Market update: PM under pressure and private equity circles easyJet
Susannah Streeter, chief investment strategist, Wealth Club: “The pound remains under pressure as political chop and change is back on the agenda in the UK. Prime minister Sir Keir Starmer is widely tipped to step down, as challenger Andy Burnham appears to be securing deep support. If the former mayor of Manchester is given an easy path to Number 10, Britain will have had seven prime ministers in roughly a decade. This level of political churn is making investors increasingly nervous about the consistency of economic policy and the challenges ahead.
The pound has dipped to levels not seen for almost three months, trading below $1.32, while government borrowing costs remain elevated. Although 10-year gilt yields have slipped below the hot levels seen during the most intense phase of the Iran conflict, they are still hovering around 4.84%, sharply higher than international peers. Investing in UK assets continues to carry a risk premium given the bouts of political instability seen since Brexit, and there is little sign of that easing.
There’s a distinct lack of direction for the FTSE 100 at the start of the week, and it hasn’t been helped by conflicting signals about a peace deal between the US and Iran. Brent crude had pushed higher as concerns resurfaced about the conflict flaring up again, given the ongoing tensions between Hezbollah and Israel. However, there does appear to be further progress being made during talks in Switzerland towards a lasting settlement, and oil prices have dipped again. A statement from Qatar and Pakistan, which are leading negotiations in Switzerland, has indicated that the US and Iran have agreed to follow a roadmap towards peace. However, it is clear there is still a long way to go, and more obstacles may emerge before a long-term deal is signed, sealed and delivered.
For now, though, Brent crude has fallen back below $80 a barrel. Tankers are moving through the bottleneck of the Strait of Hormuz and, with key oil-producing nations across the Gulf going all out to boost output, the supply crunch is easing quickly, helping to calm inflationary worries.
Shares in easyJet have surged higher as the US private equity firm eyeing the airline has doubled down on efforts to take over the company. It has taken its offer public after the board rejected its third takeover approach. Its latest proposal came at a 59% premium to the closing share price before investors became aware of its interest. Castlelake is attempting to appeal directly to shareholders through this approach, given that management clearly opposes the bid.
The airline has been battling headwinds from escalating tensions in the Middle East, which have rattled consumer confidence, driven up fuel costs and cast a shadow over the outlook for European travel demand. As a result, its valuation had fallen to a level not seen for more than three years, leaving the company looking vulnerable despite its strong liquidity position.
Castlelake clearly believes the market may be underestimating easyJet’s longer-term earnings potential and the resilience of its network. The firm is well known for investing in aircraft leasing and aviation finance and already owns a small stake in easyJet. The airline also fits neatly within its broader portfolio. However, it remains unclear how easyJet would operate in its current form under private equity ownership.
This is fresh evidence that British markets are increasingly becoming a hunting ground for sophisticated institutional investors, particularly as sterling has weakened and UK-listed stocks continue to trade at lower valuations than many international peers.”