1. China Trade (Nov) – 07/12 – while the various lockdowns and port disruptions have seen some disruption to China trade in recent months, the slowdown in trade hasn’t been as marked as first feared despite the Chinese government continuing to pursue a zero covid strategy. If as suspected the new Omicron variant is even more infectious than Delta, then this policy may well be doomed to failure. With all the warnings that port disruption might impact the lead-up to Christmas we’ve seen a lot of businesses try and get ahead of that by ordering early allowing themselves more time to build up inventory. This was borne out by the trade numbers for October which saw a rise of 27.1%, only a modest slowdown from September’s 28.1%, which was a three-month high. The main recovery in exports has been in the area of machines and electrical goods, while imports picked up a little in October to 20.6%, after collapsing in September to 17.6% from 33.1%. This week’s November numbers are expected to show a modest slowdown in exports with a rise of 19.8%, which seems a little on the low side, with imports expected to stay on the weak side, albeit slightly stronger to 20.6%.  

 

  1. US CPI (Nov) – 10/12 – it’s becoming more universally acknowledged that the Federal Reserve is behind the curve when it comes to inflation, although the recent slide in oil prices may well buy the central bank some time. With the Federal Reserve meeting next week, the debate has been intensifying over whether the FOMC will speed up its tapering timetable from the current $10bn of US treasuries and $5bn of mortgage-backed securities that it started last month. In October US CPI hit a 31 year high of 6.2%, with core prices rising to 4.6%. The hope is that this could be the high-water mark when it comes to headline CPI, however when looking at the various ISM reports there has been little sign of that. It has also been notable that a lot of US retailers have been able to pass price increases onto their customers which suggests that CPI could well remain sticky well into next year. Expectations for November CPI are for prices to rise further to 6.7%, and further reinforcing the argument for an accelerated pace in tapering. Core CPI is expected to rise to 4.9%.

 

  1. RBA – 07/12 – with the RBNZ raising rates last month by 25bps to 0.75%, attention will inevitably turn towards the RBA, and whether they will look to follow suit with a move off the current low levels of 0.1%. Give Governor Philip Lowe’s comments last month this would seem unlikely, when he said that the the latest data and forecasts don’t support a move in 2022, and that any move was unlikely to come before 2023. Last month’s pushback by the RBA wasn’t unexpected given how much yields shot higher at the end of October, and was an understandable corrective, however yields haven’t fallen back much since then, which suggests that markets don’t believe the narrative. Lowe’s assertion that Australia doesn’t have an inflation problem isn’t remotely credible, with Australian 2 year yields still well above 0.6%. The abolition of yield curve control at the last meeting appears to be a recognition of that. On current pricing that would suggest that a modest rate rise is in the works and will be increasingly difficult to push back against, given that the recent GDP numbers showed that the Australian economy was much more resilient in the last quarter than originally feared, contracting 1.9%, instead of -2.7%.

 

  1. Rolls-Royce Q3 21 – 09/12 – back in August Rolls-Royce surprised the markets with an unexpected H1 profit of £393m, beating consensus expectations of a small loss. This was helped by a better than expected £600m improvement in free cash flow, which while still negative to the tune of -£1.17bn, is still a marked improvement on a year ago. Since then, the share price has managed to make some fairly decent gains, although the recent concerns over rising Delta infections and latterly Omicron have seen the shares slip back from their November peaks above 150p. Rolls Royce has taken significant steps in the last 12 months to reduce head count and cut costs, and said it was on course with a further £1.3bn of annualised cost savings in its H1 update, however the reality remains that the business is still heavily reliant for a good proportion of its annual revenue on civil aviation engine flying hours (EFH), and while these have been improving, with the return of transatlantic travel also helping the company still looks like it could fall short of its full year target of 55% of 2019 levels for 2021. In the first four months of 2021, large engine flying hours (EFH) were at 40% of 2019 levels, supported by demand for cargo as well as the maintenance of key routes, and this improved modestly in the remaining two months to 43%, while 100 large engines were also delivered. International travel still looks like a headwind particularly as we head into the winter months, and governments reintroduce restrictions because of new variants. Investors will probably need to temper their expectations somewhat. In terms of meeting the target to be free cash flow positive by the end of this year, and £750m by the end of 2022, management insisted in August that when border restrictions are lifted the recovery in international travel will ensure that this happens and that EFH will exceed 80% of 2019 levels. This is highly unlikely to happen before the end of 2022, with the very real prospect that it may not happen at all. While that might be a cause for concern the company has seen some notable wins in other areas. On defence the company secured a contract for its F-130 engines which are to be used to power the B-52 Stratofortress for the next 30 years, in a deal that is worth £1.9bn. It was also announced that the company has agreed a deal with Bain Partners to sell ITP Aero for €1.7bn, while also winning a government contract for its mini-nuclear reactor technology.

