MARKET REPORT: Budget does little to convince investors that boost to UK's fragile High Street economy is around corner
The Budget did little to convince investors that a boost to the UK’s fragile High Street economy is around the corner.
Both J Sainsbury, down 3.4p to 310.5p, and Tesco, down 5.65p to 294.6p, fell further than the rest of their FTSE 100 peers as analysts weighed up the damage a supermarket price war could cause.
Threats of a possible price battle led analysts at Shore Capital to downgrade their rating of Tesco to sell from hold.
The broker was also gloomy about the
sector as a whole. Shore Capital said there was ‘little visibility’ in
the supermarket business and added: ‘That uncertainty makes it
especially difficult to positively recommend the sector to investors.’
The
prospect of a fight for customers was raised last week when Morrisons
posted a 13 per cent fall in full year pre-tax profit to £785m, the
group’s second annual profit fall in a row.
As
a result Morrisons unveiled £1bn in price cuts over three years in a
bid to recover market share lost to discount rivals such as Aldi and
Lidl. Morrisons, up 0.6p at 210.2p, is also to invest in the opening of
more convenience stores as well as boosting online expansion, both of
which are fast-growing sectors of the grocery market.
Last
week shares in bigger rivals Tesco and Sainsbury’s also fell heavily,
with around £2bn wiped from the combined stock market value of the three
supermarkets.
A few
days later Tesco said the chain would ditch the market-leading 5.2 per
cent operating profit margin target that once made the supermarket one
of Britain’s most admired companies. Tesco is to also cut capital
spending from just over £3bn this year to £2.5bn for the next three
years.
Tesco also plans
to slash prices by around £200m. Earlier this week Sainsbury’s saw core
fourth quarter sales fall 3.1 per cent, the first quarterly sales fall
in nine years. However outgoing chief executive Justin King dismissed
talk of a price war and added the supermarket planned to strengthen
future profit margins.
But
analysts at JPMorgan Cazenove think Sainsbury’s would do better to
focus on economies. They said: ‘We believe this strategy will make life
tougher next year for the new chief executive, as the competitiveness
lost will need to be restored.’
George
Osborne said his Budget is fit for ‘a resilient economy’. But the round
of cost cutting the country’s biggest retailers are about to embark on
show household budgets are still under pressure.
The FTSE 100 fell 32.15 points to 6,573.13 as insurance shares suffered a sell-off on changes announced in the Budget.
In
New York the Dow Jones Industrial Average edged up 7.16 points in early
trading as investors looked ahead to the first news conference of the
new Federal Reserve chair, Janet Yellen, for any clues on the speed of
future stimulus cuts, as well as how soon interest rates might be
raised.
Back in London
the Budget scrapped a requirement that pensions savings be used to buy
an annuity. That knocked major insurance companies Legal & General,
down 19.3p to 211.2p, and Aviva, which slipped 26.6p to 490.4p.
Partnership
Assurance, which sells annuities to riskier pensioners such as smokers
or those with medical conditions, crashed 176.2p to 143p.
The
Government also raised tax from 20 per cent to 25 per cent on
controversial fixed-odds betting terminals, which critics claim are as
addictive as crack cocaine.
The
country’s largest bookmaker, William Hill, saw shares slide 25.7p to
351.5p. Meanwhile smaller rival Ladbrokes slipped 18.6p to 140.4p.
However,
the Chancellor handed some good news to the gambling industry when he
said he would halve the duty on bingo to 10 per cent. Rank Group lifted
9.8p to 154p as the firm said the move meant it could build three more
bingo halls and save others under the threat of closure.
Analysts thought the move might also revive the stalled flotation of privately-held Gala Coral’s 138 bingo clubs.
Away from the Budget, Smiths Group fell 50p to 1301p after the industrial firm was hit by adverse exchange rates.
Smiths
expects the profitability of the company’s medical unit, which makes
syringes, to be hurt in the short term by the impact of tax changes in
the US. At the same time the detection equipment business faced further
government budget cuts. Smiths reported half-year pre-tax profit in the
period slipped 4 per cent to £215m.
Imagination Technologies was up 16.5p at 180.7p after the microprocessor designer announced a breakthrough in graphics chips small enough to be used in handheld devices, including mobile phones.
Shares
in Ophir Energy slumped 43.7p to 251.7p after the oil explorer said an
offshore well it was drilling in Gabon had come up dry.
The London-listed explorer said the Padouck Deep-1 well in the Ntsina Block off the coast of the West African nation had produced ‘no significant’ oil or gas reserves.
The firm said that its drilling ship would now move to explore the nearby Gnondo Block.
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