Market snapshot: reaction to US events and Diageo results

Wall Street ended the week on a high, although the clouds are never far away in the current environment.

The temporary nature of the tariff truce has injected some optimism, but the eventual outcome is far from clear. In addition, a downgrade of US sovereign debt reignited some concerns on rising deficits, while another lurch lower for consumer sentiment – to the second-lowest level on record – was accompanied by expectations of an increase in inflation to 7.3% over the next year, well ahead of the 6.5% as forecast just last month.

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Even so, the apparent dialling down on some of the previous tariff threats has left the bulls in the driving seat for the moment, with mega cap technology shares having been the particular beneficiaries of renewed buying interest. The main indices reflect the improving fortunes, with the Dow Jones and the S&P500 now ahead by 0.3% and 1.3% respectively so far this year, while the Nasdaq has all but erased its former losses to stand down by 0.5% after a torrid few months.

Asian markets were mostly weaker overnight and are still reeling from the uncertain economic backdrop, itself largely driven by lower business and consumer sentiment on the outlook.

In addition, Chinese markets came under a pressure as retail sales grew by less than expected, while growth in industrial output fell to 6.1% from 7.7% in March, which could prove to be a particular red flag since the effects of the tariffs are unlikely as yet to have fully taken hold.

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For once the UK markets chose to focus on the more negative aspects of these most recent developments, with investors taking a breather from the run which has propelled the premier index. Renewed defensive interest in gold lifted the likes of Fresnillo (LSE:FRES) and Endeavour Mining (LSE:EDV), although a weaker oil price weighed again on the majors while more broadly some of the most powerful recent risers succumbed to an element of profit taking.

Even so, the FTSE100 remains comfortably ahead in the year to date, having risen by 5.8%, while the FTSE250 has also recovered its losses to be 1.2% higher.

Diageo Q3

Diageo (LSE:DGE) is not out of the woods yet by a fair margin, but the latest quarter has provided some glimmers of hope and the stock is a bright spot in an otherwise tepid market at the open.

The current effects of the tariffs are likely to cause an annualised hit of some $150 million on profits, although the group estimates that its mitigating actions, such as increasing prices, cost control and supply chain management will limit the damage. To this end, Diageo has announced the beginning of its “Accelerate” programme which, inter alia, seeks to create a stronger operating model by delivering around $3 billion of free cash flow next year, alongside some $500 million of cost savings.

In the meantime, there was a mixed to positive performance across its geographies, leading to organic sales growth of 5.9% in the three months to 31 March, which comprised an increase of 2.8% in volume and 3.1% in higher sales. Its largest market in North America enjoyed a 6.2% hike, although the fact that some of this resulted from shipments being pulled forward ahead of the tariffs means that the next quarter will be more challenging.

Latin America and the Caribbean, a particular thorn in the side over recent times, saw a jump of 28.5% in sales, although the figure was flattered by soft comparatives from the year before. The other core geographies of Europe and Asia Pacific saw more subdued growth as consumers continued to trade down to cheaper alternatives, while the spectre of exponential growth in weight-loss drugs has led some to question the longer-term effect on the sector.

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Meanwhile, the Guinness brand continues its ascent, with growth across many of the group’s geographies and, perhaps unsurprisingly, in Europe in particular. A brief recent rally in the Diageo share price following reports that the brand was being prepared for a spin-off soon evaporated as the group quickly and unequivocally denied the rumours. In the meantime, Guinness continues to enjoy double-digit growth, which has now been the case for some four years. The brand is estimated to be responsible for around two-thirds of beer sales for the group and for 12% of total revenue, and it appears that this jewel in the crown is one which Diageo is keen to protect.

The group has maintained its guidance for the full year in terms of organic net sales growth and operating profit. Even so, the developments over the last year have taken the sheen from a stock traditionally regarded as a core portfolio constituent, despite the group’s sprawling geographical footprint and portfolio of famous brands.

The share price decline has stabilised, although the scale of the challenges ahead is reflected in a share price which has fallen by 24% over the last year, as compared to a gain of 3% for the wider FTSE100 and by 39% over the last two years. While the market consensus has recently improved to a cautious buy, it also shows that investors’ unbridled conviction for prospects is yet to come.