £50bn. The rest are likely to go over the next 18 months.
OIL PRICE SPECULATION: The oil price has been hovering around the US$65 per barrel mark for many months now, after diving to US$50 late last autumn but quickly bouncing back to current levels. These levels are not high enough to sustain many high cost operations, such as those in geographically hostile areas and at sea, and the number of operating wells has been declining (quite quickly in the USA, also due to low cost shale extraction). At the same time many national economies are picking up and use of oil based products is expanding.
Now the possible consequences of those two graph lines are being pondered by oil industry analysts, and speculation on the next significant oil price adjustment is being ventilated in the market. Several hedge funds are believed to be starting to put their money where their analyst’s pencils are landing – which is for a significant increase in the price this autumn and further upward movement next year – to a new equilibrium somewhere between US$80 and US$90. This, should it happen, will of course not be good news for most consumers, the price of almost everything being driven by the black barrels. On the other hand it will come as a relief to oil companies committed to expensive extraction programmes. And to billionaire oligarchs all over the world who will find their fortunes piling up that much faster. The next area of cerebration for the hedge fund analysts will be to work out where those capital flows might be going – and get in first.
SWEET NEWS FOR AMBASSADORS: Ferrero, the Italian chocolate maker best known for Ferrero Rocher (allegedly a staple of ambassadorial cocktail parties) but also producers of Nutella and Kinder, has announced a £112m agreed takeover deal for Thornton’s, the UK based public company which makes a range of mid-market specialist chocolate, much of it sold through its own chain of shops. Thornton’s has struggled with its retail operations for many years and has increasingly focussed on forming a premium confectionary offer for supermarkets. On the face of it, the two companies should be a good fit, giving Ferrero a UK retail presence and a line of premium products which complements its own.
Ferrero though is family owned, tightly managed, and strong on cost control. It has already announced a major strategic review of the Thornton’s business which will no doubt focus on finding economies and improving returns. Whilst it is likely to increase the products offered through the 242 Thornton’s shops to try to improve profitability there, the new owners may cut Thornton’s head office staffing and in the longer term relocate its production facilities (currently mostly in Derbyshire) elsewhere. But at least that embassy party should be offering a wider range of choccies in the future.
ALL BETS ON: More merger news – this time in the gaming and betting industry. Two of the industry giants, Ladbrokes and Gala Coral have announced that they are in preliminary talks regarding a merger. Gala Coral, itself the product of a merger between the two eponymous firms, is owned by a group of private equity houses who were believed to be intending to float the business on the UK Stock Exchange this year or next. Half year earnings prior to tax and depreciation were £135m for the last half year on turnover of £684m, giving a possible flotation value of £1.5bn to £2bn. Ladbrokes is about the same size and a merger would offer a cheaper and easier route out of their investment for the owners of Gala Coral. For Ladbrokes it gives economies of scale and a greater presence in the market, but some duplication of retail units. This is one of the issues faced by both these businesses – betting and gambling is increasingly online and highly automated. The day of the slightly raggy shop with odds boards, multiple copies of the Racing Post, and TV screens showing horseraces from all points of the Kingdom and beyond is vanishing fast. Both parties need to reinvigorate and update their businesses and this would be a sensible way to begin.
The deal is far from the finishing line yet – detailed terms have to be hammered out, and the last attempt between the same parties (in 1998) was rejected on quasi monopoly grounds. It seems unlikely that either party will offer odds on the outcome of the negotiations.
KEY MARKET INDICES: (at 23 June 2015; comments refer to change on week; $ is US$)
Interest Rates:
UK£ Base rate: 0.5%, unchanged: 3 month 0.56% (steady); 5 year 1.62% (rising).
Europe€: 1 mth -0.09% (steady); 3 mth -0.4% (steady); 5 year 0.45% (steady)
US$: 1 mth 0.21% (steady); 3 mth 0.45% (steady); 5 year 1.77% (easing)
The Euro has steadied after recent volatility. The situation in Greece may yet cause further movement. Sterling longer term rates are slowly moving up as the market reflects on how the Bank of England may start to manage current growth patterns.
Currency Exchanges:
£/Euro: 1.41, £ slightly stronger
£/$: 1.57, £ slightly stronger
Euro/$: 1.13, steady
Gold oz: $1185, slight rise
Oil, Brent Crude: $63.34, falling slightly, but within recent patterns
London Stock Exchange: FTSE 100: 6,831. FTSE 350: 3,784
Key indicators continue recent stable patterns. The stock market has seen a slight movement upward over the last week, but not statistically significant. The bond market continues to be more volatile as several major funds continue to try to exit their holdings, fearing rising returns will push bond prices down further.
