March 13, 2018

Pegler’s market report – 13.03.18: Cooling US pay growth

As published in the Brighton Argus (13.03.18) Business section under the title Pegler’s Market Report:

Cooling US pay growth

Cooling pay growth in the US has taken some pressure off stocks but the labour market continuing to tighten suggests that inflation fears will persist.

Earlier last week, an inconclusive election result in Italy, and fears of a trade war sparked by the Trump administration’s protectionist agenda, formed an uncertain backdrop to the economic news. We also saw the resignation of Gary Cohn, Donald Trump’s top economic adviser, reportedly in response to the President’s insistence on imposing new tariffs on steel and aluminium imports.

In the UK, the construction sector started the year in recession as commercial building work slumped and private housebuilding slowed, while manufacturing has had its longest run of growth since records began, boosted by global economic growth and the weaker pound.

UK car sales slowed again in February, though the pace of decline steadied, according to the Society of Motor Manufacturers and Traders. Sales of new cars fell 2.8% last month compared to the year before. February is traditionally a slow month for the car market ahead of the March number plate change.

Aviva put a smile on investors’ faces after increasing its full-year dividend by 18% – its fourth consecutive year of double-digit dividend growth. Elsewhere in the insurance sector, Legal & General’s 32% increase in profits looked impressive but was driven by exceptional items. Operating profits rose from £1.6bn to £2.1bn in 2017. Results were boosted by forecasts that improvements in life expectancy were slowing. The slowdown helps life insurers which pay annuities to customers until death. Legal & General said it was releasing £332m of reserves as its customers probably won’t live as long as previously thought. The company’s profits were also buoyed by a £246m tax benefit. Once one-off items are stripped out, operating profits rose by about 10%, consistent with management guidance. The full-year dividend rose 7% to 15.35p. Legal & General has significant operations overlooking Hove Park, although some positions are likely to move to Hertfordshire following the sale of their Mature Savings business to Swiss Re.

The soft drinks giant, Britvic, is successfully fending off the threat of climbing costs through its savings programme and the impact of the upcoming sugar tax, which analysts now believe to have only minor impact. The sugar tax will be introduced in April and companies are reformulating their fizzy drinks to help them squeeze under the threshold, as a 24p per litre levy for certain beverages looms. Britvic’s “well-developed” low and no sugar range, which includes Pepsi Max, and its focus on selling to bars and restaurants should help to insulate it from the tax.

The gambling industry has warned of wide-spread betting shop closures if the Government decides to cut stakes on fixed odds betting terminals to £2 from £100 now. GVC, is heavily effected, it was a purely online business but its purchase of Ladbrokes Coral means it now has exposure to the UK high street.

By David Pegler, Brighton Capital Management