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“The UK stock market ended the week on a sour note amid suggestions that the government could help to fill its fiscal hole with a new tax on the banking sector,” says Russ Mould, Investment Director at AJ Bell.
“Some of the biggest names in the FTSE 100 are lenders so if they’re out of favour on the stock market, it acts as a drag on the whole UK blue-chip index.
“NatWest, Lloyds and Barclays were the FTSE 100’s biggest fallers on Friday morning as investors wondered if the era of bumper profits, dividends and buybacks is now under threat.
“These companies have enjoyed a strong run on the stock market in recent years, and they’ve also played an important role in lending money to small and large businesses which helps to create jobs and support the UK economy.
“The timing of the tax debate, fuelled by a report from think-tank IPPR, is unfortunate given it coincides with a new poll from Lloyds suggesting a rise in business confidence, despite cost pressures. This positive sentiment could be threatened if businesses take the view that a new tax on banks might force lenders to tighten their lending criteria.
“Inflation data will take centre stage later today across the pond. The core PCE price index is the Federal Reserve’s preferred method of measuring inflation in the US economy. The consensus forecast is for inflation to stay level at 0.3% month-on-month for July.
“Fed chair Jerome Powell has already indicated that the central bank has had a slight shift in thinking, with the market now expecting an 85% chance of a 25-basis point interest rate cut at September’s meeting. Today’s inflation figure will play a crucial role, alongside jobs data, in determining whether the Fed cuts at this meeting, and if so, by how much.”
Banks
“Shares in UK banks including Lloyds and NatWest have taken a hit as the idea of a tax raid on lenders was suggested by think-tank IPPR.
“It’s hardly a surprise that every cushion is being upended in the hunt for extra cash to fill the much-discussed black hole in the Treasury’s finances.
“The issue is whether taxing the banks more will end up stifling the very growth the government is keen to foster, by crimping lending to businesses and households alike.
“The banks will undoubtedly argue as such, and shareholders may not want to see any such raid either. The wider public may see it differently, given how HSBC, Barclays, NatWest and Lloyds are expected to earn some £44 billion between them worldwide in 2025, their third-best year ever, after 2023 and 2024.
“Analysts’ forecasts of aggregate dividend payments and share buybacks of almost £28 billion for 2025 from the quartet could also make them a soft political target, but Chancellor Rachel Reeves may be wary of doing something that could put off investors and shareholders as she seeks to earn favour from the markets and attract investment.
“The thorny issue of quantitative easing which provided a boost to the UK economy but arguably ran too hot for too long is complicated. Reining in quantitative tightening could ultimately end up putting embers on the inflation pyre which has had such a damaging impact on UK households.”
Wood Group
“Given the precarious financial position Wood Group is in, the $110 million sale of its US transmission and distribution engineering business might have been expected to draw some enthusiasm.
“However, this is a minor subplot to the much bigger story of its takeover by Dubai-based Sidara. The company is scrambling to get its 2024 accounts in order as the deadline for Sidara to lodge its expected offer is extended to teatime today.
“It is telling that Wood Group is minded to accept Sidara’s offer, which has been reduced from the original 35p per share posited in April to 30p.
“Clearly management do not see a rival bid emerging and they know Sidara has looked through every nook and cranny of the business to understand just what a mess it is in. After all, Wood Group remains under investigation by the UK financial regulator for withholding information from its auditors.
“The situation represents a humbling fall from grace for what was once a UK market success story. The disastrous takeover of Amec Foster Wheeler in 2017 is a cautionary tale about the ability of big transactions to destroy value.
“Most shareholders will want the sorry saga to be over and will be impatient for the deal to go through.”
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...
