Global markets hit, WH Smith strengthens airport exposure and Persimmon mired by lack of transparency on costs

“You know it’s a bad day when only six stocks in the FTSE 100 are in positive territory. So much for the celebratory mood from last night’s England football win,” says Russ Mould, Investment Director at AJ Bell.

“The FTSE 100 fell 0.9% to 7,085 with miners and banks the principal sectors weighing on the index, suggesting that investors have started to worry again about the strength of the economic recovery. Miners’ fortunes are heavily tied to commodity prices and the cost of metals and minerals is typically determined by supply and demand for industrial projects around the world.

“Banks are also heavily influenced by economic activity. A strong period of growth means there could be greater opportunities to lend money to businesses and such a backdrop might also point to rising interest rates which increases the chance for the banking sector to make higher profit margins. If the economic outlook is not as strong, then investors start to go off banks for fear that it will be harder for them to push up earnings.

“A pullback in the oil price is also bad for the FTSE 100 given how oil producers Royal Dutch Shell and BP are major constituents of the stock index and a decline in their share prices acts as a drag on the UK market. Both Shell and BP’s shares were weak as Brent Crude prices lost their shine, with the black stuff falling 0.5% to $73.09 per barrel.

“In Asia, Hong Kong’s Hang Seng slumped by nearly 3% as Chinese tech stocks experienced a major sell-off amid fears of further regulatory interference.

“This year we’ve already had a big fine for Alibaba for violating anti-monopoly rules and more recently Chinese authorities told app stores to remove ride-hailing group Didi from their platforms, saying it illegally collected users’ personal data.

“China is clearly flexing its muscles and investors in this space should have already braced themselves for regulatory interference after the move on Alibaba.”

WH Smith

“Dixons pulling out of the airport retail market has left WH Smith with an opportunity to increase its market share of selling overpriced adapters for foreign electrical sockets and headphones to replace the ones you left down the back of the sofa when packing to go on holiday.

“We all know these types of products can be bought cheaper online but there will always be a market for that last-minute purchase at the airport.

“WH Smith’s contract win to open new stores in various UK airports is not only a chance to swoop in the gap left by Dixons’ departure but also a chance to roll out its InMotion brand which it acquired in 2018 when it bought North America’s largest airport-based electronics retailer.

“Not one to miss an opportunity, a key part of the InMotion UK rollout will be selling premium products from major brands, meaning WH Smith could profit from both everyday holiday-goers and wealthier travellers.

“Having a presence in the US gives WH Smith geographical diversification and also puts it in a good position to benefit from the rebound in travel activity, given that North American market seems to be more active than the UK at present.

“Domestic and business travel is picking up in the US, which might explain why WH Smith says it expects to raise its earnings expectations for the full year thanks to a stronger showing from its North American operations.

“Back in Blighty, its high street operations are not yet back at pre-pandemic sales levels but having an online greetings card business certainly helps to pick up some of the slack.

“WH Smith has been talking up its FunkyPigeon brand ever since rival Moonpig joined the stock market, and this operation will no doubt be helping to offset weaker sales of greetings cards through the high street stores.

“A lot of people will have tried buying a card online for the first time during the pandemic and realised the benefits of being able to personalise the cards and not having to hunt around for a stamp and make the journey to the letter box.”

Persimmon

“Pre-Covid Persimmon had to adopt a ‘less is more policy’, a series of issues with build quality leading it to dial down temporarily on the number of homes built to ensure purchasers weren’t left unsatisfied.

“So, investors will be relieved the housebuilder has now been able to ramp up build volumes to pre-pandemic levels without apparently compromising on quality.

“This follows up on the recent agreement with the competition authorities to support customers who have encountered issues with leasehold properties. After the scandals over wonky house builds and executive pay, Persimmon is making strides towards being a better corporate citizen.

“It’s easy to be generous when your pockets are full so there should be little surprise that with more than £1 billion of cash Persimmon is accelerating capital returns to shareholders. However, Persimmon is also buying up land at attractive valuations, laying the foundations for future profitable growth.

“There may be some frustration in the market at the absence of any specific guidance from Persimmon on margins beyond a vague suggestion that rising house prices should mitigate supply chain pressures.

“This statement suggests that should a buoyant housing market start to cool, Persimmon might see its profitability come under pressure thanks to rising costs amid shortages of materials and labour.

“Investors may well demand more detail on these issues when Persimmon announces its first half results next month.”

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