FTSE 100 makes gains despite political turmoil, Persimmon under pressure, Currys' sales stalling and Jet2 faces headwinds

“The political situation in the UK remains highly febrile, with reports now indicating the Prime Minister is set to resign later today. Although investors will be watching closely to see who emerges as a potential successor and will be longing for some stability, the FTSE 100 is nonetheless putting on a decent show and delivered some strong gains on Thursday morning,” says AJ Bell Investment Director Russ Mould.

“This continued the recovery from a big sell-off at the start of the week and followed mixed trading in Asia. Resources stocks were in heavy demand with Shell releasing a teaser ahead of its second quarter results, which revealed just how well it has done out of the recent strength in energy prices.

“The housing market continues to set new records, with house prices seemingly defying the odds to rise at their fastest monthly pace in 15 years. That they continue to do so despite the cost-of-living crisis and rising interest rates is arguably the sign of dysfunction in the market where there are still too few homes to meet demand.

“Strong property prices did not translate into a positive update from Persimmon. Housebuilders have had to work hard to stay ahead of inflationary pressures and Persimmon’s latest update suggests these are finally catching up with the industry in a material way.

“Shortages of material and labour are also diminishing Persimmon’s ability to build homes as quickly as it would like.

“The company’s strong balance sheet is at least enabling it to continue investing in land and reward shareholders but should the housing market finally start to cool then the impact on profitability could be significant.

“Luxury goods firms are often seen as more resilient in a downturn because their wealthy clientele is less affected by its effects and Watches of Switzerland's latest update appears to back up this hypothesis.

“The company nearly doubled its profit and boosted its margins – no mean feat when costs are going through the roof and testament to the pricing power of the products it sells. Attention will turn to plans for expansion in the European market as Watches of Switzerland looks to tick up its growth prospects.”

Currys

“The cost-of-living crisis has led to households thinking twice about how they splash their cash. Once money has been allocated to pay for essentials, for many people there isn’t a lot left. That means treats like getting the latest electronics gadget or buying a new sofa must either be rethought or bought on credit, with the hope that we don’t see a damaging recession.

“The fact people are making more considered purchases after a few years of over-indulgence is clear to see in Currys’ latest results, which run to 1 May 2022. Sales growth has stalled, and it is guiding for profits to be lower in the new financial year.

“Analysts saw this coming and have been steadily downgrading earnings forecasts for Currys. At the start of January, the consensus forecast for the year to 1 May 2023 was 15.68p earnings per share. Last night that stood at 11.47p, meaning estimates have been slashed by 27% this year.

“Investors also feared earnings would take a tumble, given how Currys’ share price had fallen 42% between 1 January and 6 July, being the day before its results came out.

“So why have the shares soared on the latest news? Part of it is investor relief that the results and guidance weren’t a lot worse.

“Currys is not a complete disaster as debt has been reduced and the company seems confident enough to win market share in the months ahead as weaker rivals struggle with the difficult trading environment.

“It has launched a ‘12 month pay delay’ offer on any purchase above £99, seemingly making it easier for people to go ahead with a transaction and not worry about having the cash upfront to pay for a new phone, TV or other electronic device.

“However, this doesn’t seem like a standard buy now, pay later deal which often comes interest-free. Currys is charging a 24.9% typical interest rate on credit deals so customers using this service could eventually be handing over a lot more cash than the retail cost of their item.”

JET2

“It is possible to have some sympathy for Jet2 as it bemoans the airport chaos which threatens to derail the recovery in the travel sector.

“Unlike some of its peers, which have been masters of their own misfortune in many ways, Jet2 has taken a responsible approach. Last summer it cancelled and suspended flights to avoid customer uncertainty.

“Jet2 would have hoped by being transparent with holidaymakers it would have bolstered its reputation and could have reaped the benefits in 2022.

“But, as the latest results reveal, it is being damaged by the wider disarray afflicting the sector and, worryingly, has very limited visibility on how the current year will turn out.

“The company is keeping faith with its proposition which it believes can work against a tough economic backdrop. A package holiday obviously has the advantage that its costs are relatively predictable.

“Jet2 also has the benefit of a strong balance sheet which should help it ride out the current turbulence and you could see it picking up market share as weaker rivals exit the market.

“However, it could be in for a difficult period as pressures on consumer spending and the hassle associated with foreign travel depress demand.”

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