Inflation shock lifts gilt rates and troubles the market, Marks & Spencer rejoices, SSE plans record green energy investment and Kingfisher blames the weather

“Bond markets took one look at the latest inflation figures and took the view that interest rates are going to keep going up. The UK 10-year Gilt rate jumped to 4.3% on the news, the highest level since last October and significantly ahead of the 3% level seen only three months ago,” says Russ Mould, Investment Director at AJ Bell.

“Sticky inflationary pressures, particularly in food, will strengthen the argument for the Bank of England to raise rates again. That will bring more pain to companies and consumers as the cost of servicing borrowings becomes more expensive.

“The stock market didn’t like the news, with the FTSE 100 falling 1.5% to 7,643. There were only two stocks rising in the index – testing group Intertek and renewable energy expert SSE. The biggest fallers were housebuilders and property companies, understandable given their sensitivity to interest rate moves.

“Weakness in miners implies concerns about the global economy rather than the UK. Anglo American fell 2.8% while Rio Tinto was down 2.5%.”

Marks & Spencer

“It feels like the longest turnaround in corporate history, but there are finally signs that Marks & Spencer has struck the right formula. Rather than the usual story of strong food sales making up for weakness in clothing, both parts of the business are now doing well.

“Marks & Spencer has always been the go-to place to buy pants and socks, but the rest of its clothing line has generally been seen as deeply unfashionable. Over the years we’ve had various people try to solve this problem with little success.

“More recently, a bigger push on athleisure has helped to bring in a younger crowd, while a greater focus on mainstream items such as casual dresses and denim have made the company more appealing to the general shopper.

“A 25% jump in chino sales might be driven by more people going back to work in the office but not needing to wear a suit, but in reality it’s more to do with them coming back into fashion. No longer confined to dads trying to look cool by pairing them with a polo shirt (tucked in, of course) and their running shoes, they’re now more socially accepted among broader age ranges.

“Food sales continued to be strong with the company increasing its market share. A decision not to pass on the full impact of cost inflation has worked wonders, with much of sales growth being driven by volume as prices on many items haven’t gone up as much as other grocery sellers.

“The company has been pushing value for money offers, showing it is more in tune with what customers want in the current environment.

“It’s not all good news, however. The online joint venture with Ocado is undergoing a ‘reset’ as growth hasn’t matched expectations. It is trying new things, but the jury is out on how fast it can achieve success. The Sparks card remains one of the more confusing membership/loyalty schemes on the market and there is certainly more it can do to strike a better chord with customers.”

SSE

“SSE knows the drill – an energy company reporting bumper profit is likely to draw fire right now as UK households continue to struggle with the cost of heating and lighting their homes.

“That’s why the company is so keen to emphasise plans for tens of billions of pounds worth of investment in green energy projects and to point out it has put aside a not insignificant sum to satisfy existing windfall taxes.

“SSE’s spending commitment is undoubtedly eye-catching and is good news for a government which has often attracted criticism for not doing enough to promote investment in areas like wind and solar compared with the EU and US.

“Profit with a purpose is a good soundbite, but shareholders will want to see evidence that they are being rewarded for funding the company too.

“A previous push to break up the company by spinning out the renewable energy assets, led by activist investor Elliott, has lost momentum, having reached a head in late 2021. SSE can argue that its balanced integrated model, incorporating transmission and distribution assets, is what is helping to deliver the proposed record investment.”

Kingfisher

“Investors hate excuses as much as a teacher being told ‘the dog ate my homework’ and B&Q owner Kingfisher’s apportioning a drop in sales to ‘unusually poor spring weather’ in its core markets in the UK and France won’t draw much sympathy.

“Yes, when it is wet people are less likely to be out in the garden but, in the UK in particular, spring weather is often unsettled. Investors will take some solace from the strong sales of ‘big-ticket’ items, which implies there isn’t undue pressure on consumer spending, and it is notable that profit guidance is actually above expectations.

“Significantly, Kingfisher is seeing its own cost inflation pressures ease. It will be interesting to see to what extent it passes this on to shoppers. For management it is a tricky balancing act between maximising profitability and protecting its market share and continuing to get people through the tills.”

These articles are for information purposes only and are not a personal recommendation or advice.