UK Q2 GDP - 30/09 – This week we’ll be getting the final iteration of Q2 GDP with some optimism that we might see an upwards revision to the numbers. The UK economy has performed markedly better than was expected to be the case at the beginning of the year, despite concerns over a slowdown in the Q3 data. A Q1 contraction of -1.6% was a much shallower contraction than was originally priced at the start of the year, when most estimates were over double that, the rebound in Q2 has more than reversed the damage on that count, with a 4.8% rebound. On an annualized basis this is expected to show a 22.2% rebound, however that needs to be set in the context of the Q2 lockdown of 2020, which saw economic activity slump by a quarterly -19.8%. Most of the growth came from a strong rebound in personal consumption, to 7.3% as restaurants and cinemas reopened, and it is here we could see an upward revision, along with index of services. On a disappointing note, business investment was disappointing, rebounding a modest 2.4% instead of a predicted 6.8%, and for that we can probably blame the fact that the June reopening was pushed into July, due to a sharp rise in delta cases.
US Q2 GDP - 30/09 – The rebound in the US economy from last year’s slump of -31.4% fall in GDP, has been decent, with four consecutive quarters of expansion, although the extent of the rebound has been slightly less than was anticipated back in April. The spillover effects of two US government fiscal stimulus packages saw a modest spill over into Q2, however it was much less than was anticipated when the first reading came out. Initial expectations had been for an 8.5% expansion; however, we came in well short of that at 6.5%, and while this was revised higher a month ago to 6.6%, any modest revision higher in this week’s numbers is likely to be nominal at best to around 6.7%. Personal consumption has been a key driver of the rebound, coming in at 11.9%, however it has been clear for some time that some sectors have been struggling more than expected. Supply chain disruptions have played a part, as have staff shortages in certain areas, with the US government's own stimulus payments probably not helping. The prevalence of the delta variant hasn’t helped either, and while we can expect to see an upward revision, it is clear that the US economy isn’t where it was expected to be 6 months ago, even if it has managed to recover all of its post pandemic drop in GDP.
EU flash CPI (Sep) – 01/10 – There has been a significant increase in chatter amongst some ECB policymakers that the central bank needs to start calling time on its PEPP program, given the sharp rises we’ve started to see in the headline CPI numbers. This increase in volume was prompted by a sharp rise in August CPI to 3% from 2.2% in July. This remains well below the levels in the UK and the US, however the does have form when it comes to acting prematurely when it comes to inflation. It is true that headline CPI shot up to 3% in August, and a ten year high, however core CPI is much lower at 1.6%, and has generally been a much more accurate reflection of EU inflation over the past ten years. If we get another pop higher in this week’s September flash numbers, then we can probably expect the volume to go up a notch when it comes to a slowdown in the pace of monthly PEPP purchases. ECB President Christine Lagarde did make a nod to this at the recent meeting at the beginning of the month by announcing it was slowing the pace of its monthly PEPP bond buying program, over the next three months, which is currently at €80bn a month. There will be a wider discussion on its future in December, but it was made clear that the number could be moved in either direction if required. On current numbers the EU has a lesser inflation problem than others, however the recent surge in energy prices will certainly help to sow further debate amongst the hawks and the doves on the ECB governing council, with expectations of another new high of 3.3%, although core CPI is expected to remain below 2% at 1.8%.
Manufacturing PMIs (Sep) – 01/10 - The most recent PMI numbers from both Germany and France, were a little weaker last month, although they still remain well above 50 on both counts. Nonetheless, there are growing signs of weakness as we head into the winter months, and with energy price rises now starting to prompt production shutdowns, there is a chance that this could well start to get reflected in these headline numbers. In China we’ve already seen significant signs of weakness in the past few months, as authorities take measures to cut pollution and drive prices back down. Away from China, readings in Europe, the US, and the UK, remain in the high 50s. In Germany activity is even more resilient despite the disruptions being caused by various industry shutdowns, higher prices, and weaker exports to China, with manufacturing activity above the 60 level. Whether this situation can continue is up for debate given the recent deterioration in business confidence. German IFO business activity has been on the decline in recent months, slipping to a three-month low in August. All of these could fall further in September, especially given the uncertainty over the German election which is likely to kick off a long-winded tug of war to form a new government as Angela Merkel departs the political scene after 16 years at the helm.
