Face-to-face negotiations between the two nations are set to begin later on Tuesday in Turkey.
"In February hopes were still high that consumer sentiment would recover significantly with the foreseeable easing of pandemic-related restrictions,” Germany’s GfK commented. "However, the start of the war in Ukraine caused these hopes to vanish into thin air. Rising uncertainty and sanctions against Russia have caused energy prices in particular to skyrocket, putting a noticeable strain on general consumer sentiment."
The FTSE 100 rose 0.7% as UK supermarket prices went up at their fastest pace in almost ten years in March. Meanwhile, France’s CAC was up 1.2% and the DAX rose 1.1% in Germany.
Across the pond, Wall Street’s S&P advanced 32.46 points, or 0.7%, to 4575.52, reaching its largest one-day percentage increase since June 2020. Meanwhile, the Dow Jones increased 0.3% and Nasdaq was up 1.3%
Delegates from 200 countries around the world arrived in Scotland on Sunday to unveil how they plan to cut emissions by 2030 and help save the planet. The UK prime minister Boris Johnson called the COP26 summit “the world’s moment of truth” and said that “the question everyone is asking is whether we seize this moment or let it slip away.”
Each of the 200 countries has been urged to revise its non-binding national target, known as nationally determined contributions, or NDCs, in line with a 1.5C target ahead of the summit. Scientists estimate that emissions need to be reduced by 45% by 2030 compared with 2010 levels, and from there to net zero emissions by 2050. Without this reduction in emissions, the world won’t remain within the 1.5C threshold.
As COP26 gets underway, the FTSE 100 gained 0.4% by 1.30pm in London, while Germany’s DAX rose 0.6% and France’s CAC increased by 0.7%.
US stocks also opened higher amid the summit. The S&P 500 and Dow Jones were up 0.3% and 0.4%, while Nasdaq increased by 0.2%.
In the bank’s latest survey of over 550 market professionals, it was uncovered that 58% of respondents expect a change of up to 10%. Meanwhile, 10% of respondents are forecasting a sharper sell-off in the equity market, and nearly 31% of investors believe that the markets will reach 2022 without seeing a decline.
The survey revealed that the greatest risk to the current relative market stability was new variants of the Covid-19 virus that are vaccine-resistant. 53% of survey respondents said that this was the factor that concerned them most. Other prominent concerns included economic growth that is weaker than expected, higher than anticipated inflation, a central bank policy error, and waning vaccine efficacy.
Other survey respondents also expressed concerns over the debt burden, geopolitics, fiscal policy being tightened too rapidly, and a tech bubble bursting.
The past year has seen global stock markets recover well from the pandemic due to central bank stimulus, government spending, and vaccine rollout programmes. Since the crash in March 2020, global markets have almost doubled, with the FTSE 100 is almost up 8% year-to-date.
However, economists are concerned that the recovery seen so far is beginning to lose pace as the Delta variant continues to spread across the globe. Deutsche Bank’s survey found that 44% of global investors expect lockdown restrictions to continue as they have been, while 34% of respondents believe further restrictions will be introduced.
In July, core inflation was subdued, predominantly due to a change in the sales period last year. In August, the data headed higher with a 1.6% reading.
The change in last year’s sales period as well as an increase to German VAT were the key drivers behind the increase in non-energy industrial foods prices from 0.7 to 2.7%, according to analysts at ING. “These effects are temporary and the increase in services inflation was much smaller, from 0.9 to 1.1%. Yes, price pressures are increasing, but August’s dramatic move does overstate the underlying inflation developments,” they said.
By close in London, the FTSE was down 0.4%, while France’s CAC was 0.3% lower and Germany’s DAX dropped by 0.5%. Meanwhile, according to Lloyds’ Business Barometer, business confidence in the UK increased six points to 36% in August.
