Must read: FTSE 100, Autumn Statement, Royal Mail, Fullers
17th November 2022 09:43
by Victoria Scholar from interactive investor
Our head of investment looks ahead to the chancellor's fiscal plan and some popular stocks in the news today.
European markets have opened mostly higher, with the DAX outperforming thanks to strong results from Siemens, while the FTSE 100 is lagging behind, trading below the flatline.
Halma (LSE:HLMA) is languishing at the bottom of the UK index on the back of underwhelming first half results, while housebuilders Taylor Wimpey (LSE:TW.), Barratt Developments (LSE:BDEV) and Persimmon (LSE:PSN) are at the top of the FTSE 100 ahead of the chancellor’s Autumn Statement later today.
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The chancellor Jeremy Hunt is poised to unveil a raft of spending cuts and tax increases to plug the estimated £55 billion fiscal black hole when he delivers the Autumn Statement later today. With a recession on the horizon and the 41-year high inflation there are concerns that we are heading back to an era of austerity and that could add to the woes facing consumers and businesses.
However, the Treasury has two main goals – firstly to outline a fiscal plan that compliments the monetary plan of the Bank of England in terms of its combat against inflation. He needs a strategy that helps to tame inflation, rather than focusing on growth, which was the mistake of his predecessor Kwasi Kwarteng.
The second aim is to reassure the electorate that this is a government of economic credibility, sound money and fiscal competence. He must erase the reputational damage brought about by the disastrous mini-budget in September by showing that the Treasury can balance the books by reducing spending and raising taxes.
The fiscal drag looks set to be a big theme this Autumn Statement. With upward pressures on prices and wages, the government can raise extra taxes by freezing thresholds on levies such as income tax, inheritance tax and VAT. This will drag millions more people into higher tax brackets, earning the Treasury more in terms of tax receipts in a way that is more optically palatable than announcing big swathes of tax increases at a time when the cost of everything from energy to food to mortgages is on the rise.
In terms of spending cuts, the NHS is likely to be ring-fenced after health secretary Steve Barclay hinted that there could be extra money for the NHS in the Autumn Statement. When it comes to education, a number of MPs have urged the Treasury not to make cutbacks. Therefore, defence spending, infrastructure projects and the department for work and pensions look like they are the most at risk of facing cuts.
However, there we could see increased spending but at a lower rate than inflation, equivalent to spending cuts in real terms. There is also the possibility that government budgets are frozen with cuts kicking in beyond 2025 after a General Election.
The Conservatives have said they want this to be a ‘fair and compassionate’ budget which is mindful of the cost-of-living struggles facing families. Therefore, the living wage could be set for an almost 10% increase while benefits look set to rise in line with inflation. Although public sector pay could go up, it is unlikely to rise more than inflation, representing a pay cut in real terms.
For investors, there could be a reduction in the tax-free dividend allowance with the potential for an increase to the dividend tax rate, while capital gains tax may also increase.
Elsewhere, the government could increase the windfall tax on oil companies above 25% or extend its reach to more energy companies.
ROYAL MAIL / INTERNATIONAL DISTRIBUTION SERVICES
International Distributions Services (LSE:IDS) reported a first-half group operating loss of £163 million versus a profit of £311 million a year ago. Group revenue fell by 4% to £5.84 billion, and it kept its full-year adjusted operating loss forecast for its Royal Mail division unchanged at £350-450 million. The group aims to return Royal Mail to profitability by 2024-2025.
IDS has been facing major headwinds from industrial action at Royal Mail this year which has been sharply weighing on its profitability. The Communications Workers Union and Royal Mail have extended talks this week with the goal of trying to avoid further strikes. IDS took a hard line this morning, saying that talks will cease if further strike action goes ahead.
Royal Mail has also been grappling with the end of the pandemic boom in parcel volumes, a long-term decline in letter deliveries and this year’s pressures from cost inflation. In the summer, Chairman Keith Williams the company was losing £1 million a day.
At the end of October, Czech billionaire Daniel Kretinsky got government clearance to up his 22% stake in Royal Mail, helping to lift shares last month.
Investors have had a rough ride this year with shares down over 50% year-to-date. However, the last month has been more positive for equities in general, lifting IDS by more than 20% but the stock is under pressure today.
FULLER SMITH & TURNER
Fuller Smith & Turner A (LSE:FSTA) reported half-year group statutory profit before tax of £10.7 million versus a profit of £10.6 million year-on-year. Revenue hit £168 million up from £116.3 million in the same period last year. The pub group struck an optimistic tone about the rest of the year, saying that Christmas bookings are strong. It is also likely to enjoy a boost to food and drinks sales around the World Cup.
However, Fuller Smith & Turner is not immune from the macroeconomic pressures including the rising cost of wages, energy bills and food, which are squeezing business margins across the UK.
Shares have had a tough time this year, shedding more than a third of their value. It had a very challenging 2020 at the height of the pandemic, but this year has presented new headwinds from the volatile equity market backdrop to the war in Ukraine and the consequent inflationary pressures. Despite this, the pub group has managed to enjoy both top and bottom-line growth in the first half.
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