Global Markets Overview: UK
Updated: Sep 11, 2020
From 13 to 27 July 2020
The FTSE dropped around 2.5% last week as investors weighed up current events: little progress in Brexit talks, increasing tensions between the US and China and release of June spending figures. With the fifth round of future-relation talks between the UK and the EU ending on Thursday and no progress being made on key issues concerning the assurance of fair competition and access to UK fishing waters, Michel Barnier, Chief EU Brexit Negotiator, warned “the time for answers is quickly running out".[i] The FTSE 100 notably slumped on Friday due to rising US-China tensions, after China shut the US Consulate in Chengdu in retaliation to the US shutting down China’s Houston Consulate. Better news however came from Chief Economist of the Bank of England, Andy Haldane, who announced last week that the UK had “clawed back half of lost ground”[ii] from Covid-19 and was on track for a V shaped recovery.
The FTSE 100 has been mostly stagnant since late May and card transactions have fallen 13% in the last 4 weeks,[iii] suggesting the opening of the hospitality sector on July 4th has had a limited effect, and revealing that the UK has not had as sharp of a recovery as other members of the G7. Despite the fact that Andy Haldane’s outlook on the UK may be over-optimistic, part of his job is to manage consumer and business confidence in the UK economy so it is hardly surprising that he is focusing on the positives.
UK retail is recovering, with retail sales jumping 14% in June (compared with May) - the biggest increase since records began in 1996. Retail sales are back to similar levels seen last year, however, total consumer spending in June was still 14.5% below last year’s level (retail sales make up 31% of total consumer spending).[iv] Recent increases in consumer spending have been driven by online shopping as retail footfall remains 40% below levels seen last year. Online spending on non-food items rose almost 50% in June compared with the same period last year,[v] although the proportion of online spending dropped slightly to 31.8% in June.[vi] On the back of this recent retail success, last week Unilever became the FTSE 100’s most valuable company by market capitalisation as the sales of its hygiene and ice cream products soared in the second quarter of this year, offsetting the fall in demand for other products.
With spending on non-food items finally recovering, we see there is pent-up demand in UK consumers to spend lockdown savings. However, despite the surge in online shopping (of food and non-food items), many supermarkets will continue to struggle as the profit margins from offering online groceries are so slim. Tesco and J Sainsbury have already announced expected profits to be similar to 2019,[vii] despite the surge in supermarket grocery shopping and tax reductions. Retailers will have to adapt to an increase in online shopping, which is expected to never return to pre-Covid levels, to stay competitive in the future.
After being the main market movers 2 weeks ago, UK pharmaceutical companies’ share prices, particularly AstraZeneca, have dropped over the course of last week amidst the race to develop a Covid-19 vaccine. Last Monday, Oxford University and AstraZeneca published promising results from their first phase of clinical trials, with their vaccine currently the frontrunner in the race to develop a vaccine. The UK government announced on Thursday that it had spent £100m on a manufacturing facility in Essex[viii] to produce a Covid vaccine.
The current competition in the UK pharmaceuticals sector is between AstraZeneca (2nd largest company in the FTSE 100 by market cap) and vaccine specialist GlaxoSmithKline. Since last year, AstraZeneca’s share price has gone up 40% whereas GSK’s has remained stagnant, suggesting investors are weighing in on AstraZeneca. A successful vaccine is still a long way off and GSK has announced paying £130m for a 10% stake in CureVac[ix] - the German pharmaceutical company currently working on a Covid vaccine; however, for a company with a market cap of £83bn, this is an insignificant figure.
By James Parteka - Analyst at the York IFS Global Market Telegraph
This article was first published in University of York Investment and Finance Society's Global Market Telegraph (GMT) Edition 3.1 in late July 2020.
[i] https://www.ft.com/content/14e6c44f-5573-46c1-8f4c-224747562c42 [ii] https://www.bbc.co.uk/news/business-53473616 [iii] https://www.ft.com/content/403911f3-a71f-49a7-b9c7-0ad3f8cf483e [iv] https://www.ft.com/content/48a05152-25f2-44dd-a23d-c6da26256e73 [v] https://www.ft.com/uk-econ-tracker [vi] https://www.ons.gov.uk/businessindustryandtrade/retailindustry/bulletins/retailsales/june2020 [vii] https://www.ft.com/content/b985249c-1ca1-41a8-96b5-0adcc889d57d [viii] https://www.ft.com/content/0d724afc-5f7a-48ce-9495-196d984651fd [ix] https://www.ft.com/content/6d406df6-8c33-409e-860c-6a38cc165568
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