New data points to China economic worries, FTSE retreats and AO swings back into profit

“Asian equity markets didn’t like the latest purchasing managers’ index data which implied further struggles with China’s economy,” says Russ Mould, Investment director at AJ Bell.

“The Caixin China Composite PMI fell from 55.6 in May to 52.5 in June, the softest pace since January. Service providers have seen a big slowdown in growth, which will stir the pot for the argument that China’s post-Covid economic rebound is losing momentum fast.

“Expectations for China’s economic reopening were arguably too high at the start of the year, with many people expecting the country to effectively flick a switch and everything to run at full power instantly. While there was a strong first quarter, it’s now clear this is going to be more of a slow-burner recovery than wads of money suddenly sloshing around.

“China’s Shanghai SE equity index fell 0.7% while Hong Kong’s Hang Seng index dropped 1.5%.

“Any worries about China’s economy tends to have an immediate read-across to the mining sector as it suggests that commodities demand from the Asian superpower could weaken. Anglo American fell 1.7% on the London market while BHP dipped 0.4%.

“Other London-listed stocks with big exposure to China were also in the red, including luxury goods group Burberry (down 0.8%) and InterContinental Hotels (down 0.7%).

“These stocks acted as a drag on the FTSE 100, pulling down the index 0.4% to 7,490. Only eleven stocks in the index were in positive territory in the first half hour of trading on Wednesday, led by Pearson which advanced 2.3%.

“The release of the minutes from the latest Federal Reserve interest rate meeting later today will be closely watched by investors. The general consensus is that the central bank has not finished raising rates, despite pausing last month.”

AO

“AO nudged up 0.2% after showing that efficiency and cost-cutting measures were having a positive impact on profits. Despite recording a 17% decline in full-year revenue, AO swung from an £11 million loss to an £8 million pre-tax profit.

“Mike Ashley will be happy, given that Frasers recently took a 22% stake in the business, saying the investment will help it benefit from AO’s expertise in the electricals market and two-man delivery. Frasers will no doubt be looking at ways to improve the efficiency of delivering bulky goods like fitness bikes from Sports Direct and three-piece suites from Sofa.com, two of its many brands. It also seems to be interested in dipping its toes into the electricals sector given an additional investment in Currys in recent weeks.

“AO’s decision to streamline its business has so far paid off, given the shift back to profit. It has closed operations in Germany, ended a trial with Tesco and ceased working with housebuilders, effectively saying it wasn’t worth the time and effort. An internal rejig of teams and a simplified product range are some of the other initiatives undertaken to right-size AO into a more profitable entity.

“It’s a good start, but the proof in the pudding will be sustained profit growth, and the market won’t be able to judge its success until well into next year.”

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