Market activity remains subdued in the interval between Christmas and New Years Day. It’s a time of year for reflection, but it also provides a handy juncture in which to bury unfavourable news updates – at least that’s the cynical view. But a couple of recent stock exchange releases will have raised eyebrows.
Barclays (BARC) has come out fighting after US federal regulators took the decision to sue the UK bank and two of its former employees over the issuance of allegedly fraudulent mortgage-backed securities at the height of the US housing boom. Federal authorities have already reached settlements with European lenders Credit Suisse ($5.3bn) and Deutsche Bank ($7.2bn), together with several home-grown financial institutions, so Barclays may have a fight on its hands. Click here to read our view on the legal manoeuvres and risk factors.
In what some will see as a harbinger of a wider industry malaise, Bovis Homes (BVS) revealed that around 180 completions have been deferred till 2017 following a slowdown in activity during December. The delayed completions mean that reported profits will come in below consensus expectations for the 2016 year-end, but property analysts will be wondering whether any of the house builder’s rivals will follow suit.
Long-term fundamentals remain favourable, but it’s certainly true that the UK property sector has struggled through 2016 – at least in relative terms. We’ve seen increased pricing weakness, while the fall-away in buyer registrations and transaction volumes provide an even more telling pointer. Figures from the Council of Mortgage Lenders show a slight decline in overall lending through 2016, though there was a marked increase in the incidence of homeowners re-mortgaging.
Some analysts have speculated that many potential buyers were holding off making purchases until they knew the outcome of the EU referendum, but positing Brexit-related theories quickly became the convenient fallback position in 2016. What we do know for sure is that increased stamp duty costs and regulatory changes have already weighed on activity in the buy-to-let sector and the luxury end of the market. We also know that house prices in relation to average earnings are at an historical high in London and some areas within the Home Counties, with mortgage affordability deteriorating markedly from the long run average. Therein lies the rub.
One indisputable consequence from the decision to sever our ties with the European Union was a sharp depreciation in the value of sterling. The relative decline has been favourable for exporters and for UK companies that generate sales in foreign currencies but report in sterling – most of the FTSE 100 constituents. But another consequence is that UK assets have become appreciably cheaper. Latest statistics from Dealogic bear this out, with the US and Japan stepping-up their UK-targeted M&A significantly over the year.
Whether either French group Loxam SAS or Belgium firm TVH Group NV were thinking in terms of FX benefits when they tabled their original bids for Lavendon (LVD) is anyone’s guess, but both companies decided to up the ante at the tail-end of 2016. Click here to find out details of the enhanced offers.
However, many UK companies are still prepared to make a tilt abroad. After all, M&A remains a two-way street. Online fast-fashion e-tailer Boohoo.Com (BOO) has agreed to pay $20m for US rival Nasty Gal, which caters to teenage girls and women in their 20s - the same demographic that Boohoo targets. Click here to read Harriet Russell’s take on the deal.
Good news for shareholders in PayPoint (PAY) as the payment services specialist finally managed to offload its mobile payments business. A special dividend of the gross sale proceeds, which amounts to 38.9p per share, will be paid on 11 January 2017 – the shares will go ex-dividend on 5 January 2017. Click here to read our view on the sale.
One final thought: though we realise that ‘calling the market’ is a vexed pastime, at this point last year a number of the IC writers were already concerned that valuations weren’t supported by underlying earnings. And yet 12-months on and the FTSE 100 benchmark index is 12 per cent to the good - due, in part, to events across the Atlantic. Stock markets have performed well since Donald Trump’s unexpected electoral victory in November. And the recent rise in bond yields could signal the end of deflation and improved returns on capital, although overall growth rates remain anaemic – a seeming contradiction. Any Trump-inspired attempts to expand the US economy will also be subject to Congressional scrutiny. Parallels have been drawn between the promised tax cuts and deregulation measures by the President-elect and those that followed in the wake of Reaganomics, but it worth remembering that interest rates and their subsequent trajectory were in direct contrast to where they stand now.
