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The Week Ahead: French election; UK banks, US tech results

French voters go to the polls on Sunday to pick a winner in the presidential run-off between incumbent Emmanuel Macron and challenger Marine Le Pen. Then, in a busy week for company earnings, four of the big UK banks – Lloyds, Barclays, HSBC and NatWest – issue Q1 updates, while the US’ biggest four companies by market cap – Apple, Microsoft, Google-owner Alphabet and Amazon – are also set to announce their latest results. 

OUR TOP THREE EVENTS:

Sunday – French presidential election

This weekend sees Emmanuel Macron and Marine Le Pen go head-to-head in the second and final round of the French presidential election. Macron is the favourite to prevail, but for many voters the choice is about as appetising as a mouldy piece of bread. In 2017, Macron won with over 60% of the vote, though on this occasion Le Pen appears to have closed the gap, mainly because Macron has shown himself deaf to the concerns of the poorest members of French society. Much will depend on whether the anti-Macron vote coalesces into support for Le Pen, or whether French voters simply refuse to vote for either candidate. Although Macron is ahead in the polls, he risks being pipped to the post if voter turnout is low.  

Wednesday – Lloyds Banking Group Q1 results

The recent performance of Lloyds’ shares has mystified many investors. The stock price remains well below pre-pandemic levels, even though the company is now in a much stronger financial position. When the group reported its full-year results in February, profits came in at £6.9bn, below expectations of £7.2bn. This shortfall appears to have been down to a surprise increase in operating costs, which rose above £2bn in Q4, up from £1.87bn in Q3. The investor reaction sent the shares falling to a 12-month low, though concerns over Russia’s invasion of Ukraine also played a role. Since the second week of March, the shares have rebounded.

In a boost for shareholders the company announced a final dividend of 1.33p per share – bringing the total dividend for 2021 to 2p per share – and a £2bn share buyback worth 2.82p per share. The Q4 results showed that loans and advances to customers totalled £448.6bn, up £8.4bn on an annual basis but down from £451bn in Q3. Customer deposits came to £476.3bn, up £25.6bn compared to a year earlier but again lower than in Q3. Net interest margin in 2021 improved to 2.54% on average, having risen to 2.57% in Q4. The figure is expected to reach at least 2.6% in 2022, though a slowdown in UK economic growth is likely to present challenges for the country’s banks.

Thursday – Barclays Q1 results

Barclays has had a difficult start to 2022. Its shares have plunged to 12-month lows, down almost a quarter year-to-date, having hit an almost four-year high in January. The honeymoon period for new CEO C.S. Venkatakrishnan ended abruptly after the discovery of a trading breach in the US that could cost the bank £450m, while also bringing increased scrutiny from regulators and investors. Venkatakrishnan, who became CEO in November, was in charge of controlling the bank’s risk environment when a clerical error led to the bank exceeding a limit on the sale of structured products. 

The error, which dates back to 2019 but went undetected until this year, involved the sale of nearly £28bn of exchange traded notes that track commodity prices over a three-year period. Barclays sold around £11.4bn more than it was allowed to under SEC rules. It now has to buy back the excess and absorb an estimated hit of about $592m (£450m), which is likely to knock the stuffing out of this week’s Q1 numbers. The bank said in March that it will have to postpone a planned £1bn share buyback because of the blunder. 

Until this incident came to light, things were looking positive for Barclays. The bank’s full-year profits more than doubled to a record £8.4bn, up from £3.1bn in 2020. Total revenue came in at £21.9bn, a modest increase on the previous year, as operating costs increased to £14.4bn. The investment division was a mixed bag, with the equities business delivering revenue just shy of £3bn, up 20%, while revenue from fixed income, currencies and commodities (FICC) fell 33% to £3.45bn. Investment banking fees helped offset this underperformance, rising 34% to £3.66bn thanks to a big jump in advisory fees and other capital markets activity. 

UK operations performed well with profits here rising to £2.47bn, driven by higher mortgage demand. However, a modest decline in net interest margin took some of the edge off. Income from credit card balances fell as consumers cut back on credit card spending and reduced their balances. Total loans to customers rose to £208.8bn, mostly due to higher mortgage lending. 

