Recessions, Record Profits, and Valentine’s Day Chocolate – Lloyd Adams

1. The UK entered a shallow recession, but retail sales show strong growth amid falling inflation. Economists predict improvement.
2. Germany promoted to the 3rd largest economy, while Japan slipped to 4th after unexpected recession. US inflation remains high, potentially impacting interest rates.
3. BAE Systems secured a major acquisition approval, Uber achieved profitability, Arm’s share price soared, Nvidia acquired a stake in Arm, and Airbus plans to increase aircraft deliveries.
4. Brain teaser – if the UK’s five biggest banks are set to show a record £51.6bn in pretax profit for 2023, then why is the FTSE All-Share Banks index down nearly 11 per cent in the last year?

Valentine Love was in the air last week, along with soaring US retail chocolate prices, which have risen 11% in the past year. Manufacturers say poor weather and disease are affecting cocoa crop yields in Ghana and the Ivory Coast, where 60% of the world’s production is based.

Let’s look at some country updates.

The UK’s fallen into a shallow recession as Q4 growth figures of -0.3% confirmed two consecutive quarters of negative growth. Chancellor of the Exchequer Jeremy Hunt said the figure was “not a surprise…while interest rates are high.” Nevertheless, economists predict good news around the corner. Falling inflation is putting more money in the pockets of UK consumers, leading to a 3.4% rise in retail sales volumes in January 2024, marking the largest monthly increase since April 2021.

Germany’s economy is also struggling but it claimed the spot of 3^rd largest in the world at the expense of Japan which slipped to 4^th position after its economy contracted at an annual rate of 0.4% in the fourth quarter.

US inflation figures appeared to be hotter than anticipated, with inflation on services showing no signs of slowing down. The Federal Reserve may need to hold off on cutting US interest rates and might even hike them further, causing yet more uncertainty for investors.

Now let’s look at some company updates.

It was a good week for BAE Systems, who have been given the regulatory stamp of approval for its £4.4bn acquisition of Ball Aerospace, which saw its share price hit record highs following the announcement.

Uber’s finally not just hailing taxis, they’re now hailing accomplishments, having revealed their first annual operating profit and a $7bn (£5.6bn) share buyback programme.

The craze for anything Artificial Intelligence continues, as shares in the Cambridge-based chip designer Arm were up 40% last week, following third-quarter sales of over $800mn.  Nvidia also disclosed that it has built up a $147mn stake in Arm, just a few years after it tried to buy the whole company for $40bn.

Airbus plans to deliver 800 commercial aircraft this year, which is an increase of 65 on last year. Revenues are up 11% and the company is paying shareholders a special dividend reflecting growth prospects and a strong balance sheet. However, CEO Guillaume Faury isn’t expecting a short-term increase in sales from customers switching from Boeing following manufacturing quality control concerns (when an emergency door blew off last month!). Openings for new airplane orders aren’t available until the next decade “so that would more impact the long-term competitive positioning of the two companies rather than the short term,” Faury said. 

Now time for a brain teaser, if the UK’s five biggest banks are set to show a record £51.6bn in pretax profit for 2023, then why is the FTSE All-Share Banks index down nearly 11 per cent in the last year? The poor share price is a “puzzle” according to the Bank of England governor Andrew Bailey, as the banks are now in “sound health” after a challenging few years. Philip Richards, a banking analyst at Bloomberg Intelligence, points out 3 reasons investors are treading water. First, potential UK interest rate cuts in the next few months would squeeze banking profits by shrinking the gap between borrowing and lending rates. Second, a sluggish UK economy impacts the banks’ future lending growth, and raises concern for potential loan defaults, especially in commercial real estate. Lastly, regulatory tightening and higher taxes add another layer of uncertainty. Expect flat bank valuations until this mudded water becomes clear.

It’s been just shy of a month since the Securities Exchange Commission approved Bitcoin Exchange Traded Funds (ETFs). Adoption has since picked up resulting in a formidable challenge to the long-standing dominance of Gold ETFs. The “digital gold” which closed up more than 4% in the last week, has the ETFs holding approximately $37bn in assets after less than 30 trading days. This can be compared to the $93bn in physical gold ETFs that have accumulated in over 20 years of trading. Gold on the other hand, closed down marginally -0.14%, closing just above the pivotal $2,000 which many technical traders deem as a key level.