Major escalation in the Middle East boosts oil and gold, and Next defies retail gloom

“It's never likely to be good news for the markets when ‘World War III’ is trending on Twitter. It is therefore hardly a surprise to see yesterday's positive start to 2020 for stocks come to an abrupt end after US air strikes on Baghdad airport killed top Iranian general Qasem Soleimani.

“This pre-emptive action – Soleimani was apparently helping to plan attacks on US personnel in Iraq – promises to escalate tensions in the Middle East and it is unsurprising to see crude oil prices trade higher to factor in potential disruption to supply from the region.

“Turbulence often sees investors reaching for the safety belt of gold exposure and this explains the advance for the precious metal this morning.

“The FTSE 100 fared better than some of its global peers, reflecting a heavy weighting towards oil stocks BP and Royal Dutch Shell, which benefited from the surge in the price of crude, and continued weakness in the pound which boosts the relative value of constituents’ overseas earnings.

“What happens next for equities will depend on what form Iran’s promised ‘severe revenge’ takes and how nations which are more friendly to it, like China and Russia, respond,” says AJ Bell Investment Director Russ Mould.

Next

“All the market data suggested a very difficult Christmas trading period for retailers, so how is it that Next managed to buck the trend?

“The simple answer is that growth in the online channel is boosting earnings, so weakness on the high street is less of a worry. Also in its favour is growth in full price sales, highlighting how some shopkeepers don’t have to resort to heavy discounting to shift goods.

“But there is more to the Next story than that. The company has been quietly reshaping itself to become more relevant to the modern world.

“Approximately 10% of revenue now comes from selling third party brands, 9% of revenue is generated outside of the UK and 6% comes from selling credit to customers. Shops are acting as pick-up hubs for online orders and Next has been negotiating more competitive rents when leases come up for renewal.

“The 7.8% growth in finance interest income in the 11 months to 28 December is a reminder of the importance of credit to its earnings. This is also perhaps an underestimated risk to the business in terms of any tighter credit regulation in the future and customers’ ability to settle their debts in an economic downturn.

“Next is currently giving customers what they want and in a way that is most convenient to them. Retailers who cannot do the same will not survive. However, one mustn’t lose sight of the fact that Next is not bulletproof and is still exposed to external factors like economic conditions and changes in financial regulation.

“Its shareholders have been richly rewarded with 80% total return (share price gain and dividends) in the past year, and today’s update helped give the stock another lift. The big question is for how long can this strong run continue?”

These articles are for information purposes only and are not a personal recommendation or advice.