Issue 105:2017 05 18:Week in Brief financial

18 May 2017


NEWS, the word in pink on a grey background

PENSIONED OFF:  How can you run a profitable business and still go bust?  Having an underfunded pension scheme is always a reliable way, as several British businesses have recently found out when trying to reorganise themselves.  Latest is Tata Steel, the UK arm of the Indian domiciled conglomerate which brought Corus (the company formerly known as British Steel) as long ago as 2006.  British Steel was in its day a major employer, its skilled workers well paid, a profile which lingers in its pension scheme which, with 130,000 members, is one of the largest in the UK.  Corus slowly shrank as it became less and less competitive against the lower cost base of many overseas producers, and closures and sales of parts of the business have recently accelerated.  So, a shrinking business has had to bear the increasing costs of the pension fund, an increasing headache for all concerned – the pensioners, the trustees of the pension scheme, the directors of Tata, and the Pensions Regulator.  This finally came to a head with Tata’s proposal to merge its UK operations with those of the German steelmaker Thyssenkrupp, also rolling in its European operations.  The new group refused to take on Corus unless the pension issue was sorted out on the grounds it was an uncapped and unsupportable liability.  Detailed discussions have been going on for some time and it looks as if an agreement has now been reached – one in which everybody will bear a share of the pain.  Tata will inject £550m into the scheme which will then be separated from the business into a freestanding scheme. Pension benefits will be reduced but still be not unreasonable – though those who don’t want to move can stay in the existing scheme and hope it will continue, with some compensation from the Pension Protection Fund for the risk of staying put.  Tata hopes and expects that most potential beneficiaries will move – the alternative it says, if they don’t, is that Tata Steel may go bust.  There is an extra benefit – at least it would appear to be a benefit – for those who move to the new scheme.  They will get ownership of 33% of the UK business, the main operation of which is the Port Talbot steel works, one of the biggest and most modern in the UK. The whole complex transaction needs to be signed off by the Pensions Regulator, but they are likely to agree – it solves a major headache and sets a model that might be used by other UK businesses with similar issues.

NATIONAL HOMES SERVICE?:  Sadiq Khan, the Mayor of London, is the latest in a long line of property developers to ponder on the property assets of the National Health Service.  Sadiq is not a commercial developer of course, but he does need to fulfil election promises – and government pressure – to create many more homes in London.  The NHS is believed to be sitting on some 420 acres of spare land – though that includes hospital grounds and car parks – which could provide upwards of 10,000 2 bedroomed homes. That makes the land worth getting on for £2bn, though the need to build some car parks and reorganise facilities and access might reduce that to around £1bn after costs.  But it is not the Mayor’s land.  It is mostly in the ownership of the various hospital trusts and they will, if they sell their spare assets, want full value to assist their stretched finances.  That means they might not want to sell to the mayor to build cheap housing but to private developers to build some swish luxury homes, though that market is admittedly weakening fast.  What the Mayor wants is cheap housing to ease the pressures on the young and poor who cannot afford to live in the capital anymore, a problem which is affecting essential services and forcing the young and aspirational out to regional cities.  The Mayor and the Greater London Authority have proposed some sort of joint ownership or administration of NHS land in the GLA area which would start to release land, subject to agreement as to how to deal with the proceeds.  This will follow on from the disposal of the GLA’s own surplus land and that of the Metropolitan Police, both now mostly dealt with, and that of TfL, a programme which is well underway.

BRENT, CROSS:  There is increasing discussion in the oil trading market as to whether Brent Crude – the benchmark for London pricing – is appropriate any more.  The problem is that oil is like fine wine, or more appropriately for oilmen perhaps, whisky.  It is not all the same and it is used for different purposes; Brent Crude, from the North Sea is sweet and light with low sulphur and suitable to be refined into petrol; West Texas Intermediate is lighter and better still, and easy to produce – all those nodding donkeys on the Texas plains; oil from the Arabian Gulf bordering countries (Dubai or Oman Crude) is more sulphurous and used for industrial purposes, but cheap to get out.  Brent Crude has been used as the reference point for many years and then other grades and types are priced off it, depending on quality, sulphur, and transportation costs to refining capacity.  So West Texas tends to trend and price as per Brent, but with discounts for Dubai, which is more costly to transport and refine.

Very little oil has come from the Brent field (named after the goose not the London suburb incidentally) for some time but oil from other parts of the North Sea is similar in quality and is thus priced the same way.  But even this is starting to run out and the reference market is becoming increasingly thin, which may be creating a rarity value and certainly could make the market easy to manipulate. Increasingly the market is pricing off West Texas (“WTI”) and, although they are similar products, there can be periods when local conditions can drive a significant price differential – indeed today WTI is $1.50 cheaper, reflecting the higher extraction, handling, and transportation costs of Brent.   We will continue to use Brent Crude in our index for now, but may switch in the future if market practice moves that way, as it seems to be doing.

ONE NOT FOR THE BIRDS:  Wind turbine builders and operators are relaxing again after a Court of Appeal hearing last week.  With increasing opposition to on-land windfarms – and their low levels of efficiency – the best prospect for future growth is seen to be  turbines in the seas around the UK coasts, which tend to have more reliable breezes and less vocal local residents, but do have lots of seabirds.  A Scottish court recently blocked four windfarms on the grounds that they would be very damaging to bird life, but the Court of Appeal overturned that last week.  The windfarms are not home and …er…dry yet – they need to get their subsidy contracts in place, which may or may not be easier after the election.

KEY MARKET INDICES:  (as at 16th May 2017; comments refer to changes on last 7 days; $ is US$)

Interest Rates:

UK£ Base rate: 0.25%, unchanged: 3 month 0.32% (steady); 5 year 0.70% (falling).

Euro€: 1 mth -0.37% (steady); 3 mth -0.33% (steady); 5 year 0.10% (falling)

US$: 1 mth 0.99% (steady); 3 mth 1.18% (steady); 5 year 1.88% (falling)

Currency Exchanges:

£/Euro: 1.17, £ weakening

£/$: 1.29, £ steady

Euro/$: 1.10, $ weakening


Gold, oz: $1,234, modest rise

Aluminium, tonne: $1,899, modest rise

Copper, tonne: $5,585, modest rise

Iron Ore, tonne: $67.56, rising (10% up)

Oil, Brent Crude barrel: $51.39 rising (WTI $49.90)

Wheat, tonne: £149 steady

London Stock Exchange: FTSE 100: 7,525 (rise). FTSE Allshare: 4,114 (rise)


Neat reversal of last week’s action in commodities – all up a little and iron ore up about 10%.  For oil, see our comment above.  The LSE continues to power up, reaching new heights.  Not so hot on the interest rate front which continue pretty static in the short ranges and off a little in the long, with a slight euro strengthening in foreign exchange.

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Issue 103: 2017 05 04: Week in Brief: Financial

04 May 2017


NEWS, the word in pink on a grey background

PUTTING A ROOF ON IT:  Taylor Wimpey drew a firm line under the recent controversy regarding ground rents on houses that they have sold leasehold.  The leases contain, in the normal way, annual ground rents payable by the long leaseholder to the freeholder.   Traditionally this gave freeholders a long term continuing interest in the management of their estates – as with the Duke of Westminster’s London estates – but, in an era of low interest rates, ground rents have become valuable investments.  Owned in large enough quantities to benefit from economies of scale in management, they provide reliable income (leaseholders rarely default on ground rents because of the danger of having their property repossessed for such a small amount) and occasional capital receipts – usually paid if a property owner wants to alter or extend his property and, later into the life of the lease, for lease extensions.  And they do not affect the sale value of the property when new – as they are typically £50 or £100, most purchasers do not take them in to account, but the rents sell well in bulk to specialist investors who will currently pay 20 or 25 times the ground rent, to give a 4% or 5% yield.  That is perhaps £2,500 extra receipts on a £100 annual ground rent on a single house sale, which for a large scale house builder comes to a useful extra sum per year. The Taylor Wimpey twist was to make the ground rent double every ten years, usually until capped at year 50.  TW does not hold the groundrents but has sold most of them on to professional investors. Householders, although usually legally advised on their purchases and able to calculate the cost of their mortgages, seem to have missed the financial effect of this doubling up – an initial ground rent of £100 agreed last year would rise to £3,200 per year by 2067 (at which point the cap cuts in). Of course if we go back to the bad old days of inflation this might look a bargain, but in the current climate it might be a considerable imposition and would affect the sale value of the house.

