FTSE 100 higher but Ukraine fears remain, Walmart is a winner, Natwest cost inflation spooks market

“The FTSE 100 ticked higher on Friday as nervousness around a potential all-out conflict in Ukraine persists,” says AJ Bell Financial Analyst Danni Hewson.

“Better-than-expected retail sales suggest that, for now, the increased cost of living is not preventing Britons from hitting the shops.

“Expect that to be tested through the course of the year with retailers likely to face an increasingly difficult quandary about how much of their increased costs they can pass on to customers and how much pain to endure themselves.

“The latest numbers from the world’s largest retailer Walmart suggested that chains with the right qualities can thrive despite the difficult backdrop. It has massive buying power which can use to mitigate the impact of rising prices and its value-based proposition has proved resilient in previous uncertain periods and could even help it take market share as people trade down.

“Warehouses might seem like a pretty boring place to invest but, with this type of asset heavily in demand thanks to the explosion in e-commerce accelerated by the pandemic, the returns from it have been anything but.

“The latest results from warehouse investor Segro reflect that with an eye-catching increase in the levels of rent it charges tenants helping to boost the valuation of its assets.”

Natwest

“Expectations are set pretty high for the UK banks heading into their latest reporting season and this helps explain why, despite a return to profit and otherwise pretty positive update, Natwest got us off to a subdued start in terms of its share price.

“After all the banking sector is one of the few industries which will be waving flags and cheering as interest rates are increased as it allows them to generate a higher return from their lending activities.

“The better than expected earnings and hike in the outlook were, to some extent, baked in, and investors may be concerned about the possibility of an increase in bad debts as its customers face a cost of living crisis. This could outweigh any boost to profitability from higher rates.

“Natwest seems relaxed on this score and has actually reduced its guidance on impairments – whether that view will be tested in 2022 remains to be seen.

“If it holds, then Natwest should be in a position to dole out more generous shareholder returns, which is a key attraction of investing in the sector. It should also enable it to further reduce the Government’s stake by buying shares.

“Natwest has slipped a little bit behind target on cost reduction, thanks to higher inflation, which may be adding to some investor nervousness and the company is yet to see any progress on that key measure of profitability – net interest margin.”

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