01 June 2017
Week In Brief: BUSINESS AND THE CITY
EDGING TOWARDS THE ABYSS: It is nearly ten years since the beginning of the banking crisis which has so changed the financial landscape of the western world, with what almost became a complete banking failure – indeed, would have done so had it not been for the actions of central banks in providing liquidity to what were in truth bankrupt banks. That rescue solution (ready lines of support; super low interest rates to ensure the survival of many over indebted customers, especially in the worlds of residential and commercial property; and new state provided capital, together with forced mergers) worked, but at a price we are still paying, and will go on paying for many years. Low interest rates are great for business, but much less so for depositors, giving what we can see as perhaps a key issue for the next decade or two, the inadequate savings and investments of the generations now approaching retirement, who fear not least the rising costs of healthcare in old age – as Mrs May has just noticed.
And at a more micro level, the most troubled of the banks are still struggling with the legacy of their problems. In the UK, Barclays seems to have recovered, after some major boardroom changes. Lloyds finally got free of its governmental shareholding last week and has done remarkably well in rebuilding both its retail business (including Halifax) and its commercial side (though analysts, whilst praising the remarkable success story on the business side, point to low investment in technology and systems where Lloyds will now need to invest). RBS is still loss making and is likely to have a big UK government shareholding for a while yet. RBS also has the distraction of some heavy litigation still on-going, most notably a class action by shareholders involved in the rights issue shortly before RBS’s effective collapse, many of whom would like to see former chief executive Fred Goodwin in the witness box. Most shareholders have in the last few days accepted the bank’s offer of 82p per share to drop their action, but a few are determined to carry on, though whether they will depends on their willingness to fund the legal fees of the case – especially if they lose.
But most troubled is the Coop Bank, whose fortunes we have commented on before in these notes. Coop is still struggling with bad loans on its books and a lack of profitability and is approaching the point at which the regulator is likely to ask it to close its doors and stop trading. The Cooperative Group now only owns 20% of the bank, and has financial troubles of its own, restricting its ability if asked to put new capital in the bank. The other shareholders are hedge funds, professional investors who have been asked to convert their £450m or so of current loans into equity – and provide another £300m of new capital on top. Fund managers are not noted for their sentimental streaks, or for their willingness to leap into the unknown, and to put £300m more at risk to save £450m will involve some serious thinking and calculating. So far the shareholders have said nothing of their intentions, but time is starting to run out; it is not known what is happening to the bank’s deposit base but if the bank should fail, then depositors will be subject to the £85,000 safeguard insurance from the Financial Services Compensation Scheme, so money may start to drift out soon. The bank is also for sale and there is believed to be one interested purchaser, but they will be presumably looking to an increasingly hard bargain as the clock ticks.
NOT SO GREAT: Although the UK commercial property market is not showing any particular signs of trouble, some of the big players in the market are suffering from the modest shifts which have occurred over the last year. Yields have eased slightly on all but “trophy” properties (those which tend to be bought for architectural or locational strengths), and incentives to tenants to take new space, especially in central London offices, have become a little more expensive. Great Portland Estates plc, a FTSE250 company, specialises in London West End Offices and its results show that it is feeling the pinch from that market – having made over £550m in the year ended March 2016 this slumped to a loss of £140m in 2016/17, as the company found letting deals more difficult to do and had to down-value its stock. But there is a bright side – if values continue to fall the company expects to be able to buy sites for future development at more reasonable prices.
RACING OFF: Maybe the time is ripe to get out of real estate and into real cars. Aston Martin has a new model out, the DB11, and it is selling remarkably well. First quarter sales at £188m are up 75% with 1,203 cars in the hands of happy new owners (these are expensive cars, in case you did not realise), overall turnover doubled. That swung the business back to profit for the quarter, only £5.9m it is true, but giving an outlook for the year of maybe £170m or more. That implies annual sales of over 4,000 cars, so if you buy one it won’t be the rarest car on the road – but rare enough.
MOUNTAINS OF MONEY: The British love affair with outdoor activity continues – and that is good news for Mountain Warehouse plc, who have the largest chain of specialist outdoor clothing stores in the UK – 262, of which 41 were opened in the last financial year. There are plans for another 40 or so, but the future is likely to see an emphasis on expansion into central Europe – another area of mountains and enthusiasts who walk amongst them, and also into the USA. Sales were up last year (to end of February) by 30%, at £184m, though the continuing costs of expansion meant the profit increase was a bit slower, at 22%, for a still healthy £20m. Of that turnover, 25% was from overseas which was double the proportion of the previous year.
SHORT RATIONS: We have been following the difficulties of Restaurant Group for some time. Now it looks as though the corner may have been, if not turned, at least reached. The company, which owns a number of family diners, most notably Frankie and Benny’s, has just reported on the 20 weeks trading to last week (we commend them on the efficiency of their management reporting). Turnover followed recent trends in that it was down – though by only 2%, the good news being that customer numbers are now increasing. New chief executive Andy McCue has been looking at pricing and what customers actually want, and now they are getting a bit less choice, but at lower prices, and with more focus on popular lines to cut out waste. Mr McCue has also looked closely at where the chains do best and closed a number of less profitable or loss making branches, but is opening new restaurants where footfall is of the right type for the chains offerings – airports and next to cinemas being the best. Investors liked all this, with the shares up over 10%.
KEY MARKET INDICES: (as at 30th May 2017; comments refer to changes on last 7 days; $ is US$)
Interest Rates:
UK£ Base rate: 0.25%, unchanged: 3 month 0.30% (unchanged); 5 year 0.65% (fall).
Euro€: 1 mth -0.37% (steady); 3 mth -0.33% (steady); 5 year 0.05% (falling)
US$: 1 mth 1.04% (rise); 3 mth 1.20% (rise); 5 year 1.84% (steady)
Currency Exchanges:
£/Euro: 1.15, £ steady
£/$: 1.29, £ steady
Euro/$: 1.12, € steady
Commodities:
Gold, oz: $1,263, modest rise
Aluminium, tonne: $1,949, rise
Copper, tonne: $5,670, modest rise
Iron Ore, tonne: $58.15, 22% fall
Oil, Brent Crude barrel: $51.64 falling
Wheat, tonne: £144 steady
London Stock Exchange: FTSE 100: 7,532 (slight rise). FTSE Allshare: 4,123 (slight rise)
Briefly:
More slow upward movement for our commodities basket. That is, apart from iron ore (which suffered a dramatic collapse after a smart recovery over past weeks) unexpected by the market which is struggling to explain the reason – unexpectedly high stockholdings being the most popular explanation. Oil weakened; short term dollar interest rates moved up.
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