Germany election – 26/09 – With the German election this weekend it is becoming increasingly likely that the SPD will be the largest party, confining the CDU/CSU to opposition for the first time since the turn of the century. It will then be a matter of who partners with the SPD and Olaf Scholz in partnership to form a new government, with the Greens led by Annalena Baerbock expected to make some decent gains as well. With the electoral maths as they are, any coalition could well be a three-way affair with the FDP, or the Left. From a markets point of view the presence of the FDP in any new government would be a positive as it would rein in the prospect of any rabidly anti-business policies, and too much fiscal expansion. A so-called “traffic light” coalition of the SPD, Green and FDP is seen to be the most likely, though any deal to form a new government is likely to take some time.
Next H1 22 - 29/09 – When Next last reported in July the shares finished the day sharply higher, after the company reported an 18.6% rise in full price sales for the quarter, compared to the same period in 2019. This was well above guidance of 3%, and a marked improvement on the -1.5% decline seen in Q1. Because of this Q2 outperformance sales guidance for the year was raised from 3% to 6% growth. Full year profit guidance was also raised by £30m to £750m, while Next took the decision to repay £29m of business rates relief to the government. In the period since then UK retail sales have been slightly more subdued raising the possibility that management might have been a little premature in raising their guidance. The performance of the share price since then has been subdued, trading in and around the 8,000p for the last few weeks, suggesting a similar amount of concern on the part of investors. Particular attention is likely to be focussed on staff costs given staff shortages across the retail sector. We should also be mindful of the court battle being fought by Next store staff to obtain equal pay rates with distribution centre workers. Despite these headwinds there has been little sign of a business slowdown. In September Next announced that it had reached a deal with Gap in the US to manage the US firm’s online business, through the Next website, while also hosting a click and collect in its stores for Gap products. The deal, which will start next year, is a significant retreat for Gap in terms of its high street footprint but also makes sense given the much higher costs in having such a presence.
Boohoo H1 22 – 30/09 – Boohoo’s last fiscal year was a year of two halves with the first half notable for a scandal around a supplier factory in Leicester which was operating below the required standards as set by UK Health and Safety and was also paying below minimum wage levels. Despite the short-term brand damage, management appear to have drawn a line under some of these issues, and in March took the decision to drastically cut back on the number of suppliers it uses in its supply chain to 78, down from over 200, as it looked to shore up its battered reputation, and improve its oversight. To further reinforce its governance, the company announced that it would also be setting up a risk committee to oversee supply chain monitoring and compliance. Concern was raised about these issues again towards the end of July after a report on Sky News, which the company responded to with a strong restatement. Putting to one side the noise around the supply chain issues, the company got off to a strong start when they reported Q1 numbers back in June, carrying on the momentum we saw at the end of last year that saw the business post a 41% boost in revenues and a 35% increase in profits before tax to £124.7m. At the end of its previous fiscal year, management warned that they expected 2021 to be a much more cautious year in terms of the outlook with sales growth predicted to slow to 25%. With lockdown restrictions set to ease and consumers likely to want to spend on a summer wardrobe this came across as a little cautious. Q1 revenue rose to £486.1m a rise of 32%, with the UK and US markets seeing the strongest gains, while the rest of Europe saw a decline of 14%. The full year outlook for sales growth of 25% was kept unchanged suggesting that at some point over the next few months management expects to see a bit of a slowdown in demand. This caution has manifested itself in further declines in the share price, towards their lowest levels this year. With the shares currently down over 25% year to date, shareholders will be hoping for a respite. On the plus side Boohoo was able to announce a deal with Alshaya Group in the Middle East which will see boohoo brands in Debenhams stores across the region.
