8 August 2023
Interest rates were once again the main focus in the news last week as the Bank of England (“BoE”) raised the base rate by 0.25% to take it to 5.25%. Out of the nine members on the committee, six voted in favour of a 0.25% increase, with two voting for a 0.5% increase and one voting for an unchanged policy. The BoE has now raised interest rates fourteen times consecutively, raising the base rate by a cumulative 5.10% since rates started rising in December 2021. The BoE also detailed their economic forecasts which showed that inflation is expected to ease rapidly to just below 5% by year end, alongside the BoE cutting its 2024 outlook from 3.40% to 2.25%, with 2025 being well below the 2% inflation target. It should be noted that these forecasts are conditioned on a peak rate of 6% and rates remaining near 5.5% throughout the forecast horizon.
The BoE highlighted that the current monetary policy stance is restrictive but reiterated that if there was further evidence of more persistent inflationary pressures, further tightening would be required. It was also made clear by BoE Governor Andrew Bailey that there would be no pivot to rapid rate cuts, however, the language in the BoE statement suggested that the central bank is now close to the end of its rate tightening cycle. It still remains evident that the next BoE policy decision will be determined by future economic data as Bailey highlighted the labour market, services inflation and wages as the focus for near term decisions.
In the housing market, Reuters reported that the construction sector in the UK returned to growth but housebuilders suffered another sharp contraction due to high interest rates and continued fears surrounding the outlook of the economy. The Financial Times also reported that UK estate agents are looking to expand their lettings businesses as a booming rental market is helping drive profits which have been lost by a slowdown in house sales. Rents in the UK, which have long been supported by a shortage of supply, saw an increase in May at the fastest annual pace since 2016. With the expectation that rates will remain at elevated levels for longer, estate agents are preparing for a continuation of this trend as higher mortgage costs continue to weigh on house sales.
BAE Systems, a defence, aerospace, and security company, saw its share price increase by approximately 8.7% last week after announcing first half results which beat market expectations. The company also raised its guidance for full year sales, underlying Earnings Before Interest and Taxes (EBIT), Earnings Per Share (EPS) and free cash flow. The dividend also increased by 11% when compared to last year alongside an approved further share buyback program of up to £1.5 billion. This program is expected to roll-on after completion of the current buyback program and conclude within three years of its commencement.
ConvaTec Group Plc, a UK based medical products and technologies company, announced its first half results last week which sent its share price soaring by approximately 7.4%. The company reported sales of $1.06 billion and adjusted EBIT of $214.1m, both beating expectations. ConvaTec also raised its full year guidance with organic revenue growth now expected to be between 6% and 7.5% compared to previous estimates of 5% to 6.5%. The company also announced that it continued to invest in its Technology and Innovation capabilities and advance its pipeline, providing a strong platform for future growth.
Greggs Plc, the UK based food-on-the-go retailer, experienced an approximate 6.8% decline in its share price last week after announcing its interim results. The company reported a strong end to the first half of 2023 as revenue increased 16%, beating expectations of a 12% increase. However, profit margins declined approximately 0.3% since the first half of 2022 alongside leaving its outlook unchanged which appeared to disappoint investors, leading to the decline in its share price.
Market Commentary prepared by Walker Crips Investment Management Limited.
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