Retailers face peak trading period disruption and Shell sunk by miserable pre-Christmas update

“Markets are reeling from the latest twist in the coronavirus crisis which has clouded the outlook for the remainder of 2020 and much of the first quarter of 2021,” says AJ Bell Investment Director Russ Mould.

“The emergence of a new strain in the south east of England raises the prospect of strict restrictions for an uncertain period while the UK races to vaccinate its population.

“Restrictions on traffic between the UK and other countries, including in the case of France on freight, has raised the pressure on a supply chain already creaking under the weight of an online Christmas and Brexit uncertainty.

“This sorry cocktail put pressure on the pound and the FTSE 100 on Monday, with inevitably the retail, travel and leisure sectors bearing the brunt. Oil prices also fell on fears the new strain of coronavirus could hurt demand.

“Just 10 days before the end of the transition period and we still don’t know if it will be deal or no deal in the Brexit negotiations.

“Outside the UK there was more market-friendly political news as US lawmakers effectively agreed a $900 billion Covid relief package with sign-off expected later today.”

Retail Sector

“Tier 4 restrictions could be catastrophic for retailers and lead to the demise of further companies in what is already a fragile sector.

“A lot of businesses would have been prepared for a potential nationwide lockdown in January as the price for the UK having a small window of relaxed rules at Christmas. That would have been a further annoyance but would at least have come at a seasonally quiet period for the sector.

“To now have tight rules in the period just before and after Christmas completely changes the outlook. Disruption has come at the worst time imaginable for retailers as those final few days pre-Christmas normally result in big sales. Notably, the 23 and 24 December is often the point where people will buy anything simply to get the shopping done.

“Many businesses will now have a large number of stores shut during the peak period of trading, which means lost income and potentially being stuck with masses of Christmas stock that is no good to anyone in January when shops might reopen.

“Also there is a risk of restrictions for some months into the New Year due to the fresh, apparently more infectious, strain of covid-19.

“Supermarkets are likely to be the one area of the sector that will prosper. A lot of people found out at the weekend that they are now spending the Christmas period at home rather than with friends and family, prompting a rush to the supermarket to fill up the fridges and cupboards. Online ordering slots were sold out weeks ago, so expect long queues for the next few days at physical supermarket sites.

“It’s interesting to see shares in online fashion companies fall on the Tier 4 news. One might have expected them to be beneficiaries if more people cannot go to physical shops, yet there is also the question of how the new restrictions might lead to further job losses which might affect people’s ability to spend. This is particularly true of the younger age bracket which is the target market of ASOS and Boohoo.

Retailer's Share Price Movements on 21 Dec

Frasers -5.6%

Associated British Foods (Primark) -5%

Dixons Carphone -4.8%

Halfords -3.6%

Next -3.3%

JD Sports -3.2%

Dunelm -3%

Boohoo -1.8%

ASOS -0.4%

Royal Dutch Shell

“Oil firm Royal Dutch Shell’s pre-Christmas update was anything but a festive treat for shareholders. A triple-whammy of bad news took in everything from asset impairments to lower production and sluggish refinery utilisation.

“Historically being an integrated business, with involvement in all facets of the energy sector from oil exploration through to selling fuel at the pump, has helped Shell during periods of market turmoil.

“For example, its refining business can benefit from lower prices of crude oil as it lowers the cost for the feedstock it uses to create petrol, jet fuel and other refined products.

“Coronavirus is different thanks to the scale of the collapse in demand, with its refineries running at just three quarters of their capacity.

“Amid the latest signs that containing the pandemic could be an increasingly complicated endeavour, the prospects for a recovery in the aviation sector, in particular, and thus demand for jet fuel look highly uncertain.

“As well as these short and medium-term factors, Shell faces a longer-term existential threat posed by the switch away from fossil fuels towards greener alternatives.

“Like other big oil companies, Shell is attempting to position itself at the vanguard of this energy transition but its capacity to do so relies on cash flow generated from its traditional businesses which is drying up thanks to the pandemic.

“All of which means the destiny of its dividend, already cut by three quarters in 2020, remains at best in question as we enter 2021.”

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