As the stock markets fluctuate and countries head into recession, we're starting a series looking at the stocks with the most potential for good returns with analysis and expert from the Finance Monthly team. This week, we're looking at Countryside Properties and Royal Dutch Shell:
Countryside Properties
Covid-19 has severely hit the housing market in the UK and this morning FTSE 250 company Countryside Properties PLC (CSP) reported that it lost completions and land sales in March which has impacted profit by £29 M and increased debt by £83 M. As of writing the share price had dropped 10% at the opening. With the housing market key to any economic recovery I would expect to see developers to do much better in the coming months as the lockdown is eased.
Royal Dutch Shell
With the world’s economies grinding to a halt oil prices have hit new lows in recent weeks. Royal Dutch Shell Plc (RDSA: LON) has seen its share price drop by over 52% from its 12 month high but there is no doubt that oil will be in great demand once the economic recovery finally gets underway. It seems to me that the world’s biggest players in the energy/petrochemical sector have enough in reserve to weather the storm and Shell, in my opinion, did the right thing but cutting its dividend – the first cut since WWII. No doubt it will be a bumpy ride ahead, but Shell stock looks like good value as things stand.
Please invest responsibly. Views expressed on the companies mentioned in this article are those of the writer and any investment undertaken should be independently investigated by the investor. Finance Monthly accepts no responsibility for any investment. For more information visit our stock disclaimer
Worldwide stock indexes experienced mixed fortunes on Tuesday, with some investors cheered by the Chinese economy’s apparent return to growth after a month spent battling the COVID-19 outbreak.
Among the indexes showing mild signs of recovery were the FTSE-100, which was up by 0.8% on Tuesday morning.
Other European stocks wobbled, with France’s CAC 40 seeing a 1% slide while Germany’s DAX was 0.6% down.
Despite the FTSE’s uptick, the London index remains roughly 26% down from its standing at the start of the year, having seen a mass sell-off following 9 March (colloquially known as “Black Monday”).
Showing greater optimism were Asian indexes, with Japan’s Nikkei rising by 0.9% and South Korea’s KOSPI Composite Index closing after a 2.2% net increase.
These gains follow the overnight release of China’s Purchasing Manager’s Index (PMI) for March as 52.0, an unexpectedly good showing for the nation’s economy after much of its production was put on hold during the month.
It is worth acknowledging, however, that a recovering stock market does not necessarily equate to a recovering economy. Also on Tuesday, the World Bank warned that 11 million people in East Asian countries, including China, are likely to face poverty as a result of economic downturn.
“Countries must take action now – including urgent investments in healthcare capacity and targeted fiscal measures – to mitigate some of the immediate impacts,” the World Bank said in a press release.
In the aftermath of emergency measures outlined by both governments and banks worldwide, US and European stock indexes saw an increase in value after a week of uncertainty.
The Dow Jones rose by around 1.5% after a rocky start as trading opened, while the S&P 500 and Nasdaq Composite climbed by 1.3% and 2.4% respectively.
Meanwhile, London’s FTSE 100 rose by 3%, and the European STOXX 600 index rose by around 4%. Germany’s DAX also increased by 5%, and France’s CAC 40 by 4.7%.
The increased optimism seen in these markets can be credited to stimulus measures on the part of central banks. In Europe, the ECB pledged to buy €750 billion worth of bonds in a bid to defend the eurozone from the expected damage of the coronavirus epidemic, a move which French president Emamanuel Macron said was sorely needed by “our people and our economies”.
These measures coincided with the Bank of England’s decision on Thursday to cut interest rates down to their lowest level in history, from 0.25% to 0.1%.
Norway followed suit on Friday, with Norges Bank cutting interest rates to 0.25%, its own lowest-ever rate.
In the case of the US, the stock rise came after the Federal Reserve announced plans to temporarily provide billions of dollars to nine central banks suffering from greenback shortages, and at near-zero rates. Banks affected by the offer include the Bank of Korea, the Reserve Bank of Australia, the Reserve Bank of New Zealand and the Monetary Authority of Singapore.
Despite these measures, however, US indexes are still likely to finish Friday at their worst weekly percentage drops since the 2008 financial crisis.