Some purchasers belatedly spotted this and called a foul and after some fuss Taylor Wimpey have agreed that perhaps it was unusual behaviour (though so is not reading the small print when buying a house, suggests our property lawyer) and that it will put things right. This may not be so easy though, as the investors who now own them have paid good money for their investments, so TW will either have to buy them back, or compensate the householders.  It is now in discussions as to what to do, and has put £130m aside to deal with the financial consequences.  However, the company reported that none of this seems to be affecting 2017 sales – which so far are 16% up on this period last year.

WEAKER FOUNDATIONS:  If volume house builders are having an improving time, it’s not so good at the top.  Residential property sales in the south-east, especially at the upper end of the market, continue to slow down, and the decreasing volumes are affecting residential estate agents.  Two of the largest agencies, LSL and Countrywide, both reported revenues down in the first quarter – Countrywide by 13% (LSL said 3% for them and that they had expected things to be worse).  Estate agency has high fixed costs (all those high street branches) and so is very sensitive to volumes.  The business is also migrating to the internet and becoming more competitive, forcing agency fees down, so for traditional agents with big branch networks there is a double squeeze.  Add in the usual slowing of sales caused by an election and the lookout for the first half figures must be grim, though perhaps the, also traditional, post-election bounce may help the full year figures.

FROM BRICKS TO AIR:  Also having a tricky time are aircraft builders Airbus, which is already considering the effect of Britain’s coming exit from the EU.  Airbus’s main activities are in the UK and France, and the company has traditionally been an example of how to run a cross border business, but recently it has been hit by a whole raft of problems.  It is having difficulty with its supply chain for its well-regarded new jet, the A350, the externally sourced engines for the A320 are suffering reliability issues, and the specialist military jet, the A400, has got major cost problems.  All that has hit profits for the first quarter of 2017 which are down by about half, though the company expects that it will resolve all these issues in the current year and is confident about its profit performance for the year as a whole.  As it should be – the forward order book has orders for a remarkable 6,700 aircraft – the only issue now is getting them into the hangers of the purchasers.

LIBERTY WELL:  The rise and rise of Liberty House in the UK steel industry continues.  Liberty is controlled by Sanjeev Gupta and is part of the Gupta family’s GFG Alliance, an industrial and investment conglomerate.  Mr Gupta has stepped boldly in on several occasions to buy parts of the steel industry that were been shed by Britain’s big steelmakers, Tata and Caparo.  Both said that most of the UK steel business had been rendered unviable by cheap steel imports, especially, but not solely, from China.  Mr Gupta though spotted that there were some specialist “added value” parts of the business, where local demand was strong and some tighter management and better marketing could both cuts costs and gain extra turnover.  His latest and by far his biggest acquisition is of the specialist steelworks at Rotherham which has a modern state of the art electric arc furnace and makes high end alloys for use in planes and cars.  It also is able to use scrap steel, which Liberty say will be an increasingly important aspect to the business – recycling steel is environmentally responsible but also economically sensible.  Not that it will only save old steel – it will also become a very significant customer of the former Tata steelworks at Scunthorpe, now owned by venture capitalist Greybull Capital (who bought it for £1 from Tata) who say the business is now in good heart.  In fact there is a bit of a steel renaissance going on, after some fierce cost cutting but also some relief from competition as world steel over-capacity reduces.  Sheffield Forgemasters, a long established steel casting business which supplies steel for the new nuclear submarines now being built, and which looked in a parlous state two years ago, said 2016 losses were down to £900,000 after being nearly £8m in 2015, and that it is on course to build further sales and to return to profitability this year.

KEY MARKET INDICES:  (as at 2nd May 2017; comments refer to changes on last 7 days; $ is US$)

Interest Rates:

UK£ Base rate: 0.25%, unchanged: 3 month 0.32% (slight fall); 5 year 0.69% (rising).

Euro€: 1 mth -0.37% (steady); 3 mth -0.33% (steady); 5 year 0.10% (rising)

US$: 1 mth 0.99% (steady); 3 mth 1.17% (rising); 5 year 1.94% (rising)

Currency Exchanges:

£/Euro: 1.18, £ steady

£/$: 1.28, £ steady

Euro/$: 1.09, € rising

Gold, oz: $1,255, falling

Aluminium, tonne: $1,929, slight fall

Copper, tonne: $5,688, rising

Oil, Brent Crude barrel: $51.12 falling

Wheat, tonne: £150 rise

London Stock Exchange: FTSE 100: 7,250 (fall). FTSE Allshare: 3,990 (slight fall)

Briefly: This was a very unexciting week, not much money for day traders in this sort of market – unless they are in wheat, which is edging up. Oil down a bit, UK stock market down a bit, copper up a bit.  The dollar is expecting interest rates to rise – as the Fed is signalling, not suiting Mr Trump who would like the dollar weaker.  At the moment it is going the Fed’s way.

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Issue 102:2017 04 27:Week in Brief Business

27 April 2017


NEWS, the word in pink on a grey background

ENGINEERING WOOD:  AMEC Foster Wheeler is one of those specialist engineering conglomerates which the fall of the oil price, and the consequent cost cutting in that sector, has knocked sideways.  The weakness in the oil market caught AMEC at exactly the wrong moment – it had just taken over the USA based Foster Wheeler business in 2014 and had taken on an oil tanker load of debt to do so.  Although the AMEC strategy has been to diversify into other major engineering activities and areas that are not oil related – the new Heathrow runway is one of its advisory projects – it has not been able to do that fast enough to build enough turnover and profits to support the debt burden; nor has it been able to make sufficient sales of peripheral businesses to get its obligations to the bankers down.  And in the core oil and gas based business not only has demand for specialist engineering fallen, with margins tightening to reduce profits, but the service side of the business has suffered as well, as facilities were closed or mothballed, or service issues deferred.  AMEC brought in Jon Lewis from American rival Halliburton as Chief Executive in 2016 but after a review of the business he says he can see no immediate upturn or easy solutions.

But into the breach has now stepped Wood Group, the Aberdeen based group which has been built from its specialist oil and gas activities and is a major rival to AMEC.  Wood has weathered the oil turndown much better, mainly through early cost cutting and by keeping its external indebtedness down.  However, although it thinks that the oil based side is going to recover soon with the oil price better and deferred works soon needing to be dealt with, it would also like to diversify; so it has offered to buy AMEC for £2.2bn.  This lifeline for AMEC could not be better timed.  The AMEC board has recommended the deal to shareholders and all is proceeding.  But that debt mountain continues to cast a long shadow.  There is a real danger that AMEC could shortly breach the banking covenants on its debt and put itself into default, thus enabling the bankers to demand immediate repayment of the loans.  So shareholders and board alike will be relieved that the banking consortium has now agreed modifications to the covenants which will avoid the potential default and will apply until June next year, time to get the deal done – or, if for any reason it does not happen, time to think of Plan B.

