History reveals the consequences of sticking to rigid monetary targets
BTG Advisory’s Mark Fry draws parallels between today’s grim economic outlook and the stagflationary challenge that the UK struggled with back in the 1970s. Pointing to the damage high interest rates did during Margaret Thatcher’s first administration, Fry says that, although there may have been some structural changes in the UK economy, labour market and global markets, a “blanket dismissal of the lessons from this period of economic history risks blinding policymakers, central bankers, businesses, and households to the consequences of rigid monetary targets and the utility of interest rates to control inflation.” With expectation of a prolonged recession and persistent cost pressures on businesses now widespread, Fry predicts that “a new wave of defaults is inevitable”.
Severe recession could mean £47bn of bad loans for UK banks
Credit Suisse has warned that UK banks may have to write off £47bn of bad loans in the years 2023-2025, up from a previous estimate of £41bn. The worst-case estimates assume a severe recession and provisions equal to 35% of pre-tax profit for 2023. However, the Swiss lender added that UK bank valuations remained attractive based on a mild to sharp recession and “sticky” interest rates. The Telegraph notes that major UK banks including Barclays, Lloyds and NatWest have together put aside £1.3bn to cover loan losses in their recent trading updates.
PCF Group to withdraw from banking
PCF Group said on Wednesday it would start a process of withdrawing from the UK banking market. The British lender will not recommence lending and will move to cancel its listing after its efforts to raise capital or seek other options failed. The bank typically lends to buyers of cars and horseboxes as well as to small businesses. CEO Garry Stran said: “PCF is solvent. It continues to operate in excess of its regulatory buffers. I see no reason to believe depositors won’t be paid in full and on time.”
VC funds reverse as macro headwinds hit
Private equity and venture capital funds delivered a 1.1% loss to investors in the second quarter of 2022, analysis firm Pitchbook found. “Preliminary figures for [Q2] do show a recognition that the macro environment has shifted,” said Hilary Wiek, lead analyst, fund strategies & sustainable investing at Pitchbook. “In the preliminary figures, PE and VC trailed the other private fund strategies in Q2 2022, with the highest fliers of 2021 having further to fall back to recognize the new normal.” However, “private funds valuations are not indicating much concern about the macro environment in comparison to the S&P 500,” she added.
TPG reports 60% drop in earnings
TPG reported that its after-tax distributable earnings fell more than 60% due to a plunge in asset sales across its private equity, growth, real estate, and impact businesses. Fee-related earnings for the Texas-based private equity firm were flat at $121m, up on analyst forecast of $108m. BMO Capital Markets analyst Rufus Hone pointed out that investors are more interested in fee-related earnings than performance fees because they are more predictable. Shares rose 7.72%.
EQT raises €1.1bn euros for tech start-ups
EQT Ventures revealed on Wednesday that it had raised €1.1bn ($1.1bn) as it seeks to increase investments in tech start-ups next year. Ted Persson, partner at the Swedish fund, said it would be able to invest even more in companies as valuations were currently low due to market conditions.
Commerzbank shares fall after Poland charges, high costs
Commerzbank said on Wednesday its net profit fell by 52% in the third quarter to €195m. The result was a better-than-expected outcome for the German bank, helped by higher interest rates. But problems at the company's Polish business resulted in €477m in charges. Shares fell more than 7% after the bank said its 2024 costs would be higher than anticipated, with revenue and operating profit for that year missing analysts’ current forecasts.
ABN Amro's Q3 profit jumps
ABN Amro’s third quarter net profit more than doubled to €743m the Dutch bank said on Wednesday, helped by rising interest rates and low impairments. "Uncertainty about economic developments remains high and we expect an economic slowdown," CEO Robert Swaak said in a statement. "Although we are concerned about the outlook, we are well positioned to weather this environment."
Taylor Wimpey expecting nearly £1bn profits
Taylor Wimpey has revealed it is selling almost half as many houses each week than it was at the beginning of the year, which it said reflected customers’ response to “heightened levels of uncertainty”. However, the company still expects to bring in operating profits, excluding exceptional items, of £922m for the full year. The housebuilder also reported its current order book, not including joint ventures, stands at around £2.6bn, though that is less than the £2.8bn it had in forward sales last year.
Binance walks away from FTX bailout
Binance has walked away from a bailout deal for its smaller rival FTX. The cryptocurrency exchange said that following due diligence, it would not pursue the deal. It said reports of "mishandled customer funds and alleged US agency investigations" had swayed its decision. On Wednesday it was revealed that the US Securities and Exchange Commission was investigating FTX's handling of customer funds and its crypto-lending activities. Fallout from the failed deal spread rapidly, with Bitcoin down 11% while other tokens also sustained severe selling pressure. Concerns over the proprietary trading firm Alameda Research, which is controlled by FTX boss Sam Bankman-Fried, were also heightened.
