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Market Outlook

The week ahead: US Fed Beige Book; Tesco, ASOS, Boohoo results

Read our pick of the top stories to look out for this week (11-15 January), and view our key company earnings schedule.

David talks about the rally in global stocks on the back of stimulus package hopes from the future Biden administration. The video discusses the major events of the week including US retail sales, Chinese trade data, and GDP updates from the UK and Germany. There are also announcements from UK retailers Tesco, ASOS and Boohoo, and updates from US banks and UK housebuilders.  

China CPI, PPI and trade data (December)

Monday – CPI and PPI; Thursday – trade data

China’s economy was the first to be impacted by Covid-19. It was also the first to emerge from the crisis, and the economy is experiencing a very robust rebound. The Caixin surveys of manufacturing and services are considered to be more impartial than the official readings, and the latest data came in at 53 and 56.3 respectively.

Despite the fact that things seem to be on the up, the latest reading of the consumer price index (CPI) was negative for the first time in over a decade. What makes it odder was that the CPI reading was negative, while the latest producer price index (PPI) update hit an eight-month high. PPI is connected to the manufacturing process and the recent rally in oil and metals has clearly influenced the metric. PPI can often be a front runner for CPI because if prices change at the factory level, they will probably change at the consumer level too, as producers are likely to pass on the higher price of manufacturing. 

China’s exports have been strong in recent months as the country is a major exporter of personal protective equipment. High demand for electronic items has helped too, and November’s exports report showed the fastest growth rate in over two years. The imports report cooled and it undershot economists’ expectations – which would suggest internal demand is waning a little.

JD Sports Q3 results

Monday: JD Sports is one of the few high street retailers that has held up well in recent years. The JD Sports share price hit a record high in January 2020, before enduring a painful sell-off on the back of the pandemic, but it has pulled back the vast majority of the losses. The company’s first-half update in September confirmed that its dividend would be reinstated. The company declared that it expects to make at least £265m in pre-tax profit, a rare positive as retailers across the board have been hit by the pandemic.

Revenue in the first-half slipped by 6.5% to £2.54bn, and underlying pre-tax profit slumped from £158.6m to £61.9m. The retailer ramped up spending in relation to its online business, and that’s why earnings fell. The last nine months have showed that companies that have a strong online presence have held up better than their competitors. The expenditure with respect to the e-commerce business should benefit the company in the long run. When stores reopened, there was a release of pent-up demand, especially in regions where online shopping isn’t mature.

ASOS Q1 results

Wednesday: ASOS, the e-commerce fashion firm, outperformed as its online capabilities gave it an edge over its high street rivals. The full-year numbers posted in mid-October were impressive. The company revealed profit before tax (PBT) of £142.1m, which was at the upper end of its forecast, between £130m and £150m. Sales increased by 19% to £3.26bn, and there was solid growth across all regions. The EU was the best performer as it registered a 22% increase in sales, while the UK, US and the rest of the world all posted an 18% rise in sales.
 
Active clients now stand at 23.4m, up 3.1m on the year. The group cautioned about uncertainty in the short-term because of the health crisis, but it feels that it's well positioned to take advantage of new opportunities because of its recent solid performance.

Persimmon and Taylor Wimpey Q4 results

Wednesday – Persimmon; Thursday – Taylor Wimpey

The housebuilding sector saw major disruption because of the lockdowns, but the common theme has been that demand has been strong since the property market reopened. It seems that work that should have been completed in 2020 was pushed back until this year. The first three months of 2021 are likely to busy for the industry, as the stamp duty exemption on properties worth up to £500,000 in England and Northern Ireland will remain in place until late March.

In November, Persimmon announced it would pay a second interim dividend of 70p, so the total payout for last year was 110p. With a  total dividend in the previous year of 120p, the bounceback was remarkable. Its order book was up over 40%. Taylor Wimpey announced in November that housing completions in 2021 will be 85%-90% of the level achieved in 2019. In addition to that, the housebuilder expects full-year operating profit to be slightly ahead of market expectations.

