Pound at four-month high, water utilities in focus, Jet2 faces some turbulence, relief over Dr Martens and Hays sees profit at bottom end of guidance

“The pound hit a four-month high after better-than-expected UK GDP figures. The new government has placed economic growth at the heart of its policies and it will be pleased to have inherited positive momentum with GDP,” says Russ Mould, Investment Director at AJ Bell.

“The bigger issue is whether the Bank of England will look at this data and feel less inclined to cut rates. After all, cutting rates is something a central bank does to stimulate a lacklustre economy, not grease the wheels for one already moving ahead. That said, momentum could easily lose pace, particularly if the jobs market weakens and sticky inflation causes consumers to stay cautious on spending.

“A stronger pound has traditionally been unfavourable for the FTSE 100 given many of its constituents earn in US dollars. That factor was given a backseat on Wednesday as utilities, miners and big consumer brand companies including Diageo and Unilever helped to push the index higher.”

Water Companies: Thames Water, United Utilities, Pennon, Severn Trent

“Any negotiation requires give and take and, while the increase in bills announced by regulator Ofwat is less than most names in the sector were looking for, the market reaction suggests this isn’t a bad outcome from the perspective of its listed constituents.

“Note, this is a draft decision and there is scope for firms to push for a bit more generosity before the final verdict in December.

“Ofwat certainly hasn’t taken an easy line with water companies – there will need to be a flood of investment to meet legal requirements. This follows a period when the industry has been heavily under the spotlight for the state of its infrastructure and its handling of wastewater which has ended up polluting the UK’s rivers and seas.

“Thames Water, the bête noire of the water space, got a settlement on bills way short of what it hoped for, but it has very little credit in the bank given the way the operation and its assets have been mismanaged. This may increase the likelihood of it being nationalised, with the company effectively being put in special measures by Ofwat and now scrambling to secure investment amid mounting debts.

“The fact that Thames Water, which does not trade on the stock market, has got into more of a mess than its listed peers, could reflect the greater levels of ongoing scrutiny involved in being a public company.

“A trading update from Severn Trent revealed it to be much more of teacher’s pet – earning a decent chunk of change in ODIs (outcome delivery incentives) from Ofwat thanks to strong performance.”

Jet2

“When the weather is as poor as it has been in the UK, it’s no wonder the public have been eager to fly to brighter climates. Jet2’s results tick a lot of the right boxes – revenue, profit and dividends are all up and it flew a record number of passengers. Consumers continue to do everything they can to have a week or two away on holiday, even if that means cutbacks elsewhere.

“That’s the good news, now the bad. Travel demand is solid but consumers remain reluctant to book too far ahead. Last-minute bookings typically mean airlines have to fight on price to fill their planes or holiday packages. Jet2 has managed to push up its summer 2024 prices, but they don’t fully offset cost increases.

“As ever, it falls on the Bank of England to start cutting interest rates before consumers are going to feel more confident with their finances and spending patterns evolve.

“Jet2 is doing all it can in the meantime, namely focusing on good customer service levels, investing in more aircraft, expanding its airport network and building more capacity to maintain its fleet.”

Dr Martens

“Investors breathed a sigh of relief that life is not getting worse for Dr Martens.

“After a string of setbacks in the US, there finally seems to be a sense of stability about the business. While the latest trading update didn’t contain anything spectacular, the most important thing was that it didn’t contain any more bad news.

“Yes, profit is more weighted towards the second-half period but the company had previously communicated that would be the case. Simply maintaining full-year guidance was enough to push the share price higher.

“It may sell big, stompy boots but baby steps are what Dr Martens needs to achieve in its road to recovery.”

Hays

“Like its counterpart PageGroup, which took a pummelling on a major profit warning earlier this week, Hays is also seeing signs of stress in the jobs market.

“Given recruiters are a leading indicator for wider economic conditions, as firms hire when they’re feeling confident and trim when they’re not, this reinforces the view that pressures on global growth are increasing and central banks have more scope to consider rate cuts.

“In Hays’ favour, the company appears to have made a better fist of getting ahead of these challenges than some peers and despite the material pressures on the top line, it expects annual profit to be within the consensus range, albeit right at the bottom of said range. The company also has a net cash position which will provide some reassurance to shareholders that it can ride out a volatile backdrop.

“The discipline implied by Hays’ ‘golden rule’ – profit growth should exceed fee growth, which in turn should exceed headcount growth – could be worth its weight in gold during a sticky period.”

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