The FTSE 100’s lack of tech exposure has proved to be a blessing in disguise.
The UK index is standing tall amid a global tech sell-off. Helped by record profits for index heavyweight BP and a well-received update from pharma giant AstraZeneca, the index managed a healthy gain on Friday. This followed heavy selling on Wall Street and parts of Asia as fears about AI spending intensify.
Companies seen as victims of AI disruption in the software and data space, including Sage and Relx made progress, to outweigh a weak showing from miners and London’s limited contingent of tech and AI-related plays. Miners are linked to the AI theme as copper is a key component for data centres.
Chancellor John Healey will be pleased to see that the positive reaction to his Budget in currency and bond markets hasn’t unravelled, with the pound higher and gilt yields easing. Oil prices remain elevated but are down on their highs from the week.
NatWest
It’s been a tricky third quarter for UK banks, against the drumbeat of a Budget which saw the sector face tax hikes.
Judged on growth, NatWest fared worse than its peers, reporting minimal change in third quarter profit. That is a disappointment to investors given the favourable interest rate backdrop.
There were also no upgrades to speak of and while bad debts aren’t exactly getting out of control, the increase in impairments hints at growing stress in its loan book at a time when businesses and individuals are facing pressures on several fronts.
At the same time, the market for customer deposits is proving competitive and NatWest’s commercial, institutional and wealth management arms were the standout performers.
Like rival business Lloyds, NatWest is looking to reduce exposure to the ups and downs of the economy and interest rates by expanding in wealth management. The plan is to make profit and revenue less of a rollercoaster ride for investors.
The benefits of the acquisition of Evelyn Partners earlier this year are starting to feed into performance as assets under management and fee income build.
BP
There is no doubt that BP chief executive Meg O’Neill has been dealt a useful hand thanks to the surge in energy prices this year.
The company’s quarterly profit has hit a new record, surpassing the levels seen in 2022 after Russia’s invasion of Ukraine. A loss of capacity in the refining market has helped BP, like several peers, to chalk up exceptional levels of profitability for these activities.
While its peer group has been busily returning cash to shareholders through enhanced dividends and buybacks, BP is focusing on getting its house in order debt-wise.
This prudent fixing of the roof while the sun is shining could put BP on stronger long-term foundations. It shows an understanding that times won’t always be this good for the business.
O’Neill’s simplification and streamlining of the business continues to progress and should be well-received by investors. However, eventually there will have to be a credible growth strategy to follow up on the fix-up job.
December’s strategy day is O’Neill’s opportunity to show she has the vision to lead the business into a new phase in its development.
AstraZeneca
After a period when it felt like AstraZeneca’s momentum had stalled, its latest results and accompanying plans for major cost cuts to help free up cash for investing in new drugs have injected life into the share price.
Any big pharmaceutical business needs to keep filling the hopper with fresh treatments to replace those on which it is losing exclusivity. AstraZeneca is getting credit from investors for being proactive by freeing up cash to invest. Its peer GSK announced its own restructuring plan earlier this week to help give it the capacity to deal with its own patent cliff edge.
The 25% drop in sales of AstraZeneca’s Farxiga diabetes and heart drug is an illustration of what can happen when generic alternatives arrive on the scene.
Recent setbacks in drug trials had created some nervousness about AstraZeneca’s prospects and long-time CEO Pascal Soriot is clearly looking to reassure the market on this front.
AstraZeneca’s third-quarter numbers were robust, underpinned by its blockbuster cancer treatments, with sales and profit ahead of expectations. This should help build some confidence in its punchy $80 billion revenue target for 2030.
Tesco
Tesco is to sell its Czech Republic and Slovakia businesses for £1.5 billion and use most of the proceeds after costs and tax to fund a share buyback.
The fact Tesco still had overseas interests might be a surprise to many people. The company started a big programme 14 years ago of exiting international operations including the US and parts of Asia.
It is still left with interests in Hungary and it seems inevitable, given everything else that’s gone on, that it will also sell this operation.
These strategic moves are part of a bigger picture to focus Tesco on its core UK and Ireland markets and not be distracted by other activities. Over the years these have included garden centres, financial services and more.
The grocery industry is highly competitive, and Tesco has done a fantastic job of becoming the UK market leader and retaining that status despite many rivals snapping at its heels. Having a laser focus on home territory has paid off, and exiting Central Europe interests is simply the final page of a tidying-up story.
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...