Must read: UK GDP, Inditex, Redrow

GLOBAL MARKETS

European markets have opened lower, with the FTSE 100 trading just below the flatline, as the pound weakens against the euro and the US dollar following weak UK GDP figures.

Aviva (LSE:AV.) has jumped towards the top of the UK blue chip index after announcing an £800 million divestment of its Singlife joint venture. And the housebuilders like Persimmon (LSE:PSN) and Taylor Wimpey (LSE:TW.) are also outperforming after Redrow (LSE:RDW) reported full-year underlying profit before tax which came in ahead of analysts’ expectations, lifting its shares. 

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Oil is trading near 10-month highs following an upbeat assessments on the market from OPEC and the EIA as well as supply concerns in Libya following severe flooding there, offsetting a weak demand backdrop. All eyes are on the latest US inflation figures due later today with core CPI seen falling to 4.3% in August versus 4.7% in July.

UK GDP 

The UK economy shrank by 0.5% in July, logging the steepest drop since December. It reverses growth of 0.5% in the previous month and represents a miss versus economist expectations for a drop of 0.2%. The UK’s dominant services sector saw particular weakness, driven by a slide in human health activities as doctors’ strikes weighed on economic activity. Other industrial action among teachers and rail staff also hurt the economy. Wet weather conditions dampened construction and retail spending as consumers spent more time indoors rather than shopping on the high street. Offsetting an even steeper slide in GDP was a busy summer of sporting events and theme park family visits to entertain kids during the school holidays. 

Today’s figures are a harsh reality check after the jump in GDP in June as well as the ONS’s recent upward revisions for the UK’s post pandemic recovery. Economists including those at the Bank of England are weighing up cooling inflation and strong wage growth on the plus side, against an uptick in the unemployment rate, disappointing PMI readings and sluggish retail sales on the downside. 

As a general election looms, Chancellor Jeremy Hunt is trying to paint an optimistic picture, saying there are ‘many reasons to be confident about the future’. However many are feeling less rosy as ongoing inflationary pressures and rising interest rates raise the risk of a shallow recession this year. Markets appear to be taking a pessimistic stance, with the FTSE 100, FTSE 250, and the pound trading in the red.

INDITEX 

Industria De Diseno Textil SA Share From Split (XMAD:ITX) (Inditex) reported a 40% increase in first-half profit to 2.5 billion euros on sales up 13.5% to 16.9 billion euros. However, the owner of the Zara fashion chain expects a negative currency impact of -3.5% this year, bigger than analysts had pencilled in at -2.5%. 

Inditex continues to deliver strong sales despite a weakening consumer, a trimmed down store estate, and higher prices, which have allowed the business to preserve margins in the face of inflationary cost pressures. It has also invested in in-store technology to improve checkout speeds and to reduce shoplifting. And it boasts a flexible pricing strategy that can respond to consumer demand.

However, a stronger euro is key headwind to watch, resulting in a larger downward FX impact than expected, weighing on shares today. Other concerns for the second half include the potential for weaker consumer demand and lower prices which could negatively impact earnings.

Despite this, shares are still sharply higher so far this year, making Inditex a standout winner in sector this year.

REDROW 

Redrow reported full-year underlying profit before tax of £395 million, beating analysts’ expectations for £367 million, albeit a drop from last year. Chairman Richard Akers said ‘the market did partially recover in spring 2023’. 

There’s no denying that housebuilders are facing a difficult combination of rising interest rates, cooling house prices and softer demand. But Redrow managed to outpace lowered expectations thanks to a better-than-expected spring season and an ongoing shortage of housing supply. Looking ahead, profitability and build targets are likely to come under pressure next year with Redrow forecasting a tough fiscal 2024. But any signs that interest rates could be cut as inflation and the wider economy cool, could help support the sector.  

Redrow is up around 3% so far this year, lagging housebuilders like Vistry Group (LSE:VTY), Taylor Wimpey and Bellway (LSE:BWY) but outperforming Persimmon, which is heavily exposed to first-time buyers, highlighting the mixed fortunes across the sector.