United States retail sales data will be a useful indicator of economic health and confidence. The consumer represents, by some margin, the biggest segment – and therefore driver and determinant - of the world’s largest economy. Ahead of an election it is particularly critical, although the Federal Reserve Bank’s most recent measures (increasing Quantitative Easing, has reduced the cost of mortgage and other long term loans) to boost consumer sentiment, may have come too late to influence that event.
Against a backdrop of rising electricity, gas and petrol prices (which have yet to impact), domestic inflation data – in the form of the Consumer Price index (CPI) and the Retail Price index (RPI) - is due for the month of September. Expect the Bank of England’s core measure of CPI (as its Monetary Policy Committee seek to steer the UK economy along a path of delivering 2% per annum) to have fallen back from August’s 2.5% towards 2.3% or even 2.2% as utility rises in September of last year drop out of the calculation. Somewhat surprisingly given the dull economic backdrop, inflation remains stubbornly persistent and will be a factor when the MPC next meet to decide on interest rate policy and the prospect of increasing QE.
The UK unemployment rate and claimant count is likely to maintain the conundrum: evidencing little change in unemployment (it fell by 7,000 in the quarter year ending 31 July 2012) or the rate (8.1% of population), despite the negative pace of real economic growth and surprisingly robust data on the numbers employed. Market watchers will be keen to see the minutes of the latest MPC meeting, which will show the strength of support for maintaining or easing its monetary strategy – from the current 0.5% Bank rate and QE of £375 billion – by reference to its members’ voting. Following the Fed’s lead state-side, a hike in bond purchasing (probably to £425 billion, before the year-end) remains a likely outcome.
Domestic retail sales data, including separate publication of internet retail activity and trends in lending, will provide further evidence of consumer confidence ahead of the critical seasonal shopping spree in December. Politicians will be focusing their efforts on rebuilding economic and monetary ties at the European Union Leaders summit, against a backdrop of increasing dissent from many quarters about the Euro, per se, costs of supporting Greece and other financially weaker member states. Mario Draghi, the president of the European Central Bank, has been seeking to persuade investors that its efforts and government reforms are delivering real progress in the Eurozone’s economy and financial structure (“talking his own book”, some might say).
Other economic news due:
Monday – US inventories in respect of business, manufacturing and retail sales – essentially stock levels – are published. These provide an indication, amongst other things, of how any pickup or change in demand could impact manufacturing and prices.
Tuesday – European inflation (CPI), car registration data and monthly output from the ZEW survey suggesting how the economies of continental Europe, and Germany in particular, are set to perform over the next six months. CPI, capacity utilisation (an indicator of productivity) and industrial production statistics are due from the United States.
Wednesday – a focus on housing in the US, via mortgage applications, building permits and new home starts; US crude oil inventories (after the driving season, ahead of winter) represent a key indicator of future prices. Closer to home, German wholesale (input) prices offer early advice of eventual inflation.
Thursday – a plethora of US statistics, featuring unemployment (initial, and continuing, claims) and forward-looking survey evidence on the economy (Leading indicators), manufacturing (Philadelphia Federal Reserve index, or ‘Phily Fed’) and consumer confidence (Bloomberg) in particular.
Friday – The UK state of public finances comes under scrutiny (with an impact of gilt prices, as future issuance is debated). In the EU, details of its current account, the balance of trade and payments are published along with the producer price index in Germany. An update on existing (not new build) homes sales in the United States may provide further encouragement, after signs that the housing market has bottomed and – aided by lower long term borrowing costs - transactional activity has revived.
A quarterly trading update is due from the FTSE100 constituent Fresnillo, which is the world’s largest producer of silver and Mexico’s biggest source of gold. This is expected to show further progress – towards 2012’s production target of 40 million ounces of silver and 460,000 ounces of gold (and 2018 targets of 65 and 0.5 million ounces respectively). Analysts will be keen to assess extraction costs, as well as recovery rates and grade qualities within the production report against a backdrop of a renewed focus on safety procedures, after a number of fatalities over the summer months. In the past quarter, prompted by a pickup in demand for precious metals – post increases in global money supply - Fresnillo shares have regained most of the ground they lost over the previous nine months to near their £21 all time high.
Final results are due from Bellway, a national and mid-low priced house builder which has been conservatively managed – not least in balance sheet terms, to good effect - over the past five, at times difficult, years. Pre-tax profits are set to increase by a half, and could top a £100 million, driven by a 6% increase in both volumes and completion prices, which illustrates the high operational gearing within this industry. Management’s view of the next twelve months will be of interest and they will no doubt call for more government help (re planning permission et al), but this business is capable of making decent returns in a flat house price environment.
