Mid cap rally pauses for breath, investors switch to defensive stocks again and Joules to enter administration

“The risk with any sudden surge in the stock market amid headwinds such as rising inflation and higher interest rates is that it is a short-lived event,” says Russ Mould, Investment Director at AJ Bell.

“It’s common to see a bear market rally when stocks are down, but they often cannot be sustained. To see many stocks and shares move higher for the second week in a row is encouraging but it’s too early to declare this a bona fide recovery rally.

“There are still factors that could change investor sentiment from optimism to pessimism such as if the next inflation figures are worse than expected, and the UK government’s Autumn Statement contains some tough measures to get its finances under control.

“The FTSE 100 advanced 0.4% to 7,350 while the Hang Seng jumped another 1.7%. Among UK mid-caps, the FTSE 250 dipped 0.3% to 19,567. After seeing investors pile into more risky stocks last week, today was a day for more defensive names, with tobacco, consumer goods and pharmaceutical companies in vogue.

“News that Joules is going into administration put the chills up the back of investors holding retail stocks as they wonder who might be next to issue bad news on trading. ASOS fell 3.4% and Quiz dipped 1.6%.”

Joules

“As a business Joules is now less a posh welly and more an old boot with a hole in it. The retailer has been struggling for some time, but it is still a jolt to see it enter administration.

“Lots of things have led us to this point, with the failure of Next to come to the rescue the straw that broke the camel’s back, but ultimately Joules’ proposition wasn’t robust enough to withstand such a bleak economic backdrop.

“Joules is neither a luxury brand nor does it offer compelling value and the premium high street space looks particularly vulnerable in an environment when there is so much pressure on household budgets.

“This has been compounded by some poor decision making, unhelpful weather – though blaming the weather is never a great look for a business – and supply chain problems.

“Joules’ cash and stock management have also been far from perfect, though it is fair to acknowledge the current storm would have tested even the most robust balance sheet.

“Shareholders look set to be left with nothing, though they have had a fair amount of warning of this outcome given the precipitous slide in the Joules share price since the start of the year.

“The destiny of the Joules brand itself remains up in the air. Both Next and Frasers look logical suitors given their relatively robust position and recent habit of hoovering up assets from failed retail businesses.

“The exit of a significant high street name like Joules from the scene could lead to market share gains for those businesses which remain.”

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