Sunday newspaper round-up: ECB, stress tests, Morrison’s, Woodford

by Bella Palmer

According to the most recent Confederation of British Industry’s (CBI) growth indicator, the balance of firms which responded to the survey reported a rise in output of +13%, slightly below the +14% seen the previous month. It was, however, significantly above the long-run average of +5%.

The main driver of growth was the business and consumer service sectors. The manufacturing sector continued to prove sluggish, while the distribution sector was also weaker. Rain Newton-Smith, CBI director of economics, said: “Growth in the economy is steady this month, but momentum is slower than in the first half of the year. “Business and consumer services are stoking the economic fire, but while manufacturing has seen a modest improvement, firms in the sector are still expecting to see a fall in output. “The main risks to the UK economy still stem from outside, particularly fragilities in emerging markets and the potential for global financial market volatility.”

At +17%, expectations for the next three months are the weakest they have been for two years, although still well-above the average of +10%.

Although growth has stabilised the eurozone is likely to receive a fresh wave of stimulus on Thursday, with at least £600bn pumped into the continent’s economy, Sunday newspapers reported.

Analysts are confident, the Sunday Telegraph said, that the European Central Bank (ECB) will cut interest rates further into negative territory and pump further billions of euros into the economy via its quantitative easing scheme. Although the banking sector will suffer somewhat, the stubborn low levels of inflation demand another wave of stimulus. One option the ECB is considering could be the introduction of a “two-tiered” interest rate, similar to that used in Denmark, which would penalise lenders that deposit greater amounts at the central bank.

ECB president Mario Draghi’s likely intervention, expanding his QE programme by €15bn a month to €75bn from January, will kick off what promises to be a historic month for markets, the Sunday Times said, with the US Federal Reserve also expected to raise interest rates for the first time in nearly a decade just two weeks after Draghi’s move. It would be the first time that monetary policy in America and Europe has diverged since the mid-1990s, with a possible result being the euro dropping to parity with the dollar for the first time since 2002.

Lloyds may have to cut its dividend if the Bank of England’s latest stress tests result in the regulator forcing the lender to bolster its capital resources. The Sunday Telegraph said the results of the tests, based on an imagines global economic crash beginning in China, will be published on Tuesday and are forecast to see all seven of the UK’s largest banks pass but could see them told to limit their dividend payouts to build up their buffers ahead of tougher stress tests in coming years. Lloyds is felt to be the most likely victim in the short term, with long-term payouts also at risk at Barclays and RBS.

Barclays and other banks in the City are expected to slash bonuses after another year of tumbling profits. The Sunday Times reported that Deutsche Bank is planning to cut its bonuses by 30%, while Credit Suisse could slash its pool by up to 60% and some Barclays bankers will see their bonuses slashed to zero. Loss-making fixed-income traders are expected to be hardest hit.

Shell will take another step closer to achieving its planned £55bn takeover of BG Group before the year-end, according to the Sunday Telegraph, with Chinese and Australian regulators the last to give their verdict on the tie-up before shareholders vote. Both China’s Mofcom and the Australian Investment Review Board are expected to give the deal the thumbs up.

Investors will also be looking to the People’s Republic as Chinese buyers are said to be circling InterContinental Hotels Group following the sale of Starwood Hotels & Resorts to Marriott earlier this month. The FTSE 100 hotel chain is thought to be a new target for a trio of Chinese investors that had shown interest in Starwood, sources told the Sunday Telegraph, though no approaches have yet been made.

Elsewhere in the travel and leisure sector, Richard Branson’s Virgin Atlantic is plotting a new type of bond issue for the European market, where it will raise £200m secured against its take-off and landing slots at Heathrow airport. The Sunday Times said such a deal, which should be announced within weeks, would allow carriers to raise money on what is generally their most valuable asset, with Virgin setting up a new airline called Virgin Atlantic International as a back-up buyer of the slots should anything go wrong.

Star fund manager Neil Woodford has appointed a former FBI agent as he attempts to get to the bottom of worrying allegations about a US biotech company in which he has invested $95m. After recent allegations were made of financial impropriety at Northwest Biotherapeutics, Woodford has demanded he be allowed to make an appoint of former agent Elliott Leary to the Maryland company’s board.

At the larger end of the grocery scale, Morrison’s could be knocked out of the FTSE 100 index after 14 years due to the damage done in the supermarket price war. The rise of German-owned discounters Lidl and Aldi has seen the Bradford-based group’s share price halved in the past four years to put its market value outside the 100 largest in the London Stock Market, the Sunday Times noted ahead of next quarterly assessment of the benchmark index to be issued on Wednesday.

The retail sector is forecast to see a slew of profits warnings in the wake of the massive discounting of Black Friday and Cyber Monday, with investors troubled by shops cutting prices unnecessarily and too deeply at a time when many could be selling at full price.