As further quarantine and social distancing measures come into effect, slowing spending and prompting layoffs, it is likely that market uncertainty will continue.
US markets fell by upwards of 7% in early trading on Monday, triggering the NYSE’s circuit-breaker and automatically suspending trade.
In London, the FTSE 100 sank by more than 8%, as did other European share indexes. Germany’s DAX also fell by 8%, while France’s CAC 40 saw a full 10% depreciation in value.
The Dow Jones, S&P 500 and Nasdaq saw a similar decline, each falling by more than 10%.
The global collapse follows action by the US Federal Reserve, which on Sunday cut interest rates to a target range of 0% to 0.25% while simultaneously announcing a $700 billion stimulus programme as part of a coordinated action with the central banks of Canada, Japan, England, Switzerland and the eurozone.
David Madden, a market analyst at CMC Markets, suggested that the banks’ efforts to calm the markets by using “radical measures” was actually worrying them further them and resulting in a mass sell-off.
As with the market crashes seen last week, those companies affected most by the disruption on Monday were travel agencies. Following an announcement that it would reduce its flight capacity by 75% during April and May, airline conglomerate IAG saw a 25% decrease in share prices, and holiday firm Tui saw a loss of 27%.
The Bank of England has announced a cut to interest rates on Wednesday morning in a bid to safeguard the UK economy amid the coronavirus epidemic.
Rates have been reduced from 0.75% to 0.25%, and the BoE has also reduced a key capital buffer to 0%, which it claims will enable banks to better “supply the credit needed to bridge a potentially challenging period.~
Mark Carney, the Bank of England’s outgoing governor, said that the move was intended to combat a “sharp fall in trading conditions”, including a decrease in spending on non-essential goods. However, he said in the statement that the UK economy is on course to shrink in the coming months.
“I would emphasise the direction is clear, though the orders of magnitude are still to be determined” he said.
European markets have already seen an increase in value following the Bank of England’s measures. The FTSE climbed by roughly 1.1%, while Germany’s DAX and France’s CAC 40 rose by 2% and 2.3% respectively.
This market upturn may reflect optimism in Wednesday’s Budget release, which is expected to contain further measures to support growth in the UK economy.
Mr Carney confirmed that the timing of the rate cuts was by design, stating that the action was taken on Budget day to co-ordinate for “maximum impact”.
The FTSE 100 crashed on Monday morning as Saudi Arabia moved to begin a price war on crude oil, vowing to cut prices by $6 per barrel in April.
This price cut – the largest that Saudi Arabia has ever declared – came as OPEC failed to reach an agreement on oil production with Russia, its supply cut pact partner. Saudi Arabia now reportedly plans to put pressure on its rival producers by flooding the market with cheap oil.
The move has panicked investors globally, adversely impacting share prices across London’s foremost listed companies.
Neil Wilson, chief market analyst of Markets.com, said that the event would be remembered as “Black Monday”, and warned of the negative impact that the stock decline is likely to have on firms.
Wilson added that falling stock prices could cause “an aggressive tightening in credit that can spiral into real financial distress”, echoing fears of a recession that have grown amid the worsening coronavirus pandemic.
Nigel Green, chief executive and founder of deVere Group, also emphasised the compounding worries of the market.
“Oil’s sharpest one-day drop since the 1991 Gulf war has further fuelled the sell-off in global stock markets that started a couple of weeks ago on fears that coronavirus is going to severely damage economic growth,” he said.
Confirmed coronavirus cases saw a sharp rise over the weekend, with Italy taking the radical measure of quarantining fifteen of its central and northern provinces following a weekend increase of cases from 1,200 to 5,883. Milan, the financial capital of the country, has also been affected by the measures.
Following the increased anxiety about coronavirus’s effect on international market and the more recent oil shock, Monday’s mass sell-off has caused the FTSE to drop to its lowest level in three years.
