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Market Outlook

The week ahead: UK GDP; BT, Coinbase, Disney, Rolls-Royce results

Read our pick of the top stories to look out for this week (10-14 May), and view our key company earnings schedule.

In this week's video, Michael reviews a choppy week for stock markets, and assesses the prospects for further gains. He also looks ahead to next week's US inflation and retail sales data, the outlook for the US dollar, sterling and euro, as well as covering the latest results due from BT, Rolls-Royce and Coinbase.

UK Q1 GDP

Wednesday: After a 2.2% contraction in January, which was better than expected and has been revised upwards twice, there is a hope that the slowdown in Q1 is likely to be much less than the -4% that was being pencilled in by the Bank of England in February. Since then, the Bank has revised its expectations higher, and with the recent strong gains in purchasing manager indices (PMI) data, there is a rising expectation that there will be only a nominal contraction in these Q1 figures. The rebound in Q2 is likely to more than make up for what has been a much less damaging lockdown than was originally feared. In February, monthly GDP expanded by 0.4%, raising the prospect of another positive month in March as businesses built up inventory in preparation for the economic reopening in Q2. In Q4, the economy expanded by 1.3%, whereas this Q1 preliminary number is expected to show a contraction of 1.7%. Monthly GDP for March is expected to show an expansion of 1.3%.

UK manufacturing production (March)

Wednesday: One of the bright spots of the UK economy over the past few months has been the manufacturing sector, which has performed quite well after the big drop as a result or the first lockdown just over a year ago. The sector, by and large, has managed to stay open despite the lockdown restrictions, the pity being it makes up such a small part of the UK economy. Since the ending of the first lockdown, the sector had grown consistently every month since the 4.6% decline in March 2020, and 24.4% decline in April. This trend of unbroken positive readings faltered in January, as tighter restrictions, trade disruptions at ports due to Brexit and other backlogs, as well as a slowdown in economic activity, acted as a bit of a brake on output. This led to a fall of 2.3%, while industrial production output slowed as well by -1.5%. Since then, economic activity has picked up, with a rebound of 1.3% in February, as companies look to restock in anticipation of an economic reopening at the end of the quarter. This trend looks set to continue in March, with an expectation for a rise of 1.5% in manufacturing production and 1.2% in industrial production, respectively.

US consumer price index (April)

Wednesday: Recent sharp rises in the US consumer price index (CPI) have raised concerns that the US Federal Reserve might be inclined to tap the brakes when it comes to monetary stimulus. While Fed officials have gone to great lengths to convince the markets they will be very patient, long-term yields have remained fairly firm, though they have come off their recent peaks, with the US 10-year yield slipping back from 1.77%. On an annualised basis, headline US CPI has gone from 1.4% in January to 2.6% in March, and while some of this is caused by base effects as a result of a sharp decline in prices caused by the lockdowns of a year ago, surging commodity prices have raised concerns that any rise in inflationary pressures may not be as transitory as expected. Another big jump in headline CPI could see upward pressure on yields. Expectations are for April’s CPI to rise sharply to 3.6%, from 2.6% in March. Some of that will be down to base effects, but not all, with the only discussion likely to be over whether it's "transitory".

Vroom Q1 results

Wednesday: In June last year, online car retailer Vroom decided to join sector peer Carvana in floating on the New York Stock Exchange. Vroom’s IPO saw the fledgling business rise from an initial price of $22, to close at $47.90 and a market cap of $5.52bn. For a company that has yet to make a profit since it started in 2012, that remains quite a lofty valuation, with losses increasing in 2020 to $202.8m from $143m in 2019. The lack of improvement in 2020 was troubling for a business that saw a decent increase in revenues to $1.36bn, $915.5m of which came from e-commerce. The number of cars sold is certainly going up, with a rise of 21%, however the company is spending a fortune on marketing, as well as other administration expenses. These expenses increased by $60m to $245.5m in 2020. As a consequence of the surprise rise in losses, the company is facing a lawsuit by some of its investors for allegedly misleading them with regard to the health of the business. In January, the company completed the $120m acquisition of CarStory, a digital services business that uses AI to help make inventory predictions. Losses are expected to come in at $0.62 a share. 

Airbnb Q1 results

Thursday: Last year’s Airbnb IPO was a little surprising given the impact the pandemic might have on the travel sector. Pricing in an initial range of $44-$50, share interest was huge, with the Airbnb share price closing $100 higher on the first day of trading, valuing the fledgling business at $86.4bn. Since then, the shares have gone even higher, peaking just shy of $220 earlier this year. The price now sits at closer to $150, ascribing a potential valuation in excess of $94bn, a quite staggering figure for a company with annual revenues of $3.38bn in 2020, and $4.8bn in 2019. In comparison, big hotel chain Marriott has a market cap of $48bn, with annual revenues halved from $20.9bn in 2019 to $10.58bn in 2020. 

