Our head of investment rounds up the morning's big news.
European markets have opened around the flatline except for the CAC 40 in France which is under pressure. JD Sports Fashion (LSE:JD.) is the top gainer on the FTSE 100 on a potential deal to buy Courir but this is being offset by weakness at Admiral Group (LSE:ADM) following a disappointing update from rival motor insurer Direct Line Insurance Group (LSE:DLG).
Focus is on the Bank of England’s monetary policy decision on Thursday, with expectations for a further quarter-point increase to 4.5%, marking the twelfth consecutive rate rise. Goldman Sachs has warned that the UK bank rate may need to increase further to 5% by August ‘amid ongoing inflationary pressures.’
Oil prices are giving back some of yesterday’s more than 2% jump following three straight weekly declines.
UK HALIFAX HOUSE PRICE INDEX
UK Halifax house prices rose by 0.1% year-on-year in April, sharply below expectations for a reading of +1.6%. Annual house price growth hit more than a decade low, the smallest increase since December 2012 and a sharp decline from a reading of 12.5% in June 2022. Month-on-month, house prices fell by 0.3%, missing expectations for growth of 0.8%. The typical UK property now costs £286,896 versus £287,891 in March.
While the overall market remains sluggish, there are pockets of outperformance, with new-build prices and first-time buyers remaining resilient, partly because of soaring rental costs. Geographically, the West Midlands enjoyed the strongest annual growth of 3.1%, while the South-East has seen property prices suffer.
The backdrop of rising rates from the Bank of England and the cost-of-living crisis are squeezing individuals and families and are weighing on the UK property market. Many potential buyers are holding off amid hopes that property prices will cool, and mortgage rates will ease later this year as inflation starts to finally starts to come down.
The housing market is still reeling from the fallout from the mini-budget fiscal fiasco last September, which sent mortgage rates soaring and many mortgage products temporarily pulled from the market. While the macroeconomic backdrop remains challenging, last year’s most dire forecasts have been wound back with the UK now expected to narrowly stave off a recession this year. But with the Brexit fallout, inflation above 10%, recent political turmoil, and a sluggish economy, the UK property market is not considered the investment it once was by the international community.
BRC KPMG RETAIL SALES
The British Retail Consortium’s retail sales in April grew by 5.1% year-on-year, in line with the previous month but a sharp increase from a drop of 0.3% in April 2022. Like-for-like sales growth increased from 4.9% in March to 5.2%. These figures are not adjusted for inflation, and therefore mask a drop in sales volumes, with price increases mostly responsible for the rise. Rainy and cold weather conditions also negatively impacted clothes shopping last month.
UK inflation remains stubbornly high, stuck above 10%, making goods and services more expensive for consumers and landing real wage growth in negative territory. The double squeeze on individuals and households means they are having to reduce their volumes of items purchased yet still having to fork out more pounds to cover this slimmed down shopping basket.
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Essential food items, which unlike discretionary spending cannot be cut from the budget, are getting hit particularly hard by inflation. Sharply rising shopping bills have a similar effect to a cut in wages, making consumers less well off by reducing the affordability of goods in our economy.
Royal Mail’s CEO Simon Thompson could step down from the role as soon as this week. According to Sky News, its parent company International Distributions Services (LSE:IDS) is likely to make the announcement ahead of its annual results on 18 May.
In April, the UK postal service finally reached an agreement on pay and employment conditions with the Communication Workers Union (CWU) including a 10% salary increase, which roughly matches inflation. Strikes between August and December cost Royal Mail more than £200 million. According to Sky, Thompson has ‘become increasingly disillusioned about the job in recent weeks amid a bitter fight with union bosses.’ Thompson has been at the helm for just over two years having joined the board of IDS as a non-executive director in November 2017. Shares performed very well in the first half year of his tenure but since the peak in June 2021, it has largely been a downhill slope.
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Royal Mail has struggled with a long-term structural decline in letter volumes, the fading pandemic-era boom in parcels and industrial action. Plus, Simon Thompson was accused of ‘inconsistencies’ in his hearing with MPs to the business, energy and industrial strategy select committee in January, raising questions about his leadership. While the deal with unions helps resolve on of its key challenges, drastic change is still needed at Royal Mail to reinvigorate its finances whether that be new leadership, a spin-off and or the abolition of its Saturday delivery services. In January, the company said it expected a full-year adjusted operating loss around the mid-point of £350-450 million, highlighting the extent to which Royal Mail’s woes are weighing on its bottom line.
JD Sports has proposed an acquisition of Courir in France for an enterprise value of 520 million euros. This includes paying 325 million euros through existing cash resources and taking on 195 million euros of debt. The British sportswear giant said the deal is not expected to complete before the second half of the year.
Courir is a French leading retailer in trainers, with 16% market share and 250 stores in France as well as significant e-commerce sales. Private equity firm, Equistone Partners Europe acquired the business in late 2018. In February JD Sports outlined ambitious expansion plans including spending £500-600 million a year with over half of this on new stories. It is also targeting double-digit revenue growth and operating margins. The acquisition of Courir is its first deal since outlining the new strategy this year, and will help JD Sports to expand its footprint in France. Perhaps this could be the start of further M&A at JD Sports to accelerate its growth strategy.
Investors are cheering the announcement, with shares in JD Sports up by more than 3% at the top of the FTSE 100, extending its year-to-date gain to almost 29%.
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