17 December 2015
Week in Brief: BUSINESS AND THE CITY
ROLLING AWAY: As detailed in the story elsewhere in this week’s edition, speculation about the financial condition of Rolls Royce plc has surprised the stock market. 10, Downing Street refused to deny that possible nationalisation of the nuclear division was being considered to protect strategic defence issues – RR makes the nuclear engines for both the current edition of Trident submarines and their forthcoming replacements. Rolls said that they continued to have regular but routine discussions with government about its role in the various defence programmes, which include jet engines for home and export, and the coming generation of gas turbine engines. The rumours did no harm to the share price though – it rose from recent weakness to 566p, falling a trifle later in line with the market. This is presumably the market reflecting that if the nuclear division were to be taken into public ownership then the rest of the business might become a takeover target.
MORE OIL: The oil market still captures the headlines, as the price continued to drop following the acrimonious OPEC meeting ten days ago. At the end of the week the price per barrel broke downwards through the US$40 level and continues to head down – US$37.20 at the time of writing. Though welcome to western countries who are net consumers of oil, and also to China which is a huge user of oil and struggling with its economy, the ramifications of this precipitate drop are likely to be far reaching. They include rapid contraction in the spending budgets of oil rich states, a body blow to green politics and alternative power technology suppliers trying to justify an increasing price differential on sustainable energy, and a further threat to the coal industry. In fact the latter won’t have much effect in the UK – our last deep coal mine, at Kellingley in Yorkshire, closes next week. Not good also for Britain’s North Sea oil revenue, or for Aberdeen’s role as the world centre for research and development in deep sea oil recovery – last spring the city was still regarded as a boom town with the second highest office rents in the UK, now developers report that there are no enquiries for space in the market and offered rents are plummeting.
INFLATED EXPECTATIONS: Inflation is up. Don’t panic though – the headline figure last month was 0.1% – up from minus 0.1% the month before. This is a good place for the economy to be, though economists tend to prefer slightly more than current levels – the Bank of England target levels set by the government is somewhat under 2%. The reason for this is mainly psychological – it gives an illusion of growth and gradually erodes the burdens of long term debt without panicking lenders and depositors. The net direction is likely to be back into mild deflation as commodity prices, especially oil, continue to drift down.
FLOORED: The stock market was pleased by the latest results from Carpetright, the UK’s largest flooring retailer, with four hundred stores, mostly out of town, across the UK, and also in Europe. In the first half of 2015, profits were up by six percent and turnover by nearly four percent in what remains a very competitive business, and that was after the costs of the continuing repositioning. Carpetright closed twenty seven branches in the UK and another five in Europe, but opened five in Britain and four in Europe. The strategy is to try and push the shops upmarket, both in the quality of each unit’s appeal, but also locationally. Carpetright has long been almost entirely a retailer of heavily discounted deep pile budget carpeting. But in recent years carpeting has retreated in the face of alternative floorcoverings such as hardwoods, seagrass, and laminates. This has supported the rise of much smaller independents who have a wider and more fashionable offering, and are more attuned to fashions in their area. In the summer Carpetright drastically revamped both their style and the offering in four stores, and whilst they are not prepared to comment on trading there, it is believed that it has been successful and will be rolled out on a much wider basis. If combined with the company’s aggressive marketing and discounting, and also with another product which is about to be introduced on Boxing Day – interest free credit – then the outlook for shareholders could be very good. The share price rose five per cent on the trading statement.
WALLED: Not such good news on the wall coverings front though. Walker Greenbank, who are one of the UK major upmarket wall covering makers (and a rival to the Chancellor’s family business, Osborne and Little) had their fabric printing unit near Lancaster flooded by the recent storms in the the North West. Considerable damage was done to printing machinery and to stock, and Walker Greenbank, who are quoted on the AIM market, think they could be out of operation for the most of the first half of next year. The factory accounts for about fifteen percent of group sales, but one advantage of computerised printing technology is that the programmes can be printed on compatible printing units, if the company can find capacity with a rival somewhere. The loss is believed to be fully insured, but there is bound to be some disruption to supply. Walker Greenbank will be especially concerned to maintain its reputation for quality. It owns the Sanderson, Zoffany, Morris & Co, and other up market brands which command premium prices. Profits were eleven per cent up, to £8million, for 2014, with turnover up also, so the company will be hoping for a dry winter from now on and a smooth return to full production.
BOY RACERS DREAM: TVR has long been the serious car enthusiast’s motor chariot of choice. A sensual design, magnificent speed, and a lot of noise combined with uncertain build quality and dubious reliability produced a highly specialist niche sports car, made in a factory in Blackpool. After various changes of ownership the brand closed about ten years ago, but now it is in the ownership of Les Edgar, a video game millionaire with a penchant for fast cars (and, presumably, a lot of cash). Mr Edgar, doing things in an unconventional order, has announced designs for a new TVR, even louder and faster (200mph from a Cosworth tuned engine) than the old models, and taken 300 orders backed by £5,000 per car deposits. Now he needs to build a factory and is talking to local authorities about some backing to get a site and start building.
HEADACHES ALL ROUND: Trouble down under for Reckitt Benckiser, the British proprietary drugs giant which is having a Volkswagen moment in Australia. Reckitt sells its leading brand Nurofen there – and elsewhere – under various symptom related marketing guises and at various prices – Nurofen Back Pain, Nurofen Migraine Pain, Nurofen Tension Headache, and so on. One little problem – they are all exactly the same thing, apart from the packaging. An Australian court has found that there was an intention to deceive and told the company to withdraw the products forthwith. Nurofen Red Faces, anybody?
KEY MARKET INDICES: (at 15th December 2015; comments refer to change on week; $ is US$)
Interest Rates:
UK£ Base rate: 0.5%, unchanged: 3 month 0.57% (steady); 5 year 1.32% (rising).
Euro€: 1 mth -0.12% (rising); 3 mth-0.08% (steady); 5 year 0.14% (steady)
US$: 1 mth 1.00% (rising); 3 mth 0.65% (rising); 5 year 1.57% (steady)
Currency Exchanges:
£/Euro: 1.38, £ steady
£/$: 1.51, £ steady
Euro/$: 1.1, € steady
Gold, oz: $1,072 falling
Aluminium, tonne: £976 falling
Copper, tonne: £3,072, steady
Oil, Brent Crude barrel: $37.20, sharp falls
Wheat, tonne: £112, steady
London Stock Exchange: FTSE 100: 5,874 (falling). FTSE Allshare: 3,257 (falling)
Briefly: It proved to be a dramatic week with steep falls in the oil price followed by downward movements on UK and European stock market indices. To some extent that is the markets reflecting concern at the turmoil caused by the falling oil price (though arguably that should be a positive factor), but also the weakness of major commodity shares. The oil companies are having a difficult time as are many of the major mining companies who make up a significant part of the FTSE100.
