Global markets move higher despite fragile backdrop, and Aviva quickly sheds weight

“A strong end to the week helped to lift investors’ spirits, with the FTSE 100 up 0.8% to 6,731, Japan’s Nikkei 225 rising 1.6% and pre-market indicative prices suggesting the core US markets will open 0.4% higher. The key issue is how long markets remain upbeat,” says Russ Mould, Investment Director at AJ Bell.

“Miners and oil producers drove the FTSE higher despite growing concerns about parts of the world failing to get Covid under control and what that might mean for economic recovery.

“Front of mind for the market is the matter of the Suez Canal being blocked, potentially for many more days. What’s important is how that might affect global trade and the fact it is already causing shipping rates to rise, which in turn could fuel inflation as extra costs are passed on to the consumer.

“This all suggests we remain at a fragile point for markets and one that could lead to heightened volatility.”

Aviva

“For many year shareholders have been eager for Aviva to slim down and focus on the strongest parts of the business and reignite growth.

“However, no-one expected it to shed weight at the rapid pace we’ve seen over the past year as the life insurance industry tends to move at the pace of a sloth, not a cheetah.

“Achieving multiple disposals in eight months is quite remarkable and it has created a large cash pile that gives the business many options. Often, we see companies in this situation spend money recklessly, racing to make ‘transformational’ acquisitions which rarely work out well. Fortunately, Aviva seems to be going down the more sensible route.

“It’s going to reduce debt, reinvest in its business to support long-term growth and return capital to shareholders, mostly likely via a mix of share buybacks and dividends. Investors could be looking at circa 6% yield for at least the next three years, nearly twice what they would currently get from a FTSE 100 tracker fund.

“For now, the significant cash pile makes Aviva stand out from the crowd. However, the attention will soon turn to business execution and how the slimmed-down business is going to grow in its new core focus of the UK, Ireland and Canada.

“Selling assets is the easy part. Accelerating growth can be harder than you think, and so cash-rich Aviva will need to have some bright ideas otherwise it could soon lose the spring in its step.”

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