FINALLY FINE:  Tesco is finally closing the file on the accounting scandal which arose from its trading difficulties some five years ago; the trading problems were caused by the increasingly competitive nature of the food retail business and especially the rapid incursion of the two great German owned discount food retailers, Aldi and Lidl, into the UK market.  That put Tesco (and the other big four British supermarket chains) under increasing pressure over how to maintain profit margins.  Tesco, with heavy borrowings from its previous expansion and diversification, was concerned to avoid any potential breach of loan covenants and began in 2014 to anticipate profits to try to boost current year performance (and presumably hoped that in following years something would turn up).  When that was discovered, a full enquiry brought in the Serious Fraud Office and ultimately led to the resignation of Chief Executive Philip Clarke and the departure of finance director Carl Rogberg, along  with fellow executives John Scouler and Chris Bush.  The Serious Fraud Office has now concluded its investigation into the matter and Tesco has agreed to pay a fine of £129m, something the shareholders may not be totally happy with, having seen the value of their investments reduced by the scandal and its revelation and now having to pay a fine for it.  The SFO has also announced that Philip Clarke will not be charged with any offences resulting from this, although charges remain outstanding against the other three executives.  This leaves current chief executive Dave Lewis free to pursue his bid for Booker, itself causing waves currently.

ALL THAT GLISTERS …: … may be explosive.  There are many problems running a modern business, but Galantas Gold, which is, not surprisingly, a gold miner, and is quoted on the UK AIM market and on the Toronto exchange, has an odd problem which is outside the normal range of business difficulties.  It wants to build and operate a goldmine in Northern Ireland where prospecting has shown very hopeful signs.  Work is underway but to create a deep goldmine means digging a mine, and digging a mine requires explosives; and Northern Ireland is a place which is a bit sensitive about having quantities of explosives lying about.  Indeed, a licence for gelignite can only be obtained if arrangements can be made with the local police force for a police guard.  This, the Police Service of Northern Ireland says, it will only do two days a week and at a fee.  Galantas does not see why it should pay a fee for what is to it a normal commercial activity, and in any case needs to have the explosives available five days a week.  (It is not clear what happens to the stuff the other three days in a week – does senior management take it home for the weekend?).  At the moment things have reached an impasse with work on the mine stopped – which took the share price down a quarter on Monday.

NOT SO SWEET:  Willy Wonka it ain’t.  Things are not so good in the chocolate and confectionary industry, as competition hots up, and sales weaken with traditional markets increasingly going on health kicks.  Kraft Heinz’s recent failed bid for Unilever was a symbol of that; trying to diversify as its traditional lower and middle market food businesses (including Cadbury) struggle to maintain returns.  And that struggle to find consumers’ soft centres is affecting all the big food producers, including industry giant Nestle who own Cadbury’s UK rival ,Rowntrees.  Nestle has two concerns – one is maintaining profits in this fierce market; when you are the biggest in the market, getting continuing growth whilst maintaining profits becomes increasingly difficult; and the second is that even the biggest in the world is not immune from takeover at a time when investment bankers and other deal makers are also hungry for profits.  So keep the shareholders sweet is the game; which means looking very closely at costs.  To try to improve that bottom line and keep the dividends flowing, Nestle announced this week that it will be shedding around 700 jobs, an action it has traditionally tried to avoid.   About a third of them are in the UK, in York and Newcastle, from the former Rowntree business.

KEY MARKET INDICES:  (as at 25th April 2017; comments refer to changes on last 7 days; $ is US$)

Interest Rates:

UK£ Base rate: 0.25%, unchanged: 3 month 0.34% (steady); 5 year 0.67% (rising).

Euro€: 1 mth -0.37% (steady); 3 mth -0.33% (steady); 5 year 0.09% (rising)

US$: 1 mth 0.99% (steady); 3 mth 1.15% (steady); 5 year 1.92% (rising)

Currency Exchanges:

£/Euro: 1.18, £ steady

£/$: 1.28, £ rising

Euro/$: 1.08, € rising

Gold, oz: $1,264, falling

Aluminium, tonne: $1,942, rising

Copper, tonne: $5,652, rising

Oil, Brent Crude barrel: $52, falling

Wheat, tonne: £148, slight rise

London Stock Exchange: FTSE 100: 7,275 (fall). FTSE Allshare: 3,992 (rising)

Briefly: News from France of the likely triumph of the middle was not good for the price of gold, but played well on the UK (and European) stock markets which have shown continuing strengthening.  Nothing seems to affect short term interest rates, though the dollar long rates, having come in, are now going back out.  And oil edged down again after that short recovery.

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Issue 101:2017 04 20:Week in Brief Financial

20 April 2017


NEWS, the word in pink on a grey background

GOLD SORES:  You know that the problems are real when Goldman Sachs misses its own performance forecasts; especially when they and fellow investment banks have been making positive noises, albeit unofficial, about the beneficial effects on their businesses of political change in the USA and Britain . Goldman’s first quarter this year was expected to show the investment banking giant powering on, but in fact the performance was flat – good results in mortgage and interest instrument trading were cancelled out by underperformance in commodity trading, credit related businesses, and currency trading.  The core reason seems to have been that Goldman expected interest rates to start rising under the new President and positioned their book accordingly – buying early in the expectation rates would be on the up. Initially that looked like a good call but then rates have fallen back, leaving the trading books showing losses at mark to market.  Once upon a time of course banks could re-mark their books as longer term holds and avoid mark downs, but no longer, books must be valued as if being sold at the valuation date.  But do not despair too much for the struggling bankers – in spite of the weak quarter, net revenues were up 27% against the comparative quarter last year, with especially strong performance in areas which are added value – advisory based activities, such as underwriting debt or equity raises or investment management.

The news has knocked Goldman’s already retreating share price, down 5% since the November election, and also knocked the share price of some competitors who it is thought in the market may be experiencing similar issues – without the cushion of Goldman’s strong position in added value products.

IRON AGE:  One commodity price we do not follow in our weekly round-up of market trends is that of iron ore, a basic but highly essential raw material of many industrial (and domestic) products.  Iron ore is a bit like oil – for a long time the world looked as though world reserves were running out whilst use kept going up, but then the rising price made exploration more interesting and massive new reserves were found.  Just as, needless to say, the world started to be much more efficient at using metal so demand, whilst not dropping, slowed.  And unlike oil, iron can be reused, over and over again – as the scale of the world’s scrappage business demonstrates.  It is true that Europe is pretty much mined out, the big suppliers now being in Australia, India, and Brazil – and the big users in India and China, and to a declining extent, the West.  Ore prices have also been behaving like oil recently, recovering to highs of over US$95 per tonne at the beginning of the year as demand seemed to be picking up among steel manufacturers, but now sliding back to around $65 as steel production reaches new records – but world demand for the stuff slows.  The ore industry knows what will happen next and the price reflects sharp concerns that both iron ore and steel are being stockpiled – indeed ore reserves ready for processing are said to be up about a third in the first three months of 2017.  The slow up in demand is now starting to affect mines which are easing up on production; an especial problem for Brazil where mining is a big (and relatively well paid) employer, it is also hitting the share prices of the big public mining companies most of which are also suffering from the slide in copper prices over the last few months.

LOOSE RIGGING:  The LIBOR rigging scandal just will not go away.  After a series of trials of individual traders accused of attempting to adjust the market rates for interest rate products, for their own benefit or that of mates, which produced a few convictions but also a lot of acquittals, further suggestions have been made that the real impetus came from higher up.  Recently revealed evidence suggests that this reached as high as the Court of the Bank of England, and linked in the Treasury, which is said to have wanted interest rates pushed down as low as possible to help in the crisis of 2008 – but it goes back  further than that.  The allegations have now been picked up by John McDonnell, Labour’s shadow Chancellor of the Exchequer and a close ally of Jeremy Corbyn, who has called for a public enquiry into exactly what went on and who knew what.  Given other distractions for politicians this week and into June, it seems unlikely the government will oblige him, but there may be more revelations to come about the relationships between the Bank, the regulators, and the clearing banks.