The mid cap, FTSE250 constituent retailer N Brown Group is due to report interim results. With just over half of its sales achieved online, investors have warmed to this stock as a potential beneficiary of structural change in consumer behaviour. However, they have typically been disappointed, as the promise has failed to match expectations – for a variety of reasons, ranging from its offering to financial management. This retailer has sought to move away from its specialist clothing proposition tag (which featured outsize ladies wear) to encompass a number of other niche areas, most recently acquiring High & Mighty and Figleaves. The focus will be on sales growth (like-for-like was +1.9%, as at the end of June) and margins (to reflect a changing mix, by distribution channel and product, in the business). Investors have recently warmed to the value attractions – featuring an attractive, well covered, dividend - of the stock, and will be hoping for an absence of the ‘banana skins’ that have previously undermined sentiment.
By contrast, one of the world’s most valuable drinks businesses, Diageo is due to provide a trading update which should contain few surprises. An impressive branded proposition, an ability to market itself (which does not come cheaply, by reference to the advertising budget) and a strong presence in the emerging economies should ensure that the company can maintain its track record of delivering rigorous growth. Resilience in the US can also contribute to sales of growth of circa 5% over the past quarter; it needs such growth to justify the equity’s rich premium rating and maintain investor enthusiasm. The board should also provide an update of its efforts to add to its portfolio of assets, by the purchase of Jose Cuervo tequila from the Mexican Beckmann family.
BP’s Russian joint partner in its 50% owned BP-TNK business (a key asset in BP’s portfolio) has exclusive rights, ending this day, to offer or make a deal to acquire (the somewhat forced seller) BP’s stake. Thereafter the fourth largest constituent of the FTSE100 index will be free to talk with other interested parties: of those indicating interest, Russian owned Rosneft represent the probable eventual owner. However concluded, the price is likely to understate the investment’s true worth and disappoint BP shareholders; something which is already ‘in the price’.
A trading update is due from soft drinks manufacturer Britvic, which last month announced that it was in talks with its industry peer A G Barr (best known for Irn Bru) to form a merger. Investors may gain further insight into whether the ‘wedding’ takes place in Chelmsford or Glasgow (with AG Barr, via superior financial position and trading posture, probably having the upper hand in discussions), if at all (as Takeover Panel will no doubt take a view). Investors have experienced a bumpy ride in the relatively short history of this company and the most recent underlying trading is unlikely to sparkle, after a wet summer. Synergy benefits of the merger could be substantial, but any breakdown in the proposed union could leave the stock vulnerable to a 20% retracement towards its pre-talks level.
The cash and carry business of Booker is unglamorous, but merits further investigation. That opportunity is presented when the £1.6 billion market capitalised company publishes its interim results. Profit margins have traditionally been wafer thin (rendering food retailers’ profitability relatively attractive), but Booker has been astutely managed – both in terms of operations and ungeared finances, by contrast with some operators. Analysts will be keen to learn of how Makro, acquired in July, is being integrated and its performance; plus any other expansion plans, beyond opening two more branches in India. Like for like (excluding new space/stores) sales growth has risen by 4.4% in the past quarter and, with both traditional wholesale (cash n carry) and delivered service performing well, analysts can be expected to raise their earnings forecasts. However, after consistent strong progress relative to the overall market over the past four years (rather like Diageo), the shares appear to be up with current events and pricing in further growth in 2013.
Finally, an interim management statement from the troubled hedge fund business, and recent departee from the FTSE100 index, MAN Group will be interesting; market speculation suggests that a bidder might pounce on any weakness (notably in its ability to retain assets) to make an offer. Petropavlovsk, the Russian gold miner, is also due to provide a trading and production update; seemingly managing to contrive a succession of good news, followed by bad or disappointments, a more positive update is anticipated for this mid cap explorer.
Friday 19th October
No major companies reporting expected, although Agrekko, Petrofac, Provident Financial and William Hill are due to provide quarterly trading updates. The bookmakers’ might be most interesting, post the outcome of the bid for Sportingbet (due on Tuesday), Ladbroke’s trading update on Thursday and as William Hill may seek to buy Playtech’s 29% stake in its online joint venture.
The Writer's views are their own, not a representation of London South East's. No advice is inferred or given. If you require financial advice, please seek an Independent Financial Adviser.
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