Must read: Europe, retail sales, Bentley, AO World, Robert Walters

Our head of investment examines the pressure on European markets, a challenging year ahead for the retail sector, and more.

GLOBAL MARKETS

After the FTSE 100 closed above a three-year high, European markets have opened lower following hawkish comments from two Federal Reserve policymakers. Focus now shifts to Fed chair Jerome Powell’s address later today for clues into the outlook for US monetary policy. US futures are pointing to a softer open after markets stateside closed mixed with tech stocks outperforming as the Nasdaq logged its second day of gains despite weakness for the Dow Jones. Oil prices are giving back some gains after a rally on Monday driven by hopes of stronger demand following the loosening of China’s Covid restrictions and a Goldilocks US jobs report on Friday.

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UK RETAIL SALES

The British Retail Consortium’s measure of like-for-like retail sales grew by 6.5% in December versus last year, ahead of expectations and rising month-on-month, partly thanks to a seasonal boost to spending around the festive period. However, volumes fell for a ninth consecutive month with rising prices responsible for the increase. Double-digit UK inflation is still sharply outpacing the level of retail spending, highlighting the rising cost burden businesses are having to, at least in part, pass on to consumers. With a looming recession, a softening consumer and ongoing inflationary pressures, the start of 2023 looks set to be challenging for the retail sector after the Christmas cheer fades and the reality of the cost-of-living crisis sets in.

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BENTLEY

Luxury carmaker Bentley, which is owned by Volkswagen AG (XETRA:VOW), reported a record 15,174 vehicles sold in 2022, up 4% from 2021, despite a slowdown in sales in China as a result of its Covid lockdowns. The Bentayga luxury SUV remains its best seller, accounting for 42% of sales. It comes a day after luxury rival Rolls-Royce also reported record sales last year.

Rolls-Royce and Bentley’s sky-high sales demonstrate how consumers in the ultra-high net worth category have been largely shielded from the macroeconomic pressures of the economic slowdown and the inflating cost-of-living. Both companies have managed to achieve all-time-high sales despite tight restrictions from Beijing. As China finally starts reopening its economy to the world, this could provide another tailwind to the sector this year amid the release of pent-up demand.  

Luxury car sales appear to be defying the broader doom and gloom in the wider global auto market, which has been suffering from supply shortages and weakening demand. On top of that headwinds from the global chip shortage since 2020 have start to ease off, alleviating some of the supply pressures facing the auto industry. Rolls-Royce’s pre-orders of its EV Spectre highlight the growing demand for top end electric vehicles and the fact that this category does not have to compromise on power, performance, or luxury. 

The burgeoning number of EVs which are coming to market are likely to prove to be a major challenge to Tesla Inc (NASDAQ:TSLA)s dominance and eat away at its early adoption advantage.

AO WORLD

AO World (LSE:AO.) raised its annual profit target for the year to March 2023 to a range of £30 to £40 million. It continues to expect revenue will meet previous expectations for a 17.2% fall versus year-on-year. The electrical goods retailer struck a cautious tone saying it is cautiously optimistic yet mindful of the macroeconomic uncertainty and tough consumer environment. In the first half of the year AO World reported a bigger-than-expected loss because of supply chain issues and the cost-of-living crisis.

AO World was a strong performer during the pandemic, but shares have since struggled, down by more than 30% over a one-year period caught up in the macroeconomic headwinds which have put pressure on supply and demand. However, the vendor of kitchen appliances and other electrical goods is arguably relatively well positioned to weather an economic downturn given that it sells mostly staples rather than discretionary items. Plus AO World has been successfully mitigating inflationary pressures by cutting costs to support margins while consumers preferences have been shifting to slightly higher priced longer-lasting appliances which are less energy intensive in an attempt to reduce energy bills. As a result, AO World shares have staged a recovery lately, rallying nearly 70% over the last six months, including today’s jump, catalysed by its profit upgrade.

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ROBERT WALTERS

Robert Walters (LSE:RWA) issued a profit warning forecasting full-year earnings to come in slightly below expectations. However, annual profit is still expected to hit a record high. Its quarterly net fee income in China slumped by 24% weighed down by the authorities’ Covid lockdown restrictions, which have been hampering activity in the world’s second-largest economy. Overall headcount peaked in November and declined in December while it forecasts more muted growth across all regions and all forms of recruitment.

Shares in Robert Walters are extending losses today with shares now down by nearly 40% over a one-year period. On the one hand, the recruitment firm has benefited from labour shortages which have prompted businesses to seek sourcing potential hire and filling key roles. On the other hand, the recruitment firm which in part specialises in technology has suffered amid the slew of job cuts in the sector. Plus the broader global slowdown when combined with China’s Covid lockdowns has muted hiring activity as businesses batten down the hatches, putting recruitment plans on hold amid cost inflation pressures and a softening consumer outlook.