FTSE flat, Bunzl warns on margins, Warren Buffett bemoans lack of ‘meaningful’ opportunities and housebuilders under the spotlight in competition probe

“The FTSE 100 kicked off the new week with a whimper as the index struggled to move,” says Russ Mould, Investment Director at AJ Bell.

“Bargain hunters continued to bid up HSBC after last week’s big share price slump and AstraZeneca was also in demand, but these stocks weren’t enough to put the UK market into first gear. The FTSE was stuck in neutral as miners and oil producers acted as a drag on the index.

“Bunzl was the FTSE 100’s worst performer after warning about a drop in operating margins this year. It supplies items that companies need to do business but not products they sell to customers, such as disposable coffee cups for cafés and rubber gloves for hospitals. Investors consider Bunzl to be as boring as you can get as there is no glamour to its business, but equally that means the market doesn’t expect any shocks when it reports. Therefore, warning on margins has caught people by surprise.

“Warren Buffett has a reputation for being one of the world’s best investors so when he says there is ‘no possibility of eye-popping performance’ for his investment vehicle Berkshire Hathaway in the foreseeable future, it’s natural to feel deflated. Berkshire has a growing cash pile and it can’t find good ways to deploy it at scale. Its preference is to buy all or a portion of businesses that generate good returns and have the recipe to do so for years to come.

“With the UK market trading at a big discount to the US, one might have thought he could find something worth trading on the London Stock Exchange but that doesn’t seem to be the case. He says outside of the US there are no meaningful candidates. It suggests there are plenty of cheap companies but none have the right qualities sought by the Sage of Omaha as a meaningful investment. Instead, it will no doubt look to pounce on opportunities when they arise such as during market corrections. Even though this all sounds somewhat depressing, Berkshire Hathaway is still generating big gains from its existing portfolio of assets and the share price is currently trading at a record high.

“There continue to be lots of twists and turns with UK takeovers and one trend that’s gathering pace is a bidding war. Someone throws their hat in the ring and starts the firing gun on a takeover and in the subsequent weeks we see interest from other parties or shareholders pushing for a high takeout price.

“Logistics group Wincanton is the latest candidate to follow this trend as an unidentified second party has expressed interest in potentially making an offer to compete with the existing one already on the table from CEVA. Naturally, the latter doesn’t want to risk losing Wincanton and has raised its offer with the hope that the price is good enough to seal the deal. Investors who didn’t cash out at CEVA’s initial bid will now be enjoying a nice bump to the share price.”

Housebuilders

“While they may all profess to want to help with the national mission of building more homes – and undoubtedly, they do help – there is also an advantage to housebuilders if the balance between supply and demand remains tight.

“This helps sustain higher house prices and supports their margins. In this context, the competition authorities are taking a closer look to see if some of the big housebuilders – including Barratt, Berkeley, Persimmon, Redrow, Taylor Wimpey and Vistry – have been sharing commercially-sensitive information and using that knowledge to make decisions on build-out of sites and the price of new homes.

“The CMA notes this is not a significant factor in the persistent under-delivery of homes, nonetheless it is sufficiently concerned that competition in the market has been undermined to take a closer look.

“A regulatory probe is the last thing the sector needs. It is just finding its feet again after a tricky period for the property market as demand dried up thanks to higher borrowing costs.

“Housebuilders may also argue the proposed introduction of more red tape, including the establishment of a New Homes Ombudsman, will clip the sector’s wings. However, previous issues around build quality and treatment of customers means they are reaping what they have sown.

“Where the CMA will be preaching to the converted when it comes to the industry is identifying problems in under-resourced local planning departments – a familiar grumble in the housebuilding space.”

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