Must read: Prudential, JD Wetherspoon, UK jobs, interest rates

Prudential (Tues 17 March)

Richard Hunter, Head of Markets, interactive investor says, “Prudential’s new strategy and fresh purpose is increasingly evident, and the third-quarter update in November revealed strong growth, such as a 13% rise in New business profit to $705 million (£527 million).

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The recent highlight, however, was the group’s assertion that it has reached an inflection point in its growth of free surplus capital generation, which in turn will result in higher shareholder returns.

While Prudential (LSE:PRU) is not traditionally known as a group where the dividend payment is a shining light – indeed, the current yield is a pedestrian 1.6% - the share buyback direction should prove more than enough to assuage investors. Last year’s $2 billion programme has been completed, while in January the group announced a further $1.2 billion buyback, $700 million related to the proceeds of the ICICI IPO in India.

Prudential is now focused on Asia and Africa, where the group is fully aware that such major continents bring significant opportunities. The combined populations of the two continents is around four billion, with an estimated $1 trillion of additional annual gross written premiums by 2033 being the addressable market. Given the recent weakness of consumer confidence in the region, it will be interesting to see whether, when customers are reluctant to spend, they turn to saving and wealth planning instead.

Another driver of growth which the group sees as an integrated offering is the Eastspring investment arm, which reported strong net inflows, taking the total of Funds Under Management to over $285 billion. This was attributed to improved market conditions, with the structure enabling the virtuous circle of new funds being managed separately to benefit the group as a whole.

The shares have been weighed down somewhat of late by the uncertain recovery in China and the wider market weakness, but remain up by 48% over the last year. Despite this hike, the historic valuation is not stretched by any means and indeed the shares remain down by 42% from the most recent peak of 1604p achieved in January 2018. With increasing shareholder returns allied to the significant potential and promise in both Asia and Africa, the likelihood of Prudential remaining a core portfolio constituent is likely to continue.”

JD Wetherspoon – Friday 20 March

Richard Hunter says, “Wetherspoon (J D) (LSE:JDW) has been dealt some difficult hands over the years which, for the most part, it has been dogged in turning into profit. However, despite a strong festive period the group warned in January that both half-year and full-year profits are likely to be lower than last year.

This gave investors little cause for cheer, and at the centre of the effective downgrades was £45 million of extra costs. The Wetherspoon chair has never been backwards in coming forward on the issues which the group feel are both crimping growth while also giving others an unfair advantage. The different tax treatment of alcohol sales in supermarkets is a case in point, alongside wrongly applied business rates and even the question of whether the lockdown was necessary in the UK at all, compared to the experience of other countries.

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Indeed, that lockdown continues to leave a stain and the share price remains 49% below pre-pandemic levels, despite a rise of 13% over the last year. While revenues now exceed pre-pandemic levels, the group has fewer pubs. This results in sales per pub which had increased by 29% at the full-year results, but in terms of profit that progress has been largely obliterated by growth of 57.8% and 34.5% in energy and wage costs respectively.

These costs contribute to higher costs of course and in turn keep up inflationary pressure, where the group is keen not to raise prices for consumers where possible. Even so, the group will be mindful that prospects for the UK economy are currently tepid at best, which could yet result in the consumer choosing to stay at home rather than venture out as the more challenging financial times bite.

Another difficult act comes in the form of the balance sheet, where after investment net debt is projected to rise to between £740 million and £760 million by the end of this year, compared to £724 million last year and £660 million the year before.

Access to liquidity and a largely freehold estate valued at £1.4 billion lessen any immediate concerns and Wetherspoon’s dogged determination to fight its corner has won the brand many friends, but from an investment perspective the jury remains out on prospects. A thin operating margin of under 7% reflects limited room for manoeuvre on achieving further growth, although if visitors continue to rise and with food becoming more important to revenues, there could be some glimmers of light yet to come.”

UK unemployment, Bank of England (Thurs 19 March)

Victoria Scholar, Head of Investment, interactive investor says, “Although the Middle East turmoil and energy price volatility are most likely to overshadow economic data out next week, investors will still keep half an eye on Thursday’s UK unemployment data and the Bank of England March interest rate decision.

The Iran war has drastically reshaped expectations around the outlook for interest rates and inflation. Just a few weeks ago, a March rate cut was almost a dead cert owing to the weak jobs market, whereas now the central bank is very likely to keep interest rates unchanged.

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The Bank will be worried about whether the recent oil price spike will lead to a jump in inflation expectations, given the salience of energy prices to households. The best-case scenario is for an ending to the war in Iran, a normalisation of energy prices between now and April, and a Bank of England rate cut at its subsequent meeting. However, if the geopolitical crisis and the massive disruption to oil markets continue, this year’s cutting cycle could be scuppered, and speculation will mount around the possibility of rate hikes again. Another shock to costs and real incomes in the UK would be particularly painful at a time when the economy is already in a weak position.  

In terms of the labour market report, the data covers a period pre the Iran war, so it won’t reflect the current economic backdrop. However, it will help provide clues into whether the improvement in sentiment data such as the PMIs near the start of the year had any real impact on jobs.”