Tough times ahead for Next and Shell profit beats expectations amid windfall tax talk

“Markets have been fearing interest rate hikes for some time, so it is understandable to question why equities soared after rates went up. It’s also more confusing when you consider the Federal Reserve pushed through twice the level of rate hikes you would normally expect from a central bank meeting,” says Russ Mould, investment director at AJ Bell.

“The Fed raised rates by half a percentage point whereas traditionally a quarter percentage point rise is the norm. The reason why the market jumped was down to previous fears that the central bank would be even more aggressive with rate rises to curb inflation.

“There was a lot of chatter about whether the Fed would have been bold enough to deliver three quarters of a percentage point rise. Federal Reserve chair Jay Powell gave the answer the market was looking for – no, that is not ‘actively’ being considered. Investors breathed a sigh of relief and hence share prices went up.

“But what about the next interest rate decision? What Powell says this week may not necessarily stand in a month’s time if inflation keeps going up. One must never rule out central bankers changing their mind so we could still feasibly see three quarters of a percentage point rise if inflation remains a pain, which implies markets could remain choppy for the weeks and months ahead.

“For now, markets are happy to party, with strong gains seen across Europe and parts of Asia. The FTSE 100 advanced 1.4% with a broad spread of sectors in demand. Tech stocks enjoyed a moment in the sun, while commodity producers pushed ahead.

“UK stocks continue to be takeover targets for private equity, with Ideagen the latest one to attract multiple suitors. The company provides software to manage governance, risk and compliance information for industries which cannot risk making mistakes otherwise their clients could suffer large fines, reputational damage and potentially put lives at risk.

“After enjoying a slow but steady rise in its share price for many years, the sell-off in tech stocks since last November has caused the worst run for Ideagen’s share price since it joined the AIM market 10 years ago. That no doubt attracted the attention of private equity players eager to do deals, hence why Cinven made a move in April and now we’ve got two more approaches from Astorg and Hg.”

Next

“The market has been fearful that consumer-facing companies would experience a sharp decline in trading, and indeed we’ve seen several businesses already report this trend.

“In Next’s case, sales have weakened versus a year ago, but if you compare the figures to pre-pandemic they are still considerably ahead.

“Once the latest energy bills hit the doormat, households are going to have a shock when they try and work out how much money is left after paying for food, drink, utilities, council tax and other monthly outgoings. There remains a big risk that non-essential retailers will be left out in the cold because households’ money no longer goes as far.

“Unless you need smart clothes for a job interview or need to replenish socks and underwear, there is a strong argument to make existing threads last longer when money is tight. Next may have one of the best management teams in the retail sector, but there is only so much they can do in the current situation.”

Shell

“Like BP, Shell will have done nothing to quieten voices calling for a windfall tax on the oil and gas sector after its latest update – with profit coming in ahead of expectations and up significantly quarter-on-quarter.

“Shell doesn’t even have the fig leaf of flagging major investment in the UK alongside its statement, something BP pushed with its own bumper profit announcement on Tuesday. While Shell also faces multi-billion-dollar costs associated with an exit from Russia these aren’t on the scale of those endured by BP.

“Shell is enjoying the benefits of higher commodity prices, which in turn have been heavily inflated by the conflict in Ukraine, at a time when ordinary Britons are struggling with soaring energy bills.

“Plans to allocate significant sums to share buybacks and increase its dividend will not go down that well in the circumstances and the political pressure to do something may become unanswerable, particularly if the incumbent Conservative Government endures a pasting in today’s local elections.

“Whether a windfall tax is introduced or not, Shell finds itself in a much stronger financial position than it was in even before the pandemic, with net debt down from nearly $80 billion to less than $50 billion.

“As well as reducing interest costs and enabling shareholder returns, this stronger balance sheet makes it easier for Shell to fund its transition away from fossil fuels – which come with a whole lot of environmental and, as the last few months have shown, geopolitical mess attached.

“If Shell can show it is making real progress in becoming a cleaner and greener energy business, while also supporting countries’ energy security, it may help divert the unwanted attentions of the public and politicians.”

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