06 October 2016
Week In Brief: BUSINESS AND THE CITY
BASE CAMP £: The FTSE 100 reached almost its highest level ever on Tuesday and was maintaining values over 7,000 on Wednesday, as Mrs May and the Tory Party conference made tough noises on a Hard Brexit. Base Camp Four for the index, but a dangerous place to be. The FTSE100 is being driven by the deprecation of the pound, which fell further this week against the euro and the dollar, driving the market up as returns adjusted with investors seeking income. But it is not just the internationally dominated FTSE100 that is powering up to the peak; even the FTSEAllshare has moved sharply up. The analysts think that is equally to do with the depreciating pound, the UK is seen as a safe haven still, even with the political risks ahead. But the analysts are not enjoying this particular stock market boom; like nearing the top of the mountain, the higher it goes the greater the dangers of a fall. In this instance, the investors are struggling for places to put their money – there are political threats and under-performance in Europe; the USA is doing well but there are political threats there too; the BRIC states are not doing as well as they were – and quite a lot of money for investment is actually coming from wealthy entrepreneurs in those areas who want to diversify political risks. UK property, that long term standby for many a rich investor who wants not only to invest his money but to take his friends to admire it, is certainly seeing a surge of inward investment but the traditional central London markets are also suffering from a couple of issues – nobody wants to sell because then what do you do with the money? And nobody wants to buy premiere residential because it is clearly suffering a mini-downturn. The answer may turn out to be the provincial markets – but not for the property averse investor who can only follow the FTSE. Or be very bold and trust in some more esoteric form of asset management fund – classic Ferraris, anybody? Or fine wines; at least you can console yourself by drinking them.
NOT PEAKING, BUT FLOATING: Stockbrokers are not the only ones having a good time at the moment; the investment bankers are seeing an unexpected upsurge in activity in new listings. Star of the week is the impending IPO of ConvaTec, who have just issued the trailer for their forthcoming production, aimed at late October or early November, which hopes to raise US$1.8bn by floating the company on the London Exchange. The business, which operates from Berkshire, turned over US$1.7bn last year from its activities making medical aids for older patients, particularly colostomy bags. It was bought by its two private equity fund owners from USA pharmaceutical giant Bristol-Myers Squibb in 2009 (it was originally founded in 1978). As often with private equity owners it has high levels of debt and most of the new money will be used to bring down debt levels to, or below, normal industry levels. It is also about to get a new chairman – Sir Christopher Gent, former chairman of GlaxoSmithKine will come aboard at the time of the floatation, and is expected to lead the business on a rapid growth trajectory – its market is growing very strongly as the population ages.
The owners say that the result of the Referendum was not an influence on their decision to float, but many of the raft of flotations coming up this autumn were certainly delayed by a reluctance to go to the market whilst the referendum was pending; hence the rush now – a rush which will be pondering the current bull run very thoughtfully, and hoping the direction of the market does not reverse before Christmas
CRUMBS: An unexpected loser from the Referendum result – or at least from the fall in sterling that followed – is Greggs, bakers to practically every town in Britain, headquartered on Tyneside where it began many years ago as a single shop run by Mr Gregg. Much of the raw material that goes into the products that so tempt customers – sausage rolls, pasties, cream buns, and much more – is imported, meat, flour, coffee, fats and oils, and even some dairy products. Some of that can be replaced from local sources but by no means all and, if sterling continues the way it is going, input costs are going to increase significantly. Indeed the costs of some ingredients, such as wheat, are rising per se. But Greggs has no export business to balance things off so the result is a squeeze on margins or an effort to push prices up; as customers at the more cost conscious end of the market are Greggs’ bread and butter, that is not easy. Roger Whiteside, chief executive, says that there is not an immediate problem as Greggs buy on forward contracts, but most of those will be up for renegotiation by early next year when, if nothing changes, he expects a squeeze on profits. There is no sign that Greggs growth is slowing yet -sales were up 5.6% in the summer quarter.
GOING HOME: Barclays Bank was early into international markets – some old-timers remember Barclays DCO, its separately run business mainly active in Africa – but has slowly withdrawn, suffering both from bad lending results and from unmanageable political risks. Latest arm to be chopped off is the Egyptian banking business, established over 150 years ago and now trading out of 56 branches using about £2bn of capital. A minnow by Barclays’ standards but its disposal part of the simplifying operation being run by new chief executive Jes Staley. The operation is being sold as an operating bank in one lot to a Moroccan rival. Next likely to go is the remaining operation in Zimbabwe – if Barclays can find a buyer – and its remaining interests in South Africa. There is also an African operation which specialises in business banking where Barclays is exiting more slowly, as there are some feed-ins to the core bank. Rumours are that one group interested in that is led by Bob Diamond, former Barclays chief executive. Mr Staley envisages that within five years Barclays will be entirely focused on its UK and USA operations, which is where he sees best opportunities for low risk lending and selling premium services.
MOVING ON: Aston Martin, the great British car maker is changing itself to a broader luxury brand, having recognised that making luxury cars is a tricky business in down cycles. It is now going into luxury yachts – not an uncompetitive market, with the hope of various brand tie-ins such as clothes and travel. It is also, enthusiasts may be horrified to hear, going to modernise its car factories with extensive robotisation. (It has one robot at the moment, rumour had it that it made the tea, but apparently it is a gluing machine.) Aston Martin lost £128m in 2015 and sees .a very significant increase in output coupled with a reduction in unit costs as an essential element of returning to profit
KEY MARKET INDICES: (as at 4h October 2016; comments refer to changes on last 7 days; $ is US$)
Interest Rates:
UK£ Base rate: 0.25%, unchanged: 3 month 0.38% (steady); 5 year 0.39% (rising).
Euro€: 1 mth -0.37% (steady); 3 mth -0.30% (steady); 5 year -0.27% (rising)
US$: 1 mth 0.52% (falling); 3 mth 0.86% (steady); 5 year 1.21% (falling)
Currency Exchanges:
£/Euro: 1.13, £ falling
£/$: 1.27, £ falling
Euro/$: 1.12, € steady
Gold, oz: $1,311 falling
Aluminium, tonne: $1,670, rising
Copper, tonne: $4,790, rising
Oil, Brent Crude barrel: $48.72, rising
Wheat, tonne: £129, rising
London Stock Exchange: FTSE 100: 7.074 (rising). FTSE Allshare: 3,849 (falling)
Briefly: Commodity markets generally continued to strengthen, following the cautious trend of the last few weeks. Oil again is moving to test the $50 a barrel level – with winter coming in the USA and Europe, it may succeed this time. The LSE almost reached new heights (see above). Interest rates remain steady with a curve up in the longer term; the pound weakens against the dollar and the euro.
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