US CPI, Fed Beige Book & retail sales (December)

Wednesday – CPI,  Beige Book; Friday – retail sales

Traders will be keen to find out the levels of demand in the US economy for the all-important shopping month of December. The November reading for CPI was 1.2%, which was unchanged on the month. In May, the reading was 0.1%, so there has been a big recovery in demand. The Federal Reserve has operated a very aggressive policy of monetary easing in a bid to assist the economy and help demand. The Fed is all too aware that a very loose monetary policy is likely to result in higher inflation, and that’s why the central bank are content for it to run over their 2% target for some time.

Even though the Fed is keen to spur on economic activity, November retail sales fell to 0.3% – its lowest reading in six months. It's possible that consumers were curtailing their spending in anticipation of Christmas. In mid-December, the Fed confirmed it will purchase at least $120bn worth of bonds each month until substantial progress has been made towards reaching full employment, and its price stabilisation goals. The Beige Book update is likely to show that the recovery is going well.

Associated British Foods Q1 results

Thursday: On balance, the Associated British Foods group was negatively impacted by the pandemic. Primark suffered because of the lockdown, while the food and sugar divisions outperformed for a change.

Primark was hit hard by the pandemic – it doesn’t have an online operation, hence why operating profit at the unit slumped by 62% to £362m. The Primark business will be held hostage by the pandemic, but nonetheless, the company will continue to open new stores due to its popularity. On the bright side, the AB Food division registered a 15% jump in earnings, while the sugar division saw earnings come in at £100m, up from £30m in the previous year. Overall, the group revealed a 12% drop in full-year revenue and adjusted operating profit slumped by 31% to £1.02bn. In light of the tough restrictions, it's likely that Primark underperformed over the festive period.

Boohoo Q3 results

Thursday: The online fashion house was already growing in popularity before the pandemic struck, as fashionable brands and the relatively low price tags led to high demand from millennials. The pandemic was a double victory for online retailers, because not only did they see a surge in business, their traditional high street competitors were held back by the lack of footfall.
 
In late September, Boohoo posted solid first-half figures as it announced a 45% increase in revenue to £816.6m. Pre-tax profit jumped by 51% to £68.1m. The online fashion retailer performed well across various divisions. The UK unit saw a 37% rise in revenue and the international business registered a 55% increase. The overseas business now accounts for 47% of group revenue, which is an improvement on the 44% it equated to last year. The Boohoo share price took a severe knock over the summer, on the back a report of unethical and illegal practices being carried out by a third-party supplier. An investigation found that there was no deliberate wrong-doing carried out by Boohoo. The company has now overhauled its supply chain, and that has helped to restore the group’s image.

Dunelm Q2 results

Thursday: The Dunelm share price hit a record high in early October, and traders snapped up the stock in advance of the first quarter update that was due in mid-October. The announcement was strong but since then the share price has been moving lower. In the first three months, revenue increased by 36% to £359.1m. Gross margin increased by 100 basis points when compared with the same time frame one year ago. The group confirmed that trading is going well and that business has been ahead of expectations.
 
In September, the company posted a relatively robust set of full-year numbers. Sales for the 52 week period slipped by 3.9% to £1.05bn, but sales until February rose by 6.8%. The closure of stores because of the pandemic impacted revenue. Online sales in the fourth quarter surged by 105.6%, and digital sales as a percentage of total sales were 27%, up from 19.6% last year.

No final dividend was paid because management wanted to conserve cash for the busy Christmas period, but it hopes to make an interim payment in the new financial year so traders will be looking out for any further updates in that regard.

German preliminary GDP (2020)

Thursday: The German economy fared relatively well last year. It was one of the earlier European economies to go into lockdown, which is why it contracted by 1.9%, on a quarterly basis, in the first quarter. The economy shrank by 9.8% in the second quarter – the largest contraction on record - then it rebounded by 8.5% in the third quarter. It was encouraging to see that there was such a robust recovery, but by the end of the third quarter, economic output was down roughly 4% since the end of 2019.
 
