Hot UK inflation, Middle East tensions rise and M&S updates on cyber attack
Susannah Streeter, head of money and markets, Hargreaves Lansdown: “The FTSE 100 has struggled to cling onto gains as investors get to grips with hotter-than expected Uk inflation figures and rising geo-political risks. Sterling has risen amid expectations that the hotter inflation number will make policymakers that bit more inclined to keep interest rates higher for longer. Financial markets have reduced expectations for rate cuts this year, with only one reduction looking bolted on. As the pound flexes more muscle it adversely affects the value of multinationals overseas earnings, which is putting pressure on the FTSE 100.
April was awful in terms of price rises for consumers. With many bills increases already flagged, inflation was always set to rise sharply, but the jump was even bigger than expected. While rises in gas, electricity, water, transport, and mobile phone calls were forecast, consumer also had to pay higher prices if they splashed out on enjoying themselves, with leisure and recreation costs also rising. But it’s been tough for retailers, who haven’t been able to pass on higher costs to customers. Instead, the price of furniture and clothing has fallen. Consumers are keener to spend money on enjoying themselves rather than buying more stuff and seem more inclined to swallow higher prices if they are being entertained.
An escalation of conflict in the Middle East is back at on the worry lists following reports that Israel could be planning to hit Iranian nuclear sites. The situation in Ukraine is also a fresh cause for concern, as although Trump as said negotiations for a truce will start soon, the US administration appears to be retreating from a role as broker in attempting to end the conflict. Gold has pushed higher again, as investors look for safer havens to shelter their money. The lower dollar is also making the price of the precious metal look more attractive to buyers around the world. The greenback has sunk to a two-week low, as a widening deficit in the US is assessed, and more policymakers at the Fed warn about the economy deteriorating due to Trump’s trade policies. Stagflation is rearing its head again as a big worry, as slowing growth and rising inflation are eyed. Oil prices have risen amid concerns about conflict spreading in the Middle East. Brent Crude has risen sharply to around $66 dollars a barrel as speculation has swirled about Israel’s preparations for strikes against Tehran. It comes as US-led talks aimed at persuading Iran to halt uranium enrichment have faltered. If Israel does strike, it’s feared that Iran could close the Strait of Hormuz, which is a key route for crude from producers in the Gulf, disrupting world supplies.
JD Sports results underline the tough environment for clothing retailers amid economic uncertainty. Underlying sales dipped 2% in the first quarter, in what it described as a volatile market. Buying a new pair of top-end trainers isn’t a priority for as many sports and fashion fans right now. Amid concerns about the vulnerability of the retail sector to cyber-attacks, JD Sports has offered notes of reassurance in this update. It stressed it’s spent £60 million to secure and improve the resilience of its IT infrastructure and back-office systems. Despite the weaker sales figures, there are a few rays of optimism in this update. Although the company says tariffs could hit pricing and demand, it ultimately sees no material effect from US trade policy, despite the market turmoil which was caused. It’s estimating that it will be able to grow organic revenue in the medium term by around 2-3%, ahead of market expectations. With an eye on its weaker share price, JD Sports has announced a £100 million share buyback programme.
Marks and Spencer has been left counting a high cost for the cyber-attack which is continuing to disrupt online operations. As expected, clothing, home and beauty sales have been hardest hit, with a hit to profits of £300 million. Finally, there will be some relief that a timeline has been put on a return to normal service. But given that it won’t be until July, it shows the depth of the disruption the company has had to deal with. However, it will be dealing with this damaging breach from a position of resilience given its strong full year results. Full year sales rose 6.1%, and the 22% rise in pre-tax profit of £876 million beat expectations.
With more here’s my colleague Aarin Chiekrie, equity analyst, Hargreaves Lansdown: “Marks & Spencer has smashed full-year profit expectations, driven by strong growth in the food division. A continued focus on quality, value and innovation has seen shoppers fill their trolleys with M&S food more often, meaning the group wrestled more market share from competitors last year.
Despite the strong performance, much of the focus today was on the commentary around the ongoing cyber-attack, which has hamstrung performance in the new financial year and even put a full-blown stop to online orders in the Fashion, Home & Beauty division. This disruption’s set to continue throughout June and into July, before M&S expects to restart and ramp up operations again.
The cyber attack looks set to cause a £300mn hit to operating profits this year, which management will look to try to partly offset through a tight grip on costs and other trading actions throughout the year. It’s reported that M&S has insurance in place to cover as much as £100mn of the costs. And luckily, the warm Spring weather should have driven more footfall to the high street, so it’s likely that a decent chunk of online sales will have shifted to in-store to help soften the blow.
While that’s frustrating for investors, the bigger picture needs to be kept in mind. The cyber-attack is likely a one-off event, and the underlying business is performing well. M&S is gaining market share, improving profitability, and the balance sheet is in great shape. The ongoing negative headlines have caused the valuation to fall in recent weeks, and it now sits in line with peers, which doesn’t look too demanding given the above-average growth in food. This could mark an attractive entry point for investors willing to ride out some turbulence in the near term.”