NOT GOOD ENOUGH: The legacy of 2008 still hangs over one major bank.  RBS was supposed to sell its recently carved out Williams and Glynn’s subsidiary (a loose successor to the bank of that heritage which was centred in the North West).  After years of trying to separate it off – complex reporting and management systems seemed to make that almost impossible – it was finally able to persuade the Treasury and is currently urging European Commission competition regulators to be allowed to keep it, provided that it injects about £750m into rather vaguely described initiatives to increase competition in the small business market.  RBS’s small competitors – the so-called “challenger banks”, do not like that at all, calling for the government to force RBS to divest itself of a range of assets into the market so that the RBS business can be shrunk and the challengers be given more of a leg up to become competitive.  They also want RBS to be forced to continue to provide basic services at cost so they do not have a one stop advantage over smaller banks that do not have capabilities in, say, foreign exchange or derivative provision.  The UK Treasury has said the RBS proposal is the best way ahead – but it is far from certain that the EC will take that view.

HEAVY BOOZERS: Good news for those facing the uncertainties and upsets of a General Election campaign – in 2016 45 new gin distilleries were opened, giving all the benefits of diversity and competition to a market which is so close to so many hearts.  Or livers.  For the first time gin sales exceeded £1billion, and HM Revenue and Customs, who has awarded itself the not unpleasant job of monitoring the sector says that British gin is exported to 139 counties.  Many of the new batch are artisan distilleries, capable of being run from a big garden shed or even a couple of back bedrooms.   A lovely way to sooth yourself to sleep.


(as at 18th April 2017; comments refer to changes on last 7 days; $ is US$)

Interest Rates:

UK£ Base rate: 0.25%, unchanged: 3 month 0.34% (steady); 5 year 0.64% (falling).

Euro€: 1 mth -0.37% (steady); 3 mth -0.33% (steady); 5 year -0.01% (falling)

US$: 1 mth 0.99% (steady); 3 mth 1.15% (steady); 5 year 1.83% (falling)

Currency Exchanges:

£/Euro: 1.18, £ rising

£/$: 1.26, £ rising

Euro/$: 1.06, € steady

Gold, oz: $1,285, rising

Aluminium, tonne: $1,915, falling

Copper, tonne:  $5,620, falling

Oil, Brent Crude barrel: $55, rising

Wheat, tonne: £147, steady

London Stock Exchange: FTSE 100: 7,123 (fall).  FTSE Allshare: 3.9204 (slight fall)

Briefly:    Mrs May’s election announcement seems to have affected many things – even in international commodity markets.  That traditional shelter, gold, rose; the traditional index of nervousness, oil, also rose; and everything else fell.  On the financials front, though there was very little movement – sterling was slightly up and most longer term interest rates fell.  Or maybe it is just that everybody is away for Easter?


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Issue 100:2017 04 13:Week in Brief Financial

13 April 2017


Headline image saying £NEWS

TRY AGAIN:  The troubles of leading house builder Bovis may be coming to an end with the help of fellow residential builder Galliford Try – but not quite in the way that Bovis had in mind.  Bovis found both house sales and its share price in a downward spin last year after revelations that the company had been hustling customers to accept houses that were not quite finished, so as to book sales early, so advancing profits and, allegedly, senior management bonuses.   The chorus of complaints from new home owners and the concerns of shareholders led to the departure of the chief executive and a decision by the board to pursue a merger – the chosen mergee being Galliford Try.  But GT has now decided that this is not a deal, for reasons that are not entirely clear but may have something to do with the costs of integration and Bovis’s low margins compared with rivals in the industry.  So Bovis now is trying a different route.  It has taken on Galliford Try’s former chief executive, Greg Fitzgerald, as its new CEO.  Mr Fitzgerald has a very good reputation among house builders, having built up two small residential developers in the Home Counties, sold them and himself to GT, and then worked there for thirty years, the last ten as chief executive, building the firm up to become a major player in the industry.  He has agreed a three year deal at Bovis with most of his remuneration by bonus, but payable only in shares, to align his performance with returns to shareholders.  He has a big job to do in restoring confidence, cutting costs, and rebuilding the Bovis brand name, but most observers think that will be a challenge that he will meet.

POWERING ON – OR OFF:  We wrote in the Shaw Sheet last week about the sources of electrical supply now available and how perceptions of oil shortages and pressure on supply are misconceived.  As if to prove our point, the National Grid has now reported  that it expects problems with the supply of power this summer – Britain is likely to have too much of it.  As more and more capacity comes on line, especially from sustainable sources, the demand for power in the summer is actually falling and is predicted this year to be about 5% down on last.  This is mostly because of us users getting more and more efficient in how we use our electrical kit, those solar panels on the back roof making quite a contribution, and not least because the increases in prices coming through will enable suppliers to pay the green costs placed on them by government to encourage a move to sustainable carbon neutral production.  That is working well – especially in promoting solar panels which, of course, are at their most productive in the summer.  But National Grid has to manage forward supply, partly so that surges do not occur, damaging sensitive electrical equipment, but also so that production is not wasted – or fall short, as the Grid still has to pay for contracted power whether it gets used or not.  Last year the Grid was paying incentives to some industrial users to use more power at times of low demand – just as it sometimes pays during winter peaks to not use electricity.  Now they are looking at paying some wind farms and solar producers to not produce this summer.  Unfortunately for householders with panels on the roof or a turbine on the chimney, this offer will not apply to them.

NOT JUST SOFT SOAP: Unilever has shown its critics and grumbling shareholders that at least one of their recent criticisms was misplaced – exhibiting a remarkable fleetness of foot in putting up a series of proposals for moving the business on after repulsing the failed takeover bid from Kraft Heinz.  It has proposed a sale of its margarine and fats unit, and also an internal merger of its two food divisions, which should in fairly short time raise operating margins to around 20%, reducing the capital requirement of the business and enabling dividends to be improved.  The first sign of this will be a €5bn special dividend to be paid to shareholders in the next few months.  The strategic review has been completed in a month, but the reaction of the market was that this was a collection of sensible suggestions that addressed concerns about the business and would improve returns whilst strengthening the trading of the business by enabling concentration on core brands.

GIVE A LITTLE WHISTLE: In the UK and the US, the Financial Conduct Authority, the Prudential Regulation Authority, the Department of Justice and New York Department of Financial Services have all said that they will investigate the conduct of Barclay’s CEO Jes Staley and his efforts to discover the identity of the writer of a whistleblowing letter. Mr Staley has said that he was trying to protect a colleague and has apologised for his actions.  Whistleblowing is an important weapon in fighting corruption, but the process can only work if the whistleblower is confident that he will remain anonymous.  In this case the whistleblower has remained anonymous, but there will be concerns that the story will discourage others from coming forward.  Mr Staley will have his pay award adjusted by as much as £1.3m by Barclay’s as a result of his conduct.

OILING THE WHEELS: Having previously said that it only paid money to the Nigerian government, Shell has now admitted that it dealt with a convicted money-launderer when negotiating access to an oil field in Nigeria.  Shell and the Italian company ENI paid the Nigerian government $1.3 billion, of which it is claimed $1.1 billion was passed on to a firm called Malabu, controlled by Dan Etete, a man later convicted of money-laundering in a separate case.  Shell has said that they believe the settlement was a fully legal transaction.


(as at 12th April 2017; comments refer to changes on last 7 days; $ is US$)

Interest Rates:

UK£ Base rate: 0.25%, unchanged: 3 month 0.34% (steady); 5 year 0.69% (falling).

