Markets rally after Fed leaves rates unchanged, Sainsbury’s has found its groove, Shell delivers generous buyback and BT makes big progress on costs

“The Federal Reserve’s decision to hold rates has been given the thumbs-up by the market, resulting in a decent session on Wall Street last night and positive sentiment extending across the main European indices and most of Asia on Thursday,” says Russ Mould, investment director at AJ Bell.

“This represents the second time in a row that US rates have been left untouched. If Jerome Powell makes it a hat-trick in December, it is feasible that markets could take this as confirmation the Fed is done raising rates altogether in this cycle.

“Later today we’ll get the Bank of England’s latest decision on UK rates and it too is expected to make no changes. That would be another tick in the box for investors looking for evidence that interest rate pains have peaked.

“The renewed optimism in the markets was illustrated by the breadth of sectors experiencing a rally. On the FTSE 100, all the major sectors pressed ahead apart from healthcare which was held back by Haleon’s quarterly results coming in below expectations. Hikma Pharmaceuticals and GSK also saw share price losses.

“The true test of how investors are feeling is to look at Ocado’s share price. If it is rising, there is a good chance that investors are in a risk-on mood; if it is falling then investors are feeling cautious. Today we’ve got an 8% share price hike. The stock is the FTSE 100’s biggest blue-sky company – its earnings growth potential is centred on winning more clients and getting existing clients to deploy more of its technology.

“In theory, an end to interest rate pressures could mark the turning point for companies to think about increasing investment in their business. Remember that the stock market is about pricing in what investors think could happen in the future, so blue-sky stocks like Ocado have a tailwind when hopes are raised. Nonetheless, reality will always catch up and if the company doesn’t meet expectations, then its shares could fall back as quickly as they’ve gone up.

“Elsewhere, perennial disappointer BT caught the market by surprise with its latest quarterly results beating expectations. Its shares jumped nearly 7% in early trading, helping to lift the stock out of its rut. BT’s challenge is to sustain this positive momentum and history suggests this is a hard feat to achieve.”

Sainsburys

“It’s been a while since Sainsbury’s has consistently done well, but the current management team seemed to have created a formula that works. Market share gains and improved sales volumes are proof that Simon Roberts’ strategic focus on food is paying off. In addition, staff are benefiting from higher pay, more employee discounts and free food at work. Happy shoppers and happy staff make for a good combination.

“Success in the grocery sector lies in offering what customers deem to be good value for money. That doesn’t necessarily mean the cheapest price, more that they feel what they’ve spent is worthwhile.

“Sainsbury’s has long been seen as ‘stuck in the middle’ – more expensive than Asda, Tesco and the discounters but not as pricey as Waitrose. Therefore, the business has never been the first choice to attract cash-strapped consumers, nor has it traditionally appealed to people with a few quid to spare.

“The response by the current management team has been to offer good quality products at more affordable prices, which has helped pick up business from those seeking to trade down from the likes of Waitrose, while also luring in people on tighter budgets looking for a treat. Once these shoppers have entered its stores, they then find plenty on offer at the right price points for them.

“Not everything is perfect in the business. The financial services arm saw declining profits, clothing sales have been poor and Argos has not been a shining star for a while.

“Sainsbury’s now enters the key festive trading period where a lot lies on consumers deciding to splash the cash at Christmas, buying their food and toys from the grocer. Given this year’s performance so far, Sainsbury’s has a fighting chance of doing well, yet it has plenty of competitors all with their own tricks up their sleeves.”

Shell

“Given energy giant Shell always trails its quarterly numbers the scope for a welcome or unwelcome surprise is somewhat reduced and, sure enough, the company has served up a solid third quarter update.

“The divergence in fortunes with BP – which disappointed earlier this week – will only add fuel to the fire in terms of speculation around some kind of merger between the two companies.

“Profit is down materially year-on-year but that’s the nature of having your fortunes tied to a volatile commodity and Shell enjoyed a bumper third quarter in 2022 in this respect thanks to the impact of the war in Ukraine on oil and gas prices.

“It’s now the turn of conflict in the Middle East to put upward pressure on oil and gas prices again. Chief executive Wael Sawan is certainly feeling confident enough to dole out generous returns to shareholders with another big share buyback.

“Investors in oil and gas stocks on this side of the Atlantic have felt short-changed relative to holders of the big US oil firms which have ignored the clamour to go green and been rewarded by the market for doing so.

“That informs the shift under Sawan since he took over at Shell at the beginning of the year. Investments will still be made in the energy transition but they will have to stack up in terms of returns.”

BT

“Incoming CEO Alison Kirby will take a look at today’s first half results from BT and find elements to both please and upset her.

“The company has made significant progress on costs and is reining in spending which should result in healthier cash generation.

“This is clearly encouraging but is also the kind of stuff Kirby herself might have targeted, as typically a new boss will look for some easy wins by making efficiencies to get their tenure off to a good start.

“There is top-line growth in evidence, albeit modest, and operationally the roll-out of fibre networks has been impressive. However, much of the growth in revenue is linked to inflation and in terms of customer numbers the consumer business is under some pressure as housebuilding slows and competition ramps up.

“The shift to the EE brand continues and, with people holding on to phones for longer, this part of the business is branching out into areas like smart fridges. BT, which has arguably tried to do too much in the past, including an expensive foray into sports broadcasting, needs to be careful not to move too far outside its main remit.

“The big debt pile is likely to focus the mind and explains why the dividend has been held at the same level as last year. With nearly £20 billion of borrowings on the balance sheet there’s little danger of anyone at BT getting carried away.”

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