FTSE makes gains after market wobble and Primark sales better than expected for Associated British Foods

“After a difficult couple of weeks for investors, a measure of calm returned on Monday with the FTSE 100 enjoying solid gains to trade firmly above the 5,800 mark,” says AJ Bell Investment Director Russ Mould.

“While they may not all physically be returning to their desks, many City professionals will have returned to work this week from their summer holidays and it will be interesting to see if this helps bring to an end the recent wobble in the markets.

“Supporting the FTSE’s rise was a drop in sterling amid some fairly negative mood music on the fate of the latest round of Brexit talks.

“Dominated by constituents with substantial overseas earnings, the index benefits from the bump these earnings get when the pound falls against other major currencies.

“Oil prices continued to sound the alarm bells – falling again as the US benchmark WTI trades below $40 per barrel.”

Associated British Foods

“A key takeaway from Primark-owner Associated British Foods’ latest update is the disproportionate impact the current crisis appears to be having on major cities and particularly city centres.

“Take out just four of Primark’s store estate – all of them destination city centre sites – and the company’s sales performance since lockdown ended would have gone from creditable to highly impressive in the circumstances.

“Primark needs a measure of normality to do well. Its low ticket business model is not a proposition that seems likely to translate well to the internet and the company has not gone down this route, not even considering it at the height of the coronavirus restrictions.

“A return to nationwide lockdown or just more restrictive measures would significantly undermine the recent sales momentum.

“In the coming months and years there are two counteracting forces to watch that could influence performance.

“In a recession people often trade down, ditching more expensive brands and products and reaching for a bargain alternative – this could increase the size of Primark’s customer base.

“The flipside is a growing awareness of the social and environmental cost of cheap clothing – such ethical concerns seem particularly important to younger people and bring with them the risk of pressure from investors and regulators.

“In the company’s defence it has made strides tackling these issues but some people will remain sceptical that it can sell its clothes so cheaply just by being efficient, not advertising too much, buying in bulk and avoiding expensive hangers, tags and labels.”

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