Shares in London opened up positively again to extend their positive start to the year with the FTSE100 rising 0.4 per cent and the FTSE250 up 0.3 per cent, a shift not mirrored in Europe where the main benchmarks are off in early trading. US stocks recovered some poise yesterday with the S&P500 up by 0.75 per cent and the Nasdaq gaining 0.69 per cent.
Overnight Asian stocks continued their decent run at the start of 2023, as hope gathers that the relaxation of restrictions under China’s zero-Covid will eventually feed through to improved regional economic performance. The jury is most certainly out on that score, particularly given that the problems dogging the company’s all-important property sector – credit, confidence, and liquidity – have yet to be adequately resolved.
Overnight markets also had to digest mixed signals on monetary policy from the minutes of the Federal Reserve’s December meeting. The dilemma for The Fed is that although inflation appears to have peaked, further rate rises will be needed to get it fully under control. Bank strategists have indicated that the pace of rate rises is likely to slow, but they could extend well into the year – and perhaps beyond. The fear is that the increased cost of capital will choke off growth in the economy. And there is evidence to suggest this is already happening.
Amazon (AMZN), for example, has announced that it will be extending its redundancy programmes this year through further job cuts. The total number of workers to be laid off now stands at 18,000 as the online retailer adjusts to the general fall-away in demand.
Near-term concerns over Amazon’s business volumes are mirrored across the tech sector in general. Investors may be hoping for a sustained reversal in fortune for the FAANG stocks after a dismal 2022, particularly given that another avenue of growth – China – was effectively withdrawn from the equation. The reality is, however, that if you dominate any given market, you will invariably be vulnerable to cyclical shifts – pre-eminence is synonymous with high beta.
But that doesn’t mean that you can’t be knocked off your perch. The fact that market disrupters are also vulnerable to disruption came to mind as news emerged that Microsoft (MSFT) is moving ahead in partnership with OpenAI – an artificial intelligence research laboratory – on its ChatGPT software, which interacts in a conversational way with users.
For more on ChatGPT read: Artificial Intelligence: bubble or next big thing?
It differs slightly from Amazon’s Alexa in that it “admits its mistakes, challenges incorrect premises, and rejects inappropriate requests”. (It’s almost like being married). The development of this software would have been of great interest to the mathematician and computer scientist, Alan Turing, who devised a test to determine if a computer can be said to possess artificial intelligence through its ability to mimic human responses under specific conditions.
It would pay for tech investors to keep an eye on developments given the potential prize on offer. It’s thought that this kind of flexibility and interactivity could eventually present a user-friendly rival to Google’s search tools. Executives at its parent company Alphabet Inc (GOOG) will be understandably nervous given the implications for advertising revenues and the primacy of its service.
Next raises guidance after cheerful Christmas
Next (NXT) has increased its profit guidance after a strong Christmas period, giving a welcome boost to the retail industry.
Full price sales were up 4.8 per cent in the nine weeks to 30 December, despite management predicting a 2 per cent fall. As a result, Next has increased its full-year profit before tax forecast by £20mn to £860mn, which is 4.5 per cent higher than last year.
In-person sales drove growth, and management said it had underestimated the negative effect Covid-19 had had on shopping last year. The December cold snap also gave a “dramatic boost to sales” following an “unusually warm” autumn.
All eyes are now on the year ahead. Next said there is still a “high level of uncertainty”, but it expects full price sales for the year ending January 2024 to be down 1.5 per cent against the current year. Meanwhile, profit before tax is expected to drop by 7.6 per cent to £795mn. JS
Dignity boosted by takeover news
Funeral provider Dignity (DTY) said in a late-afternoon update yesterday that it is “minded to recommend” to shareholders a 525p per share unsolicited cash takeover proposal, which sent the shares up by more than a fifth. The offer was received on 13 November from a consortium – which already owns 30 per cent of the company’s share capital – led by Dignity’s former chief executive Gary Channon and Direct Line founder Sir Peter Wood. Talks started in October, and the consortium had several proposals rejected, with a first offer of 475p per share. Under the takeover rules, the consortium must confirm it intends to make a firm offer for Dignity by 1 February.
Despite the takeover news boost, Dignity’s shares are still down by 14 per cent over the last 12 months. The company posted a chunky pre-tax loss in its latest results and is struggling with post-pandemic funeral sector trends such as labour shortages and lower death rates. CA
B&M raises profit forecast
B&M European Value Retail (BME) shares rose by 2 per cent in early trading after the discount chain said it had enjoyed “strong” trading in its third quarter to 24 December and revealed an intention to pay a 20p per share special dividend next month. Revenue was up by 12 per cent in the quarter to £1.6bn, while gross margins improved on the back of “excellent sell-through” in merchandise ranges, the retailer said. Management now expects full-year adjusted cash profits to come in at £560mn-580mn, ahead of consensus analyst forecasts.
Stifel analyst David Hughes said that the sales performance “reflects the draw of B&M’s strong price position at a time when the rising cost-of-living crisis continues to put pressure on household budgets”. CA
Capricorn board: NewMed deal the best we can do
Capricorn Energy (CNE) has come under heavy fire in the past six months, first for its plans to merge with Tullow Oil (TLW), and more recently for its NewMed Energy deal that will hand shareholders a hefty dividend but leave them with little after that. In reaction, shareholder Palliser Capital has called a vote on seven of nine board seats, including chief executive Simon Thomson. Last month, the 7 per cent shareholder said it had lost confidence in the directors’ “judgement and priorities”, and proposed a new strategy that would hand more cash to shareholders and focus on the company’s Egyptian portfolio. Shareholders will be able to vote on both the board seats and NewMed deal at the beginning of February.
Capricorn said in a letter to shareholders on Thursday the NewMed deal was better for investors than Palliser’s alternative option. “We believe it is likely that Palliser’s nominees will terminate the [NewMed] combination in favour of implementing [its own plan], which is likely to destroy value,” the letter said. Capricorn also said it badly needed a deal given the “challenges of a standalone future as a subscale, non-operated E&P company”. AH
Easing chip shortage boosts December car sales
New car registrations increased for the fifth successive month in December but the stronger finish to the year was not enough to offset the decline experienced in the first half.
The number of cars registered for the whole of last year stood at 1.61mn units – a 2 per cent fall on a pandemic-affected 2021 and a 30 per cent decline on pre-pandemic levels, according to the Society of Motor Manufacturers and Traders.
In December, new car registrations increased by 18.3 per cent to 128,462, as the lack of semiconductors that dogged production in the early part of the year continued to ease.
The chip shortage should ease further this year, but supply will remain “erratic” and will continue to affect production, the SMMT said. Its latest market outlook published in October predicted registrations would increase to 1.8mn this year, which would translate to an £8.4bn industry-wide increase in turnover.
“The automotive market remains adrift of its pre-pandemic performance but could well buck wider economic trends by delivering significant growth in 2023,” said SMMT chief executive Mike Hawes. “To secure that growth – which is increasingly zero-emission growth – government must help all drivers go electric and compel others to invest more rapidly in nationwide charging infrastructure,” he added.
Although supply is improving, demand could well be hit by a squeeze in household incomes and a sharp increase in borrowing costs, said Samuel Tombs, chief UK economist at Pantheon Macroeconomics.
“We expect private registrations to remain about 15 per cent below their 2015-to-2019 average in 2023,” he said. MF
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