Why a Conservative victory was already priced into the markets - James Rowbury

James RowburyJames Rowbury
James Rowbury
The inevitable flow of dramatic news that comes with a general election campaign seemingly did little to sway UK markets.

A Conservative victory was likely priced into UK markets. A more important factor affecting UK markets recently has been US trade disputes with China and the rest ofthe world.

Markets across the globe appear to hang off President Trump’s every word. Last week, his announcement of potential tariffs on $2.4bn of French luxury goods in retaliation to a proposed digital services tax contributed to the FTSE 100 plummeting 1.8% in a single session.

Hide Ad
Hide Ad

Such is the influence of the US on global trade that any announcement from President Trump has the potential to outweigh the impact of the election result on UK markets, particularly in the short-term. Politics aside, there were several UK companies with interesting news this week.

Shares in Tullow Oil fell sharply on Monday morning after the multinational oil and gas explorer slashed its production outlook, scrapped its dividend and ousted two senior employees. Chief Executive Officer, Paul McDade, and Exploration Director, Angus McCoss, resigned by mutual consent after a prolonged period of underwhelming performance.

Tullow Oil expects to produce between 70,000-80,000 barrels per day in 2020, with its output subsequently falling to 70,000 b/d in the next three years. These figures represent a 30%drop in output expectations, with initial projections of 93,000-101,000 b/d for 2019.

The London-based firm cited problems with lower demand for its Jubilee field gas from the Ghana National Gas Company as well as mechanical issues on two of its newly-constructedwells at a separate oilfield. Tullow Oil was also dealt an exploration blow as two potential discoveries off the coast of Guyana were announced to contain heavy crude oil in a form thatmay not be commercially viable.

Hide Ad
Hide Ad

The negative news contributed to Tullow’s share price falling by 72% on Monday, wiping over £1bn from the company’s market capitalisation, with the price reaching its lowest level since 2000. Dorothy Thompson, Non-Executive Chair and former boss at Drax, has been appointed Executive Chair on a temporary basis. Thompson said: “the board has been disappointed by the performance of Tullow’s business and now needs time to complete its thorough review of operations.”

It serves as a testament to the skill of housebuilder Berkeley Group’s previous communications and expectations management that its share price remained relatively unaffected by the firm reporting a 31% drop in pre-tax profit for the six months leading up to September.

Profits dropped to £276.7m while revenue was also down, falling 44% to £930.9m. However, this was largely well received by investors as Berkeley stated the drop represents a normalizing of profitability.

The firm has weathered a challenging London property cycle, selling several Central London developments that boosted revenues andprofits in recent years.

Hide Ad
Hide Ad

Berkeley is now focused on investing in its balance sheet to provide support for its six-year pre-tax profits guidance of £3.3bn. Management confirmed the group has around £500m in excess cash for potential reinvestment, leaving the company well- placed to take advantage of arising uncertainty.

These results cap off a strong year for Berkeley, with its share price rising by 37.01% in the last twelve months. On Monday, Tesco confirmed it is considering the sale of its Asian business, Tesco Lotus. This could be an encouraging sign for shareholders, with the valuation of the supermarket giant’s Asian operations currently standing in excess of £6.5bn, around 25% of Tesco’s entire enterprise value. Its Lotus brand operates over 2,000 stores in Malaysia and Thailand, employing around 60,000 people. The sale would fall in line with moves Tesco has made in recent years to reduce its overseas operations and shift focus closer to home.

In 2013, Tesco sold its US-facing Fresh & Easy business after citing cultural differences in US consumer habits as a sticking point for implementing its desired strategy. The same year, Tesco announced its withdrawal from China shortly after their failed attempts to attract the interest of Chinese consumers. Following a turnaround plan launched in 2014, after an accounting scandal and record losses, the supermarket giant sold its South Korean businessfor £4.2bn in 2015.

Should the Lotus sale progress, Tesco would be solely operating stores in the UK, Ireland and Central Europe. This proposed sale could be shrewd business from Tesco, taking a profit and focussing on markets it knows well. Selling Lotus, however, would be relinquishing an established arm of the business with a strong 25-year foothold in Thailand and Malaysia.

Hide Ad
Hide Ad

By James Rowbury, Investment Research Coordinator, Redmayne Bentley

Please note, investments and income arising from them can fall as well as rise in value. This article is for information only and does not constitute a recommendation to buy or sell shares in the investments mentioned.

Related topics: