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Original article
In this week’s Commercial Awareness update, we discuss the economic prospects after Brexit, Lloyds Banking Group ban Bitcoin purchases on credit cards, Apple breaks a revenue record, Capita’s share price drops 50% and why international markets dipped.
Economy “worse off” with Brexit
Last week a leaked Government impact assessment revealed that the UK will be worse off after Brexit regardless of the deal it negotiates with the EU. The analysis prepared by Whitehall officials for the Department for Exiting the EU showed that the economy would decline in the next 15 years in all of the three scenarios it reviewed. If Britain leaves the EU with no deal, the report suggests growth in the economy would be down 8%, whereas it would be 5% down if there’s a comprehensive free trade agreement with the bloc. Even in the scenario where the UK remains part of the European Economic Area, and therefore the single market, growth in the economy would be down 2%. In almost every sector, in every region growth is impacted by Brexit, according to the report.
The report was meant to be presented to senior government ministers in private this week, but was published on news website BuzzFeed. It has added fuel to the debate with many anti-Brexiteers suggesting the government must steer towards a soft-Brexit. This once again highlighted potential divides in government, with Brexiteers David Davis and Boris Johnson wanting Theresa May to reaffirm her commitment to Brexit. While Chancellor Philip Hammond continues to seek a “middle way” to protect UK businesses from the potential side-effects of leaving the EU.
Questions to ask yourself… Should the government continue to pursue a hard-Brexit on the back of these forecasts? Which sector do you think will be hit hardest by Brexit?
Companies to watch
Lloyds Banking Group
Lloyds Banking Group has banned its customers from purchasing Bitcoins on their credit cards. Starting today, those who have a credit card with Lloyds Bank, Halifax and Bank of Scotland won’t be able to buy any type of cryptocurrencies. The decision has been taken after Bitcoin lost 30% in the last week alone - its worst week since April 2013. In November it reached a peak of $19,000, but now is trading at around $8,300. With these significant fluctuations, consumers could buy into Bitcoin and find themselves losing out and running up significant debts - Lloyds is concerned people may not be able to pay them back if Bitcoin falls even further.
There are also worries amongst authorities that criminals are using Bitcoin to evade money laundering checks and taxes. The Treasury said last week they intend to bring in updated regulation for virtual currency platforms.
Apple
Despite selling fewer iPhones last quarter than it did in the previous year, tech giant Apple posted the largest quarterly revenue of all time. For the fourth quarter in 2017, Apple reported revenues of $88.3 billion and a net profit of $20.1 billion. However, Apple shares did lose value after the report of slower sales and a lower gross profit margin than expected for the new iPhone X. Overall, sales of iPhones were lower in the holiday quarter of 2017, compared to the previous year, but it wasn’t all bad news for the firm - with the higher price of the iPhone X, Apple is starting to make a greater margin on their products, something which will make its investors happy.
Capita
Outsourcing giant Capita’s share price dropped 47.5% last week, after the firm shocked the markets with a profit warning last week. Capita has been awarded 226 UK public sector contracts in the last two years and is the main player in the UK outsourcing market - they also operate London’s congestion charge and collects TV licence fees for the BBC. Analysts expected the company to make annual profits of £400 million, but forecasts have just been cut to between £270 million and £300 million. Capital has announced plans to raise £700 million by issuing new shares and it will also cut dividend payments. This latest announcement spooked investors and its share price lost 47% in a day, and sparked worries about its future. The suggestion is Capita has relied on acquisitions to fuel short-term growth and there is weakness in some of their new contracts.
After Carillion’s collapse last month, this has worried the markets, but this new direction may be what saves Capita in the long run. The plan involves cost-cutting and selling unprofitable businesses, which with the new investment could shore up their future.
Questions to ask yourself… Will Bitcoin continue to fall when authorities clamp down on their trading? Should the government intervene to stop companies like Capita and Carillion from collapsing? Will the higher priced iPhone X cause Apple to lose some of its client base?
International markets
There has been a sell-off in equity markets across the world as investors respond to forecasts for higher inflation. The recent rise in bond yields and strong US job data on Friday led to a poor day of trading on US markets. The S&P 500 experienced its worst day for over a year and dropped over 2% on Friday alone. Markets around the world have reacted negatively too, especially in Asia - Hong Kong’s Hang Seng index fell by 2.7% and in Japan, the Nikkei Stock Average fell by 2.55%.
European markets also opened down today, but there are signs of strength in EU economies, especially in France. Under new President Macron the French economy expanded 0.6% in the final quarter of 2017, rounding off the strongest year of expansion in the last six. Macron has made changes to labour laws and provided more support for businesses. This economic focus has driven more investment in France and helped trade. However, there’s still more to be done in France to improve the economy - public debt is almost at 100% of GDP and unemployment is significantly above the UK at 9%.
Questions to ask yourself… What is the biggest threat to the global economy this year? Is confidence the biggest factor in market fluctuation?