Barclays suffers from US debacle, Shell sees profits soar and Fed commentary does markets a favour

“On a super Thursday for corporate results the FTSE 100 made solid progress in early trading as the US Federal Reserve helped give global markets a boost overnight,” says AJ Bell Investment Director Russ Mould.

“It wasn’t so much what the Fed did, since a 75 basis point increase in rates was widely expected, as what it said in noting that some economic data had started to soften.

“This gave investors at least a hint that it might start to ease its foot off the rate acceleration pedal a touch, and helped Asian markets make progress overnight.

“Mining outfit Anglo American did better than expected. Although, like a high jumper in the early rounds of a competition, it was clearing a low bar as expectations had been successfully managed down by management ahead of time.

“Despite dialling up its first revenue growth in years the market effectively hung up on BT as the company faces up to industrial action on Friday and continues to confront problems in its business-to-business enterprise arm.

“Smith & Nephew struggled during the pandemic as elective surgeries were cancelled and demand for its hip and knee implants fell. As we emerge from the pandemic then in theory it should have a big backlog of business to get through, but supply chain and execution issues in its orthopaedics business are holding it back.

“Recently appointed CEO Deepak Nath really needs to sort these problems out fast so the company doesn’t miss out on a significant market opportunity.”

Barclays

“Barclays’ numbers were scarred by further damage caused by the structured products debacle in the US.

“The market is pretty unforgiving of banks at the moment. Investors are wary of their exposure to a weakening economic backdrop, despite any benefit they might be getting from rising interest rates. So the last thing banks can afford is self-inflicted damage of the kind Barclays is enduring.

“The sums involved are large, though far from crippling for a company of Barclays’ size. However, it is the hurt it does to management credibility and the concern it creates over governance standards which are most relevant.

“Looking beyond this issue, the underlying picture at Barclays is more positive. Profit may have missed expectations, but earnings were slightly better and the company delivered big growth in the dividend, as well as unveiling a further share buyback which was larger than had been pencilled in by analysts.

“Barclays also stuck with a returns target of more than 10% both for this year and in the medium-term. For now investors may well be in ‘well I’ll believe it when I see it mode’ and the company can ill-afford any more mistakes in the short term.”

Shell

“Let’s be clear, Shell makes very little of its revenue from producing and selling gas in the UK. Nonetheless, the optics of record profits and big shareholder returns when many Brits are struggling to pay their energy bills are uncomfortable for the business.

“It is certainly the case that Russia’s invasion of Ukraine, and the impact it has had on supply of oil and gas, has benefited Shell. Though it could argue it has had to deal with a significant weakening in prices due to factors outside of its control in the past and in some ways this is just the nature of being a big energy producer.

“Where criticism might be more legitimate is in terms of how Shell uses its recent bounty. Should it be allocating so much cash to shareholder returns when there is a real need to invest in both new sources of supply and in projects which can aid the energy transition?

“While investors might be pleased for now with the generosity on offer, they do need to have in mind the political pressure Shell could come under.

“The windfall tax is unlikely to make a material difference to Shell as it has a relatively limited footprint in the UK, but as a signal of the direction of travel it could presage more trouble ahead.

“After all, other global governments may look at the pain ordinary people are enduring and conclude the likes of Shell can bear more of the load.

“The risk of demand destruction is also very real, particularly if there is a downturn in the economy, and Shell can’t count on such strong prices remaining in place indefinitely.”

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