Equity markets push forward, Alliance Trust eyes FTSE 100 promotion on Witan deal, Volkswagen agrees Rivian tie-up, FedEx boosted by cost cutting, AO and Marks Electrical show retail sector is still alive

“With the Nasdaq recording a 1.3% gain and Nvidia rebounding after its sharp sell-off to secure a 6.8% advance last night, it’s no wonder that European and Asian markets have woken up with a spring in their step on Wednesday,” says Russ Mould, Investment Director at AJ Bell.

“The FTSE 100 advanced 0.4%, led by Shell, AstraZeneca and HSBC, as buyers were happily snapping up the giants of the UK stock market. US inflation data on Friday will be a major test for market sentiment, but for now it looks like investors are in a chipper mood.”

Alliance Trust / Witan

“The investment trust M&A machine has been going into overdrive over the past year or so, and now we’ve got a deal that could create a new FTSE 100 member.

“Investors who want to beat the market often turn to actively managed investment funds or trusts in the hope that they will outperform. Given these fund managers are collecting an annual fee for the work, one would hope they can do better than the market, but Witan has found it hard to achieve this goal on a sustainable basis.

“Retirement plans by Witan’s CEO Andrew Bell prompted a review of the trust and it was effectively plonked on the market with a ‘for sale’ sign, in the hope that a rival would take it over.

“Its closest competitor Alliance Trust has won the match and is set to create a £5 billion investment trust group that would put it on a par with F&C Investment Trust in terms of size.”

Volkswagen / Rivian

“The decision by German car maker Volkswagen to link up with US electric vehicle firm Rivian solves problems for both parties.

“Volkswagen’s EV software isn’t up to scratch and the new deal provides access to a more sophisticated set-up which it can install in its own cars. Rivian has been struggling to attract funding and is under material financial strain so the injection of capital from Volkswagen helps to address that problem.

“It’s quite the turnaround for Rivian given that shortly after its widely hyped IPO, the EV group was valued at more than Volkswagen. Since then, Rivian has been more of an old banger of a stock than a thrusting electric vehicle champion.

“The problem facing the industry is that they know a change is coming, given the regulatory pressure to move beyond the combustion engine. However, at the moment hard-pressed consumers are less likely to make the switch and there are noises governments may water down or delay targets to ban the sale of new petrol vehicles.

“Then there is the sceptre of low-cost competition from the China with the leader in this market, BYD, making a splash as an official partner of Euro 2024 – putting its brand in front of the eyeballs of millions of Europeans.”

FedEx

“Delivery and logistics specialist FedEx is often closely watched because of the insight it offers into wider economic conditions – with demand for its services closely tied to GDP.

“However, the euphoric market response to its latest numbers reflects the levers the company is pulling internally to fix its problems and bring down costs rather than any signs of meaningful growth.

“The company beat expectations as efficiencies came through and, crucially, is eyeing profit for the current year ahead of expectations. The market also seems chuffed with its plans to potentially spin-off or sell its freight-trucking business, though such a move could be dilutive to margins in the longer term.

“The company should benefit from an unprofitable US Postal Service contract coming to an end in September. Chief executive Raj Subramaniam, who took the helm two years ago, has done a lot to fix the company’s problems but he will be hoping for some help from an improved backdrop soon. Restructuring and cost-cutting can only take you so far if business remains slow.”

Retail: AO, Marks Electrical

“Retailers have been put to the test in recent years with regards to the resilience of their business model and their ability to navigate tough market conditions. Not everyone has sailed through, but those with the right ingredients are now reaping the benefits and are looking to come out the other side in a stronger position.

“Consumers have been watching their pennies which has been bad news for big ticket items such as sofas. Some electrical goods might have been deemed too expensive by the public, but certain items are essential and broken ones will need to be replaced whether there is a cost-of-living crisis or not.

“AO and Marks Electrical have gone head-to-head with essential electricals such as fridges and washing machines, and both have reported their latest results with some success.

“Focusing on high levels of customer service is a clever strategy as ultimately consumers want to order something and for it to arrive at their home as soon as possible and without fuss.

“AO’s earnings have soared after a strategic decision to focus on profit and cash generation, rather than simply chasing market share at any price. Sometimes it can be the right decision to simplify everything and focus on profit and efficiency. It’s a good start but ultimately selling electrical goods is a low margin business so there is little room for error.

“Marks Electrical is the smaller rival nipping at AO’s heels. The results suggest it is holding up well in a tough market but management is clearly frustrated by lower margins and higher costs, so there is still a lot more work to be done before it can be truly happy.”

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