Earnings results for UK retailers pointed to healthy consumer spending, while the Trump rally showed signs of fatigue.
Also in this week's bulletin:
Retail sales for the fourth quarter showed UK consumers spending heartily over the festive period.
US stocks were jumpy following the president-elect’s first press conference, as the Trump rally lost steam.
Trade tensions rose, as the US launched a WTO action against China, and Trump criticised Chinese policy.
Volkswagen agreed a $4.3 billion US fine for emissions cheating, but Fiat Chrysler now faces investigation.
Report by St James's Place Wealth Management
1. Retail therapy
The old saw that England is “a nation of shopkeepers” looked apt last week, as a slew of retail earnings figures showed shoppers taking
High Street sales to new levels in the fourth quarter.
Among the risers was Marks & Spencer, which reported a 2.3% annualised rise in fourth-quarter sales for its clothing and home
divisions, its best Christmas boost since 2011. The success reflects in part a shift in business strategy, and augurs well for a
company increasingly focused on its supermarket offering.
“With a new CEO that understands retailing, big changes are being made, and its long-maligned General Merchandise division
is beginning to regain share previously ceded to the likes of Next – this complements the well-regarded food division,” said
Chris Reid of Majedie Asset Management. “The stock offers a very attractive valuation, on a yield of 5.7%, which is nearly
covered by earnings, and with the asset backing of a mostly freehold estate. [Moreover,] in three years’ time it will be 75%
food.”
Indeed, food retailers enjoyed a buoyant end to the year, even allowing for the season, as Tesco posted a 0.7% rise in sales and
Morrisons reported its fourth consecutive quarter of sales growth. “The food retailers all enjoyed a good Christmas and at both
Tesco and Morrisons the new management teams have done a good job of restoring competitiveness,” said Nick Purves of RWC
Partners. “Like-for-like sales volume is arguably the most important metric at any retailer and, for both companies, volumes
have been growing for 18 months now. Both have the potential to restore a good portion of the profitability that has been lost
over the last three or four years … [leading] to further upside in the share price.”
Debenhams, ASOS and JD Sports joined Marks & Spencer in reporting impressive clothing sales for the quarter, reflecting
much more than simply the usual yuletide upswing, although in some cases it was foreign earnings that delivered the profits
boost.
“ASOS had a solid quarter as it is starting to reap some of the rewards of its investments in non-UK infrastructure, distribution
and IT systems, offsetting modestly slower UK sales growth,” said Jim Hamel of Artisan Partners. “Part of the non-UK boost
is attributable to currency – particularly… versus the Australian dollar and the Russian ruble. However, ASOS’s ability to
reduce its delivery time in Russia and offer free returns in Australia are also positive catalysts. ASOS has an attractive growth
runway ahead.”
The FTSE 100 struck another record high, gaining 1.8% over the course of the week, clocking a 14th
successive day of gains;
although some leading retail firms, John Lewis among them, warned that a weaker pound would put pressure on margins in
2017. Comfort came from Fitch, a leading financial ratings agency, which reported that all UK sectors would continue to
prosper, even in the case of a hard Brexit.
The Fitch report resonated all the more in a week when the prime minister appeared to indicate that free access to the single
market was unlikely post-Brexit. Sterling dipped further in response, and further still as Theresa May’s Brexit speech
approached. Martin Wolf, a leading economics and finance commentator, wrote last week that “the single market option is
dead” while TheCityUK, the City of London’s principal lobby group, announced it had given up fighting for access.
Meanwhile, the Institute for Fiscal Studies published a report showing that, in the UK, inheritance is becoming an increasingly
important source of wealth for young people, in light of wage stagnation and the sharp rise in house prices over recent years.
As a result of these factors, the amount of wealth held by elderly households has increased rapidly, making the need and potential
for savings through estate planning all the greater.
Monday 16 January 2017