• York Investment & Finance

Global Markets Overview: UK

By James Parteka, Analyst at the York IFS Global Market Telegraph

From 31 August to 6 September 2020

After an initial fall last week, the FTSE 100 rallied towards the 6,000 mark on the back of the pound falling slightly against the dollar, after recently touching an 8-month high (being exporter heavy the FTSE 100 is negatively impacted by a strong pound). Last Tuesday, Apple became more valuable than all the companies in the FTSE 100 combined after its shares rose 4% [1]. Bank of England Governor, Andrew Bailey, has stated that the central bank has more ‘firepower’ to support the economy adding that big, aggressive bond-buying pushes (quantitative easing measures) are most effective when crises strike. Hoping to reassure the markets that even with near zero interest rates the Bank of England still has effective monetary policy tools to fight off recession, he also stated that negative interest rates were unlikely to be used in the future but not off the table [2]. Chancellor Rishi Sunak has the tough challenge ahead of setting out the Government’s sustainable finance plan after months of spending and giveaway programmes. Mr Sunak has already set expectations for possible tax rises, particularly for corporation tax and capital gains tax, although he has reassured troubled Conservative MPs there will not be a ‘horror show of tax rises’ [3].

There are four ways a government can lower the amount of real national debt; lower spending (austerity), raise taxes, grow the economy with constant spending or allow higher inflation to degrade the real value of the debt. Unfortunately for the Chancellor, the UK economy grows too slowly to let growth degrade real debt and the Government has not shown any signs that it wishes to enact a second decade of austerity, leaving tax increases as the tool to fix the deficit of the UK Treasury. The Bank of England may also adopt a similar position to the Federal Reserve in being more tolerant of temporary inflation increases as announced in late August by Federal Reserve chair, Jerome Powell [4].

Pubs and restaurants benefited throughout August from the Chancellor’s ‘Eat Out to Help Out’ scheme with consumer spending in the food and drink sector returning to levels seen last August. However, many takeaway and fast food outlets were left behind, particularly those who cater to commuters. Pret A Manger announced in late August that it will be cutting nearly 3,000 jobs (almost a third of its workforce) due to ‘lower transaction levels’ in 2020 with trade in UK stores remaining 60% lower than levels seen last year [5]. As the pandemic claims more jobs (already more than 750,000 in the UK [6]) retailers are beginning to worry recent spending splurges will be short lived.  Furniture seller DFS warned investors not to get too excited after reporting a 40% jump in order value of sofas and other furnishings over a six-week period in July and August [7]. Waitrose started a 12-week rapid food delivery trial from September 1st with Deliveroo in some UK towns and cities. This will allow consumers to buy a limited range of 500 grocery products to be delivered in as little as 30 minutes [8]. The new focus on the ‘on-demand’ convenience grocery shopping is partially due to smaller, more frequent grocery shopping from consumers now that restaurants have re-opened. 

Although online shopping has fallen since June, the proportion of online shopping is far above levels seen in 2019 leading to pressure for increased online delivery capacity for supermarkets. Online delivery of groceries has always been challenging with the cost of preparing and delivering the order often higher than the delivery charges. Marks & Spencer (M&S) has an average online transaction value of £13, not enough to justify these costs [9]. Partnering with a specialist online delivery company and using a limited range of products should overcome some of the hurdles, however, what is yet to be seen is the demand for the fast delivery of small quantities of groceries.

The Hut Group is one of the latest companies looking for an initial public offering (IPO) in the UK. The E-Commerce company, based in Manchester, whose brands include ESPA Skincare, Myprotein and Christophe Robin hair products is targeting a £4.5bn valuation hoping to raise £920m as a standard listing which would make it the UK’s largest IPO this year [10]. Many in similar positions to CEO Matt Moulding may choose to be listed in the US due to a shorter listing process and more voting power for the founders at the expense of shareholders.  However, Mr Moulding has stated that being a company founded and based in the UK they would do their best to ensure The Hut Group is listed in the UK.

The targeted £4.5bn valuation would be enough to put The Hut Group on the FTSE 100 had they chosen a premium listing although the standard listing will give more control to Mr Moulding to protect the business from a hostile takeover, which also means the shares will not be bought by tracker funds.

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 6 in early September 2020

Reference list:

[1]. https://www.bbc.co.uk/news/business-53996191

[2]. https://www.ft.com/content/fc71adfe-8b8d-4656-bafa-24add419b18f

[3]. https://www.ft.com/content/c80dab84-efde-4219-9612-ed27a41255ae

[4]. https://www.ft.com/content/e1e59faa-5005-4e1c-9d54-b1a8d4de9586

[5]. https://www.ft.com/content/47ee3232-d1dc-48b0-b377-a80e1e8cae3b

[6]. https://www.ft.com/content/c8ef84bf-0539-4281-b353-d5b840d10b5e

[7]. https://www.ft.com/content/106173a6-0b95-4a0d-ab29-5508c88c1818

[8]. https://www.ft.com/content/816828c4-ab48-4a97-9c25-ca37942be25c

[9]. https://www.ft.com/content/8aa756ac-3c35-11e9-b72b-2c7f526ca5d0

[10]. https://www.ft.com/content/481b0b9f-504b-482b-9c77-a63b20757d40

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