Aviva promises regular payouts as premiums rise
Aviva has pledged "regular and sustainable" payouts to investors as the insurer reported a 10% rise in gross written premiums in the first nine months of the year, to £7.2bn. The value of new business in its UK and Ireland life division rose 46% over the same period to £466m. However, shares were down 1.4% due to a fall in Aviva's sales of bulk annuities. Aviva has been under pressure from activist investor Cevian Capital to increase returns to shareholders for some time.
LEISURE & HOSPITALITY
Sales slow at Wetherspoons
JD Wetherspoon has reported a 1.1% fall in like-for-like sales in the five weeks to November 6 compared with pre-pandemic trading in 2019, having increased by 1.5% in the previous nine weeks. Compared with a year ago, sales rose 10.1% in the first nine weeks of its financial year and were 8.9% higher in the past five weeks. The company warned of slowing sales and said it was facing “substantially higher” costs for staff, food and repairs.
Rolls-Royce lays out plans for nuclear power revolution
Rolls-Royce has identified sites across Wales, the North and West Midlands where it could build 30 small-scale nuclear reactors. Each of its proposed Small Modular Reactors (SMR) will generate about 470MW of power each for at least 60 years. Rolls-Royce SMR and the Nuclear Decommissioning Authority will need agreement from the Government before the sites can be used, Rolls said.
MEDIA & ENTERTAINMENT
Meta to cut 11,000 staff
Facebook and Instagram owner Meta is to lay off 11,000 employees as part of a wider shake-up of the business. Those affected in the US would get at least six weeks salary as compensation, plus a further two weeks' wages for every year served. The arrangements would be similar elsewhere, the company said. However, it was unclear whether any UK jobs were affected. Founder and chief executive Mark Zuckerberg admitted his own plans for growth had been too optimistic and apologised for having to slash so many jobs. Commenting on the decline of Meta, The Telegraph’s Matthew Lynn says an “eccentric and poorly realised bet on the metaverse, and the neglect of its core social networking business, has led Meta to this dismal point” and only Mark Zuckerberg is to blame.
Higher mortgage rates force housing market slowdown
The Royal Institution of Chartered Surveyors (Rics) has revealed that house prices stalled in October after over two years of growth. Rics found that across Britain, 2% more property professionals reported house prices falling rather than rising, ending a 28-month run of growth. Simon Rubinsohn, chief economist at Rics, said: "The latest feedback to the Rics survey provides further evidence of buyer caution in the face of the sharp rise in mortgage costs. As a result, the volume of activity is likely to slip back over the coming months and realistic pricing is much more important to complete a sale. The settling down in financial markets could provide some relief although it may be premature to assume this will be reflected in a reduction in lending rates any time soon."
Revenues rise at M&S
Marks & Spencer has reported an 8.5% increase in revenues to £5.5bn, thanks to its clothing and home division generating sales growth of 14% amid a “return to more normal trading patterns” after the pandemic. Overall clothing and home sales rose to £1.7bn for the 26 weeks ended October 1, generating profit of £171.4m, while shop sales increased 18%. Despite this, adjusted pre-tax profits fell to £205.5m, from £269.4m a year earlier.
Poor health of public holding back UK growth – Haldane
Economic growth is being held back by the deteriorating health of the British public, former chief economist at the Bank of England Andy Haldane has warned. “We’re in a situation for the first time, probably since the Industrial Revolution, where health and wellbeing are in retreat,” he said. “Having been an accelerator of wellbeing for the last 200 years, health is now serving as a brake in the rise of growth and wellbeing of our citizens.” He said the pandemic was a tipping point for a health service that has seen one of the lowest rates of investment in the G7. Citing a record number of unfilled vacancies, Mr Haldane proclaimed: “We haven’t got enough people.”
Foreign investors dumped gilts in mini-budget crisis
Foreign investors have dumped UK government bonds at the fastest pace on record over a three-month period. New data from the Bank of England shows the exodus of international bondholders accelerated in September, with £14.8bn of gilts sold by foreigners. Overseas investors sold a total of £23bn of gilts in the three months to September. Foreign investors are among the biggest private holders of UK government debt, owning just under 30% of the outstanding gilt market.
Baldwin new chair of Treasury committee
Former Treasury minister Harriett Baldwin has been elected chair of the Treasury select committee after her predecessor, Mel Stride, was appointed to Rishi Sunak’s cabinet. Baldwin is noted for being a critic of Bank of England Governor Andrew Bailey’s failure to increase interest rates well before Vladimir Putin’s invasion of Ukraine.