Must read: FTSE 100, IMF forecasts, AG Barr, Pets at Home, Brexit anniversary

After one of the strongest January performances in years, markets have caught the jitters just as it was about to end. Our head of investment has the latest.

GLOBAL MARKETS 

European markets have opened mixed, with the FTSE 100 giving back some of yesterday’s gains ahead of a critical few days for central banks.

The French economy grew by 0.1% in the fourth quarter of 2022, slowing from 0.2% in the previous quarter, but beating expectations to mark the third straight quarter of growth. European banks are in focus with earnings from UniCredit SpA (MTA:UCG) and UBS Group AG (SIX:UBSG) out this morning, helping the sector to buck the broader weakness across markets. 

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China’s official NBS manufacturing PMI surpassed the key 50 boom-bust divide, hitting 50.1 in January versus 47 in December, driven by Beijing’s unwinding of its zero-tolerance to Covid approach. Despite this, there was a sea of red across Asian markets overnight, with the Hang Seng down by more than 1% after negative momentum carried forward from a difficult session on Wall Street. 

In the US, markets suffered ahead of the Federal Reserve’s interest rate decision on Wednesday, with the Nasdaq 100 suffering its steepest daily slide of 2023. However, as we prepare for the final trading session of the month, the S&P 500 is on track for its best January since 2019, and US futures are pointing to a rebound at lunchtime. 

IMF UK FORECASTS 

The International Monetary Fund (IMF) has predicted that the UK will be the only major economy out of the 15 in the report, including sanction-rocked Russia, to shrink in 2023. The fund expects the UK economy to contract by 0.6% this year, downgraded from growth of 0.3% in its previous forecasts.

The British economy is expected to contract on the back of high energy prices, tax increases and rising interest rates. However, the IMF said the Treasury appears to be on the right track after the Autumn Statement and the fund upgraded the UK’s growth outlook for next year from 0.6% to 0.9%. Interestingly, the IMF did not mention Brexit as a reason because of the UK’s underperformance. 

The UK’s latest GDP figures saw the UK economy grow in November by 0.1% versus expectations for a contraction. It hangs in the balance whether the UK will narrowly stave off a recession or not. At the start of the year, Prime Minister Rishi Sunak pledged to halve inflation and grow the economy. While inflation is already showing signs of easing, the IMF’s forecast indicates the latter pledge may be more difficult to achieve.

The IMF showed its support for the government’s fiscal prudence in the Autumn Statement in stark contrast to the fiscal fiasco around the mini-budget in September. This suggests that the Treasury is unlikely to pull any rabbits out of the hat at the Spring Budget on 15 March, with Chancellor Jeremy Hunt expected to stick to tax increases rather than cuts as taming inflation remains an ongoing priority.

AG BARR 

Barr (A G) (LSE:BAG) expects full-year revenue to hit £315 million, ahead of expectations for £302 million. The drinks maker also forecasts full-year pre-tax profit to surpass expectations for £42.6 million, sending shares higher in today’s trade. 

Revenue enjoyed a boost thanks to the eight weeks of trading from its newly acquired Boost brand. Both Boost and MOMA are expected to help growth this year through higher sales. While the Irn Bru maker has been suffering from inflation cost pressures and a negative short-term margin impact from the Boost acquisition, it has been raising prices, helping to pass on these extra costs to consumers rather than absorb them. 

AG Barr had a difficult time during the pandemic when bars and restaurants were shut, but there was a shift in preferences towards at home consumption, which has extended into the post Covid era. Shares have been enjoying a bounce back since October, rallying by more than 20%, although the stock has struggled in January, and after today’s bounce is trading flat year-to-date.

PETS AT HOME 

Pets at Home Group (LSE:PETS) has raised its full-year earnings guidance, forecasting profit before tax to come in at the top end of its range of between £126 million and £136 million versus its previous forecast for £131 million. Consumer revenues jumped by 9% in the third quarter year-on-year thanks to a record number of consumers, while group revenue rose by 8.8% to £347.5 million. Traders are buying the stock on the back of the update, sending shares sharply higher. 

Pets at Home has benefited from strong veterinary GP registrations, with vet demand an essential and therefore resilient service that should help the company weather the economic downturn. Accessories returned to growth in the fiscal third quarter thanks to seasonal demand for pet presents over Christmas and freight container rates are coming down, providing a tailwind for Pets at Home through lower costs. However, it warned of a challenging inflationary environment this year. 

Pets at Home has had a very strong start to the year, up more than 20% since the 1st January including today’s surge, offsetting some of last year’s decline to reduce its one-year drop to around 15%. There is a very rosy outlook on the stock from the analyst community with 10 buy recommendations versus just one sell.

UK MARKETS SINCE BREXIT 

Three years on since the UK officially left the European Union, quantifying the impact of Brexit on UK markets is a real challenge given that it has been clouded by a series of factors including the war in Ukraine, the mini-budget, snarled up post-pandemic supply chains, and Covid itself. 

The FTSE 100 has gained around 7% since the UK broke away from the EU on 31 January 2020. Complicating the picture of course was the pandemic, which catalysed a major global market-sell off in February and March 2020. More than a third of the UK index’s value was wiped off from the January high until the March low. Since the nadir, UK equities have been climbing back with the FTSE 100 now close to its record high.

Rising interest rates and surging commodity prices meant that the UK index was much more resilient than the FTSE 250 or its European or US equivalents last year, thanks to gains for a number of stocks including BP (LSE:BP.), Shell (LSE:SHEL) and Standard Chartered (LSE:STAN). 

Cable (GBPUSD) is trading down by around 6% since the official Brexit date. After the Covid-driven sell-off in 2020, the pound started to regain ground, peaking in May 2021. However, after the high, interest rate differentials have punished the pound as the US central bank, the Federal Reserve embarked on its aggressive rate hiking path, driving investors towards the US dollar, at the expense of sterling.

Since the lows in September of last year following the disastrous mini-budget, sterling has been bouncing back amid expectations that the Fed will shift towards a less aggressive pace of tightening, sending the dollar lower and the pound higher against it.

KANTAR UK GROCERY INFLATION 

UK grocery price inflation hit a record 16.7% in the four weeks to 22 January. Kantar’s research suggests UK households are having to pay an average of £788 extra a year on shopping bills with particularly painful price increases for eggs, milk and dog food. Although the UK’s headline inflation rate has been easing, price pressures remain sky high for groceries, an essential spend that is hard to trim, highlighting the ongoing cost-of-living pressures which are negatively impacting those at the lower end of the income spectrum disproportionately.

Over the Christmas period, most UK supermarkets enjoyed robust sales. However, the boost was driven by higher prices rather than higher volumes, with many consumers trading down to unbranded, value ranges to combat the squeeze on budgets. 

According to Kantar, Aldi UK saw three-month sales rise by 26.9% and Lidl sales grew by 24.1%. Tesco (LSE:TSCO), Sainsbury (J) (LSE:SBRY) and Asda all reported sales growth of around 6%, but Morrisons continues to struggle suffering a 1.9% sales drop during the 12 weeks to 22nd January.

The German discounters continue to eat into the market share at the Big Four with Aldi already overtaking Morrisons and Lidl not far behind. Aldi and Lidl’s commitment to super low prices has driven consumers to their stores at the expense of Morrisons amid the intense price competition, which is squeezing margins as cost pressures remain elevated.