Must read: UK economy, Waitrose, Frasers/AO World, Heathrow

Our head of investment rounds up the morning's big news.

GLOBAL MARKETS 

European markets have opened higher, with Ocado Group (LSE:OCDO), Frasers Group (LSE:FRAS) and B&M European Value Retail SA (LSE:BME) among the outperformers on the FTSE 100, which is inching back up towards resistance at 7,600. Markets are in an upbeat mood in anticipation that the Federal Reserve will hold off from another hike this week. 

US futures are pointing higher after Wall Street’s major averages closed in the green on Friday, with the S&P 500 logging its fourth straight week of gains. The index hit the highest level since August, landing it back in bull market territory. Meanwhile global stocks also reached a 13-month high amid hopes that global inflation rates are finally starting to ease and after a slew of strong US economic data including the latest non-farm payrolls report. 

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Wednesday will mark the conclusion of the Fed’s two-day policy meeting, with expectations for the central bank to keep rates on hold after ten consecutive hikes. However, there are growing expectations of another rate increase in July, suggesting that the current hiking cycle isn’t over yet.

The European Central Bank and  Bank of Japan will also announce monetary policy decisions this week.

UK ECONOMY 

The Confederation of British Industry is forecasting growth of 0.4% in 2023, an upgrade from its previous expectation for a contraction of 0.4%. It also upgraded its outlook for GDP next year to hit 1.8% up from 1.6%. Its new director general Rain Newton-Smith said ‘businesses and consumers alike will be relieved that the UK economy has avoided recession and will re-enter growth territory in the second half of this year. Similarly, KPMG is no longer forecasting a recession, now pencilling growth of 0.3% in 2023 and 1.1% in 2024. 

The UK economy is not out of the woods yet, but the direst forecasts continue to be wound back. This included one particularly pessimistic projection from the Bank of England which said last year that the UK would face the longest recession since records began. This year, however, the central bank sharply upgraded its gloomy predictions.

The British economy is still struggling with above-target inflation, rising interest rates, negative real wages, and sluggish growth domestically and among its key trading partners. However, with inflation finally dropping back into single digits, China’s anti-Covid lockdown restrictions being removed, energy prices cooling, and some light emerging at the end of the monetary policy tightening tunnel, there are reasons to be cautiously optimistic. 

As an indicator of the cocktail of both headwinds and tailwinds facing the UK, the FTSE 250, a barometer of the health of corporate UK, is roughly flat so far this year.

WAITROSE 

Waitrose is cutting prices on more than 200 products including butter, bread, beef mince and salads. It already cut prices of over 300 products in February, with half of all items now at least 10% cheaper. This follows similar decisions from rivals like Tesco (LSE:TSCO) and Sainsbury (J) (LSE:SBRY) which have also been reducing prices. 

The supermarket sector is notoriously price competitive, particularly given the rise of the low-price German discounters Aldi and Lidl, which are gaining market share amid the cost-of-living crisis and squeezed household budgets. Waitrose has been reducing its prices in a bid to stem an exodus of customers to less expensive rivals. 

While supermarkets have been grappling with inflationary pressures from sky-high food prices and expensive wage bills, unlike other industries, they struggle to pass on additional cost pressures to consumers without denting demand. The focus for Waitrose is on trying to regain market share rather than preserving margins, given that UK inflationary headwinds from expensive energy and food are expected to come down this year.

FRASERS / AO WORLD  

Frasers Group acquired a strategic stake of 18.9% in AO World on 9 June for £75 million. The investment comes after ‘productive talks over the last two years about establishing a strategic partnership.” The retail giant behind Sports Direct, Jack Wills, Sofa.com and others said AO’s electrical know-how will help drive growth in ‘bulk equipment and homeware ranges.’ John Roberts, Founder and CEO at AO said there are ‘a range of compelling strategic opportunities to explore together.’ 

Although the pair may initially appear to be an unlikely match, on closer inspection, there are potential synergies between the two retailers in terms of at-home appliances, with Frasers’ sofa range complementing AO’s white goods offering. 

Shares in AO World have struggled over the last year, trading flat over the past 12 months until Friday’s close, as the cost-of-living crisis prompts consumers to hold off from purchasing big-ticket items like fridges and washing machines. But given the recent recovery off last year’s lows for its shares, Frasers Group clearly judges that now is a good time to pounce in case the recent recovery continues, and shares become even dearer. The vote of confidence is providing a significant boost to shares in AO World this morning which are currently up by over 7%. 

The deal is part of Frasers’ broader intelligent strategy to acquire and build stakes in other businesses with the goal of positioning itself as a consumer platform for the world’s best brands to provide ‘a world-leading retail ecosystem.’ White goods could become another string to its bow.

HEATHROW

The triple bank holiday in May helped drive Heathrow’s monthly passengers up to 6.7 million. In May 1.6 million Heathrow passengers flew across the North Atlantic with one in four passengers flying between the USA and Europe passing through Heathrow. The airport said it ‘remains critically important as the UK’s gateway to the world.’ Plus, Heathrow said it ‘successfully managed eight days of strikes during the busiest days in May, with no delays at security and no flight cancellations.’ CEO John Holland-Kaye said he does ‘not anticipate cancellations as a result of strikes during the summer holiday getaway.’ It has called upon the government to reinstate Tax Free Shopping. 

As we approach the all-important period for international travel over the school holidays, Heathrow signalled that it is hopeful for minimal disruption from planned industrial action. Passenger numbers continue to pick up in the post-Covid era as pandemic headwinds shift to the rear-view mirror. 

Individuals and households where possible continue to prioritise their international holidays over other spending amid the cost-of-living crisis, exemplified by strong performances from airlines such as easyJet (LSE:EZJ) which lifted its profit expectations this year. Shares in easyJet are up almost 50% so far in 2023 while International Consolidated Airlines Group SA (LSE:IAG), British Airways’ parent company has also logged an impressive near 25% gain, sharply outperforming the FTSE 100 and FTSE 250. 

However, the shift towards hybrid working patterns with more employees working from home and holding video conference meetings online, suggests that revisiting the pre-pandemic highs for business travel will continue to be a challenge.