Last year, Airbnb reported annual losses of $4.6bn, though a good part of that was as a result of a $2.8bn charge in relation to the IPO. Revenues in Q4 fell 22% to $859m, and while they declined to offer a forecast for 2021 profit and revenue, there was optimism over a recovery, especially in the US. Analyst expectations for revenue this year is for a return to 2019 levels, around $4.8bn, however the company still isn’t expected to generate a profit in these Q1 results, with losses of about $130m expected, on revenues of $712m.

BT Group full-year results

Thursday: Over the last year, BT Group has had to contend with the competing demands of a tough market in broadband and mobile, which has hit margins in its consumer division, while the enterprise and the global divisions are having to cope with rapidly changing business environments, as fixed phone lines are used less. It's also competing with Sky for eyeballs with its huge investment in BT Sport, and where the latest Premier League rights are coming up for renegotiation. 

On the plus side, its Openreach division has the chance to benefit from the rollout of the high-speed broadband the UK needs, but only if it's kept under the BT umbrella. Last May there was some chatter that BT was looking at selling off a multibillion-pound stake in Openreach, in order to help fund its investment in accelerating the build of its FTTP network, with a target of 20m homes by the mid-to-late 2020s, and a target of over 2m in 2020-2021.The company also said it had doubled the number of FTTP orders, as well as expanding its 5G network across 112 UK towns and cities. This outperformance prompted BT management to up its profit guidance for the full-year to £7.3bn-£7.5bn, while also saying it expected to restore the dividend of 7.7p a share in the next fiscal year. 

All of this costs a great deal of money, which explains why BT is now in talks to offload BT Sport, which is becoming a luxury that BT can no longer afford if it's to plough investment into its network infrastructure. Given BT’s other obligations in terms of 5G and broadband upgrades, they simply don’t have the resources to compete with the likes of Sky, Disney and other new entrants to the market, like Amazon. Any additional money that can be freed up by the disposal of this asset can be better spent in supporting its various networks, where it's making significant progress.

Rolls-Royce Q1 results

Thursday: Rolls-Royce was already wrestling with some serious issues even before the pandemic came blowing in over a year ago, its share price well down from 2018 peaks, as problems with its Trent 1000 engine, which powered the Boeing 787 Dreamliner, caused the company to post a £2.9bn operating loss in its 2018 full-year numbers, followed by a loss of £850m in 2019. Last year’s operating loss of £2.1bn was almost as large as 2018, and while the size of it is certainly sobering, optimism is more tempered unlike last year, due to the uncertainty about when air travel is likely to return to any kind of normal post-pandemic.

If the £2.1bn operating loss wasn’t bad enough, when other costs were added the loss ballooned to an even bigger £4bn, with other charges including a £1.7bn underlying finance charge related to its FX hedge book, due to lower US dollar receipts in 2020, as well as future years. That said, management were still fairly optimistic about the future, estimating a free cashflow outflow of £2bn for 2021, based on wide body engine flying hours of 55% of the levels of 2019, with an expectation of turning cashflow positive at the end of the second half of this fiscal year, with positive free cashflow of £750m in 2022, based on engine flying hours of 80% of 2019 levels. The company was and still is to a certain extent, hugely reliant for a good proportion of its revenue on these aviation air miles, which means it's still facing a significant cash outflow, even with the thousands of job cuts and cost savings. The expectation of a pickup in air travel to the tune of 55% of 2019 levels in the second half of the year still seems somewhat optimistic, and the Rolls-Royce share price performance since that March guidance appears to bear that out for now.

This Q1 update is unlikely to show much of an improvement in terms of its civil aerospace division, given the virtual shutdown of air travel over the past three months, though the US market has been more resilient, and is starting to return to a semblance of normal. As economies start to reopen for the summer season, we can expect to see some improvement in the overall number of engine hours flown, however as events in India, and other parts of the world have shown, the virus has continued to wreak havoc. This is likely to slow down any return to normal as we know it, as traffic light systems act as a further barrier. CEO Warren East said that the £9bn of extra liquidity the company raised should be enough to see it through the next two years, even if there is no aviation rebound. This is probably just as well, as they may well need it, if they aren’t able to dispose of any more assets. Their sale of Bergen engines has been held up by the Norwegian government on national security grounds, while talks over the disposal of Spanish operation ITP Aero are also being hindered by concerns over job losses.