Investors dialling into the Q1 earnings call will be eager to see whether Barclays goes down a similar path to JPMorgan and Goldman Sachs in setting aside larger sums of cash to guard against possible loan losses that could arise from soaring inflation and higher interest rates. 

MORE KEY EVENTS (25-29 APRIL):

Monday 25 April

No major announcements

Tuesday 26 April

Associated British Foods half-year results

Earlier this month Primark owner Associated British Foods’ share price hit its lowest levels since March 2020 when the pandemic forced the closure of its stores. With no online operation, this meant a complete stop for revenue from its Primark business, aside from any government support and employee furlough programs.

In January, when the company reported its Q1 numbers, the share price was at a five-month high but has struggled since then. The European business has been its weakest performing area due to store closures in Austria and the Netherlands, where the company saw a £30m sales loss at the end of Q1. The US business on the other hand showed the biggest improvement, with overall sales up 37% from pre-pandemic levels. Total Primark sales were still 5% lower than pre-Covid. All the other businesses improved on their revenue performance from a year ago, with the exception of grocery brands, which saw revenue drop to £1.2bn, down from £1.22bn. Sugar saw a 12% rise in revenue, agriculture a 7% increase, and ingredients grew 6%. The retailer has had to deal with rising costs, some of which are being offset by price increases where necessary.

The half-year results are expected to put sales and adjusted operating profit for the group strongly ahead of last year. Half-year sales at Primark are forecast to be well over 60% ahead of last year with an operating profit margin of 11%, as all stores remained open, except those in Austria and the Netherlands which closed for short periods. Grocery revenue is expected to be 2% ahead of last year, along with sugar revenue which is expected to be 20% higher. Due to higher inflation and input costs margins could well be lower, despite some price increases. The full-year outlook is expected to remain unchanged.

HSBC Q1 results

HSBC’s full-year numbers sent the shares on a decline that took them to their lowest levels of the year in March. Since then, we’ve seen a modest rebound. The bank reported profits before tax of $18.9bn for 2021, a decent increase from the previous year, as UK banking outperformed, delivering annual profits of $4.8bn. The bank’s Asia operations were the main area of profitability, contributing $12.2bn. The bank announced a $1bn share buyback as well as a per-share dividend of $0.18.

Performance in Q4 was disappointing compared to the previous quarter, with reported profits after tax coming in at $2bn, less than half of what they were in Q3. The main reason for this was a $500m charge in respect of recent developments in China’s real estate sector. This is unlikely to have improved, and was a main concern for management, who cited a weaker outlook for growth in Q1.

With the Chinese government implementing rolling lockdowns in support of its zero-Covid policy, profits in Asia may have taken a hit in Q1, while the wider cost of living crisis may have impacted its UK business which has performed very well in recent quarters. Management guidance for Q2, as well as the rest of the year, is likely to be key in determining where the share price is heading.  

Microsoft Q3 results

It’s been a difficult quarter for tech stocks, some more than others, as concerns about valuations and rate rises cause investors to be more discerning. Since the record highs of last year Microsoft shares have slipped back, although they have managed to hold above $270.

Its Q2 numbers were very strong, with revenue coming in at a record $51.73bn, a 20% increase from a year earlier, and above expectations, while profits rose to $2.48 a share. Its cloud business Azure saw an increase in revenue of 46%, in line with expectations, although down from the previous four quarters, when revenue growth was above 50%.  Its “Intelligent Cloud” business also saw another decent quarter, reporting record revenue of $18.33bn. Personal computing and gaming revenue saw revenue come in at $17.47bn, a big jump on Q1 and the year-ago quarter, although this was largely expected with the increased adoption of Windows 11. Xbox content and services revenue rose 10%, reinforcing the decision to go all-in with the purchase of Activision Blizzard.

