Markets start to recover, all eyes on the ECB, UK bank stocks in demand, Deliveroo burns through cash and The Gym Group hit by rising costs

“One minute the market is worried about a banking crisis, the next minute it is more relaxed. This hot/cold mentality creates an odd atmosphere and today we have another one of those days where investors are seemingly less worried. How long this situation lasts is another matter,” says Russ Mould, Investment Director at AJ Bell.

“News that the Swiss National Bank would step in and lend Credit Suisse up to 50 billion Swiss francs was the catalyst for investors to breathe a sigh of relief, leading to gains of between 1% and 2% on the main European stock market indices.

“However, we are nowhere near safe territory for the markets. It would only take another piece of bad news from the banking sector anywhere in the world to put investors on edge again.

“There is also the question of how the latest banking crisis will affect lenders’ appetite to loan money to start-ups and larger but unprofitable businesses. Might that have a knock-on negative impact to the economy?

“Oil prices tumbled yesterday as the market worried that problems in the banking sector might lead to recession and hurt commodities demand. The black stuff clawed back some of this lost territory on Thursday with a 0.9% gain to $74.34.

“The next test for the markets will be the ECB’s interest rate decision later today. It seems unthinkable that it would go for an aggressive 50-basis point hike given the nervousness around the banking system. Opting for a 25-basis point hike would show that it is still on a path to try and bring down inflation but also conscious of the fragility around the financial sector that’s caused so much nervousness around the world.

“If it went down this path, it would in effect be doing a dress rehearsal for the Federal Reserve next week. The prospect of a 50-basis point hike from the Fed now seems unthinkable. Equally, being overly cautious might send another worrying message.

“Given the strength of the US jobs market and sticky inflation, the US central bank would have to show extreme fear at the financial system if it was to leave rates untouched or even cut them. Instead, a 25-basis point hike would be its way of biding time to assess the situation but also stay on the path to taming inflation.

“In the UK, the FTSE 100 advanced 1.2%, with investors finally finding the confidence to go bargain hunting among the banking stocks. Barclays advanced 3.3%, Lloyds jumped 3.2% and HSBC moved 2.8% higher. With circa 10% share price losses over the past week for many of these companies, investors now have the chance to buy them on a cheaper valuation and enjoy even higher dividend yields than were on offer earlier in March.

“DFS managed to escape a big share price sell-off. While it flagged 2023 profit would be towards the lower end of previous guidance, the sofa seller said it had enjoyed market share gains to a new record high.”

Deliveroo

“There are two big problems looming over Deliveroo. Households with less money in their pocket are unlikely to casually order in food on a regular basis and, as we have emerged from the pandemic, there are competing demands for any disposable cash they do have.

“Undoubtedly there will still be an appetite for ordering food through an easy-to-use platform but fierce competition in a market which also features big names like Just Eat and Uber Eats makes turning a profit hard.

“There’s no reason for people to be anything other than platform agnostic. It’s very hard to stand out and that means heavy marketing spend to stay front and centre in people’s minds.

“The company is still burning through lots of cash and although it is attempting to signal to the market that the inflexion point, when it starts to deliver meaningful cash flow and profit, is not too far away, a more difficult economic backdrop could stymie its efforts in this regard.”

The Gym Group

“The company may be pushing hard but it’s still proving difficult for The Gym Group to bear the weight of escalating costs.

“While its no-frills, low-cost offering may have some appeal, people might decide they can do without gym membership entirely and invest in a pair of running shoes or set of home weights instead.

“The Gym Group has also attracted some criticism for changing its key performance indicators, so it is harder to work out how individual gyms are contributing to the bottom line.

“Non-property net debt jumped in 2022 from £44.1 million to £76.1 million to fund the remainder of a site roll-out programme and to buy three sites from Fitness First. With membership growth starting to slow and with the inflationary pressures the company is facing, The Gym Group is having to take a different approach.

“It is a sign of the company’s caution that it is now pledging to only fund new sites from its own cash flow and while such prudence is no bad thing it does mean investors will have to face up to a slower pace of growth.

“Whoever comes in to replace the departing CEO Richard Darwin will really have to flex their corporate muscles to help win the market over to the story once more.”

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