Euro€: 1 mth -0.37% (steady); 3 mth -0.33% (steady); 5 year 0.20% (rising)

US$: 1 mth 0.98% (steady); 3 mth 1.15% (steady); 5 year 1.96% (falling)

Currency Exchanges:

£/Euro: 1.18, £ rising

£/$: 1.25, £ stable

Euro/$: 1.06, € stable

Gold, oz: $1,275, rising

Aluminium, tonne: $1,907, falling

Copper, tonne:  $5,745, falling

Oil, Brent Crude barrel: $56, rising

Wheat, tonne: £148, stable

London Stock Exchange: FTSE 100: 7,349 (rising).  FTSE Allshare: 4018 (rising)

Briefly:    Very steady week in most areas – with signs of the Easter break beginning early.  Gold continues to push gently upwards – a long term trend seems to be emerging there .  As always oil provides the main action – a push back up from the weakness of a couple of weeks ago seems likely to reverse as more benign conditions in Libya mean that supplies of crude from that market are increasing rapidly.


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Issue99:2017 04 03: Week in Brief financial

06 April 2017


NEWS, the word in pink on a grey background

BRAKES ON AT CARR’S: Carr’s is an unusual conglomerate, combining a traditional but sizeable business of selling agricultural supplies in the UK, New Zealand, and the USA, with a technical engineering business which is strong in nuclear.  The idea is that they are sufficiently diverse to make it likely that troubles in one area will be offset by good performance in the other.  Not this year; although Carr’s forecast last autumn that profits would improve in the current trading period, in the event performance has swerved from the expected path after problems in both areas late in 2016.  In the agricultural division, problems in the dairy based business arose from a reduction in demand coupled with pressure on Carr’s costs as oil prices recovered; whilst in the engineering part of the business several expected contracts did not materialise, mainly because of the well-publicised problems in finalising the Hinckley Point scheme.  Problems in the USA agricultural world mean that no upturn there is likely for the next couple of years, but in the UK the prognosis is a bit better. The UK dairy industry is also picking up, leading to hopes for early margin improvements there, as is also the case in New Zealand.  On the engineering side, Carr’s did win a contract in connection with work at Sellafield in North West England, and it says other nuclear work is going well; with the longer term outlook good.  Nevertheless, analysts say indications are that profits will be 20% down on forecasts made late last year, with a recovery in 2018.

SHRINKING SCOTT:  We have followed in these pages the continuing difficulties of the Guardian newspaper, which has for some time being unable to match its income to its outgoings. The reason that this has not caused to a crisis much earlier is the support of the Scott Trust, set up by the founding family many years ago, which is cash rich from sales of other publishing assets.  But the cash mountain has gradually shrunk and the board of the newspaper, having valiantly hoped that by keeping on a full journalistic staff and free reader access to the Guardian website, readership and revenue might recover, have finally decided they have to take action to reduce costs.   This follows an appeal last year for voluntary redundancies which apparently was fully subscribed, but there is now to be a series of compulsory job losses.  The management of the paper says that departments will be given cost reduction targets, overall equating to around 20% of the present cost base, and asked to submit proposals to achieve them; this will involve job reductions in all area, but it is thought likely to fall especially heavily on the editorial area which, still employing over 700 journalists, is believed to be by far the largest newsroom in any UK newspaper.  It employs about half the total staff.  Two hundred and fifty jobs went last time, though the number of posts now threatened is thought to be about half that.  The board want to get the group to a breakeven point by early 2019.  One further job loss may be current chief executive David Pemsel – he is rumoured to be a potential front runner to take over as chief executive of Channel 4 Group.

STICHING IT TOGETHER:  In a move which has engendered considerably less publicity than another pension matter which he has been involved in,  Philip Green has agreed to increase the contributions of his family holding company, Arcadia Group, to the pension deficits of the fashion retail businesses which it controls.  The best known of these is Topshop, but it includes various other high street brand names, where the pension funds have funding deficits along the same lines (but not so significant) as the BHS group, which was sold and then collapsed into administration a year ago.  The Green family resisted making up the deficit in the BHS scheme but has now agreed to put £363m into the scheme, which is estimated to be about 60% of the current shortfall.  Arcadia Group has now agreed to more than double the contributions into its pension scheme – though only from mid 2019 – to try and clear a deficit estimated at £565m.  It estimates that the deficit will be cleared by 2026.  This is now awaiting approval by the pensions regulator and Pensions Protection Fund, but they are thought likely to agree.

ANY STORM IN A PORT:  Not if the international cruising operator Global Ports Holding has anything to do with it.  It is believed to be sailing to a listing on the London Stock Exchange later this year and is busy strengthening its board of directors to go with its new status.  The London listing – the company is already listed on the Istanbul exchange – should raise about £700m, some of which will go to reduce debt and the rest to expand the group’s activities.  The group has developed the specialist business of servicing cruise liners in dedicated areas in ports, initially in Turkey where it began but it is now expanding across Europe and the eastern cruising circuit.  It has created a market which was not really known to exist – that of creating dedicated and secure high quality facilities for ship boarding passengers and the servicing of their ships, and has benefitted from the rapid expansion of this part of the tourism business.  Latest director to clamber on board is none other than Peter, Lord Mandelson, who, Global Ports says, will bring many important international connections to its business through political and commercial links from his time as EU Trade Commissioner.  Also going up the gangplank will be Thierry Deau, who founded and ran Meridiam, the major French asset manager.

CUTTING THE MUSTARD:  Reckitt Benckiser, formerly Reckitt and Coleman, is said to be preparing to sell one of its core brands – French’s Mustard, not to be confused with French mustard of course; this is the sizzler you squirt on your hot dog.  Reckitt bought French’s in 1926 when it was building world leadership in mustard; Colman’s went in 1994 and is now part of Unilever, and Reckitt has increasingly refocused as a specialist in health and hygiene products, recently buying Mead Johnson, the baby product specialist.  Increasingly it feels French’s, of which it sold 160 million bottles last year, has no natural place in the group, and thinks it might do better in new ownership.   Oddly though it has no plans to get rid of its ketchup division or its other famous American countertop brand, Frank’s Red Hot sauces.

KEY MARKET INDICES:  (as at 4th April 2017; comments refer to changes on last 7 days; $ is US$)

Interest Rates:

UK£ Base rate: 0.25%, unchanged: 3 month 0.34% (steady); 5 year 0.69% (falling).

Euro€: 1 mth -0.37% (steady); 3 mth -0.33% (steady); 5 year 0.20% (rising)

US$: 1 mth 0.98% (steady); 3 mth 1.15% (steady); 5 year 1.96% (falling)

Currency Exchanges:

£/Euro: 1.17, £ rising

£/$: 1.24, £ falling

Euro/$: 1.06, € falling

Gold, oz: $1,257, rising

Aluminium, tonne: $1,948, rising

Copper, tonne: $5,816, slight rise

Oil, Brent Crude barrel: $53, rising

Wheat, tonne: £147, falling

London Stock Exchange: FTSE 100: 7,309 (slight fall). FTSE Allshare: 3.984 (slight fall)

Briefly: Very steady week in most areas – with signs of the Easter break beginning early.  Gold continues to push gently upwards – a long term trend there seems to be emerging.  As always oil provides the main action – a push back up from the weakness of a couple of weeks ago seems likely to reverse in the next few days as more benign conditions in Libya means that supplies of crude from that market are increasing rapidly.