If that acquisition is approved by regulators, this segment is expected to be a key growth area going forward and could well go on to become its biggest earner. On guidance Microsoft said they expected Q3 revenue to slow slightly to between $48.5bn and $49.3bn, above forecasts. Profits are expected to come in at $2.19 a share.

Alphabet Q1 results

When Alphabet reported record revenues for Q4, its shares briefly surged to new highs of more than $3,000. Following that spike, the shares have slipped towards their lowest levels since last July. Investor concerns that rising costs might impact the profitability of its Google business were comprehensively put to bed as the company reported record revenue of $75.33bn for Q4, a 32% increase on the year-ago quarter, while also improving operating margins to 29%.

The advertising business was once again the standout performer, accounting for $61.24bn of total revenue in Q4, with YouTube accounting for $8.6bn of that amount and generating almost $26bn in operating income. This was reduced by losses in its cloud and other businesses, although losses in the cloud business narrowed to $890m on revenues of $5.5bn. Other divisions posted losses of $1.45bn.

The company also announced a 20:1 stock split in an attempt to help broaden the shareholder base, which will take effect on 15 July, subject to shareholder approval. The company’s success has attracted scrutiny, particularly in the area of digital advertising, with the business facing anti-trust lawsuits across a number of US states in the past few months. Profits for Q1 are expected to come in at $25.82, with the big question being whether Alphabet can sustain revenue growth of 30% and above at a time when costs have risen substantially. Last year the employee headcount rose by over 21,000 to 156,500.

Wednesday 27 April

Lloyds Banking Group Q1 results

See top three events, above

Meta Platforms Q1 results

Shares in Facebook parent company Meta plunged 26% in February – wiping a record $232bn from its market value – after the tech giant’s Q4 results revealed a drop in users. Overall, the Q4 numbers weren’t that bad, with revenue coming in $33.67bn, which was better than expected, while profits came in slightly short at $3.67 a share.

The negative reaction was due to a fall in daily and monthly active user numbers, which came in below expectations, raising concerns that social media was hitting peak user growth. Facebook also warned that Q1 revenue would come in between $27bn and $29bn, a significant decline from Q4 and below market expectations of $30bn. The fallout from Apple privacy changes, and a weakening economic outlook that is prompting cutbacks on ad spend, appear to be stifling revenue.

Social media peer Snap recently missed on both revenue and profits, warning that ad spend for Q2 was falling back sharply. After Netflix was punished for missing on user numbers, could we see another Meta meltdown this week?

Thursday 28 April

Bank of Japan rate decision

The decline in the Japanese yen is likely to increase pressure on the Bank of Japan to be more hawkish when it meets on Thursday. Since the end of last year, the Japanese yen has fallen more than 10% against the US dollar which, for a country that is a net importer of commodities and energy, will exert huge upward pressure on inflation.

The Bank of Japan has spent years trying to tease the inflation genie out of its bottle, with little success. In March, headline CPI inflation increased to 1.2%, up from 0.9% in February, though it is still below the 1.5% seen in February 2018.

Japan’s central bank has only rarely managed to hit its inflation target of 2% - it did so in 2008, and for a few months in 2014 and 2015, when CPI peaked at 3.7% before dropping sharply. We could see inflation continue to rise from current levels if commodity prices keep increasing and the yen drops further.

Barclays Q1 results

See top three events, above

J Sainsbury full-year results

Commenting on the Q3 results and addressing the company’s outlook, Sainsbury’s CEO Simon Roberts painted an upbeat picture for the UK’s second biggest supermarket by market share, upgrading full-year guidance for underlying pre-tax profit to £720m, up from £660m.

On a two-year basis grocery sales were up by 6.6%, although the business continues to struggle on the general merchandise front, which includes the Argos brand. Total retail sales were up 1.4% from 2019 levels, but down 5.3% versus the same period in 2020. Since those numbers were released, the picture has changed somewhat, with the shares down at one-year lows on concerns about food price inflation, tighter margins, and rising costs as the food and retail sectors compete for staff.

Earlier this month the supermarket signed up to the Real Living Wage, a pledge to pay all of its workers over £10 per hour. Recent data from Kantar suggest that Sainsbury’s is being squeezed by competition from the likes of Tesco and Waitrose on one side and, on the other, Aldi and Lidl.

