ECB takes centre stage, Primark warns on energy costs, Melrose automotive unit spin off, Darktrace suitor exits and Restaurant Group takeaways warning

“For years, central bank interest rate decisions used to be background noise, with investors confident that rates would stay low. This year they’ve become must-watch events, with every word studied by the market,” says Russ Mould, Investment Director at AJ Bell.

“The current theme is not whether central banks will raise rates, but by how much. Investors are also hungry for forward guidance on future policy moves as central bankers try to regain the initiative in the fight against inflation, now that their narrative about the resurgence being transitory has proven – so far – to be wildly inaccurate.

“The European Central Bank is under the spotlight today and there is a feeling we could get a chunky rate hike, potentially as much as a percentage point increase. The ECB was late to the party when it announced a first interest rate increase for the year, and now it has some catching up to do.

“Despite the threat of a big rate hike, markets in Continental Europe pushed ahead on Thursday. Germany’s DAX index advanced 0.4%, led by financial stocks Deutsche Bank and Allianz. France’s CAC 40 moved 0.3% higher while Spain’s IBEX 35 was flat.

“In the UK, the FTSE 100 traded 0.3% higher at 7,261 with banks, energy producers and miners leading the charge.

Associated British Foods (Primark)

“Plenty of companies around the world have bemoaned inflationary pressures thanks to the rising cost of labour, raw materials and energy. The latter is now taking an even bigger bite out of company profits and causing further pain.

“Primark owner Associated British Foods is the latest to warn on profits because of higher energy bills, as well as unfavourable foreign exchange rates. It will be hoping that Liz Truss can pull a rabbit out of the hat when she unveils her plan to deal with the energy crisis, praying that help is given to businesses as well as consumers.

“Primark has a lot of lights to keep on as it is one of the few retailers to still prioritise physical shopping outlets, rather than online. Pressure on energy costs means its margins will be squeezed, which is not a good situation for a low-ticket seller.

“Making matters worse is declining disposable income for consumers. Primark might benefit from people trading down from more expensive retailers. However, a good chunk of its core audience sits in the lower-income category and these individuals are really feeling the pinch.

“Primark’s business has thrived over the years as many customers who visited its shops intending to buy one item ended up walking away with a bundle of clothes, having been tempted by the low prices. Now we face a situation where many of its customers will have to think hard about every shopping decision, and the historical ‘load up the basket’ mentality may no longer apply.

“Ultimately Primark works as a volume business – prices are cheap, but it needs to sell a lot of items to earn big money. The risk now is that the average basket size falls and costs keep going up. The fact it buys most of its clothing stock in dollars adds to its problems, given that sterling is under considerable pressure.”

Melrose

“The purchase of GKN by Melrose in 2018 was controversial and bitter to say the least, even if that relied on a somewhat simplistic characterisation of the latter as a corporate vulture.

“Today’s announcement that the automotive division is to be spun off may prompt a chorus of ‘I told you so’ from those who warned about one of the UK’s most storied engineering names falling into the hands of the turnaround specialist.

“That’s not to say there isn’t logic to the move – even if it does mark a slight shift from Melrose’s ‘buy, improve, sell’ model to ‘buy, improve, list’ with a separate stock market listing planned for GKN’s automotive arm.

“The GKN aerospace business is lagging behind the automotive side in terms of the progress of its restructuring, perhaps inevitably given the scale of the impact on it from the pandemic, and this move will allow Melrose to bring greater resources and focus to the former.

“It will also create a business which will be well positioned to pursue consolidation in a car-making sector which is in a state of flux thanks to the disruption of recent years and the shift towards electric power.

“Prior to the GKN acquisition, Melrose had a good track record of generating returns for shareholders. Partly thanks to Covid, it has been a harder slog with GKN. Melrose management will hope this move brings them a step closer to realising the potential returns they first identified nearly five years ago.”

Darktrace

“Cybersecurity group Darktrace tumbled 31% after Thoma Bravo ended takeover talks. Don’t expect bid chatter to fade away. Now that someone has thrown their hat into the ring, and sterling weakness makes UK stocks particularly attractive to overseas buyers, Darktrace is likely to be on the radar of other players eager to grab a strong position in a vibrant industry.

Restaurant Group

“Restaurant Group’s news that delivery sales have weakened failed to dent shares in Just Eat and Deliveroo. With cost of living pressures getting worse, ordering a takeaway could become a luxury treat that is no longer affordable. So, all the restaurants, including Wagamama itself, which have enjoyed a new sales channel in recent years, will be sad that the wind has come out of the delivery sails.”

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