Smiths Group FY 21 – 28/09 – At the beginning of this month Smiths Group announced that it had secured better terms for the sale of Smiths Medical division, withdrawing its recommendation to support the TA Associates bid, and recommending a sale to US based ICU Medical for $2.7bn plus an additional $100m contingent on the share price performance of the enlarged ICU business. The deal is expected to close in the first half of 2022, with Smiths owning 10% of ICU Medical on completion. The company also said it would return $737m to shareholders by way of a share buyback. Since that deal was announced the share price has fallen to its lowest levels this year, perhaps because in the last 12 months the medical division has been a notable outperformer, given that it was at the forefront of the coronavirus outbreak. The company was a specialist in the production of medical ventilators, as the NHS scrambled to boost the number of breathing aids it needed to help save lives. On the flip side the decision by NHS doctors to hold off on elective procedures did hit revenues in the likes of its other specialties. As from next year the company’s focus will be on its oil and engineering businesses. Its John Crane operation is currently undergoing a restructuring to the tune of £70m, while its engineering division has been hit by the volatility in the oil price. On the plus side the recent recovery in the price of oil saw operating profits improve in H1 to £166m, ahead of market expectations, however that still hasn’t prevented significant underperformance with the share price down over 10% year to date. Hopefully this week’s FY update will reverse some of that underperformance.
Synairgen – H1 21 - 30/09 – Up until the end of 2019, Synairgen was probably one of those companies you’ve never heard of, but conducts important work when it comes to respiratory treatments for asthma and other pulmonary conditions. While Covid-19 has presented many challenges, for the biotech sector it has proved to be a boon, as well as enabling the industry to make tremendous advances in the development of new treatments for a range of respiratory ailments. In the last 18 months the company has increased in size to over 100 people after one of its drugs, which was developed to treat lung disease, was found to be able to boost protection against damage to the lungs from two variants of Covid in early trials. The drug, which is an interferon beta, labelled SNG001, and is administered by way of a nebuliser and is still undergoing trials, with the company hoping to get regulatory approval next year. The share price has seen some enormous swings in the last 12 months, ranging from peaks a year ago of just over 240p to lows of 75p in November 2020. The shares have recovered since then and have settled down in a range between 180p and 140p. At the end of its last fiscal year the company had no revenues to speak of, but did manage to raise a total of £87.1m in October 2020 in an equity issue to strengthen the balance sheet and fund a phase III trial, as well as manufacturing SNG001. Losses for the year were £17.7m, with R&D amounting to £15.5m. The company had cash balances of £75m as of year-end. This week’s H1 update will be closely watched for progress on the various trials as well as progress on supply chain activities in preparation for a possible launch next year.
Bed Bath and Beyond Q2 22 – 30/09 – Back in June Bank of America along with several other brokers withdrew its rating on Bed Bath and Beyond making the admission it was no longer trading in line with its fundamentals. Putting to one side the fact that a lot of US companies could fall into that category Tesla and Uber being obvious examples it was nonetheless a revealing observation of how recent volatility in the US stock market and the so called reddit trade has seen volatility rise in some of the more heavily shorted parts of the US market. Bed Bath and Beyond has been in difficulty for some time and in its most recent numbers the company announced a 16% decline in Q4 net sales to $2.62bn due to the closure of all its store real estate. On the plus side online sales rose 86%, however that wasn’t enough to offset the decline of in-store sales. In Q1 the retailer was able to show an improvement narrowing net losses to $51m, while reporting a rise in sales of almost 50%, however with the business still undergoing a restructuring process, things aren’t likely to improve quickly. Q1 revenue rose to $1.95bn with digital sales rising to 38%, as the company signed a deal with DoorDash to offer same day delivery to customers’ homes. On a more optimistic note, the company raised its full year guidance for revenue to between $8.2bn to $8.4bn. For this upcoming quarter, management said they expect revenues to come in at $2.06bn and for profits to come in around $0.50c a share. Despite this optimism the shares have underperformed, slipping back to levels last seen in May. Bed Bath and Beyond also said its modernisation program was ahead of schedule as it looks to spend $250m over the next three years to remodel 450 of its existing stores, as well as launching several new private label brands this year to drive people to its stores.
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