Apple Q2 results

The Apple share price has held up well despite all the volatility of the last few weeks. Revenue in Q1 set a new record of $123.95bn, above expectations of $119bn, while profits came in at $2.10 a share, or just under $35bn, with record revenue for iPhone sales at $71.63bn, above forecasts of $67.74bn.

The Q1 results showed revenue of $10.85bn for Mac, $14.7bn for wearables, home and accessories, $7.25bn for iPad, and $19.25bn for services. Only iPad revenue fell shy of consensus expectations, which were at $8.1bn. The miss was a little disappointing given the launch and updates of the mini and iPad range, with Apple CFO Luca Maestri blaming difficulties in sourcing components. Because of shortages, some components had to be allocated to the more expensive iPhone, which suggests that demand wasn’t the problem, and that Apple gave priority to its higher-margin product.

Operating margins on products came in at 38.4%, although services margins rose to a new record of 72.4%. Services revenue continues to go from strength to strength, with 785m subscribers to music, streaming and gaming. Apple CEO Tim Cook suggested that they are starting to look at developing products for augmented reality, and were formulating plans for an AR headset and glasses in the next year or so, as it looks to move into the Metaverse.

The Q1 numbers were all the more impressive given that there were some product delays during December. These disruptions could well bleed into Q2, with revenue expected to drop to around $90bn. Apple once again refused to offer guidance, but profits are expected to come in at $1.42 a share.

Amazon Q1 results

Amazon’s share price has fallen more than 13% year-to-date, after the company issued weak Q1 guidance when it reported its Q4 and full-year numbers at the beginning of February. Net sales are expected to come in between $112bn and $117bn, below market expectations of $120bn, while operating income is set to come in between $3bn and $6bn, down from $9bn a year ago.

Some of the disappointment was offset by the announcement of a $20-a-year, or $2-a-month price hike in Amazon Prime for US members, as investors fretted about the company maintaining its margins in the face of higher costs. In Q4 Amazon hired an extra 140,000 staff, while over the course of 2021 operating expenses rose to $445bn, up from $363bn in 2020.

The big concern over a price hike for Prime customers is that it might cause some churn. However, it appears that management are betting that a new Lord of the Rings series, and streaming rights to Thursday night American football, could tip the balance in their favour. Its cloud business has also been a significant contributor – in Q4 AWS posted revenue of $17.8bn, a 40% increase on the previous year, and beating the $16.1bn in Q3, continuing the run of quarter-on-quarter improvements seen throughout 2021.

Investors will be hoping this trend continues, as we look ahead to the upcoming 20:1 stock split, which was announced in March and is set to take place on 6 June 6, subject to shareholder approval. Profits are expected to come in at $8.51 a share.

Friday 29 April

Germany, France, Italy, Spain Q1 GDP

The recent surge in energy prices, and commodity prices more broadly, is expected to have had a chilling effect on economic output in Q1, even before the war in Ukraine took hold. The German Bundesbank has already indicated that the German economy is set for a recession due to the huge surge in energy prices, and if Russian oil and gas gets embargoed that effect is likely to be multiplied. The German economy was already in contraction at the end of last year, with this week’s preliminary Q1 GDP reading expected to come in at 0.2%, though we could conceivably see a negative number. The French economy is expected to slow to 0.3%, down from 0.7% in Q4. The Italian economy is expected to slow to 0.1% in Q1, down from 0.6% in the previous quarter, while Spain’s economy is expected to slow to 0.5%, down from 2.2% in Q4.

EU flash CPI (April) 

Despite inflation being at a record high of 7.4%, the European Central Banks’ recent meeting featured a dovish tilt from President Lagarde and the governing council. This was a surprise given the hawkish shift at the March meeting.

With core price growth at 2.9% we’ve seen a raft of ECB policymakers call for a rate rise as soon as July. Both Belgian ECB council member Pierre Wunsch and ECB vice President Luis de Guindos have said a July rate hike is becoming more likely. These calls are likely to get louder if core CPI continues to rise as it has in the UK and the US, where core prices initially lagged behind the headline rate but now appear to be accelerating.