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Issue98:2017 03 30:Week in Brief Financial

30 March 2017


NEWS, the word in pink on a grey background

NOTHING HELPS:  When it was first announced, the proposed Tesco purchase of Booker was hailed as the final mark of the supermarket giant’s recovery from the accounting scandal and poor performance which have damaged its reputation over the previous four years and seemed to confirm that new chief executive Dave Lewis had truly started a new era.  Booker was a good fit with Tesco – if you take out some of the competition in the small “mini-market” business which is increasingly over-provided and where rationalisation of the Budgen and Tesco Metro chains would bring direct costs savings but give Tesco access to Booker’s core business of supplying the wholesale catering business where it is a market leader and enjoys rapid growth.  Most analysts praised the logic of the deal and the deal making skills of Mr Lewis and his team.  Until now, that is.  There seems to have a been a change of sentiment especially amongst some Tesco shareholders who are canvassing support for the deal to be cancelled, mainly on the grounds that Tesco is paying too much.  Also of concern is that the regulators concerned about competition in the retail food market (Tesco alone has over 21% of the market) will force the sale of more local stores than would be good for the supermarket chain.   Mr Lewis’s views in response have not been shared but Tesco has now issued a formal statement in response to the remarks and the rumours of shareholders combining to possibly try to stop the deal.  They say that the transaction remains on course and is good value for the group.

Some analysts say that for all Mr Lewis’s success in turning the Tesco business around and back to profitability, he has not been great at managing his main shareholders; several large institutions are significant holders including Schroders and Artisan Partners who hold 9% and have asked the board to withdraw, citing nervousness about renewed expansion so soon in the recovery programme.  A little more pre-discussion might help next time.

LIKE A HURRICANE:  The oil price slowly slides back from its recent circa  peaks of circa US$60.  It is now trading just above $50 with more pressure on future price trends.  In the USA Mr Trump is likely to dismantle at least some green energy measures which will enable coal and shale oil and gas to step up profitable production, and even in the UK, new oil reserves are being found offshore.  The latest is to the west of the Shetland Islands and has been discovered by Hurricane Energy which has been prospecting in this area for some time and believes it has discovered a major field.  Although it has long been suspected that there is oil under the Atlantic coast here, the practical difficulty was always how it could actually be extracted from such deep and stormy waters.  The ocean has not become any less difficult or forbidding, but the technology of extraction has much improved, so that platforms and drills are more robust and maintaining them easier.  And cheaper – at $50, such reserves can be extracted profitably – which is also the case for shale oil.  The thinking behinds OPEC’s attempts to restrict output from its members is that offshore reserves and shale need a breakeven price of $70/75 to work – but improvements in drilling have pushed that cost right down.  $50 seems to be the mark now and that could well mean that it is about what we will be paying for the basic barrel for the foreseeable future.  Most OPEC members can produce very profitably at that level of course, but as we have explored before, many OPEC members have got used to very high oil revenues and cannot meet their ongoing obligations without more of it.  They may have to learn…

BLOWN AWAY:  One of Britain’s great success stories in combining need and technology to produce profits is Dyson, founded by Sir James Dyson, who began by producing an improved vacuum cleaner, and is now a major producer of many products which move air – hand driers, humidifiers, heaters and so forth.  The products are well designed and well-engineered – and sell at a major premium to the competition; such is the benefit of brand reputation.  Dyson has kept much of its research and product development in its base in Wiltshire, but increasingly makes most of its products in the Far East, largely in Malaysia.  It has also recently opened a new plant and research facility in Singapore.  That increasingly looks like a clever move – Dyson saw profits rise 41% last year and most of that is from sales in the Far East, both to increasingly wealthy households in China and those in the rising nations ringing the South China Sea.  As Dyson is a private company it does not publish actual profits, but it did say that turnover was up 45% to £2.5bn, and that gross earnings were £630m – a remarkable margin in competitive products.  Half that comes from vacuum cleaners, but the growth now is in the company’s other products, where it is increasingly selling to business – hand dryers for company wash rooms for example.  The USA remains Dyson’s biggest market, with the UK second, but China is now fourth and India is starting to figure on the company radar – and that is where Dyson sees the next big area of growth.   India is not an easy market for overseas makers to break into, with high tariff and ownership barriers, but Dyson’s strategy is to start manufacturing there before long, and possibly form a partnership with a local company to help them sell and build.

FROM AIR TO WATER:  A warning to Dyson – what was once a similar much praised British success story, now struggling to regain momentum, is changing its name.  Wolseley was a leading brand of plumbing suppliers with a network of outlets across the UK and a great reputation for quality and price.  After twenty five years of unbroken profit growth things went very wrong – starting from that common problem, a US acquisition which very quickly started draining money out of the business – just as a downturn hit the UK building market.  The American business eventually got turned round but the UK end has never really got back to where it was.  The company has just announced that the improvement in profits seen last year has been sustained into the first half of this, showing £515m, and to consolidate on that recovery Wolseley will become “Ferguson”, the name of the American business.  That will emphasise where it performs best – the Nordic business will be sold and the UK business will see further cuts – the best growth message for the present time will continue to be the USA.

KEY MARKET INDICES:  (as at 28th March 2017; comments refer to changes on last 7 days; $ is US$)

Interest Rates:

UK£ Base rate: 0.25%, unchanged: 3 month 0.34% (slight fall); 5 year 0.80% (rising).

Euro€: 1 mth -0.37% (steady); 3 mth -0.33% (steady); 5 year 0.13% (falling)

US$: 1 mth 0.98% (rising); 3 mth 1.15% (rising); 5 year 2.00% (falling)

Currency Exchanges:

£/Euro: 1.16, £ rising

£/$: 1.26, £ rising

Euro/$: 1.08, € rising

Gold, oz: $1,243, rising

Aluminium, tonne: $1,918, slight rise

Copper, tonne: $5,774, slight fall

Oil, Brent Crude barrel: $51.8, steady

Wheat, tonne: £148, rising

London Stock Exchange: FTSE 100: 7,343 (slight fall). FTSE Allshare: 3.997 (slight fall)

Briefly: Dollar short term interest rates continue to edge upwards, though for the first time for a while the movement up in long rates has reversed – this could well be a response to what is increasingly forecast as the economic consequences of Mr Trump, an early boom followed by a slowdown.  The rest of the market continues pretty steady – with oil still keeping above the $50 mark and wheat shifting upwards again.

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Issue 97:2017 03 23: Week in Brief Financial

23 March 2017

Week in Brief: Business and the City

NEWS, the word in pink on a grey background

WITHOUT A PADDLE: Thames Water have been fined £20 million for pumping almost one and a half billion litres of untreated sewage into the River Thames in 2013 and 2014, killing birds, fish and dragonflies and polluting the river, normally an attractive feature of Henley and Marlow, with nappies and other debris.  As five different installations were involved in the leaks, the judge concluded that top management must have been aware of what was going on.  The company has apologised.  Thank goodness it didn’t happen in the regatta season!

WALL STREET: Some put the fall in Wall Street this week down to doubts as to whether the new US administration will be able to deliver on promised tax cuts. Others, however, are concerned that US stocks are overvalued with the S&P 500 trading at 18.5% times expected profits.  Recent polling also suggest that investors are underweight in UK stocks, with a reduced level of new equity investment.

A MATTER OF TIMING: Conventionally, figures showing that inflation is now running at above 2% might be expected to mean that recent falls in interest rates must soon begin to reverse. For the moment however the Bank may seek to “look through” the recent inflation figures on the basis that longer projections show a return to 2% level, but there must be a limit to how long that policy can last, particularly in view of the recent increase in US interest rates by ¼%.  Interest rates are going to go up sooner or later and we would all prefer that the process was smooth and gradual. There are obvious risks in leaving it too long. (See moving the interest rate goal posts)

TAXATION OF DIVIDENDS: By how much should you reduce tax on dividends received by shareholders to take account of the fact that the profits distributed have already born corporation tax within the company?  That question has bedevilled the UK’s tax system for many years.  Before the European Court of Justice declared it illegal, we used to have an imputation system. That meant that a dividend paid by a UK company was accompanied by a tax credit, redeemable in cash by the recipient to the extent that it could not be set against his or her tax bill. This allowed all shareholders, including non-taxpayers such as pension funds, to get a rebate for some of the tax which had been paid on the underlying profits.

