With stock markets starting the week in downbeat fashion, our head of investment looks at what's affecting sentiment.
European markets have started the week on a negative note. The FTSE 100 is leading the declines with C-suite changes driving price action as Legal & General Group (LSE:LGEN) shares languish near the bottom after CEO Nigel Wilson announces plans to retire, while Unilever (LSE:ULVR) is trading near the top after revealing CEO Alan Jope’s successor.
Markets are trading cautiously ahead of a busy week for central banks with interest rate decisions from the Federal Reserve, the European Central Bank and the Bank of England. All three are expected to raise interest rates as their mission to curtail above target inflation continues.
However, peak interest rates appear to be approaching as inflation levels finally start to cool. This morning Spain’s January inflation rate fell by 0.3% month-on-month versus a rise of 0.2% in the previous month but its annual rate rose slightly from a 13-month low to 5.8% year-on-year.
Unilever has appointed Hein Schumacher as its new chief executive officer, taking over from Alan Jope who is stepping down on 1 July. Schumacher will receive an annual fixed salary of 1.85 million euros. Schumacher is an industry veteran; he has been CEO of Royal FrieslandCampina, an 11 billion euro dairy business since January 2018 and earlier in his career he worked for the Kraft Heinz Foods Company for over a decade.
Unilever’s outgoing CEO Jope has been at the helm since January 2019, steering the business through the ups and downs of the pandemic. Since his appointment, shares in Unilever are little changed, underperforming other stocks in the sector. Shares jumped when he announced his departure last year, suggesting investors are hungry for a change in leadership. Jope came under heavy criticism during his time as CEO over his failed attempts to acquire GSK’s consumer health business. Activist investor Nelson Peltz of Trian Partners joined the board last year and has been pushing for a major shake-up of its vast operations. He previously was an activist at rivals including Procter & Gamble and said this morning he ‘strongly supported’ the new appointment.
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While Unilever is in the consumer staples sector, a part of the market that is typically viewed as relatively resilient to an economic downturn, the business is facing challenges from rising costs and the risk that consumers trade down to unbranded, cheaper alternative products. Unilever has been trying to offset cost pressures by increasing prices, but this could dampen demand amid the cost-of-living pressures and can weaken relationships with retailers who are also dealing with already squeezed margins.
Unilever shares have got off to a tough start to 2023, shedding more than 4% compared with a gain for the FTSE 100 of almost 3%.
Lidl GB announced plans to invest £4 billion in the UK food industry this year. It is accelerating its spending plans announced in 2019 and said its 5-year investment commitment will be exceeded by an additional £2 billion.
Aldi and Lidl have been nipping at the heels of the Big Four supermarket giants in the UK with their commitment to rock-bottom prices appealing to consumers more than ever as the cost-of-living crisis squeezes household budgets. In fact, last year Aldi overtook Morrisons to become Britain’s fourth largest supermarket group with Lidl potentially on track to become the UK’s fifth biggest grocer. In November, Lidl announced that profits had quadrupled year-on-year with an extra 770,000 shoppers visiting its stores each week. Today’s investment announcement should help to propel its growth trajectory.
Ryanair reported record third-quarter earnings after tax of 211 million euros, ahead of expectation for 200 million euros. It is forecasting after-tax full-year earnings of between 1.325 billion and 1.425 billion euros after upgrading its profit outlook in January. It flew a record 38.4 million passengers in the final three months of last year. Ryanair said European short-haul will return to its pre-Covid high in 2024 the earliest, possibly 2025 and capex will peak higher than expected at 2.5 billion euros in next year, instead of 2.2 billion euros, putting pressure on shares today.
After a very difficult time during the pandemic for the airline industry when almost all flights were ground to a halt, strong demand from tourists in the US and Asia is helping boost demand for Ryanair’s European routes, partly thanks to a stronger US dollar and weaker euro against it. Ryanair’s demand outlook appears to be very strong both over Easter and the summer with headwinds from transport strikes in the UK also easing. However, it is still grappling with growing operating costs given the inflationary pressures from higher wages and aviation fuel and capex remains elevated. While the trajectory is encouraging, there is still some way to go to regain its pre-Covid levels of demand and normalised costs.
Shares have had an impressive start to the year, rallying by more than 28%, helping to offset some of last year’s slide. But the stock is under pressure today weighed down by cost pressures.
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