In late October 2020, the German government announced there would be a partial lockdown starting in November that would last unit December and the aim was to relax restrictions in time for Christmas. The health crisis escalated and the lockdown was extended until the end of this month. The German services sector contracted in October, November and December according to the PMI reports. By contrast, the manufacturing sector saw solid growth, in fact, the December reading showed the fastest growth rate in over two years.

Tesco Q3 results

Thursday: Tesco posted its first half numbers in October and the update was strong. In the six month period, group sales increased by 6.6% to £26.7bn. The operating profit before exceptional items dropped by over 15% to £1.037bn, but the company predicts that the annual result should be around the same level as last year’s reading. Like-for-like sales in the UK increased by 7.6%, and keep in mind that the first quarter reading was 8.7%, and things have cooled from the days at the earlier stages of the pandemic.
 
The interim dividend was lifted by 20% to 3.2p, and that made the company stand out in the current environment. Tesco’s banking division weighed on the group. Lower income and a jump in bad debt provisions led to the subsidiary posting an operating loss of £155m. Recently the company completed the sale of its businesses in Thailand and Malaysia, which is a part of its wider restructuring plans so it can concentrate a number of core markets.

UK GDP and services output (November)

Friday: England entered a month-long lockdown in early November and other parts of the UK endured tough restrictions too, so the readings are likely to be poor. In October, the GDP reading was 0.4% on a month-on-month basis, and that was a drop off from the 1.1% growth posted in the previous update. The services report showed 0.2% growth, down from 1% posted in the previous update.
 
The final reading of the manufacturing and services PMI reports came in at 57.5 and 49.4 respectively.  Roughly 75% of the UK’s economic output comes from the services sector. Britain’s furlough scheme was supposed to end in late October but the scheme has since been extended twice – it will now finish at the end of April. That should provide much needed assistance to the UK labour market and therefore that should have helped output in November. Two months ago, it was possible that businesses were building up their stockpiles ahead of Christmas and to a lesser extent, EU goods might have seen higher demand also because of the political uncertainty that existed at the time.

JPMorgan Chase, Wells Fargo, Citigroup Q4 results

Friday: The banking sector has been in the firing line during the pandemic, as bad debts are tipped to soar. In the last reporting season, the major banks lowered their bad debt provisions and that suggests that the firms feel we are over the worst of the pandemic.

JPMorgan set aside $569m in the third quarter and keep in mind the banks’ total provision from the previous two quarters was more than $15bn, so it was a huge fall. EPS and revenue were $2.92bn and $29.94bn respectively, and both topped forecasts. Wells Fargo is one of the largest mortgage providers in the US so therefore it is more exposed to the residential property market than its peers. The bank announced a $769m provision for bad debts in the third quarter, and that was a big fall from the $9.5bn posted in the previous quarter. The depressed interest environment squeezed lending margins and net interest income fell by 19%.

Citigroup’s third quarter update was well received as EPS was $1.40, and that smashed the 93 cents that analysts were predicting. In the three month period, the credit loss provision was $1.9bn, and that compared with the $2.2bn set aside for bad debts in the second quarter.

Index dividend schedule

Dividend payments from an index's constituent shares can affect your trading account. See this week's index dividend schedule

Selected UK & US company announcements

Monday 11 January Results
AZZ  (US) Q3
JD Sports (UK) Q3
Tuesday 12 January Results
Albertsons (US) Q3
Games Workshop (UK) Half-year
Wednesday 13 January Results
ASOS (UK) Q1
Persimmon (UK) Q4
Thursday 14 January Results
BlackRock (US) Q4
Boohoo (UK) Q3
Dunelm (UK) Q2
First Republic Bank (US) Q4
Taylor Wimpey (UK) Q4
Tesco (UK) Q4
Friday 15 January Results
Citigroup (US) Q4
JPMorgan Chase (US) Q4
Wells Fargo (US) Q4

Company announcements are subject to change. All the events listed above were correct at the time of writing.


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