That all went wrong when the ECJ forbade of the charging of advance corporation tax, which safeguarded the Exchequer by ensuring that the tax paid by the company was at least equal to the tax credits given.  So the tax credit ceased to be something that could be cashed in and became an element in the computation of tax on the dividend.  That hit non taxpayers such as pension funds who now received no compensation for the tax paid on the company profits.  Individual taxpayers, however, benefitted from the tax reduction and, until last year, the combined effect of the tax credits and special dividend rates produced a charge of 0% for the basic rate (ie 20%)taxpayer, 25% for the upper rate (ie 40%) taxpayer and 30.6% for the additional rate (ie 45%) taxpayer.  Now, following the abolition of tax credits and ignoring the £2000 tax free dividend allowance as trivial, the rates will be 7.5%, 32.5% and 38.1%.  Those who work by reference to net income will be rebalancing their portfolios but the fact that the markets are dominated by institutions who will be unaffected by the change means that it will probably not affect prices.

KEY MARKET INDICES: (as at 22 March; comments refer to changes since last issue; $ is US$)

Interest Rates:

UK£ Base rate: 0.25%, unchanged: 3 month 0.34% (slight fall);

Euro€: 1 mth 0.39% (rise); 3 mth 0.36% (rise);

US$: 1 mth 0.98% (rise); 3 mth 1.16% (rise);

Currency Exchanges:

£/Euro: 1.15, £ rise

£/$: 1.25, £ rise

Euro/$: 1.08, € rise

Gold, oz: $1,241, rise

Copper, tonne: $5,766, rise

Oil, Brent Crude barrel: $50.4, fall

Wheat, tonne: £144, fall

London Stock Exchange: FTSE 100: 7,327 (fall). FTSE Allshare: 3,984 (fall)


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Issue 96: 2017 03 16: Week in Brief, Financial

16 March 2017


NEWS, the word in pink on a grey background

ALL CHANGE:  Rather more change than expected at HSBC which has been engaged in a search for a new chairman to replace seven year serving Douglas Flint – who was finance director before that.  HSBC almost always has promoted its top men (they all have been, so far) from internal candidates, a tradition which it defended as key to the tight corporate culture which drives the bank’s shared values and crisp internal communication.  But the banking group has decided that that need not be set in stone. The new Chairman will be Mark Tucker, not a HSBC man, not even a banker, (though he did two years as finance director at HBOS pre-recession), a tough taciturn South African who has had remarkable success in running insurance companies.  The bank has taken considerable trouble and time to get the right man in the chair, recognising there is a lot to do to get the bank moving again.  Tucker is said to have both the skills and the personal attributes to fit in – HSBC traditionally likes its leaders and seniors direct and brisk.  His first task is to find a new chief executive – the present one, Stuart Gulliver has confirmed that he will be leaving next year, as planned, though there were rumours that he might stay on a bit longer.  The new CEO may also be recruited from outside – there are not as many internal candidates as the bank might like, and there are a few very strong external candidates available, led by Antonio Horta-Osorio, currently doing the job with notable success at Lloyds Banking Group, but who is said to want fresh fields and a new challenge.

Whoever gets the job is going to have to work with Mr Tucker on a tottering in-tray of issues; HSBC has rather lost its way since the days when it was a world beater.  Excursions into the USA proved badly timed and very expensive and are not resolved yet with a settlement over mis-selling to sort out; expansion in Europe was probably a long term strategic error which is now being slowly reversed as the bank increasingly concentrates on the Far East where it is pre-eminent and on India and the Middle East; service issues in retail continue to cause trouble and expense – as does the investment to solve those problems; and not surprisingly return on capital remains poor.  Mr Tucker is said to enjoy a challenge and this will certainly be a big one, although his timing may also be good as Mr Gulliver has done much of the ground work to move the HSBC tanker onto its new course; even so Tucker will need a very strong chief executive to keep things moving.

BUILDING BIGGER:  The battle for Bovis is slowly warming up.  Once one of the high-fliers of the UK housing building industry, the group’s reputation was greatly damaged by a scandal in 2016 when it was revealed that customers had been pressurised into completing purchases of houses where the building works were not finished – mainly, it appeared, so that the group could meet demanding financial targets.  That led to a raft of damaging and expensive complaints, much consequential reputational damage, and a 30% drop in the share price, followed by the resignation of chief executive David Ritchie.  It also put the quoted company into play, as leading housebuilders looked to consolidate the market and get ownership of Bovis’s land-bank and land options.  Bovis is thought to have ownership of about 19,000 house plots, worth perhaps a £1billion, with a current market valuation for the whole group of around £1.1billion, so the work in-progress and market reputation – even damaged – is coming in at very little.  But there is some nervousness about the sustainable value of those plots – about three years supply to Bovis as it stands – because of the holding costs, some planning gain payments which will be triggered when work begins on some sites, and government threats to landholders who own consented plots and do not build them out fast enough. They may find their planning revoked or be forced to sell the plots.

Redrow were first to make an offer, valuing Bovis at around £1.14bn, rejected as not enough by Bovis’s management, as was a subsequent offer of £1.19bn from Galliford Try, a group which has grown fast over the last few years and is a similar size to Bovis.  Both Redrow and Galliford are especially keen to expand in  the south east of England. They are respectively focussed on the Midland and North-West and Midlands and South-West, so Bovis would be strategically a perfect fit for either of them.  Although Bovis has rejected the Galliford offer as not reflecting the full value of the Bovis business, it has said that it is not opposed to a takeover but wants to get the right price for its shareholders, and remains in discussions with Galliford.

IMPORTING JOBS:  Vodafone is the latest UK company to announce that it is returning a raft of call-centre jobs to the UK, from South Africa in this instance.  Vodafone has suffered from high volumes of complaints about its service quality and response, and in attempting to address those issues has decided that it helps to have a greater concentration of staff nearer customers.  2,100 jobs will be created in the UK by the move, mostly by expanding existing call centres across the UK, with the largest beneficiary geographically being Manchester.  Vodafone are far from the only telecoms company doing this – EE and British Telecom (now owner of EE) are also running down their overseas support networks and replacing them with UK domiciled services.  Quality is not the only issue – indeed may not be the real issue – wages and operating costs in traditional overseas call centre locations such as India and Malaysia have increased rapidly as those economies grow, and the economics of operating offshore are nowhere like so appealing as they once were.

SHOPPING PROBLEMS:  It’s not just City bonuses that are being cut; John Lewis Waitrose, the English middle class’s favourite department store and supermarket chain, is once again, for the fourth year running, cutting its staff annual bonus.  For 2016 it will be 6% – it was more than double that at 15% in 2012 – although group profits for the year were 21% up at £370m (on sales of £11.3bn). What is perhaps unusual in this is that John Lewis is a partnership in which all its staff are partners, so the bonus decision has to be “sold” to them as owners. The reasons for the continuing cuts are not hard to find – wage inflation, especially the costs of the minimum wage but also rising social costs – healthcare and pensions – are pushing earnings and rewards up for the less well paid but stressing the cost base, whilst John Lewis and Waitrose are engaged in long term upgrading of many of their stores to keep customer loyalty, protect against potential competitors, and keep the retail estate in best order in case of economic turmoil over the next few years. Waitrose in particular has been on the expansion path and the group wants to make sure finances are kept tight whilst those investments start up and begin to contribute.  However, Sir Charlie Mayfield, the chairman, did flag that whilst staff were very understanding of the need to conserve cash, the board were looking to circumstances in which they would be able to start to build the bonus back up.

KEY MARKET INDICES:  (as at 7th March 2017; comments refer to changes on last 7 days; $ is US$)

Interest Rates:

UK£ Base rate: 0.25%, unchanged: 3 month 0.35% (slight fall); 5 year 0.78% (rising).