Retail consultancy Kurt Salmon said there could be a “Red Friday rather than a Black Friday”, the Mail on Sunday reported, as deeper promotions and faster delivery options eat into profits and there could be some swift downgrades between now and the spring.

The government has infuriated smaller retailers and supporters of the diversity of British high streets with the Chancellor’s attempt to save £417m by failing to extend a measure to provide business rate relief to 278,000 smaller shops. The government’s former high street tsar Mary Portas pointed out to the Mail on Sunday that policy appeared to ignore global firms such as Amazon and Google which pay insignificant levels of tax on their massive sales, while former Wickes and Iceland boss Bill Grimsey said smaller shops, pubs and cafes on our high streets and in our towns needed the breaks in order to survive.

There were also some infuriated independent shopkeepers at the annual meeting of the mutually-owned NISA retail group, where a vote to bring in measure to protect against a possible takeover failed to get the necessary votes. This put the mutual in play, the Sunday Times wrote, at a time when the convenience industry is consolidating at a rapid pace.

Sports Direct has approached a number of major shareholders of Goals Soccer Centres with an offer to buy their shares, following the purchase of a 5% stake earlier this month. A source close to Sports Direct told the Sunday Times that Sports Direct owner Mike Ashley had no intention of making a full takeover bid, implying the move could be a curtain-raiser to open discussions over sponsorships or concessions within the business.

Anheuser-Busch InBev will put major beer brands Peroni and Grolsch on the block to help grease the wheels of its £177bn merger with SAB Miller. Looking to appease EU antitrust regulators, the sales are likely to attract acquisitive interest from Dublin-based C&C, owner of Bulmers and Magners, or giant rivals Heineken and Molson Coors, the suggested.

Venture capital firm Draper Esprit is planning to float in London market as soon as December, according to the Sunday Times. The firm, which is run by former 3i and Elderstreet partner Simon Cook with support from senior venture partner Tim Draper, aims to drum up between £120m and £150m to buy out investors from one of its venture capital funds.

Zoopla should be almost dead by now, shouldn’t it? In January, estate agents fed up with handing over great wads of cash to Zoopla and rival Rightmove banded together to set up a rival listing website: Don’t worry, I’ve never heard of it either.

The industry also forced agents who signed up to the new service to choose between the two more established sites to list their properties. They couldn’t use all three. Zoopla, younger and smaller than Rightmove, was getting dumped at an alarming rate. In the first few months agency numbers plummeted 25%.

Yet that was then. The exodus has stopped. OnTheMarket’s listings are still rising, but a juggernaut it is not. Last month the site had 5.7m visitors, nearly an eighth of what Zoopla gets in a typical month — and fewer still than market leader Rightmove.

That is not to say OnTheMarket has not taken a bite out of Zoopla’s business. Its rise forced Alex Chesterman, Zoopla’s founder and chief executive, to scoop up price comparison site uSwitch in April to plug the hole. The move, pooh-poohed by critics at the time, appears to be working.

Zoopla isn’t dead. On the contrary. And at a price/earnings ratio of nearly 19, it is generously valued.

Yet there is still room to run here. If I were an estate agent, I might describe its shares as “airy” with “high ceilings”. Buy.

Sell shares in Berkeley Group, Questor wrote in the Sunday Telegraph, as the London-focused housebuilder looks past its best. A peak of £35 this summer has seen 10% subsidence since as pressure is put on profit margins by rising costs of skilled building workers and building materials. While sales and cash levels were increasing respectably, interim results next Friday are likely to show a slowdown with revenue and profit down by double-digits.

The second half of the year could see demand weaken as the Chancellor’s extra 3% stamp duty on buy-to-let property and gain tax on overseas buyers. The stock still offer a very attractive dividend yield around 5%, but the share price could sink further under various pressures, including rising interest rates next year. Taking some profits would be a prudent move.

It has been a tumultuous week for London-focused house builder Berkeley Group. The shares soared after the housing budget was doubled in the autumn spending review, before falling back to earth as increased taxes on buy-to-let threatened to cool white-hot demand in the capital.

Berkeley shares have soared in value by more than four times since their lows of 2009. However, it looks like the best returns are now well behind them after the shares peaked at £35 in August this year and have since fallen more than 10pc.

Profit margins are coming under pressure as shortages in skilled labour cause wages among bricklayers and electricians to rise ahead of inflation. The cost of building materials is also beginning to rise steadily.

Looking at Berkeley’s share price today, it seems to price in the current high level of profits, which have been achieved on record house prices, and much of the return of capital already.

Questor recommended buying Berkeley shares at 801p back in 2010. We think it would be prudent to bank some profits.

This article is for information purposes only.
Please remember that financial investments may rise or fall and past performance does not guarantee future performance in respect of income or capital growth; you may not get back the amount you invested.
There is no obligation to purchase anything but, if you decide to do so, you are strongly advised to consult a professional adviser before making any investment decisions.

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