08 October 2015
Week in Brief: BUSINESS AND THE CITY
AN INSPECTOR CALLS: The Serious Fraud Office has announced that it is investigating actions instigated by the Bank of England during the early stages of the financial crisis in 2008 and 2009. The Bank of England has confirmed that several officials have voluntarily met officers from the SFO but have refused to provide any further details, on the usual grounds that this is an on-going investigation where it is unable to comment until matters are concluded. The investigation is believed to centre around the way in which the Bank’s emergency liquidity auctions were conducted. The Bank gave considerable guidance to commercial banks participating in the auctions as to the nature and level of security cover required, to ensure that the participants were treated equally, but this may be held to constitute market “rigging”. It is not known whether the investigation was instigated by the SFO or as a result of a complaint by a third party.
NEW RATINGS: George Osborne in his lead speech at the Conservative Party Conference in Manchester announced an unexpected reform to Business Rates, the local land taxes which property occupants pay. At the moment there is a standard Business Rate across England, a system introduced in 1990 to ensure that left wing councils did not over-tax local businesses – or right wing councils compete to draw businesses to their areas by cutting rates. Now George wants to allow councils to do that very thing, which he thinks will be good for business generally, and encourage voters to not vote for high-taxing councillors if they think it will cost local jobs. He intends to pass control of Business Rates back to the councils, who will also be allowed to keep the proceeds of the rates they raise. This will be subject to safeguards so that councils can only cut rates, not increase them. (Though this constraint will not apply to cities which have elected mayors and want to spend the extra on infrastructure projects, who are presumably judged more responsible.) The current system of equalisation payments, so that councils do not see major falls in income or are unfairly penalised because of local circumstances, will remain in place.
This was not as well received as the Treasury may have been hoping. Most businesses are concerned more about the level of rates rather than who collects and spends them. Rates have crept up to become a major occupational expense – often being around a third of rental costs for buildings – and for those businesses which have a physical presence and who have to compete with virtual firms domiciled in low cost locations they are a major strain on viability. They would like to see rates abolished and a sales or turnover tax replace them. Even the property industry has long been campaigning for a reduction or amendment to the rating system which would reduce the burden of business rates, not least because it forms a major drag on rental levels landlords can charge because of what rates do to overall occupational costs.
MORE TAXING: As set out in more detail elsewhere in this week’s Shaw Sheet, the OECD has published its long awaited reports, the BEPS Reports, on tax avoidance by global businesses. As with business rates, discussed above, this is a concern not just to governments who are losing out on tax yield, but to many businesses who by their nature or history are domiciled in locations where they have to pay tax but compete with businesses that don’t. But as our report details, the problem is clear; the solutions aren’t.
SOUNDS EXCITING: In a further boost to the developers of the new Kings Cross office, arts, and retail development north of Kings Cross railway station, Universal Music, the music and entertainment agency which also has major businesses in ticket agency and in music publishing, is moving in 2017 to 177,000 square feet of new offices currently under construction. Universal is moving from High Street Kensington where it has long been based, and the move will enable it to get all its operations under one roof (and just down the road from Google, who are also moving to Kings Cross in the next couple of years). As in common with most of the new buildings here, their new offices are specified for young staff and maximum flexibility, with bike storage, shower and changing facilities, a restaurant and breakout facilities, and a roof garden (an essential now for any truly hip employer). These things don’t come cheap – the rent is rumoured to be close to £80 per square foot.
POPULAR BANKING: The Chancellor did not confine himself to rate reform at the Conservative Party Conference – he took another lesson from the Thatcher book of popular capitalism by announcing the proposed sale of the government’s remaining stake in Lloyds Banking Group by way of a public offering. So far the government has been unloading the shareholding it took when it had to rescue the bank after the merger between Lloyds and Bank of Scotland in 2008 by selling tranches in the market whenever the share price started to strengthen. But Mr Osborne has long trailed the idea that some of the stake should be sold back to the public, and now, with the government stake being cut from 40% of the bank to under 12%, the time has come. The offer is likely to be made early next year, with about £2bn of stock to be sold, with incentives to small shareholders who will get a 5% discount, and share bonuses if they keep their allocations for a period. The price has not yet been suggested, but the government has been selling at around 74p; it needs to sell at more than 86p to make a surplus on the final slug. The market price last night was 77p.
SHOPPING BASKET: Not only does Tesco have to start charging customers 5p for every flimsy plastic bag they need to carry the weekend shop home in, following the introduction of planet-saving legislation to cut back use of plastic, they are still struggling to get the business back on the road following their problems and wholesale senior management changes of the last couple of years. Their half year results announced this week showed a 1.1% fall in sales, not surprising as the chain closed some of its loss making stores, and also a fall in comparable profits, down £166m from £543m. It also confirmed that it was still in discussions with the Serious Fraud Office regarding its alleged profit overstatement from 2013. The share price fell 2%, but most analysts were more positive about the figures, seeing that underlying profits are improving, the cost cutting by new CEO Dave Lewis is starting to come through in the bottom line, and international sales are improving
FASHION FAILINGS: It’s been a tricky year for many fashion retailers. Bad weather and fickle shoppers – and continuing restraint by those on the High Street still nervous about take-home pay – have hit some of the value retailers hard, as French Connection announced a couple of weeks ago. Now Ted Baker, a FTSE 250 company, has both good and bad news for investors and commentators. Profits in the first half were strong, up 15% on the comparable period last year, but the company also announced poor trading in August, blaming the wet weather, although it said things had improved since. What concerns investors is that Ted Baker is in the middle of a big expansion in overseas markets – the USA, Canada and Hong Kong principally – so a soft cash flow will not help that. It was enough to take the share price down 4%. And maybe produce some bargains in their stores.
KEY MARKET INDICES: (at 6th October 2015; comments refer to change on week; $ is US$)
Interest Rates:
UK£ Base rate: 0.5%, unchanged: 3 month 0.57%(slight fall);5 year 1.28%(slight fall).
Euro€: 1 mth -0.14% (steady); 3 mth-0.4% (slight rise); 5 year 0.23% (steady)
US$: 1 mth 0.34% (steady); 3 mth0.45% (steady); 5 year 1.36% (falling)
Currency Exchanges:
£/Euro: 1.35,£ steady
£/$: 1.52, £ steady
Euro/$: 1.12, € steady
Gold,oz: $1,147 edging up
Aluminium, tonne: £1,016 steady
Copper, tonne: £3,402 rising
Oil, Brent Crude barrel: $51.92,10% rise on week
Wheat, tonne: £117, rising
London Stock Exchange: FTSE 100: 6,372. FTSE 350: 3,544
Briefly: Whilst interest and exchange rates continue steady there is sign of some recovery in commodities markets with oil the leader. The LSE also shows signs of optimism with a strong recovery over the week which looks like a reversal of the downward drift we have seen for some time.