Euro€: 1 mth -0.37% (steady); 3 mth -0.33% (steady); 5 year 0.18% (rising)

US$: 1 mth 0.89% (rising); 3 mth 1.12% (rising); 5 year 2.19% (rising)

Currency Exchanges:

£/Euro: 1.14, £ falling

£/$: 1.21, £ falling

Euro/$: 1.06, € steady

Gold, oz: $1,206, falling

Aluminium, tonne: $1,881, slight rise

Copper, tonne: $5,793, slight fall

Oil, Brent Crude barrel: $51, falling

Wheat, tonne: £146, steady

London Stock Exchange: FTSE 100: 7,360 (slight fall). FTSE Allshare: 4,003 (slight fall)

Briefly: Interest rates seem to be on the move upwards; especially in the longer maturities; the dollar in particular continues to lead other currencies in this respect. The LSE continued to rise, with the Allshare breaking the 4,000 barrier; oil did the reverse with an unexpected decline to US$51 a barrel. Supply issues are the cause there – US output is rising and the market is doubtful on Saudi figures which it also suspects to be rising, casting doubts on the strength of the new OPEC agreement.

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Issue 95: 2017 03 09:Week in Brief Financial

09 March 2017


NEWS, the word in pink on a grey background

URGE TO BE LARGE:  After the recovery from the 2008 recession and banking crash got underway, a positive meadow of small banks and quasi banks began to flower, filling the spaces left by the struggling big banks, especially the big four clearing banks (Barclays, RBS, Lloyds and HSBC).  The opportunities were mainly in the small business sector and in personal banking, where lending growth for the new entrants was greatly helped by the low rate interest rate environment – meaning that debt providers could charge highish margins that allowed for some comparatively risky strategies, and also for the high operating costs of being in that sector (small loans are expensive to run).  Some have prospered and a few have fallen by the wayside, the most visible success being perhaps MetroBank, whose branches are an increasingly common sight in south-eastern prime high streets.  But now the challenger banks are starting to feel the cold winter of competition – from each other, as they grow, from the partially resurgent clearing banks as they recover, from some serious majors such as Handelsbanken and Santander, and also the side winds of slowing demand in a lending market where longer term interest rates have risen and borrowers are being more cautious about business risk over the next two to three years.

Not surprisingly, the challengers are starting to look at how best to strengthen their balance sheets – Wellesley, the peer to peer operator which we looked at a few weeks ago, is busy capital raising to cover rising default risk in its property development focussed book, ICG Longbow is doing the same to grow and diversify its book – again mainly in property – where it wants to move into larger and more robust clients, and Shawbrook, which is a more generalist bank along the MetroBank model, though with a significant property angled loan book, has been approached by its main shareholder Pollen Street Capital, together with a partner, BC Partners.  Both are private equity funds which specialise in the financial sector, and they would like to acquire Shawbrook with a view to taking it private – Shawbrook was floated in early 2015 and is in the FTSE250.  Pollen own about 38% of Shawbrook already, but they have yet to convince their fellow Shawbrook shareholders that their offer, equating to around 328p is of interest.  However, the market view is that this is not an argument about principle – there is little advantage but a lot of cost to the public quote – but to what is a fair price for the business.  As little as 350p, an extra 22p, might swing it, say the analysts.

THE NEW AGE OF MOTORING:  Diesel is dead, petrol is passing, electricity is the eco-future.  That finally seems to be confirmed with the surprise announcement by Bentley, the prime luxury car maker, that they are to introduce an electric sports car; a proper Bentley with a soft top and just two doors.  Perhaps it is not such a surprise in the industry. Bentley has been known to be working on radical changes for its next generation of cars, and battery technology is moving on so fast that even a heavy, many accessoried, car such as a Bentley can get enough mileage out of battery packs to make an electrical version a viable proposition.  And Bentley is part of the Volkswagen Group, which, after recent bad happenings, is anxious to prove its green credentials both to the car buying public and to the regulators.  The new car is said to be capable of 310 miles on a single battery charge – not so far off what the Continental model will do on a tankful of petrol – although one problem common to all car makers is the time taken to charge batteries – up to four hours on a home charging point and maybe two hours on the new generation of commercial charging points.  There is another problem too – not to the car makers but to governments.  As electric propulsion is now growing fast, the impact of it will soon be felt on revenues from fuel based tax, so we are soon likely to see changes to the taxation regime for motorists – maybe to something more value based.  That will not be good for Bentley and other British (and Italian) luxury and fast car makers, though maybe if you can afford to buy the car, the tax bill won’t worry you.  Or perhaps it will – Bentley has not yet quoted a price for their new electric super-sports model.

SAILING ROUND WINDMILLS:  You’ve heard of wind power, you’ve heard of wave power, you’ve heard of tidal energy; but now here comes the ultimate: underwater windmills.  They are not windmills of course; they are watermills, turbines attached to the seabed which are driven by the flows of sea water and tides.  This may sound like fantasy, but they are real enough.  Four have been installed experimentally off the north coast of Scotland and they seem to be proving both technically reliable and good sources of constant energy.  The developer of them is Atlantis Resources, maybe not the wisest choice of name, but they say that they have now proven the concept.  They just need the money to make their sunken power city viable.  Atlantis would like to install another 260 mills underwater in the same area, which will bring great economies of scale in instalment, management, and power generation – and have been working on improved turbines that will be bigger and thus more economical to build and operate.  The site is not the most convenient – about as far from electricity users as could be – but the water is deep (so good for safety), the seabed suitable for holding the turbines in place, and the water flow strong and reliable.  The proposed full installation would produce up to 400 megawatts of electricity, enough to power about 175,000 houses, so the underwater farm would be a meaningful contributor to Britain’s power deficit.  Atlantis though needs government help to pay for the installation, and is bidding for a subsidy this year to build another 50 mills. The government is cutting back on subsidies for sustainable energy because of growing consumer resistance to the extra premium on bills, and also recognising that shallow water wind turbines seem to be reliable and cheaper to fund – and less controversial than their on-land cousins. Nevertheless, Atlantis hopes that the reliability of their model and their acceptability to landscape campaigners may win them some extra government support.

NOT QUITE OVER:  The London Stock Exchange says that its proposed merger with the Frankfurt Bourse is still possible and is continuing to work on the technical details (see our story last week).  It rather contradicted itself though with an increase in its dividend by 20%.  It is true that turnover was up by a similar percentage but profits were nearly halved for 2016. Commentators have said that the only reason to increase the dividend was to keep investors on side as the merger receded into history.

KEY MARKET INDICES:  (as at 7th March 2017; comments refer to changes on last 7 days; $ is US$)

Interest Rates:

UK£ Base rate: 0.25%, unchanged: 3 month 0.36% (slight rise); 5 year 0.71% (rising).

Euro€: 1 mth -0.37% (steady); 3 mth -0.33% (steady); 5 year 0.07% (rising)

US$: 1 mth 0.83% (rising); 3 mth 1.1% (rising); 5 year 2.09% (rising)

Currency Exchanges:

£/Euro: 1.158, £ falling

£/$: 1.22, £ falling

Euro/$: 1.06, € steady

Gold, oz: $1,217, falling

Aluminium, tonne: $1,867, falling

Copper, tonne: $5,855, slight fall

Oil, Brent Crude barrel: $56, slight rise

Wheat, tonne: £146, rising

London Stock Exchange: FTSE 100: 7,263 (slight fall). FTSE Allshare: 3,953 (slight fall)

Briefly: Stock market up, commodities down (honourable mention for wheat which has shown increasing volatility over the last month) and sterling down, interest rates rising again, especially in the longer dated maturities, and with the Fed pushing for rates to rise. There is some economic nervousness around and it is showing this week; government spending in the USA and UK may start to drive inflation a little and the market is pondering on that.

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