The week ahead: UK spending review, Fed minutes, flash PMIs, Aviva, AO World, Compass Group

1)    UK Spending Review – 25/11 – the recent extension of the furlough scheme until March next year was the first acknowledgment by the UK government that it needed to adopt a change of strategy to the somewhat piecemeal approach it had started to adopt with respect to supporting the UK economy, as the original furlough program came up for expiry. The late change of heart with respect to the extension of furlough, while largely welcomed came too late to save some jobs which might well have been saved if action had come sooner. With speculation mounting that the government is looking towards trying to identify areas where taxes could go up in order to start limiting the rise in current debt levels, there is concern that outlining a series of measures so soon, before a viable exit strategy has been identified, could prompt some businesses to rein back their investment plans in 2021. This week’s one-year spending review will look at budgets for the next 12 months, perhaps fleshing out last week’s announcement by the Prime Minister of a green revolution, covering key areas like the energy, infrastructure as well as the NHS, education and other public services, particularly in the hardest hit parts of the UK. 

2)    UK/EU trade deal – 23/11 – there’s been plenty of speculation as to how late the UK government can leave it before it’s too late to come to an agreement on the future EU/UK relationship after 31st December this year. A lot of people have been briefing that 23rd is the final cut-off date in order to get the necessary ratifications in place for there to be a seamless transition on the 1st January 2021. Given previous experience of the EU, this seems unlikely and it is more likely that we’ll get another delay. On the plus side the UK does appear to have managed to tie up deals with Japan and Canada in the last month, so optimism is growing that the EU and UK will be similarly pragmatic with each other given the dire economic circumstances coming to both in the coming months as virus cases continue to rise. 

3)    Fed Minutes - 25/11 - at its post US election rate meeting the Federal Reserve was still a hostage to events, given that there was little visibility in the aftermath of the vote as to who would be in the White House come January, as well as the timing of any new fiscal stimulus plan.  Unsurprisingly the central bank chose to keep a low profile, merely content to re-stipulate the need for further fiscal measures, from US policymakers. One thing they did do, prior to the election, was lower the minimum loan size of its Main Street Lending Program to $100k, from $250k in order to catch more of the smaller businesses which ran the risk of falling through the cracks. One thing was notable was that Fed chair Jay Powell was committed to the central bank doing more to support the economy, but he was also insistent that US policymakers needed to do more as soon as practically possible. The Fed decision was unanimous on this occasion unlike in September where there was some dissent over the Feds new approach towards inflation. Whatever new fiscal measures are agreed the US central bank will still be at the forefront of not only the US policy response, but also the global policy response in the weeks and months ahead. This week’s minutes may give us further insight into what other monetary policy discussions took place, and what else could be coming down the pipe in the weeks and months ahead.

4)    Germany, France manufacturing and Services flash PMIs (Nov) – 23/11 – there has been increasing evidence in the past few months that the summer rebound that characterised the summer bounce back in France and Germany has run its course. In the most recent October PMIs, the numbers painted a mixed picture for the German economy, with services slipping back into contraction territory of 49.5, while manufacturing moved higher to 58.2, and its best levels since March 2018. November is likely to be a different story given the limited lockdowns imposed across the country. In France it’s been a similar picture with services remaining weak, slowing to 46.5 from 57.3 in July, as rising infection rates prompted localised lockdowns and restrictions being imposed across the country. As we start out into Q4, it is clear that the recovery seen in the wake of the contractions in Q2 has been a robust one, however the sharp deterioration in recent services PMIs is increasing concerns over an economic cliff edge, as we head towards the chill of a European winter. On the plus side manufacturing has been a strong performer for both Germany and France, helping to offset some of the slowdown on other parts of their economies.  

5)    UK manufacturing and Services flash PMIs (Nov) – 23/11 - In the UK the economy has proved to be much more resilient, though that is probably down to having come out of lockdown later, as well as “eat out to help out” in August. No deal Brexit concerns notwithstanding the UK economy has continued to perform well in its post lockdown period, and after the outperformance seen in August, September also posted some decent numbers across the board. In September services activity slowed modestly to 56.1, while manufacturing came in at 54.1, showing that the UK economy performed extremely well in Q3. This was always unlikely to continue in Q4 and the October numbers, unsurprisingly reflected that with a slow down to 53.7 and 51.4 respectively, as localised restrictions impaired economic activity. This week’s November numbers are set to show further weakness with the services sector set to bear the brunt as a result of the England wide lockdown that came into effect on 5th November.

6)    US Consumer Confidence (Nov) 24/11 – the strong rebound in retail sales since the US came out of lockdown has been surprising to say the least. We’ve seen a V-shaped recovery when it comes to retail spending, while consumer confidence also rebounded strongly in September, after a weak August and has managed to maintain that September rebound into October. This has come about despite a rise in uncertainty ahead of the recent presidential election, and the lapsing of the $600 a week payment that went to US households up to the end of July. This week’s November consumer confidence numbers are expected to remain resilient, coming in at 101.5, as the US economy gears up for the Thanksgiving break this week. The main concern around a resilient number remains about rising infection and hospitalisation rates, across various US states, not to mention the recent Chicago lockdown announced by the Chicago Mayor Lori Lightfoot.

7)    Personal Spending (Oct)/US Final Q3 GDP - 25/11 – Personal spending has seen a strong rebound in the last five months after the big declines seen in March and April. This rebound looks set to continue this week with another positive number, albeit at a slower rate of 0.7%, as we head towards November and the Thanksgiving holiday period. This has come about despite patchy income data, which suggests that US consumers are dipping into their savings, a situation which is unlikely to continue indefinitely, in the absence of further fiscal support from the US government. On the US economy we look set to see the rebound seen in the most recent Q3 GDP numbers, revised up to 33.2%, helping to further reverse the 31.4% decline in Q2. The 40.7% rebound in personal consumption was the key driver behind that economic rebound, and any upward revision to this week’s data is likely to come from that area.  The big question is whether that is sustainable as we head into Q4?