Coinbase Global Q1 results

Thursday: After its eagerly anticipated direct listing saw Coinbase shares open at $381, well above its indicative price of $250, the shares have found life a bit of a struggle, sliding back down to around $300. There’s certainly been no shortage of interest around cryptocurrencies these past few years, and the decision to sell shares in one of the biggest crypto exchanges has generated a great deal of interest, with the likes of bitcoin and ethereum trading at record levels in recent weeks.

In its most recent quarterly update, Coinbase announced that it expects to make between $730m to $800m in this quarter. The company said it had 56m verified users and its latest results showed the company turned over $1.8bn in the first three months of its fiscal year. This is more than the company made over the whole of 2020, when it generated revenue of $1.3bn. In terms of trading volumes, the last quarter's turnover was $335bn, with assets on its platform rising to $223bn, with $122bn from what they called “institutional” users.

Perhaps surprisingly, Coinbase didn’t provide any guidance, citing the “inherent unpredictability” of its business. The company did outline three separate scenarios for the year, with the most optimistic predicting around 7m monthly users, which is slightly higher from its current 6.1m monthly transacting users. As a result of the direct listing, the company expects to incur expenses of $35m in Q2.

Disney Q2 results

Thursday: The pandemic has taken a huge chunk out of Disney’s annual revenues, with the closure of its theme parks which alone caused a 2.6bn hit, as well as the collapse of its holiday travel business. Its studio business has also struggled due to the closure of cinemas, yet to look at Disney's share price you wouldn’t even know there was a problem, given it hit record highs in March. The one saving grace has been its streaming service Disney Plus, which generated a surprise profit of $17m in its Q1 numbers a few months ago, after revenue fell back to $16.2bn. There's an expectation that the service will hit 100m subscribers this quarter, with the second season of Star Wars spin off 'The Mandalorian' attracting new users. The service is still losing money, although nowhere near as much, with an expectation of a move into profit some time in 2024. As the summer months get closer, investors will be looking for a boost from the reopening of Disney theme parks, which happened on a staggered basis last month. After surprising the markets with a profit in Q1, expectations are for a similar profit in Q2.

DoorDash Q1 results

Thursday: Online delivery service DoorDash saw its share price surge 86% higher from its $102 IPO price on its first day of trading, at the beginning of December last year, giving the business an eye-watering valuation of $72bn. This is a business that lost $616m in 2019 and another $436m in 2020, despite managing to increase revenue by 326% from $885m to almost $2.9bn in 2020. However, this also came with a huge rise in costs, which increased by $1.82bn. 

In an industry that also has Uber and GrubHub, and where margins are wafer thin, DoorDash needs to find a way to generate more revenue without increasing its costs by a similar amount. As things stand, the DoorDash share price has slid back from its recent high, and while management has plans to enter Japan, in addition to its current markets in the US, Canada and Australia, it's unlikely that we will see a profit in this quarter either. The outlook will also be important at a time when economies are reopening for the summer months, and which could see delivery volumes decline. Losses are expected to come in at $0.10 a share.

US retail sales (April)

Friday: After a weak end to 2020, the US consumer has roared, helped in no small part by significant amounts of fiscal stimulus, while the recovery in US jobs has also helped. In January we got another downpayment with a new $900bn stimulus plan that was agreed at the end of last year, prompting a big rebound in January retail sales of 5.3%, to a seven-month high. While the February numbers showed a fall of 3%, the new stimulus payments signed off in March, of $1.9trn, saw another big lift for March consumer spending, with the best performance since April last year, when the US came out of its first lockdown, rising 9.7%. The April numbers aren’t likely to be anywhere near as robust, with a consensus of around 1.1% This seems pretty much in line given how well the US jobs market is going, however we could see an upside surprise given there is some evidence that all the stimulus payments in March haven’t as yet been spent. Combined with the continued solid progress in the US vaccine rollout, consumer spending should remain strong, particularly since US theme parks reopened in April.

Index dividend schedule

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

Selected company results

Monday 10 May Results
Dignity (UK) Q1
Marriott International (US) Q1
Provident Financial (UK) Full-year
Tessco Technologies (US) Q4
Virgin Galactic (US) Q1
Tuesday 11 May Results
Arrow Global (UK) Q1
Coca-Cola Consolidated (US) Q1
Medica (UK) Full-year
Planatir Technologies (US) Q1
QuantumScape (US) Q1
Treatt (UK) Half-year
Wednesday 12 May Results
Bumble (US) Q1
Compass (UK) Half-year
Vroom (US) Q1
Thursday 13 May Results
Airbnb (US) Q1
BT Group (UK) Full-year
Burberry Group (UK) Full-year
Doordash (US) Q1
Fartech (UK) Q1
Rolls-Royce (UK) Q1
Walt Disney (US) Q2
Friday 14 May Results
Sage (UK) Half-year

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