However, while it is a significant factor, Mark Halstead, partner at business intelligence and financial risk firm Red Flag Alert, says Brexit can also distract from more fundamental problems with a business, such as unrealistic profit guidance given to markets, setting inflated expectations, poor management performance, unsustainable debts reducing ability to invest, or an inability to adapt to changing market conditions.
Financial Distress Has Increased
Of course, Brexit does have an impact on many businesses and is often a contributor to those in trouble.
Importers, for example, are suffering from the falling pound (at least those that haven’t been managing currency exposure) and the lack of certainty over a trade deal makes investment justification challenging.
Our own figures show that since the 2016 referendum, there has been a 40% increase in the number of UK companies in significant financial stress. And the number of those in ‘critical’ financial stress has increased 8% year-on-year. Businesses in the real estate and property, construction, retail and travel sectors have been the most severely affected.
Consumer Spending Remains Steady
However, if we look more closely at different sectors, we see that the impact of Brexit is more complex than it might first appear.
Take retail, for example. The sector has been experiencing a digital revolution that has seen the high street face stiff competition from the internet. At the same time, business rates and rents have increased, and consumer habits have changed.
Brexit has played its part by knocking consumer confidence, but some retailers are doing very well in this environment.
Clothing retailer Primark has no online sales presence at all, and yet it reported a 4% increase in sales earlier this year, while its mid-market competitor Next saw its full-price sales increase 4.3%
Both of these brands have strong value propositions: Primark is known for its heavy discounts on fashion, while Next had a reputation for its home delivery service long before online retail took off.
It’s also worth noting that consumer spending has actually increased during 2019. Although it may have peaked, it remains to be seen if the previous growth is set to continue.
Brexit can even present some opportunities. Low-interest rates have resulted in poor returns for investors, and so lending to businesses is now a viable alternative – helping businesses access capital for propositions that may have been unattractive to investors pre-referendum.
Builder blames Brexit
FTSE 250 housebuilder Crest Nicholson issued a recent statement outlining a decreased profit projection, and Brexit was the headline factor: “During the second half of FY2019, the Company has experienced a volatile sales environment in some of its regional businesses, driven largely by ongoing customer uncertainty relating to Brexit and the economic outlook in the UK.”
Two additional factors cited were a reduction in the value of some London property stock and a large cost associated with remedial works regarding combustible materials.
While Brexit uncertainty does affect housebuilders, it may be a stretch to blame it for huge reductions in profit. Perhaps Crest Nicholson were a little over-ambitious with original house evaluations, and Brexit has nothing to do with the £17m remedial works required to bring properties in line with government guidance.
While Brexit uncertainty does affect housebuilders, it may be a stretch to blame it for huge reductions in profit.
One could also argue that low-interest rates and weak sterling (both driven in part by Brexit) are helpful to housebuilders.
Beach the Brexit-blame
Another company blaming Brexit for not meeting performance expectations is travel retailer On the Beach: “This weakening of Sterling (driven by Brexit) leads to a significant increase in On the Beach prices versus full risk competitors; as a result, the Group anticipates delivering a full-year performance below the Board's expectations.”
Another interpretation might be that the company’s currency hedging strategy, or lack of it, wasn’t robust enough to maintain margins during uncertain times.
Lunar Caravans: Low Consumer Confidence or Overtrading?
Lunar Caravans is another business that has blamed poor performance on Brexit.
Until recently, the caravan, motorhome and campervan manufacturer had been profitable. In fact, in 2017 it reached a peak turnover of £50.6m from the production of around 3,400 units.
However, jump forward just two years, and the company was calling in the administrators, blaming a 20% drop in sales across the leisure vehicle industry caused by reduced consumer confidence due to Brexit.
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But once again, Brexit was only part of the story.
In 2016, the company’s profits were £1.6m; however, this dropped to £725k in 2017 when Lunar’s holding company had to buy back shares from three retiring shareholders.
Then, the company began to see a steady increase in its costs as the pound began to slip against the Euro.
With turnover increasing but profitability declining, the company was beginning to overtrade and struggling to manage its growth.
