05 January 2017

Week In Brief: BUSINESS AND THE CITY

GLOOMY START:  First fashion retailer to comment on its winter trading results is Next, long regarded as an exemplar of that famously roller coaster sector.  But last year its winter sales were poor and shocked the market; it vowed that this season it would get it right.  No such success.  Sales to the end of December were provisionally said to be about 3.5% down on last year, with particularly weak performance (down 7%) in the opening days of the post-Christmas sales – a trend also commented on by other retailers, based on both takings at the till and footfall in the stores. Next had guided analysts to sales going up a little, so this was a double shock and was reflected in the share price which fell 14%.  Some of this is thought to be of a result of the intensely fought pre-Christmas so called “Black Friday” promotions, which in a short time have become an expectation among shoppers getting their Christmas present list sorted at discount prices – and not saving their pennies for the early January sales.  Lord Wolfson, long serving chief executive of Next, is sparing shareholders nothing – not only did he comment that 2017 could be another very difficult year on the sales front, but he also pointed to a range of cost increases which he expects to hit his business in the forthcoming 12 months, ranging from higher import costs for stock as a result of the weak pound, to higher business rates on its southern stores as a result of the forthcoming rate revaluation, and encompassing higher minimum wage rules and the cost of the apprenticeship levy.  After all this gloom shareholders were probably surprised to hear that Next still expects profits around £792m, at the bottom of expectations set out at the beginning of the year, but not a total disaster; indeed the company expects to pay special dividends of around £250m to its shareholders next year as it sloughs off surplus capital.  The company warned though that it thinks profits will drop further next year, and also points to a market that may be becoming increasingly mature – we are actually buying less clothes (at a lower average spend) and seem to be increasingly spending our cash on eating out and other leisure pursuits.

OR MAYBE, A CHEERFUL START: If retailers are glum, UK manufacturers generally aren’t.  The weaker pound, especially since the Brexit vote in June, has made British-made goods more attractively priced in overseas markets – and also made them better value compared with imports.  All this means that production in the nation’s factories continues to rise and is now at highest levels since 2013.  Value added engineering is perhaps the sector benefitting the most – probably not just from the currency factor but also due to investment by many businesses into the technology end of the market, where premium prices can be obtained for efficiency and anything that lowers labour costs.  The UK motor industry is having an especially good time, with sales up an eighth to 1.6 million in the year to the end of November – and remarkably more than three quarters of those sales were for export.  One example is that of Land Rover, the West Midlands based car manufacturer, which has over the last twenty years and though several changes of ownership invested both in the quality of its cars and in the manufacturing processes in its factories.  What Land Rover now produces may be sold under the same brand names (principally Range Rover and Discovery) but they are very different vehicles – specification to compete with any luxury brands but also an ability to go off-road.  Meanwhile the old range of mud pluggers has been completely phased out so that farmers and contractors and those who don’t want too much technology will, at least for the time being, have to look elsewhere – Land Rover realising that the vast bulk of their profits are from their high spec vehicles. They are investing more money into their UK business – though not quite going so far as Weir, the Scottish engineers and pump makers, who are considering bringing back to the UK some of the production capability they relocated abroad. The question for all such investors though is whether the current currency exchange levels will stay as they are, and what Brexit, when implemented, will do to their ability to export from the UK.

GO NORTH YOUNG MAN:  So perhaps those booming manufacturers may consider employing some nervous toilers from the City of London.  The London Stock Exchange operates two markets – the main market for more mature and bigger businesses and AIM, which is especially angled at the smaller players, the so called smallcaps and midcaps.  AIM (the Alternative Investment Market) was set up to make it easier and cheaper for small companies to raise money from third parties, with easier rules, lighter touch paperwork (including lighter due diligence), and lower listing and operating costs.  In spite of a few scandals it was a major success, reaching its peak in 2007 with over 1,600 companies listed.  But since then it has relentlessly shrunk – partially due to the 2008 recession which led to some companies failing and other being swallowed up by larger stronger rivals, but also due to the growth of the equity risk funds which offer a much simpler way for entrepreneurs to raise backing – and often gives them management support and marketing links.  The thinking of AIM was that eventually the risk funds would want to exit their investments via AIM listing, but that does not seem to happen, with companies being traded to other risk funds or sold to large main market companies or increasingly to overseas funds, and the regulatory burden on the AIM market ever increasing.  Bad news for the stock brokers who specialise in advising AIM listed companies – a small market and less activity means that there are less and less earnings for them and the number of broking firms has fallen from over 50 to 36.  And that is still too many, say analysts who can only see further declines.  Not a good outlook for young City people out to establish names and reputations.

NICE BITE:  It’s pasty eats pasty in Cornwall.  The upmarket brand, West Cornwall Pasty Company, from St Just, near Truro has been sold by its private equity owner Enact to Samworth Brothers, who own leading rival and indeed market leader, Ginsters, based in Callington in east Cornwall.  The purchaser intends to continue with West Cornwall as a separate brand trading mainly through its retail outlets.  The price paid has not been disclosed, but no doubt the deal team will be OK for a celebratory lunch.

KEY MARKET INDICES:  (as at 3rd January 2017; comments refer to changes on last 14 days; $ is US$)

Interest Rates:

UK£ Base rate: 0.25%, unchanged: 3 month 0.37% (fall); 5 year 0.80% (falling).

Euro€: 1 mth -0.37% (steady); 3 mth -0.32% (steady); 5 year -0.04% (fall)

US$: 1 mth 0.77% (rising); 3 mth 1.00% (rising); 5 year 1.94% (falling)

Currency Exchanges:

£/Euro: 1.22, £ rising

£/$: 1.18, £ falling

Euro/$: 1.04, € rising

Gold, oz: $1,166, slight rise

Aluminium, tonne: $1,701, slight fall

Copper, tonne: $5,573, slight fall

Oil, Brent Crude barrel: $55.55, rising

Wheat, tonne: £139, rise

London Stock Exchange: FTSE 100: 7,133 (rise). FTSE Allshare: 3,889 (rise)

Briefly: The New Year has started with some modest recovery in prices following the holiday lull. Oil continues established in the mid $50’s range, though forward prices are weakening. Increases in long term dollar interest rates have faltered which might suggest a peak for the moment, though sterling and euro have not yet reacted to the dollar movement over the last six weeks

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