Must read: Federal Reserve, BAT, Berkeley Group

FEDERAL RESERVE – WED 10 DEC

Victoria Scholar, Head of Investment, interactive investor says, “The Federal Open Market Committee (FOMC) is seen cutting the federal funds rate by 25 basis points (bps) to 3.5-3.75% at the conclusion of its two-day policy meeting on Wednesday 10 December. Having already reduced interest rates twice so far this year in September and October by 25 bps at each meeting, recent weeks have seen rapid growth in the probability of a final cut before year-end.

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Traders are pricing in around an 87% chance of a reduction next week, up from 30-40% just weeks ago, with the increase driven by dovish rhetoric from New York Fed President John Williams and Fed Governor Christopher Waller, combined with softer economic data including a disappointing November ADP private employment report this week. Patchy economic data owing to the US government shutdown has complicated the picture for the Fed, with the BLS cancelling the release of October’s US consumer price index and October's US jobs report.

The growing chances of a rate cut next week have weighed on the US dollar, which has fallen to a near five-week low. With White House economic adviser Kevin Hassett a likely candidate to succeed Fed President Jerome Powell next year, there are growing expectations for a less cautious, more dovish shift in monetary policy in 2026, adding downward pressure on the greenback.

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Bond investors are particularly concerned about the upside risk to inflation and downside risk to long-term treasuries if Hassett pursues a looser monetary path in the new year. Bank of America is now forecasting two additional quarter-point cuts in 2026 - in June and July - 'due to the change in leadership, not our read on the economy.’”

BRITISH AMERICAN TOBACCO – TUES 9 DEC

Richard Hunter, Head of Markets, interactive investor says, “At the half-year numbers in July, British American Tobacco (LSE:BATS) reported a 1.8% increase in overall revenue to £12.1 billion, although growth in New Categories slowed to 2.4% in the face of illegal US vapes competition. Even so, the strength of the US, Americas and Europe offset weakness elsewhere and the group reiterated its full-year guidance.

The previously announced £1.1 billion share buyback programme should complete soon, and an increase to a dividend which already yields 5.5% is planned, again underlining the group’s prodigious cash generation, which has more than kept the wolves at bay.

Volumes and trends will be of interest in this latest update as well as any progress on the New Categories unit. The need for a long-term replacement for traditional combustible products has left the tobacco majors needing to move from a standing start, and even after some years of development the unit this has yet to make a meaningful contribution to profits. There has undoubtedly been some progress and at the latest count smokeless products accounted for 17.5% of overall revenues last year, with an ultimate target of 50% as the group aims to become a predominantly “smokeless” business by 2035.

The pressure on traditional tobacco products has been in evidence for some considerable time, driven both by changing lifestyle habits as well as increasing regulation. There have been several instances of governments toughening their stance on tobacco sales, especially to youngsters, which adds to the burden of regulatory censure which has plagued the sector over recent years. In addition, and quite apart from this general decline in traditional tobacco products sales as health issues come to the fore, there is a reluctance among some investors to invest in the sector at all on ethical grounds.

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BATS previously advised that the most meaningful growth this year would likely to be weighted towards this second half, as the group planned new category innovation in key markets, in what would be something of an echo to last year’s performance. The successful launch of Velo Plus in the US will also be large contributor to the region returning to revenue and profit growth for the year.

Against these tides of turbulence, investors have been handsomely rewarded of late for their patience. The shares have risen by 49% this year alone, in addition to which the group remains committed to a higher level of shareholder returns including further buyback programmes, despite the investment needed in transitioning the company.”

BERKELEY GROUP – WED 10 DEC

Richard Hunter says, “In a brief trading statement in September, Berkeley Group Holdings (The) (LSE:BKG) reaffirmed its previous guidance and reiterated its commitment to the new “Berkeley 2035” growth strategy.

The strategy is ambitious and, while the group has much in its favour, ultimately it operates in a cyclical sector which is currently constrained by the wider economic environment. For potential buyers, the level of interest rates and general affordability are under some strain.

Investors will be looking for a detailed update on the group’s aim to improve shareholder returns, with £260 million of the £2 billion 2035 strategy already completed and the next aim being a further buyback of £640 million by 2030. This adds to a dividend yield of 1.8%, which is pedestrian compared to sector peers.

A red flag emerged from the trading statement which troubled more cautious investors. Previously, the group had advantages arising from its primary focus on London and the South East. Higher house prices had followed from a systemic undersupply of homes, employment levels remained strong and the recent round of wage rises (while inflationary) helped to mitigate some of the problems. However, Berkeley revealed that new housing starts in London were currently at levels not seen since the Global Financial Crisis of 2008, even though it remained optimistic on the government’s more positive ambitions on planning permission and housing delivery.

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More positively, there could be an update on full-year guidance, where the group previously confirmed its year-end target for pre-tax profit of £450 million, already 85% secured and for a similar number the following year. Berkeley intends to retain £300 million of net cash by the end of the year also, giving some financial firepower if required. Nonetheless the current economic backdrop has overhung the sector for some time now without any obvious positive catalysts on the horizon.

The overarching concerns have been reflected in the share price performance, where a decline of 11% over the last year has on more than one occasion left Berkeley on the cusp of relegation from the FTSE100. For the moment, the company is clinging on to its premier index status although investors will continue to expect some improvement in the group’s prospects.”