21st December 2018

Market Roundup Chart 1: UK Consumer Prices Index March 2017

It was a dramatic week for equities as markets fell sharply 3.5 around the world amid concerns that the US is raising interest 3.0 rates too quickly, potentially causing a recession. The US Fed- 2.5 eral Reserve raised rates on Wednesday (see below) but wor- 2.0 ries about such a move dominated the early part of the week 1.5 and led stocks lower on Monday. Stocks in the US fell to a 14- 1.0 month low and the FTSE 100 fell by 1% to 6,773. Brexit dramas 0.5 0.0 also weighed on sentiment and retailers had a tough time. -0.5 ASOS, the online fashion brand, saw its shares fall by 38% as it Aug 13 Dec 14 May 16 Sep 17 Feb 19 downgraded its guidance for the year. It was a shock in the run- UK CPI up to Christmas and other retailers saw shares fall along with sentiment; Ocado, Next, Marks & Spencer, Primark owner As- Source: ONS Data at 20/12/2018 sociated British Foods, Kingfisher, Dunelm, JD Sports, Dixons,

Sports Direct and Ted Baker were all down on the day. UK Chart 2: CBI Industrial Trends Order Book Volume Balance blue-chips fell again on Tuesday, down by 1% but the domesti- cally-focused FTSE 250 managed a small gain. The FTSE 100 rose by 1% on Wednesday buoyed by low inflation data and re- 20.0 ports of strong manufacturing output. GlaxoSmithKline shares 15.0 were up by over 3% after reports of its joint venture with Pfizer. 10.0 After the US rate rise on Wednesday markets fell sharply. The 5.0 S&P 500 dropped as low as 2.3 per cent having been up 1.5 0.0 per cent before the Fed decision. At the closing bell, it was -5.0 down 1.5 per cent. On Thursday the rout continued in the US, -10.0 -15.0 with the Dow Jones down 2% and the S&P 500 down 1.6%. -20.0 The UK’s FTSE 100 finished 0.7% lower. In early trade on Fri- Aug 13 Dec 14 May 16 Sep 17 Feb 19 day, UK shares were trading slightly higher on low trading vol- CBI Monthly Order Book umes. Source: ONS Data at 20/12/2018 Company Focus: Stagecoach Transport operator Stagecoach announced on Thursday that it had struck a $271m (£213m) deal to sell its US business to a Chart 3: Stagecoach Group - Revenue private equity firm. The US division was put up for sale following years of poor performance. The company reported an overall pre-tax loss of £22.6m over the half year, led by an £85.4m write- 8% down on its US business. The deal could be completed by the end of April. After the sale, Stagecoach plans to concentrate on UK Rail 15% its UK bus and rail operations. Chief executive Martin Griffiths said: “We have strong bus and rail operations in the UK where UK Regional Bus 46% public transport has good prospects as the clear solution to the challenges of increasing road congestion and poor air quality.” North America Variant will pay $207m, with $142m in cash due on completion of the deal and another $65m in the form of a “Deferred Payment UK Bus 31% Instrument” which is dependent on the future performance or later sale of the business. The private equity house will also take on $64m of debt. Stagecoach said that money from the sale will Source: Stagecoach 2018 Annual Report Data at 21/12/2018 be used to further reduce its net debt.