This reduced the value of the company by £1m and left it with fewer reserves to weather difficult times. And these difficult times soon came.
The company had invested heavily in new products, but several design issues in the new caravans saw a flood of warranty claims coming in from thousands of angry customers.
This further eroded profits, damaged the brand and added to the financial risk associated with the business.
With poor sales and spiralling costs, huge debts accrued, and the company was unable to pay its creditors – by which time the writing was on the wall.
Brexit Alone is Not Toxic
The impacts of Brexit are undoubtedly severe; however, they shouldn’t always be terminal, and Brexit alone doesn’t automatically equate to a toxic business environment.
In many cases, it represents a short financial shock that lays bare a company’s underlying long-term weaknesses and sends it spiralling.
But those businesses which are financially healthy and have competent management who can react to changes in the market stand a much better chance of being able to weather Brexit and maybe even achieve some growth.
However, every owner of stocks, bonds and ETFs has the right to lend these - meaning that in this unrealised market there are around $40tn of assets collecting dust. Below, Boaz Yaari, CEO and Founder of Sharegain, explains everything you need to know about securities lending.
In short, securities lending is due a revamp so that it can be fit for purpose in a post economic crash, 21st-century financial world. This would result in a more efficient and regulation compliant process for large banks and assets managers; huge cash potential for private investors and wealth managers; and greater liquidity and long-term trust in capital markets.
Securities lending is a long-established practice in capital markets that has until now been largely confined to big financial institutions, even though every owner of stocks, bonds and ETFs has the right to lend them. As a consequence, most asset owners know little about this lucrative practice, which has become a global industry with a massive $2tn of assets on loan on a daily basis. Here are some of the intricacies that make this such an exciting space:
Securities lending is a long-established practice in capital markets that has until now been largely confined to big financial institutions, even though every owner of stocks, bonds and ETFs has the right to lend them.
- Securities lending has been going on for over 40 years. The first formal equity lending transactions took place in the City of London in the early 1960s but it really took off as an industry in the early 1980s. The practice has evolved from a back office operation to a common investment practice that enhances returns for big financial institutions.
- Securities lending plays an important economic function in capital markets. It brings greater liquidity and efficiency to the market, ensures the settlement of certain trades, promotes price discovery and facilitates market making. It also plays a critical role in derivatives trading, certain hedging activities and other trading strategies that involve short selling.
- Securities lending is a great source of alpha, and a way to earn from the hidden value of your portfolio. Earnings from lending are dependent on the level of availability of your stocks. The more widely available stocks, known as ‘general collateral’, generally produce lower returns, of up to 0.5% (50 bps). Hot stocks, known as ‘specials’, can command much higher returns varying from 1.0% (100 bps) to over 100% (10,000 bps) annually in more extreme cases.
- Sometimes short-sellers are right! For example, they spotted that there was trouble with construction company Carillion long before anyone else. A year prior to its collapse, Carillion was the FTSE 250 most shorted stock, which should have sounded alarm bells. However, at other times they are wrong. They can misunderstand the present or future business of a company, as we saw with online supermarket Ocado and a share surge in early 2018 which wiped out $382m for short sellers. At the end of the day it’s not the short sellers who dictate the long-term direction of the stock but the performance of the business itself.
- Did you know that fund managers, active or passive, engage in securities lending to help boost a fund's performance or offset its costs? This has helped keep index fund charges down, which is hugely important in an age where the hunt for alpha has taken more importance - and where fees are under the microscope.
- In general, securities lending has negative beta to market conditions, with all things being equal. When stocks rise in a bull market, demand to borrow securities wains and lending rates are lower, but you do enjoy the appreciation of your assets. On the other hand, in a bear market (when stocks depreciate), demand to borrow stocks increases and so do lending rates. This way you benefit from a new stream of income to mitigate the volatile times.
- Demand for borrowing ETFs is growing exponentially, with the huge swing towards passive investing over the past decade or so, and currently there are over a 100 ETFs returning more than 2.0% (200 bps) to lenders.
