• York Investment & Finance

Global Markets Overview: UK

By Harry Bartlett, Analyst at the York IFS Global Market Telegraph

UK markets rally as asset managers bet on UK equities, Tui bets on its comeback in 2021 given UK vaccine progress whilst the Bank of England tells commercial banks to be ‘ready’ for negative rates and Arcadia’s subsidiaries are finally sold to Asos and Boohoo.

The FTSE 100 has had yet another bullish run this week after its record high in January since the beginning of the pandemic, appreciating in value by around 1.8%. Asset managers have been ‘betting on a comeback’ in UK equities as a result of more Brexit certainty, once warded off by the politicised market conditions becoming complicated and difficult to navigate.[1] More Covid-19 legislation has been announced recently, mentioning jail time for travellers to the UK as well as an update from the Bank of England on the bank lending rate. Asos and Boohoo are in the headlines this week as a result of their transactions with the Arcadia Group, picking up numerous high-street retailers. Tui has come out with positive sentiment towards international travel off the back of strong vaccination data.

Travellers to England face jail time if they hide trips from high-risk countries. Matt Hancock announced last week: as a result of the threat of Covid-19 mutations, ‘we must strengthen our defences’ against the virus. The new measures require inbound travellers to present three negative Covid-19 tests, one 72 hours before departure, and two on the second and eighth day after arriving respectively.[2] The potential punishment for not adhering to the new guidelines includes fines up to £10,000 and one could face up to 10 years in jail. News broke earlier in the week that the AstraZeneca vaccine efficacy against the South African variant of Covid-19 was less effective at stopping mild and moderate cases of the virus. This subsequently led the WHO to come out and back the vaccine despite rendering only 10% effective against this strain.[3]

The Monetary Policy Committee at the Bank of England announced this week that they expect to see a vaccine-fuelled economic recovery in the second half of this year, whilst also discussing the prospect of negative interest rates.[4] It has said that it would force commercial banks to prepare for negative rates to be imposed in six months. Whilst this is entirely dependent on the recovery after the vaccination programme, Andrew Bailey, Bank of England governor, wants commercial banks to be in the position to react if the rates become negative. However, he ‘did not wish to send any signal that [Bank of England] intended to set a negative bank rate at some point in the future’. Financial markets reacted to the policy statement, with the pound jumping 0.8% against the dollar as those who bet that negative interest rates would be implemented unwound their positions. UK Government bonds also sold off, while the two-year gilt yield rose 0.04% to -0.04%.

Tui, Europe’s largest tour operator, has announced that they expect a summer holiday recovery off the back of the vaccine rollout and has planned to run 80% of its normal travel programme this year. Summer bookings are reportedly 44% down compared to 2019 levels but average prices were up by a fifth. More than 50% of the bookings have come from the UK, which is making stellar progress with its vaccination programme.[5] Around half of the customers that have booked holidays already have done so through cancellation vouchers from last year. Revenues dropped 88% from €3.85bn to €468m in December 2020. Tui's net debt increased to €7.2bn, following the issuance of a €500m rights issue last month and three state-backed loans from the German Government.

Asos confirmed last week that it will acquire Arcadia’s Topshop, Topman, Miss Selfridge and HIIT brands,[6] whilst Boohoo has agreed to buy Burton, Dorothy Perkins and Wallis, marking the dissolution of Sir Philip Green’s fashion conglomerate Arcadia.[7] Asos is said to have bought the brands for more than £300m; yet the deal has not included the transferral of the Group’s 70 stores, as in the words of Asos chief executive Nick Beighton, ‘it’s not our model to operate stores’. Likewise, Boohoo has bought up their share of the Arcadia subsidiaries for a comparably small £25.2m, acquiring the digital assets and the intellectual property of the brands. Similar to the Asos deal, the stores are not included in the deal, leaving behind thousands of jobs across the Arcadia brands. Following the lockdown in the UK with stores forced to close and limited cash flow to service its debt, Arcadia prompted the decision in November to call in administrators.

This article was first published in the University of York Investment and Finance Society's Global Market Telegraph (GMT) Edition 2 in late February 2021.

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Reference list:

[1] https://www.ft.com/content/442e7d88-4d5e-4251-95ae-950077b70b39

[2] https://www.ft.com/content/69c4ca21-1c4e-40dd-9c06-5ea89326642a

[3] https://www.ft.com/content/e9bbd4fe-e6bf-4383-bfd3-be64140a3f36

[4] https://www.ft.com/content/0ca97eb2-a3a8-4bfd-a2df-034c73b5a0e3

[5] https://www.ft.com/content/50ae0452-c4bc-456c-8d49-8aa9daacd6cf

[6] https://www.ft.com/content/015699a2-bbb0-4fc5-a4f8-47028de35ba9

[7] https://www.ft.com/content/46db4868-6b25-474b-adc3-fb6768ec2b21


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