07 July 2016
Week In Brief: BUSINESS AND THE CITY
MIXED MESSAGES IN THREADNEEDLE STREET: The Governor of the Bank of England is treading a very difficult high-wire at the moment. He nailed his colours firmly to the “Remain” mast, in a way that most previous Governors have been careful to avoid in matters of political controversy. Now he has to protect the interests of the economy with essentially a caretaker Chancellor (who may or may not be in the job for much longer) and a departing Prime Minister. Signals from the Governor’s office suggest that base rate could be lowered – it has been a half of one per cent since March 2009, although he has not suggested whether this be to nil per cent. But lowering it will not just be an easy way of cutting borrowing costs (which a few points cut will not affect much), it will also have all sorts of knock-on effects on interest earnings for pensioners and other net depositors, and act as a possible disincentive to those already worried about investing in sterling assets. So he has also announced a loosening of capital ratios for banks – which might sound an odd strategy at a time of potential recession. But Mr Carney wants to keep the banks lending and not have them close their doors to protect capital – even if that means lending on the Bank’s old bugbear, property. Although there have been increasing noises in the prime commercial property sector that the market, especially in offices and in London, is starting to overheat, the Governor does not want too abrupt a reversal of the growth seen recently, where office rents have been rising and yields falling – causing investors to rush to put more money into property. Brexit might very quickly reverse that trend if some City occupiers decide to move to Europe, so best to try to make sure the banks are comfortable lending to the sector to tide it over the forthcoming troughs. Already, many of the major property funds have suspended withdrawals by investors temporarily whilst the market settles, so the threat to the property market can be clearly seen.
MONEY IN THE FIREBOX: Network Rail, which is owned by the government and owns and operates most of Britain’s railway infrastructure reported that profits were down 19% for the year ended March 2016, at £411m. The profits are not paid to the government, but reinvested into the railway system. Which is just as well – Network Rail also reported that debt was up by almost £4bn, to £41.6bn at the year end. The company blamed the age of the railway system, which it said is now under strain because of the record number of passengers which the railways are carrying, and the increasing amount of freight, even allowing for the loss of coal and steel traffic. To try to cater for the increase in patronage and to improve performance – especially time reliability, where targets continue to be missed – Network Rail is investing heavily into major renewal and upgrading projects which is the main source of all that additional debt. However, commentators have suggested that the company is not getting good value for money, and has rushed too quickly into prestigious new systems, such as the electrification of the railway from London Paddington to Bristol, which is running well over budget and behind programme. At the same time arrears of maintenance are causing big problems – such as the collapse of an embankment near Carlisle which has closed the second route in the North West to Scotland completely for the rest of the year.
ESCAPING THE NETTO: J Sainsbury, which recently bought Home Retail Group, owner of Argos (the deal is agreed but not yet closed), is continuing, like great rival Tesco, to tidy up its trading approach. The latest move is to shut down its joint venture with Danish supermarket chain Dansk Supermarket, the owners of discounter Netto, with which had opened 16 budget supermarkets in the north of England, as rivals to Aldi and Lidl, the German discounters. But it seems to have been a case of too little, too late. Aldi and Lidl were already well entrenched in the north and Netto could not find enough sites to make economic sense for the new business – and analysts could not work out why Sainsbury would not simply use its own brand which is already well regarded if it did find opportunities. The two co-owners had to make a decision as to whether they should make substantial further investment to create opportunities of scale, or give up. With Sainsbury concentrating on the Argos acquisition, the decision was to give up. No jobs will be lost – the two parents will absorb the employees. Embarrassing for Netto though – this is second time around. They built up a much bigger discount chain in the early part of this century which they ended up selling to ASDA in 2010 under the pressures of the recession.
NO BREXIT: Britain may be heading for the European exit, but in the London Stock Exchange everything is heading the other way. For some time the LSE has been negotiating a merger with Deutsche Borse, the largest German stock exchange, based in Frankfurt. Finally the agreed terms were put to the vote and the result was 99.89% in favour. The merger will now proceed. But what will happen in the long run? The deal was carefully structured to give senior roles mostly to Brits initially, then to Germans, then on merit. The main operations were to stay in Britain, but with much of the technical backup in Frankfurt. That may change though with Britain leaving the EU – the German shareholders of DB will own 55% of the merged business, so they may want to take more of the business into the Eurozone more quickly.
HOUSES BUILT ON ROCKS: Persimmon, the York headquartered and mainly north and midland focussed house builder, was very quick to release first half (to the end of June) trading commentary and preliminary results. Persimmon, as with all the major house builders, seem to be major losers in the post Brexit referendum turmoil, at least so far as their share price is concerned. Persimmon said that revenues were up 12% in the first half, to £1.49bn, with sales continuing strong through May and June. Further, they said, they expect this trend to continue as they cannot see that many of their buyers are Brexit sensitive; they point to the two major factors that affect their business as being firstly, mortgage availability and interest rates – which continue to show as very positive, and secondly the planning system which continues to be a serious impediment to supplying enough stock. However positive the company is, the market is much less so. The share price, which had been £20.98 on Referendum Day, fell to between £13 and £14 – and has stayed there.
NO MORE EXCUSES: Those of our readers who travel via Heathrow will be glad to have one piece of good news. No, not that the third runway is confirmed. But a new luggage handling facility is – Balfour Beatty has won a £170m contract to build a state of the art baggage facility. Now there is a better than evens chance that you and your cases will arrive in the same place at the same time, every time.
KEY MARKET INDICES: (as at 5th July 2016; comments refer to changes on the week; $ is US$)
Interest Rates:
UK£ Base rate: 0.5%, unchanged: 3 month 0.52% (falling); 5 year 0.43% (falling).
Euro€: 1 mth -0.41% (falling); 3 mth -0.28% (falling); 5 year -0.32% (falling)
US$: 1 mth 0.49% (rising); 3 mth 0.62% (rising); 5 year 0.94% (falling)
Currency Exchanges:
£/Euro: 1.18, £ weakening
£/$: 1.31, £ steady
Euro/$: 1.11, € steady
Gold, oz: $1,342, rising
Aluminium, tonne: $1,652, rising
Copper, tonne: $4,919, rising
Oil, Brent Crude barrel: $47.91, rising
Wheat, tonne: £110, rising
London Stock Exchange: FTSE 100: 6,522 (steep rise). FTSE Allshare: 3,519 (rising)
Briefly: Nobody would want to be a market predictor in times such as these. Although sterling continues very weak, the stock market is having a great time, the FTSE 100 reaching over 6,500 on Monday. And many commodity prices are moving up to; suggesting talk of a worldwide recession may be overdone.
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