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Strength in Sterling a negative for UK Equities

August 14, 2013 in UK

Sterling has been remarkably strong in recent weeks rising from 1.48 USD to the current level of 1.55 USD. Economic data has been better than expected with PMI (Purchasing Manager’s index) figures the best for 6 years, GDP second quarter figures double the 0.3% expected growth surprising the market with 0.6% and subsequently increased growth forecasts for 2014. The UK economy is performing much better than expected as recent economic data shows and this has led to a stronger pound especially against the US dollar. However, there are inflation concerns and unemployment is still very high. Carney’s comments on forward guidance stating that interest rates will remain at 0.5% for the next 3 years has also acted as a catalyst in supporting Sterling. However, figures out today show that unemployment is still at 7.8% which is much better than much of Europe but is still on the historic high side.

With Sterling above $1.55 and a number of UK blue chip companies major dollar earners, strength in the pound is going to have a detrimental impact on profits for  a number of major dollar earner companies such as BAE Systems, Barclays, BP, Glaxo, HSBC,  Rio Tinto and Vodafone. In recent weeks both Barclays and BP have underperformed the FTSE 100 and are barely changed from the level at the start of the year.

If Sterling continues to strengthen this is going to make it difficult for the FTSE 100 to make much further headway as a number of the UK’s largest companies (especially heavyweight mining and oil companies) derive a majority of their profits in US dollars.

Is the FTSE 100 running a little ahead of itself above 6600?

July 26, 2013 in UK

 

Equity prices are beginning to look toppy again, the FTSE 100 has been struggling to make much headway above 6600 this week. Results in the UK have been generally good but a lot of this has been factored into prices– this week ARM holdings had results which the market initially liked but with the shares on a p/e ratio of 70 the share price has since weakened as the share price factors in a lot of good news. Similarly, yesterday aero-engine maker Rolls Royce announced good results but with the shares having had a spectacular run over the last few years, the share price seems rather high above £12 a share.  Similarly, EasyJet had much better than expected results yesterday and the shares rose sharply  on the back of the excellent results.  With the share price so high after the 140%  rise in the last year, the share price has come into profit-taking today.  The financials have had a great run in the last few weeks with Lloyds market capitalisation currently £47 billion. The shares are up more than 35% since the start of the year. Results due next week will need to be better than expected for the shares to maintain their current share price but obviously those that bought before 2007 will disagree when the share price was many times above the current level. Similarly Royal Bank of Scotland have had a very strong run since the first week of July rising from 270p to 340p yesterday – a rise of 25% within a month! Have fundamentals changed that much to justify a rise of more than a quarter in such a short period of time?

 

With interest rates so low and other asset classes giving very low yields,  UK equities are still sought but some share prices seem to be running a little ahead of themselves. There are still some FTSE 100 companies that yield above 5% (Astra Zeneca, Aviva and National Grid for example) and those may still be sought for their income generation. The London market has had a tremendous run since the end of the May with the FTSE 100 rising from  6000  to the current 6600 level. Over confidence and over exuberance may spoil the party in the short-term, be careful, share selection is going to prove more difficult in the weeks ahead with some share prices discounting a lot of good news!

The Latest Employment Data from the U.K.

December 13, 2012 in UK

Between May to July 2012 and August to October 2012:

  • the number of people in full-time employment increased by 44,000,
  • the number of people in part-time employment fell by 4,000, and
  • the number of unemployed people fell by 82,000.

Between August to October 2007 and August to October 2012:

  • the number of people in full-time employment fell by 421,000,
  • the number of people in part-time employment increased by 709,000,
  • the number of unemployed people increased by 879,000, and

(Source: http://www.ons.gov.uk)

Further, in the month of November, the number of jobless claimants fell by 3,000 compared to analysts’ estimations of a rise of 7,000.

These are statistics that show a gradual improvement in the employment scenario over the short term, and may point to an economy whose fundamentals may be somewhat better than estimated by analysts.