Interactive Investor

Market snapshot: Far East dictates direction in UK

With Wall Street shut Monday for a national holiday, it's Asian markets that UK investors are looking to for clues as to where we go next. Our head of markets explains what's happening and looks at Ashtead's Q1 results.

5th September 2023 08:12

by Richard Hunter from interactive investor

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Global trading volumes were significantly lighter in the absence of any direction from US markets, which were closed Monday for Labor Day.

Asian markets reflected the differing fortunes of the main players, with Japan’s service sector growth continuing to accelerate. However, in China some of the optimism which had been building over the last couple of trading days showed some signs of evaporating, with the Caixin PMI service sector growth number dipping to 51.8 from 54.1 in July.

The figure served a stark reminder that sluggish demand remains in place despite some tinkering at the edges by the authorities, with the absence of a major stimulus still weighing on market performance. In addition, the wider issues of weakening consumer confidence, an ailing property sector and high youth unemployment, let alone any geopolitical tensions with the US in particular are increasingly leaving the economy in need of resuscitation.

The blow to what had been an apparently improving situation in China spilled over to the UK in opening trade. The FTSE100 again dipped below the borderline and after a weak start the FTSE100 is now down once more, by 0.6%, in the year to date. Early casualties from the fall included the more obvious stocks with a China exposure, such as the miners and Prudential (LSE:PRU). Meanwhile, a raft of broker downgrades weighed on the likes of Tesco (LSE:TSCO), Sainsbury (J) (LSE:SBRY), B&M European Value Retail SA (LSE:BME) and Hiscox Ltd (LSE:HSX).

Elsewhere, the latest retail sales numbers from the British Retail Consortium painted a slightly better picture, with an increase of 4.1% in August comparing to a rise of just 1.8% in July.

The economy continues to confound the doom-mongers with a selection of surprisingly robust numbers, although investor support towards the UK remains elusive, with the overhang of further interest rate rises which could yet squeeze the life out of limited growth. This pessimism continues to show most clearly in the FTSE250 index, which added its weakness in early exchanges and which remains down by 2% so far this year.

Ashtead Group Q1

After a sterling performance at its full-year numbers in June, Ashtead Group (LSE:AHT)’s impressive momentum has continued with its first quarter numbers outstripping expectations.

Group revenue increased by 19% within which the crucial US unit posted gains of 22%. Operating profit grew by 18% and pre-tax profit by 11% alongside further strong investment in the business in an attempt to consolidate the current strength of the trading position. Some $1.1 billion was spent on the business, with $361 million on nine bolt-on acquisitions, while 40 locations were added in North America.

Expansion into North America is clearly paying dividends in both the US and Canada. The receding risk of recession in the States also feeds into a positive narrative, while the equipment rental space not only continues to grow with revenues up by 14%, but the group estimates that there could be much more to play for.

The business is a cyclical one which brings its own risks, especially in the event of any weakening in demand, and the negative response to the numbers echoes the wider market weakness at the open. Even so, for the moment, Ashtead is making hay while the sun shines and momentum is building.

The shares have risen by 26% over the last year, as compared to a gain of 2.3% for the wider FTSE100, with the market consensus of the shares as a 'buy' fully likely to remain intact following this update.

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