      

 

  1. British American Tobacco Q4 21 – 07/12 – it’s not been a great year for the BAT share price with concerns earlier this year that the US was considering legislation to cut the amount of nicotine in cigarettes to a level that’s not addictive. This may have been a problem a few years ago, however these days it is less of a worry as the industry moves into other areas in order to retain a decent revenue stream. In June the company said it was increasingly confident that it would meet its £5bn target of New Category revenue by 2025, and 50m consumers of non-combustible products across the operations by 2030. The company also upgraded their constant currency revenue growth to above 5%, above the previous guidance of 3% to 5%, driven by optimism over rising demand for alternatives, across all of its ranges, and its markets. This has been borne out by the growth in its Vuse product which in September became the number one global vaping brand by market share. Despite this the shares have continued to struggle, perhaps over concern with respect to how they might be affected under new potential EU regulation and tax rules. The company is also looking to diversify its product range into CBD products after acquiring a 19.9% stake in Organigram, a leading Canadian cannabis provider.   

 

  1. Brown-Forman Q2 22 - 08/12 – it’s not just Jack Daniels that appears to appeal to people’s taste for whiskey products, Brown-Forman’s new Tennessee Apple brand has helped the share price to perform well in recent months, with full year sales rising 3%, to $3.5bn, when the company reported back in June. The company pulled its guidance initially in the wake of the Covid disruption, however it did keep the dividend and went on to say it fully expected to continue to be able to do so, despite the uncertainty around Covid. The sales of its Early Times, Canadian Mist and Collingwood brands also helped in improving the company’s focus on its best performing markets. For Q1 revenues saw a boost after the EU and US agreed to postpone a planned doubling of tariffs on American whiskey to 50%, which was supposed to take effect on 1st June, with profits coming in at $0.40c a share, while net sales rose to $906m. With negotiations ongoing with respect to the complete removal of the current 25% tariff the next 12 months could well offer a significant boost to sales if a tariff removal could be agreed. Management reiterated that they expected full year 2022 numbers to see mid-single digit growth in underlying sales and operating income, although supply chain disruptions could be a headwind. Profits are expected to come in at $0.52c a share.                

 

  1. GameStop Q3 22 – 08/12 – when it comes to fundamentals around GameStop the share price performance this year in no way accurately reflects how well the business is doing. We’ve seen huge amounts of volatility since the middle of January, and ands while the noise around this meme stock has subsided somewhat since then the shares are still up over 900% year to date. Away from the noise that has dominated the discourse around this company GameStop has been struggling for some time with falling sales because of online game stores cannibalising its market share. The reality is that mall shopping isn’t anywhere near as profitable at a time when ordering games can be done at the click of a mouse and downloaded straight to your computer or console without the need for a physical disc. While the Reddit day traders have come to the rescue of a tired brand, the recent share price movements suggest a business that is currently in limbo. The company is taking steps to move to a more digital model, but it is going to take time. Management have brought in several names from Amazon and Walmart to address this, while Ryan Cohen became chairman on June 9th charged with turning the business around. All the free publicity at the start of the year helped boost its Q1 numbers by 25% to $1.28bn and cut losses to $0.45c a share, however the company still faces a long road back. In Q2 these losses to $0.76c a share. More worryingly revenues were down on Q1, which means it’s not enough to just cut costs to sustain a tired business model, revenues need to increase as well, and they aren’t. Revenues have been in decline since 2018 and are continuing to remain weak. At this rate GameStop will struggle to get close to last year’s revenue numbers, with the company declining to offer guidance for Q3. The company helped buy itself more time in June selling an extra 5m shares and raising another $1.1bn in the process. This was on top of the $551m it raised in April. Now it needs to start making money, though even if it doesn’t that probably won’t be enough to stop its shares going higher. After all, down is the new up these days where meme stocks are concerned. Losses are expected to come in at $0.46c a share.

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