‘Here we go again’ would be an understandable response. The stewards across the river at Threadneedle Street understand well the efficacy of these statements, whether or not the suggested action comes to pass. But these words were enough to push sterling to $1.35, a level not seen since the days following the referendum vote. Our economist Chris Dillow has written this week on what rising rates might mean for equities in general. I'd like to add some thoughts on a sector-by-sector impact.
Some market-watchers believe the recovery in cable may roll back some of the bearish sentiment weighing on the retail sector. “Negative margin assumptions look set to recover in many stocks,” argue analysts at N+1 Singer, highlighting the half-year results from Next (NXT), which we covered last week. The weaker pound had been expected to boost prices by 5 per cent, but that year-on-year effect is now expected to fall to 2 per cent by the spring. The broker sees earnings upgrades in store for Halfords (HFD), Findel (FDL), Mothercare (MTC) and N Brown (BWNG).
This is a pursuit for the stronghearted. Looking across the retail sector, using S&P Capital IQ data, the two biggest fallers since the EU referendum are Dixons Carphone (DC.), down 59 per cent, and Topps Tiles (TPT), down 47 per cent. The electricals retailer is now trading at just six times consensus earnings, making it tempting to call the bottom, especially with two iPhone models coming down the tracks, which may help jog the mobile phone market out of its stupor. But sterling’s strength through the next 18 months will be tied up with the progress of the Brexit negotiations. And any FX benefit has to be set against the impact on the consumer economy of prices continuing to outgrow wages.
There has been an accompanying sell-off in the UK government bond market, with the 10-year gilt yield reaching yearly highs. A turn in the market rate is obviously bad news for companies reliant on debt. Using a broad measure of total debt to total equity, again via Capital IQ data, the most leveraged of the London-listed companies that we cover is the acquisition-hungry Dignity (DTY), whose ratio is around 21 times. Morbid as it may be to point out, the funeral services provider has a certainty of cash flow to handle a highly leveraged balance sheet.
Findel pops up again with a leverage ratio of 15 times. Within that, the online retailer's core bank debt is declining, and it has a hedging policy to manage the cost of borrowing, but that’s still a top-heavy balance sheet. No doubt investors will be stress testing their more debt-reliant holdings.
By the same measure, rising rates will be good news for those who look to make a margin on debt, such as banks (unless loan books deteriorate substantially), and those companies that are forced to invest in it, such as insurance companies. They will also reduce corporates’ defined benefit pension liabilities.
A change in the price of money reaches all corners, but all we are seeing is how the market is responding to the idea of monetary policy normalisation. No one really knows how the economy will react once it actually begins. The Financial Conduct Authority again this week drew attention to the consumer credit market: can it be cooled, safely? Ditto the housing market. The pilot has calmly reassured us about the turbulence ahead, but he knows little more than us about how bumpy a ride it will turn out to be.
Ian Smith is companies editor.
*20 September 2017: The original, online version of this article incorrectly stated the main bank rate at 0.5 per cent. This has been corrected.