8)    Aviva Q3 – 26/11 – when Aviva reported its H1 numbers in August, profits saw a fall of 11%, as insurance claims rose by £165m, dragging operating profits down to £1.2bn. Having suspended the dividend in April the company announced an interim payment of 6p a share. The firm’s asset management arm Aviva Investors took a sizeable hit as profits fell over 40% to £35m, however the recent improvements in financial markets could see some of this clawed back in Q3. New CEO Amanda Blanc has certainly taken over at a very challenging time but has said that the main focus of the business going forward will be on the company’s core markets of UK, Ireland and Canada. This suggests that we could see plans to dispose of the businesses in France, Italy and Singapore, as the company looks to reduce its debt levels, and improve its cash levels.    

9)    Daily Mail FY 20 – 23/11 – when Daily Mail reported its numbers for the nine months to June, the company said profits would be 44% lower due to the lockdowns brought about by the pandemic, which prevented people from going out and buying a newspaper. This in turn prompted a sharp decline in advertising revenue which saw revenues decline 7% to £934m. This was a sharp turnaround from where we were at the end of February when group revenues for the five months of the year, were reported as being up by 3%. The company which also owns the Metro and the “i” paper, was slightly more optimistic when it published its pre-close update in October, after a strong rebound in September advertising revenues, however revenues and profits are still expected to be sharply lower from a year ago.  Full year revenues are expected to be either side of £1.21bn, a decline of 6.5%, from last year, with an adjusted operating profit of between £85m to £90m.          

10)  Compass Group FY 20 – 24/11 – when Compass outlined its latest Q4 numbers the share price dropped back sharply at the end of September, as revenues fell by 36%, only a slight improvement from the -44% seen in Q3. The company also said it would have to take impairments to the tune of £100m. This is expected to translate into full year organic revenues showing a decline of 19%. The gradual re-opening of schools across Europe and the US has helped revenues rebound in the short term, however the sports and leisure part of the business has continued to struggle largely due to the fact that it has had to remain closed.    Recent lockdown measures across Europe won’t have helped either, however the recent rebound in the share price suggests that some think the hard yards are in the rear-view mirror. With governments seemingly determined to keep schools open, this view may well be correct, and should help limit some of the cash burn in the short term, with total liquidity at around £5bn as of financial year end.        

11)  AO World H1 21 – 24/11 – its universally acknowledged that online retail has been one of the big winners in the face of the economic lockdowns faced by UK consumers. This is perfectly illustrated in the performance of AO World’s share price this year, with the shares up over 300% year to date. Results for the year ended 31st March last year showed a tiny pre-tax profit of £1.5m. Since then the outlook has changed markedly with expectations for these numbers to explode higher in 2021 to £36.6m this year and £43.6m in 2022. Total H1 revenues are expected to show a rise of 57% to £715m, due to strong demand in its UK and Germany markets, as people spent money on new washing machines, fridges, cookers and TVs.   

12)  Best Buy Q3 21 – 24/11 – yet another US retailer that has managed to ride out some of the worst of the coronavirus shutdowns, with its shares also at record highs earlier this month. Best Buy saw revenues slip back in Q1 as a result of the store shutdowns, however a 154.4% rise in online sales helped offset a lot of the slowdown in revenues. In Q2 online sales saw a 242% rise from a year ago, while same store sales also rebounded 5.8% as lockdown restrictions were lifted. Revenues came in at $9.91bn in the second quarter with projections, while profits blew away expectation, coming in at $1.71c a share. The bulk of sales came from the sales of electrical items, from computers to kitchen items, though Q3 sales and revenues could well struggle to meet the levels we saw in Q2. As we look ahead to the Q3 numbers we can probably assume that costs are likely to be higher due to staff safeguarding measures and the like, with profits expected to come in at $1.64c a share.          

13)  Deere and Co Q4 20 – 25/11 – in August, US agricultural equipment company Deere and Co reported Q3 revenues and profits that came in ahead of expectations, while also raising its full year guidance. In Q2 management said they expected global sales to fall by up to 30% to 40% in Q3, despite beating revenue expectations in Q2. While revenues beat expectations, this was mainly because of the varied measures the company took to cut costs which has included the laying off of hundreds of workers, replacing higher paid more experienced workers with younger and lower skilled employees. Since the Q2 numbers back in May the US economy has continued to open up, helping to pull the shares solidly from their March lows to be trading at record highs earlier this month. With over 50% of its business based in the US the strong rebound in the US economy has certainly helped, with profits expected to come in at $1.30c a share.  

14)  HP Inc Q4 20 – 24/11 – the shift to working from home in the wake of the coronavirus pandemic has precipitated a big shift in demand in recent months, a trend that HP struggled to adapt to in its Q2 numbers, due to manufacturing and supply chain hold-ups. While the company notebook and PC sales were solid, peripheral sales have struggled, especially printing revenues over the last two quarters, which due to office closures saw big falls in revenue. In Q3 printing revenues were down 20% to $3.9bn, which caused total revenues to fall 2.1% to $14.3bn, which was slightly better than the $12.5bn in Q2. HP still has a strong position in terms of the global market for PC sales, it accounts for 21.8% of it, but is under pressure from some of its more nimble and cheaper peers, like Lenovo. The best sellers in Q3 were notebooks, which saw a 32% rise in sales, while desktops saw a decline of 30%. Q4 expectations are for EPS to come in at $0.52c a share, which would be in line with what we saw in Q3’s numbers.