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The FTSE 100 drifted in early trading on Thursday, dragged down by weakness in the mining and energy sectors.
Weaker-than-expected US unemployment data may have further firmed up expectations of a rate cut when the Federal Reserve meets next week. However, this is not ‘new news’ for investors and the indifferent performance of stocks in the UK and Asia suggests its ability to sustain market momentum is ebbing away.
This leaves the focus on extended valuations in the technology sector and sentiment seems to be more cautious for now.
Meta platforms
The US tech companies often seem like four-tonne rhinos swatting off flies when it comes to their interactions with competition authorities. Antitrust probes typically turn out to be a mild annoyance but not anything more than that.
Time will tell if the investigation reportedly set to be launched imminently by the EU into Meta also falls into that category. Meta recently saw off a case in the US where the Federal Trade Commission was looking to force it to completely unwind its acquisitions of WhatsApp and Instagram.
The expected action by the EU looks more limited in scope, having been prompted by the rollout of the Meta AI system into WhatsApp, and following individual action from the Italian authorities.
The EU has been prominent in efforts to push back against the dominance of the US tech goliaths and, amid criticism from the Trump government, has launched legislation to try and limit their power and influence. However, whether these efforts and new rules actually have any teeth remains to be seen.
Power companies
The market verdict on Ofgem’s decision to approve £28 billion of new investment in the energy grid is not overwhelmingly positive, with shares in National Grid and SSE trading lower on the announcement.
Prior to the publication of this plan, the industry pushed back on the amount it was allowed to achieve in returns, and it doesn’t seem to have got what it asked for. Given Ofgem’s announcement might lead to households paying materially higher energy bills, complaints from utility companies may not wash with many.
The scale of the investment required means National Grid and SSE need the backing of shareholders, and to do that they need to be able to offer a reasonable level of return.
Rio Tinto
The mining sector has two types of leaders – one hungry for deals and an ‘empire building’ mentality, the other with a keen eye on costs and efficiencies to run a well-oiled machine.
It’s clear in which category Rio Tinto’s new boss Simon Trott lies, as the company’s capital markets day announcement is all about numbers. He wants to simplify the business and ‘discipline’ looks to be his favourite word.
In an industry renowned for overpaying for acquisitions and having volatile earnings, Trott’s management style might not be a bad thing. He is focused on increasing production, cutting costs and reviewing the asset portfolio. A lid is being put on capital expenditure.
Rio Tinto should have learned from its mistakes of the past, and shareholders might now prefer a slow and steady approach compared to the grand days of old.
Future
Future’s wreck of a share price heading into its latest full-year results suggested it had all but been written off as a growth company by the market.
However, the promise of a return to organic revenue growth in the current financial year has clearly changed a few minds – particularly as it is not expected to come at the expense of profitability and investors are also being promised improved cash flow performance to boot.
If delivered, it would suggest Kevin Li Ying’s efforts to revive Future’s fortunes are starting to have some tangible impact. However, the proof will be in the pudding and the company has a lot of hard work to do to deliver on its guidance.
Frasers
Dan Coatsworth, Head of Markets at AJ Bell, comments:
International sales have come to Frasers’ rescue, with rapid growth helping to offset a troubling pullback in UK operations. This result means that Frasers’ recent geographical expansion efforts were perfectly timed. The key question to ask is whether branching out was down to bold growth ambitions or recognition that its homeland is no longer a slam dunk for earnings.
Frasers has blamed excess inventory in the retail sector for weighing on the wider market. Too much stock means retailers must slash prices to shift units. If someone is selling goods cheaply, competitors tend to cut price-tags rather than risk standing firm at full price and the result being that no-one buys their goods.
Frasers’ Sports Direct division is no stranger to a pile ‘em high, sell ‘em cheap strategy, but the parent has increasingly been focused on earnings quality rather than quantity.
Encouragingly, Frasers’ upmarket operations enjoyed a strong bump in gross margins from 38.6% to 42.7% as Flannels becomes a bigger contributor to the premium lifestyle division.
Investors aren’t quite sure how to react to a complicated set of results, given so many moving parts involving retail, property and financial services. One might have thought the weaker UK showing would have troubled the market, but for now investors seem to be giving the company the benefit of the doubt.
Russ Mould: Investment Director
Russ Mould is AJ Bell's Investment Director. He has a Master's degree in Modern History from the University of Oxford and more than 30 years' experience of the capital markets.
He started out at Scottish...
