1 September 2016

Week in Brief: Business and the City

BRAKE AND ACCELERATE:  Tata’s UK subsidiary JLR – or Jaguar Land Rover as it is better known – reported a good second quarter to the end of June.  Or was it a bad second quarter?  In terms of volume it was certainly very impressive; sales were up 16% on the comparable period last year, with more than 132,000 cars sold.  That pushed total earnings up to £5.45bn – but that is only 9.2% up.  The reason for that is that JLR is selling an increasing range of smaller cars, with the continuing success of the baby Range Rover, the Evoque, the new Discovery Sport, and, on the Jaguar side, the XE and the F-Pace.  More cars but lower priced cars translates into lower profits – down from £638m to £399m.   JLR also pointed to the immense amount of investment in the business since Tata bought it 2008 – over £11bn – which is also putting a brake on profitability, though likely to lead to much greater growth in the future.  Another factor suppressing profits this year is the less certain economic environment in China, one of Land Rover’s biggest markets, especially for the top of the range, and most profitable model, the Range Rover.  JLR think that that market will recover – but probably never to the level it achieved for JLR  in the past, as the Chinese government is placing greater emphasis on home produced, or at least locally built, luxury vehicles.  But JLR remains confident that all that investment has given it a solid basis for future growth for quite a while – the F-Pace and the XE look to be selling strongly and are both doing especially well in the USA, plus there is a new Defender due out shortly – a direct descendent of the original iconic off roader that began the Land Rover business.

ENERGY CORNER:  Britain’s power business is under great pressure at the moment, with growing worries that the output from the aging network of power stations will fall short of demand should we have an exceptionally cold winter in the next few years.  The further delays on Hinckley Point, and in building new nuclear power stations generally, the closure of most of the first generation nuclear stations and practically all the coal fuelled stations, the difficulties in getting reliable output from alternative fuel sourced stations, and the slow build-up of green energy sources, all mean that peak power coverage is only just positive even in beneficial conditions.  In the long run, the outlook is much better – the various wind farms now under construction (mostly offshore) will be more efficient than their land based siblings, the UK’s shale oil and gas reserves will provide a reliable source of carbon based fuel for traditional power stations, and bio-mass is becoming more efficient all the time.  Now the National Grid, which manages the supply and demand equation, is to invest in battery storage facilities so it can store power from renewable energy outputs – which tend to be less regular in output than carbon type generators.  Large capacity battery technology has moved on a great deal in the last ten years, assisted by the amount of research going into batteries for electric cars.  The first round of NG facilities is comparatively modest – £66m in eight smaller schemes around the UK, located next to power stations and windfarms, which will charge up during periods of power surplus, and then be able to come instantly on-line when needed.  This has always been possible – the Ffestiniog Power Station in North Wales for instance pumps water up into a storage facility during surplus, the water been released into the turbines of a hydro power facility when required – but lithium battery technology means power can be stored for much longer.  It’s why your electric torch stays alight for so much longer – soon it could also be why your home lights stay lit on cold nights.

INDIGESTION:  Although the food industry reports that the budget restaurant business is booming after the Referendum – apparently we are all feeling so good about the future that we are eating out much more, or in London, having it delivered to the door –  the upsurge in outsourcing eating has come a bit late for Restaurant Group.  The FTSE250  company operates a number of lower and mid-market eatery chains, such as Frankie and Benny’s which has 263 Italian style outlets, and Chiquito’s which is Mexican style.  The first half of 2016 showed a £22m loss compared with a £38m profit for the comparable period last year.  This is blamed on problems in the Frankie and Benny’s chain, where customers have been resisting prices rises, and menu changes and lower quality of service have also led to lower footfall and spend.  The group have decided to close 33 sites including 11 Chiquito’s – and dispense with the services of its chief executive – although it also continues to open new restaurants.  That makes understanding the figures a bit complicated – but stripping out new openings, sales are down about 4% on comparables, although 3% up overall, with a £59m charge to reflect closure costs and site down-valuations.

NOT MOVED: We may be eating out more as signs of new found Brexit confidence – but are we are moving house less post referendum?  Residential mortgage approvals for July were down about 10% on the previous running average, and on last year.  Early to say but maybe we are cutting back on large purchases until we can see more about our future post European lives.  Car finance lending showed a similar pattern, so both these will be good indicators of consumer confidence as negotiations progress.

“IF YOU WANT A FRIEND…  get a dog”, said Gordon Gecko in that favourite film of every City banker, Wall Street.  But now bankers have a new friend, and a very surprising one at that.  Carolyn Fairbairn, newly appointed Director General of the CBI, the representative body of businesses and employers, has said that bankers have paid their penance for their role in the 2008 recession.  Now, she says, the time has come to forgive and move on, to let the bankers “off the naughty step”, because we need a strong independent and innovative financial sector as the country moves to and through its exit from the European Union.  She went further, saying that the regulators of City institutions should now start to “prioritise competitiveness”, remarking that this might require amending legislation to change the remit of the regulators.  She has also called for the withdrawal of the 8% top up tax which banks have to pay on profits, saying that this will enable the banks to rebuild capital more quickly, and be more competitive.  She signalled that her next speech will urge the government to seek in its Brexit negotiations a strong position for UK financial services in Europe, and to ensure that British finance houses are able to employ the best talent from around the world by a liberal visa system that will encourage mobility of labour in the UK market.  Ms Fairburn sees Britain’s banking industry and the City as integral to the future strengthen of the British economy – and she would like the CBI to become a representative body for the financial services industry by encouraging many more financial houses to join.

KEY MARKET INDICES:

(as at 30th August 2016; (commodity prices and FTSE as at 26.08.16 due to Bank Holiday), comments refer to changes on the week; $ is US$)

Interest Rates:

UK£ Base rate: 0.25%, unchanged: 3 month 0.42% (rising); 5 year 0.37% (rising).

Euro€: 1 mth -0.23% (rising); 3 mth -0.28% (steady); 5 year -0.28% (steady)

US$: 1 mth 0.50% (steep fall); 3 mth 0.75% (rising); 5 year 1.20% (rising)

Currency Exchanges:

£/Euro: 1.17, £ rising

£/$: 1.31, £ steady

Euro/$: 1.12, € steady

Gold, oz: $1,322, falling

Aluminium, tonne: $1,627, falling

Copper, tonne:  $4,621, falling

Oil, Brent Crude barrel: $49.80, rising

Wheat, tonne: £126, falling

London Stock Exchange: FTSE 100: 6,838 (steady).  FTSE Allshare: 3,729 (rising)

Briefly: The dollar sees continuing upward pressure in longer rates (though short rates fell abruptly).  Commodity prices headed down again, including wheat as farmers began forward selling this year’s harvest – longer delivery dates are noticeably firmer.   Sterling is also rising in the longer rates, and oil still tests the US$50 barrier.

 

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