In this week’s Commercial Awareness update, we discuss the interest rate rise, hesitation over IPOs, some good news for the oil industry, fixed-odds betting terminals and changes in the way consumers shop.
Interest rate rising
Last week, the Bank of England announced it was raising interest rates from 0.25% to 0.5% in the first rates rise in ten years. The Bank’s governor Mark Carney highlighted the need to control high inflation rates and strong employment figures as the key reasons for the rise in rates, and has signalled there may be two more increases over the next three years. However, he also suggested this would be heavily dependent on how Brexit might affect the UK. The rates rise is good news for the 45 million people in the UK with savings, as high street banks are expected to pass the interest rate boost to customers in the near future - higher interest rates (therefore more returns on savings) tend to encourage people to save, rather than spend, hence the ability to lower inflation. It’s less good news for homeowners with outstanding variable rate or tracker mortgages, with payments varying on the base rate of interest set by the Bank - about half of the 9.2 million households with an outstanding mortgage are on variable rates.
How did the markets react?
It’s been ten years since the last rise in interest rates - and that was to reach 5.75% - so this is a fairly novel occurrence. However, commentators have seen it coming for months and shares in high street banks have tended to jump on hints of rises from the Bank - the higher the interest rates they can charge on loans they give out, the greater the profits that can be made by high street banks.
Overall, the FTSE 100 rose to its highest level on Friday, finishing the week at 7,560.35. Investors appeared pleased with the news of more planned rate rises to come in the near future, and news that the service sector (the majority of the UK’s economy) grew more than expected in October supported these gains. However, it wasn’t all good news, as the value of the pound dipped almost two cents against both the Dollar (to $1.3062) and the Euro (to €1.1204), with many actually worried further rates rises might have to be quicker than the markets originally expected.
Questions to ask yourself… Who benefits the most out of higher interest rates? Which is a better indication of economic - the value of the pound or the FTSE?
UK firms pulling out of IPOs
In the last week, two big British companies announced they were putting their plans to float on the London Stock Exchange on hold, citing market uncertainty as a key reason.
Arqiva - the UK’s largest TV transmitter business - announced plans for a flotation which would have valued them at $6 billion. They have put these plans on hold for the time being, blaming market volatility.
Bakkavor - in an update last month, we covered the ready meal supplier’s planned flotation at a £1 billion valuation. Last week, these plans have been scrapped.
These decisions are likely to be taken after a number of recent IPOs across Europe have been underwhelming, with many firms finding their shares drop below initial listed value in the days after the flotation. French fashion company SMCP floated at €21 per share and hasn’t seen its share prices rise, while shares in Austrian bank Bawag have actually dropped since its flotation last month. This hasn’t put everyone off, as German meal kit delivery start-up HelloFresh announced initial plans for an IPO last week, hoping to raise €357 million at a valuation of €1.5 billion.
Question to ask yourself… Are some firms being overvalued ahead of IPOs? Will there be a spike in IPOs before Britain leaves the EU in 2019?
Companies to watch
There was good news for the oil industry as Royal Dutch Shell announced a better-than-expected 47% increase in its Q3 profits. There has been a three-year downturn in the oil industry, which has been heavily impacted by a significant fall in the price of oil, but these results and BP’s results last week suggest a turnaround in fortunes. The price of brent crude oil hit $60 per barrel last week, which is its highest level since 2015. On the back of higher oil prices, Royal Dutch Shell recorded Q3 profits of $4.1 billion - up from $2.8 billion last year and, more importantly, $500 million above market expectations.
Shell has been cost-cutting in recent years, attempting to cut the cost of production while prices were low. This has helped it reduce its net debt from $77.9 billion last year to $67.7 billion, but it was also boosted last quarter by a 2% rise in production.
A new report from Waitrose has highlighted how British people’s shopping habits have changed, with the weekly shop becoming a thing of the past. The study found that two-thirds of people pop to the supermarket once a day, with 10% buying their evening meal on the way home every night, rather than doing one or two bigger shops per week.
What influenced these new trends?
It’s often said that people now have busier lifestyles and, with modern technology, plans are easier to make last minute. Therefore, popping to the shops as and when rather than risking having lots of waste from a large weekly shop fits in with the modern lifestyle. It could be that larger supermarkets are reactively responding to these trends, but are they actually setting these new trends to benefit themselves? Most local convenience stores (e.g. Sainsbury’s Local) are now open for around 17 hours per day, meaning you can shop anytime, but items often cost more than in their big supermarkets - it’s likely to be better for their profit margins if people shop little and often at these stores rather than do a planned big weekly shop.
Apple’s shares hit a record high on Friday, after the tech giant announced better-than-expected results and there was optimism as the new iPhone X was launched. Queues could be seen outside Apple’s flagship stores as early as Thursday night, as it released its first iPhone with an edge-to-edge display screen on Friday morning. However, it was actually the previous quarter sales and the new expectations for the next quarter which caused Apple’s shares to rocket (opening 3.5% up on Friday). In the quarter to September, Apple’s revenue increased 12% to $52.6 billion, while it sold more iPhones (46.7 million), tablets and Mac computers than expected. Now the iPhone X has launched, with a retail price of £999, the markets predict it to be a strong Christmas period for the firm. As a result, the share price reached a record high and experts predict Apple is on the verge of becoming the first trillion dollar company.
Questions to ask yourself… Is it more cost efficient to buy food more often at a higher price or weekly at a lower price but risk waste? Which other industries benefit from a rise in oil prices? Is the iPhone X overpriced at £999?
Fixed-odds betting terminals
There has been a lot of coverage of fixed-odds betting terminals in recent weeks and whether more should be done to stop problem gamblers from losing so much on them. A fixed-odds betting terminal is an electronic slot machine, which allows users to bet on various outcomes of a game, with the odds of each variable being predetermined. The current maximum stake is £100, but this means punters can lose this amount every 20 seconds on some machines. The government has set up a 12-week consultation into whether the limit should be set at £50, £30, £20 or £2 - the Labour Party is calling for smaller £2 limit.
This could have a huge impact on betting companies, which are thriving at the moment. Last year, their income from betting terminals was £1.8 billion (just over half of their revenues), which would be cut significantly if the £2 limit was brought in. The Association of British Bookmakers has claimed that these new limits could lead to 20,000 job cuts and make a significant dent in Treasury income from duty on machine gambling.
Questions to ask yourself… Should the government be doing more to support problem gamblers? Is this new clamp down anti-free market?
By Ben Triggs - Marketing Manager
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We're delighted to have EY as the sponsor of the Commercial Awareness update this month. Check out all of their live roles on their profile page.