• York Investment & Finance

Global Markets Overview: UK

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

The FTSE 100 shot up on Monday last week before dropping back to around the 6300 mark, where it has roughly been since Pfizer and BioNTech made an announcement that their vaccine was 90% effective (revised to 95% effective last Wednesday delaying expected market tumbles following the initial Monday rise[1]). Whilst recent vaccine success puts a rough time frame on how long it will take to return to relative normality, even after a pandemic recovery many sectors will continue to see reduced demand for months after the end of Covid. Airlines currently have share prices that remain greatly depressed compared to pre pandemic levels (British Airways owner IAG had a share price of 640 GBX in February, it currently sits around 150 GBX). Chaos has erupted over the past few weeks in the UK government with Prime Minister Boris Johnson having to self-isolate after possible Covid-19 exposure. The PM’s chief advisor Dominic Cummings and communications director Lee Cain both left Downing Street after recently being criticised by Boris Johnson for destabilising the government amid important Brexit negotiations[2].

This raises the question of what Boris Johnson’s plans are for his government in the future. With Joe Biden currently set to take presidency in the US in January 2021 and the post-Brexit transition period ending on January 1st, the PM is probably looking to change the look and aims of his government to fit in on the new world stage as well as to bring back the support of voters (particularly first time conservative voters won over in the north of England by Mr Johnson’s ‘levelling up’ agenda).

Retail sales were up 4.9% in October compared to October 2019, as the new national lockdown drove consumers to begin stockpiling foods again, early Christmas shopping also boosted retail sales. However, despite strong retail sales, spending in restaurants was 33% lower than in October last year and high street shops continue to struggle from an increase in online shopping[3]. As new restrictions have come into force and the Government is trying to find ways to taper wage support, UK unemployment has increased to 4.8% (in the three months leading up to the end of September, above of the 3.9% rate seen at the same point last year). The biggest contributor was a fall in company hiring as the usual flow of people starting new jobs has decreased[4]. The pandemic has shifted consumer spending patterns, with a recent increase in spending on frozen food. UK supermarket group Iceland saw revenues increase 22% in the six months leading up to September, way ahead of increases seen by competitors (Tesco reported a 6.6% increase, Asda 3.5%)[5].

Part of Iceland’s success can be attributed to its ability to quickly expand online delivery capacity at the beginning of the pandemic as it picks from stores. Iceland can currently fill 750,000 orders a week, similar levels seen to its far larger competitor Asda[6]. Whilst increased online deliveries look like they will continue even once the pandemic is over, increased demand for frozen food may taper off which could make Iceland’s recent success short lived.

Following Pfizer and BioNTech’s vaccine announcement on November 9th the price of oil (Brent crude) has increased and remained between $42 and $45 per barrel[7]. The recent boost of optimism has greatly helped the beaten down share prices of UK oil majors BP and Royal Dutch Shell with share prices increasing 30% and 20% respectively since November 9th. However, even with recent gains, prospects for the oil industry are shaky with Brent futures contracts for 2025 at $49 a barrel (i.e. traders are predicting the oil price to rise by only around $3 a barrel over the next few years)[8]. While the futures market may not be entirely accurate for predicting prices it does at least show us that the pandemic hasn’t been the only factor significantly reducing demand for oil especially as Brent was trading at $70 a barrel at the beginning of 2020.

In response to this BP and Royal Dutch Shell have had to change their long-term strategies with both branching out further into different sectors and with different long-term targets. BP hopes to achieve net zero emissions by 2050 with plans to cut production of oil and gas by 40% in the next decade[9]. Its plan involves a heavy emphasis on renewables, recently teaming up with Danish wind power group Orsted to develop a green hydrogen project in Germany (its first exposure to this sector)[10]. Royal Dutch Shell also has an ambition to be net zero on all manufacturing emissions by 2050 at the latest, also hoping to reduce the net carbon footprint of all its products by 65% by 2050[11]. Shell’s plan relies more on the efficiency of its products and the production of them to cut its carbon footprint.

This article was first published in University of York Investment and Finance Society's Global Market Telegraph (GMT) Edition 12.1 in late November 2020.

Reference List

[1] https://www.bbc.com/news/amp/health-54986208 [2] https://www.ft.com/content/6f0fc7a4-becc-474a-9924-57d9c8419551 [3] https://www.ft.com/content/2877582f-e48a-4406-989f-e4c58c696dff [4] https://www.ft.com/content/147178b0-0330-4943-b485-f1f4b527febf [5] https://www.ft.com/content/b1b7c637-36d1-438a-aebf-670b88cb0699 [6] https://www.ft.com/content/b1b7c637-36d1-438a-aebf-670b88cb0699 [7] https://oilprice.com/ [8] https://www.ft.com/content/e1b7bab4-b962-4fab-ae7f-10da597b1cf6 [9] https://www.ft.com/content/e1d53208-b460-4708-a89c-d8b418cceffb [10] https://www.ft.com/content/c808b72f-8e51-448d-927e-405fbbe2eb97 [11] https://www.shell.com/media/news-and-media-releases/2020/responsible-investment-annual-briefing-updates.html

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