The ECB appears to be underestimating this effect, although there is slightly more slack in the eurozone labour market, which means wage growth will lag. Another hot number this week, such as a move to 7.6% or higher, and pressure will ramp up for a July rate hike.

US core PCE (March)

Recent comments from St. Louis Fed President James Bullard suggest that he might be open to a 75-basis-point rate hike when the Federal Reserve meets next month. Markets are already pricing in the probability that we’ll see a half-point increase in the Fed funds rate, and investors appear to be relatively comfortable with that idea now.

Based on the CPI and PPI numbers we saw in March, there is little sign that headline inflation is slowing. Estimates for the March reading of the core personal consumption expenditure (PCE) deflator – the Fed’s preferred measure of inflation – are for a modest slowdown to 5.3%, versus 5.4% in February. However, the recent strength in the US dollar may act as a deflationary drag.

NatWest Group Q1 results

Like those of its peers, NatWest Group’s shares fell to a one-year low in March, with the Russian invasion of Ukraine contributing to some of that weakness. There has been a modest rebound since then, but it is clear that the next nine months are likely to be challenging for the UK economy, as consumers face surging energy prices and a squeeze on living standards.

Last year total profits came in at £2.95bn, compared to a loss of £753m in 2020. The numbers were flattered enormously by the release of £1.28bn in reserves that were set aside to cover potential loan losses in 2020. Since those numbers were released, the UK government’s stake in the group has fallen to 48.1% after it sold £1.2bn worth of shares at the end of March.

CEO Alison Rose said the bank expects to maintain ordinary dividends of around 40% of attributable profit, and to distribute a minimum of £1bn in each of 2022 and 2023, via a combination of ordinary and special dividends.

Net lending in Q4 improved by £800m, while over the course of 2021 customer deposits increased by £48.1bn to £479.8bn. While the outlook is expected to be challenging over the coming months, the main focus is expected to be on lending patterns – not only to consumers, but also to businesses. Cashflow should not be a problem given that the bank will receive €6.4bn in proceeds from its deal to sell its Irish loan books to Permanent TSB. This will reduce the value of its assets and will go towards boosting its capital position further.    

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Selected company results

MONDAY 25 APRIL RESULTS
Activision Blizzard (US) Q1
Coca-Cola (US) Q1
TUESDAY 26 APRIL RESULTS
3M (US) Q1
Alphabet (US) Q1
Associated British Foods (UK) Half-year
General Electric (US) Q1
General Motors (US) Q1
HSBC (UK) Q1
Microsoft (US) Q3
PepsiCo (US) Q1
United Parcel Service (US) Q1
Santander (UK) Q1
Visa (US) Q2
WEDNESDAY 27 APRIL RESULTS
American Tower (US) Q1
Automatic Data Processing (US) Q3
Boeing (US) Q1
Ford (US) Q1
French Connection (UK) Full-year
GlaxoSmithKline (UK) Q1
Harley-Davidson (US) Q1
Hertz (US) Q1
Lloyds Banking Group (UK) Q1
Meta (US) Q1
Pinterest (US) Q1
WH Smith (UK) Half-year
THURSDAY 28 APRIL RESULTS
Amazon (US) Q1
Apple (US) Q2
Barclays (UK) Q1
Columbia Sportswear (US) Q1
Comcast  (US) Q1
Hershey (US) Q1
J Sainsbury (UK) Full-year
Mastercard (US) Q1
Robinhood Markets (US) Q1
Standard Chartered (UK) Q1
Stryker (US) Q1
Thermo Fisher Scientific (US) Q1
Twitter (US) Q1
Whitbread (UK) Full-year
FRIDAY 29 APRIL  RESULTS
AstraZeneca (UK) Q1
Charter Communications (US) Q1
Exxon Mobil (US) Q1
Honeywell International (US) Q1
NatWest (UK) Q1

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

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