Brewin Dolphin Research Economic Roundup The US Federal Reserve pressed ahead with an interest rate rise on Wednesday despite pressure from Donald Trump to hold off to avoid damaging the economy. The rate rose by 0.25% to a range of 2.25%-2.5%, but said that it was likely to raise rates only twice in 2019, as opposed to previous guidance of three rate hikes. Economic growth in the US has been revised down for 2019 from 2.5% to 2.3%. The Fed cited strong economic growth, a tight labour market and lack of inflationary pressures for the rate increase. Many observers are worried that the Fed is raising rates too quickly against a softer economic backdrop, which in turn will lead to sharper than intended economic slowdown or possibly a recession, which would have knock-on effects for global growth – this has already shown signs of slowing. UK house prices fell in December, leading to the biggest drop over a two month period since 2012, according to property group Rightmove. Prices fell by 1.5% in December in addition to a 1.7% drop in November. It says the falls have been caused by vendors dropping prices to attract buyers despite the traditional Christmas slowdown, stretched affordability and political uncertainty undermining confidence. Buyers, for their part, are demanding bigger discounts. Analysts said that Brexit uncertainties were sure to be playing a part and many people would be waiting until after the Brexit outlook was more clear before committing to buying or selling, exacerbating the current shortage of properties on the market. UK inflation fell to its lowest level in more than 18 months in November, pulled down by the falling cost of fuel. The Office for National Statistics (ONS) said that the consumer prices index rose by an annualised rate of 2.2% in November, down from 2.3% in October and the lowest reading since March 2017. Core inflation, which strips out volatile energy prices, eased to 1.8% from 1.9%. The Bank of left UK interest rates unchanged on Thursday. The UK’s manufacturing sector produced an encouraging performance at the end of the year, with growth in exports help- ing to overcome reduced domestic demand. The Industrial Trends Survey for December, released by the Confederation of British Industry (CBI) said 28% of manufacturers had reported order books as above normal, and 20% below normal, giving a balance of +8%. That was below November’s figure of +10% but ahead of the long-term average of -13% and analysts’ forecasts of around +6%. Output expanded in 15 of the 17 sub-sectors, with the biggest growth reported by food, drink and tobacco; mechanical engineering; and chemicals. Orders for export are at their strongest since the begin- ning of the year, with 27% of firms saying there were higher than normal and 13% stating they were below normal. Consumer confidence fell to a five-year low in the UK in December, according to the closely watched GfK survey. Its index fell to -14 this month from -13 in November, with three of the five measures used to calculate the overall scored down, and two up. Client strategy director Joe Staton said: "At -14 this month, UK consumers are ending 2018 on a pessi- mistic note with Christmas cheer in short supply. We are five points lower than this year’s opening score in January and were no higher than -7 this summer.” Company announcements that caught our attention this week

Date Company Comment

19/12/2018 Glaxo- GlaxoSmithKline (GSK) and US rival Pfizer are planning to combine their consumer healthcare busi- SmithKline nesses in a deal that will create the world’s biggest provider of medicinal products sold directly to the public.GSK will take a majority controlling equity interest of 68% and Pfizer 32% in the joint venture, which still needs approval by shareholders and regulators. Within three years of closing the deal, GSK intends to demerge the consumer division through a UK stock market listing. Emma Walmsley, chief executive of GSK, said: “Ultimately, our goal is to create two exceptional, UK- based global companies, with appropriate capital structures, that are each well positioned to deliver im- proving returns to shareholders and significant benefits to patients and consumers.”

17/12/2018 SSE SSE has cancelled plan to merge its retail business with rival , a deal that would have created the UK’s second-biggest energy supplier. Reasons given include “challenging trading conditions” and concern that the new company would not be able to list on the ’s main market. The two companies said last month that they would have to renegotiate the deal, in part because of the government’s new price cap to be introduced on 1 January 2019. SSE confirmed that it is now consid- ering other options for its retail business, SSE Energy Services, including a standalone demerger or sale. The company said: “SSE will continue to build on the significant work done to date to separate SSE Energy Services as an independent, self-sufficient entity within the group, in preparation for its fu- ture outside it.”

Key Company Diary Dates

Brewin Dolphin Research

Mon 24 Dec TalkTalk Telecom Group Interim dividend payment date Thu 27 Dec Telecom Plus AGM Fri 28 Dec GCM Resources AGM

Economic highlights over the next week Fri 28 Dec – Mortgage Approvals – British banks approved 45,289 mortgages for house purchases in October 2018, up around 3.6% on the previous year, according to UK Finance. Fri 28 Dec – German Inflation – Germany’s annual inflation rate slowed to 2.3% in November from a ten-year high of 2.5% the previ- ous month. Could this be a sign of more uncertain growth prospects? Fri 28 Dec – Chicago PMI – Regarded as a leading indicator of the US economy, the Chicago Purchasing Managers Index rose to an 11-month high of 66.4 in November.

Index Movements* Index Value %Change FTSE 100 6,877.50 2.59% FTSE 250 17,818.56 0.37% AIM 888.88 -0.11% Dow Jones 24,597.38 -1.40% S&P 500 2,650.54 -1.68% Hang Seng 26,524.35 1.41% Nikkei 225 21,816.19 1.46%

Currency Movements* Currency Pair Value %Change £:$ 1.26 -1.28% £:€ 1.11 -0.97% £:¥ 143.38 -0.16%

Best & Worst performing sectors (rel. to FTSE 350)* Best & Worst FTSE 100 performing stocks* Sector %Change Company %Change Basic Resources 5.17% Anglo American 10.00% Technology 0.29% TUI 9.38% Oil & Gas 0.24% BHP GROUP 8.96% Chemicals -0.58% RIGHTMOVE -6.01% Financial Services -0.58% SAINSBURY J -6.70% Insurance -1.70% Associated British Foods -7.62%

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