FTSE lower ahead of US midterms, Associated British Foods’ big comeback and Persimmon warns on housing market

“The FTSE 100 started Tuesday on the back foot as the latest in a seemingly regular dose of political turmoil looms on the horizon in the form of US midterm elections,” says AJ Bell Investment Director Russ Mould.

“The Republicans are widely expected to make sweeping gains and should they control both houses of Congress then Democratic president Joe Biden would essentially be in office but not in power given the divisive nature of politics across the pond.

“This could be a mixed blessing for markets as gridlock in Washington would at least prevent any legislation being introduced which could damage businesses.

“The latest data from the British Retail Consortium paints a bleak picture for the retail sector ahead of the Black Friday sales event and the festive period.

“Mild weather is also not helping the sales of higher margin products like winter coats and footwear, sending a chill through sellers of clothing in particular.”

Associated British Foods

“Talk about a comeback. Associated British Foods’ sales and profit have jumped for joy like a shopper finding an absolute bargain. The company is fighting back from Covid with a vengeance, with its Primark chain seeing a big jump in sales as the world returns to a more normal state post-pandemic.

“The decision to now hold prices in Primark and sacrifice some margin as inflation remains high shows that it cares more about its customers than profits. It’s a calculated move which Primark hopes will earn it some with goodwill with customers as the company which understood the financial pressures people are under.

“Primark’s business model is based on shifting a large volume of goods at low prices. It relies on people browsing the aisles and popping items in a basket on impulse because they look cheap. There comes a level when a higher price will stop this shopping behaviour and Primark clearly doesn’t want to reach this tipping point. It seems to be taking the view that it’s better to have customers buy something at a lower margin than nothing at all.

“Fortunately, there are other businesses within the broader Associated British Foods group which can pick up the slack in terms of margins. It has been putting up prices in its food business to help recover higher input costs and the group is in a strong financial position.

“Despite the uncertain backdrop in the near-term, it’s impressive to see the group say it has enough surplus cash to start a new share buyback, thereby signalling that it thinks its shares are cheap.

“Like most retailers, its shares have been decimated this year as the market prices in a recession. The question now is whether all this bad news is now in the price. Investors seem to think so as the shares have started to pick up since October and today’s results spur another leg up.”

Persimmon

“Today’s warning from Persimmon on the housing market feels like it has been in the post for months.

“Housebuilders enjoyed a sugar rush driven by goodies like pent-up demand, appetite for extra space from people spending more time working at home and a stamp duty holiday, yet an inevitable crash has followed.

“Cost-of-living pressures have been exacerbated by soaring mortgage rates such that house sales are slowing down and prices look set to come down too. This will expose the profitability of Persimmon and its peers given they are subject to the higher cost of raw materials and labour.

“The end of the Help to Buy scheme is another reason why it is unsurprising Persimmon is unwilling to commit to guidance for 2023, beyond making sure everybody is very clear it won’t be as good as 2022.

“Against this backdrop Persimmon had no choice but to look at a change to its dividend policy, with the company relying on significant cash reserves to pay the dividend in recent years rather than funding it entirely out of its free cash flow.

“A double-digit dividend yield was the market ringing the alarm bell over the fate of the dividend and a hefty cut can’t be ruled out as Persimmon looks to cut its cloth to fit more straitened circumstances.”

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