Cracks appear in China rally, Vistry warns, Rémy Cointreau, Pernod Ricard and Diageo hit by anti-dumping measures, Imperial Brands pleases, Greencore upgrades guidance and Motorpoint revs up

“Beijing’s ‘whatever it takes’ economic stimulus programme continued to drive a strong rally in Chinese shares. Shanghai’s CSI 300 index jumped another 5.6% as trading resumed after a week-long holiday, with healthcare, technology and industrials leading the charge,” says Russ Mould, Investment Director at AJ Bell.

“Some might find this rally quite remarkable given Beijing has form in doling out stimulus programmes, most of which failed to have a lasting effect. Quite why it is different this time remains to be seen.

“The devil is in the detail and we’re lacking precise information from officials on how Beijing expects the Chinese economy to regain previous strength beyond headline initiatives announced last month including a lower cost of borrowing on existing mortgages and banks having the capacity to lend more money.

“In particular, the market wants firm details on fiscal stimulus which hasn’t been forthcoming. It explains why some cracks were starting to appear in the China euphoria, with Hong Kong’s Hang Seng index slipping back 7% as investors trimmed positions in consumer-facing companies, real estate and financials.

“You can tell some scepticism is already creeping in, given how the mining sector was firmly in the red on Tuesday. Metal producers have been keeping their fingers crossed for stronger demand from China following a miserable time for industrial commodity prices of late. However, the negative share price performance of Antofagasta, Rio Tinto and Anglo American would imply that China’s latest economic stimulus measures might not live up to the initial hype. Or it might simply be canny investors locking in some of the recent gains on the stocks just in case we see a broader pullback.

“The FTSE 100 is heavily exposed to the commodities sector which meant that weakness in miners pulled down the broader market. The UK index fell 1.3% to 8,200, also weighed down by a slump in housebuilders off the back of Vistry’s warning, and a decline in other Asia-exposed stocks Prudential and HSBC.

“Vistry’s problems might be of its own making, with the company potentially having failed to keep full sight of costs. However, the market has taken this news to be a possible warning of cost pressures across the sector, prompting a sell-off in other housebuilders’ shares.”

Vistry

“Vistry had been quietly eking out a strong reputation with the market over recent years but today’s news has done a lot of damage to its credibility with investors.

“The scale of the understatement of build costs in its South division is jaw-dropping and it’s not a surprise to see that changes in the management of that division are underway.

“It is also unsurprising that an independent review is being set up, with the company scrambling to contain the issue. A reaffirmed commitment to the £130 million share buyback and confirmation that the company will return to a net cash position this year are clear attempts to reassure shareholders.

“However, this issue is going to affect profit across the next three years and the reputational issues may even last beyond that.

“Today’s revelations will obscure the strategic progress of the business. Up to now, under CEO and industry veteran Greg Fitzgerald, its focus on regeneration and affordable housing, supported by the £1.3 billion acquisition of Countryside Properties in 2022 and a 2020 merger with relevant businesses previously owned by construction firm Galliford Try, has proved something of a winner.

“Teaming up with local authorities to provide affordable housing has enabled it to buck uneven trends seen in the wider UK property market.”

Rémy Cointreau | Pernod Ricard | Diageo

“China continues to have tit-for-tat trade disputes centred upon accusations of unfair competition and protectionism. It has imposed anti-dumping measures on brandy imported from the EU, knocking shares in big drinks companies for six. Rémy Cointreau, Pernod Ricard and Diageo were all hit by the news, representing another point of tension between the Asian country and the West.

“Anti-dumping is an import duty charged in addition to normal customs duty and can be levied when a foreign company sells an item significantly below their normal price.

“Importers of brandy coming to China from the EU will now have to put down security deposits of up to 39% of the import value, with it unclear as to when the deposits will be returned. That could push up the price of such products for drinkers, and potentially lead to reduced sales of EU-originated brandy if the consumer seeks cheaper alternatives.”

Imperial Brands

“The tobacco industry has responded to increased regulatory pressure, particularly in the West, by expanding into next generation products like e-cigarettes and vapes. In this context it’s not a surprise to see the market react positively to Imperial Brands’ latest numbers which show strong growth from this part of the business.

“This still remains a modest and loss-making part of the wider group but at least investors can look at the trajectory and be encouraged that it might make a meaningful contribution down the line.

“Since taking over in 2020, Imperial Brands’ CEO Stefan Bomhard and his team have done a decent job at expectations management, setting reasonable targets which the company has been able to meet or surpass.

“The reduction in losses from next generation products also means the company can return more of the cash thrown off by its sales of traditional cigarettes to shareholders through dividends, notably moving to quarterly payments, and share buybacks while also reducing debt.

“Like the oil industry, which is finding it difficult to resist the temptation to cash in on its lucrative hydrocarbons-related activity despite a proffered commitment to the energy transition, it will be difficult for Imperial Brands and its peers to move away from their traditional stomping ground given the attractive returns on offer.”

Greencore

“Greencore served up a veritable feast with guidance for operating profit to be ahead of expectations. The food-on-the-go producer has delivered an impressive comeback after being derailed by the pandemic where fewer office workers nipped out for one of its sandwiches at lunchtime.

“An efficiency programme combined with an evolution of hybrid working towards greater days in the office have served to benefit the group. A 178% share price return over the past 12 months has also filled shareholders’ bellies.”

Motorpoint

“Having given tentative signs of a recovery in trading six months ago, Motorpoint has now confirmed it is back in the fast lane.

“The nearly new car seller should have benefited from the Bank of England cutting interest rates in August as pressures ease on household finances. That should have put more people in a better position to press the button on a big-ticket purchase and a vehicle is often a necessity if they have to drive to work.

“The stars are finally aligning for Motorpoint as it returns to profit. Sales volumes are up by a healthy amount, it is turning over stock more quickly, and demand is improving. Vehicle availability is still constrained at the newer end of the market, yet Motorpoint still seems able to persuade individuals to drive off its forecourt with something that’s in stock.

“Motorpoint has guided for £2 million pre-tax profit in the six months to September. The consensus analyst forecast is £4 million for the full year, which means the company is well on its way to meeting expectations. If momentum stays strong with the business, it might imply that full-year earnings forecasts are too low, particularly if the Bank of England cuts rates again in the coming months and consumers feel more confident about their finances.”

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