19 November 2015
Week In Brief: BUSINESS AND THE CITY
UP THE WORKERS: Good news for workers in the UK economy; after six years of falling or flat-lining real wages, average wage inflation was 1.9% in the year ended April 2015. In fact wages only rose by 1.8%, but as the economy saw deflation of 0.1% that left things looking better in the pay packet. Of course, these figures are sweeping generalisations – wage growth is thought to be much stronger in the south (where there is a shortage of labour especially in lower paid jobs) than in the north, and London is showing especially strong growth (though housing costs may leave many low and even medium paid workers not feeling much better off). This is not the least of the reasons of course that George Osborne has acted so boldly in his pushing up of the minimum wage over the next five years – he thinks it will almost certainly be in the wage money anyway. Other interesting things to come out of the survey are that there are practically no gender related differences in pay, at least until workers reach the age of about 40, when it starts to diverge with men pulling significantly ahead. The explanation for that is presumably the conflicting time pressures from children and work that women start to face, though it may also reflect that the current rising generations of women are more inclined to expect the same pay, and negotiate accordingly. The survey does not include the self-employed, who effectively have to pay themselves. There is some research in recent years that suggesting that they pulled in their belts much tighter than the employed to keep their businesses going, but are now awarding themselves higher pay rises.
ALSO UP?: But if you were thinking of taking on more borrowings, perhaps a new car or bigger house, on the back of your expanding wage packet, hold off a while yet. At the Bank of England Deputy Governor, Ben Broadbent, sounded a considerable note of caution on the optimistic noises made by many analysts and commentators on the low likelihood of interest rate rises in the next two to three years. This cheery view of life (if you are a borrower, not so much if you are a depositor) has, he said, been driven largely by some rather glib consideration of the Bank’s own projections on inflation forecasting, which showed that interest rate rises would not influence the Bank achieving its target rate of inflation (2% in the long term). On this basis there arguably would be no need to push rates up to control inflation. Broadbent pointed out though that this is only one measure used by the Bank for judging how to manage interest rates and that the main one is actually the forward interest rate market. Part of the Bank’s task is to manage possible volatility in rates, so it is more forward-looking than commentators seem to be assuming. This speech was taken as a warning, if subtle, that interest rate rises may come sooner than expected. Certainly this was what the currency market thought, with sterling showing strength against the Euro, and even against the mighty dollar, which is also expecting some movement from the Fed soon.
BRICKS AND PROFITS: British Land, one of the two UK property REITS quoted in the FTSE 100, announced exceptionally strong asset growth in its first half 2015 results (to the end of September). The residential and office portfolio, almost entirely located in the south east, was up 8.5%, with a lower but still positive performance from the retail business which was up 1.8% – that portfolio is more diversely spread across the UK, and includes BL’s large holding of Tesco supermarkets. As a result pre-tax profit was up 10% to £171m. This compares with the recent figures from BL’s great rival, Land Securities, which had net asset values up 5.7% but profits down nearly a third. Both great property companies are now increasingly cautious and reducing their gearing; BL said it had reduced its by 3% in the half year, with more to come, though its debt is 34% of total assets to LS’s 26.5%. A lot of the reduction at British Land will come from further sales of the retail portfolio – it is projecting further disposals of around £250m, similar to the first half, while remaining the largest single owner of retail property in the UK. It sees plenty of opportunities to make money in the sector – especially with the growth in “click and collect” which it says is a very popular and growing business model in major shopping centres. This was all good news to the stock market, with shares in both companies rising.
POST EARLY FOR DIVIDENDS: The profit mutterings about the difficulties of Royal Mail in the crowded delivery market have spread to its big rival UK Mail. Half year profits to end September dropped to £2.2m from £12m in the comparable half in 2014. Chief executive Guy Buswell blamed dislocation by a major investment programme, currently on-going, which he says has caused problems in efficient handling of parcels traffic to such an extent it was causing a loss of customers. This is believed to be problems caused by brand new highly automated sorting which …er… doesn’t. The market was not entirely shocked as the problems had been well flagged and this is in any case the weaker half of the year; though in spite of reasonable comments from analysts the share price dropped over 15%. The company itself remains hopeful that the new machinery will settle down quickly and that they will be in for a much better second half – to such an extent that the dividend was only reduced by 20% for the half. The board still expects to make around £10m and £12m for the full year, depending on how much business it can win back, and how quickly. That may well be a good call as turnover was rising strongly at the end of the period, to such an extent that it was 4% up overall. But the biggest single income this year was from the Department of Transport – they are paying UK Mail £22.2m in instalments to move part of its new hub, which is standing on the route of the new HS2 rail route.
PIGGY BEHAVIOUR: Fortunes have been founded on the unexpected – but not many as unexpected as a small pink pig with a special appeal to toddlers. The piggy star in question is Peppa Pig, but nobody has to deal with cantankerous animal stars with demands for double troughs in their dressing rooms and their own mud bath. Peppa is a cartoon character, and now part of the much larger Entertainment One group of companies, which makes TV entertainments, a cash intensive but successful business. It saw profits rise 42% in the first half (ending September 2015) to £39.9m. Turnover was down a little as the number of new releases dropped, but the catalogue of family favourites keeps bringing in the bacon.
KEY MARKET INDICES: (at 18th November 2015; comments refer to change on week; $ is US$)
Interest Rates:
UK£ Base rate: 0.5%, unchanged: 3 month 0.57% (steady); 5 year 1.37% (falling).
Euro€: 1 mth -0.14% (steady); 3 mth -0.07% (falling); 5 year 0.12% (falling)
US$: 1 mth 0.31% (steady); 3 mth 0.39% (fall); 5 year 1.58% (falling)
Currency Exchanges:
£/Euro: 1.42, £ rising
£/$: 1.51, £ steady
Euro/$: 1.07, € steady
Gold, oz: $1,069, falling
Aluminium, tonne: £961 falling
Copper, tonne: £3,088, falling
Oil, Brent Crude barrel: $43.57, falling
Wheat, tonne: £112, steady
London Stock Exchange: FTSE 100: 6,239 (fall). FTSE Allshare: 3,427 (fall)
Briefly: The FTSE indices continued to weaken, possibly reflecting some poor European economic data and of course the tragedy in Paris. Although short interest rates are steady, long rates are still showing signs of falling, even in the US$, which has been pushing up. Commodities generally are also still falling, with copper in particular sinking fast. Oil has also dropped quickly from the US$50 level achieved only three weeks ago to $43.
