Despite a relatively light schedule of FTSE trading updates, last week proved a tumultous time for three heavyweight UK corporates.
Provident Financial, WPP and Dixons Carphone all saw the value of their share price decrease by double digits, after profit warnings, concerns over senior management and questionable growth prospects sent shareholders running for the hills.
The UK’s largest sub-prime lender – which counts Neil Woodford as a majority shareholder – suffered a particularly crippling loss, with its share price collapsing close to 70% after trading opened on Tuesday, wiping £1.5bn off its market cap.
Commentators and journalists revelled in Woodford’s “bad call,” his purchase of 103,000 shares after Provident Financial’s first profit warning in June.
The following day advertising giant WPP saw its shares fall 12%, and the day after shares in the the FTSE 250 company Dixons Carphone’s sank 30%.
Coupled with the Office for National Statistics’ confirmation of lacklustre growth over the second quarter and flat business investment, it is easy to see why the market remains split on the UK’s prospects in the near-term.
But is the series of profit warnings and rapid-fire sell-offs, confirmation that the UK bears are correct?
Richard Stammers, European Wealth’s investment strategist, argued that the FTSE 100 firm’s losses over the week isn’t necessarily a “red flag” for the UK equity market as a whole. Rather, what it does emphasise is that “when valuations are stretched, the failure to deliver earnings is swiftly punished”.
Still, he cautioned that “investors should take extra care to try to identify companies which will deliver their expected earnings and be wary of those where earnings may be missed”.
It is also important to remember that these results were published in August, said Adrian Lowcock Architas investment director, “a time when volumes are traditionally low” and “the impact of bad news on share prices is usually exaggerated”.
“The UK is going through a period of weakness but global growth is stable and indeed wide spread which is good for an index as global as the FTSE 100,” he continued.
“The stronger global growth is also likely to support the UK economy as it helps with our exports and services. Overall, I think we will avoid a recession and growth will recover.”
The fact that Provident Financial recouped 50% of its share price losses last Friday, lends some credence to Lowcock’s and Woodford’s point that markets overreacted.
It would have been a terrible time for Woodford to sell down his exposure to the sub-prime lender, agrees Lowcock. But at the same time, Provident Financial will “likely see another profits warning before everything is put right,” he predicted.
“He does know his companies, but the issue with Provident Financial was the size of the holding meant he wasn’t in a position to sell easily even if he had wanted to. Woodford is a long-term investor, but his timing is not always fantastic (no one’s is) and that is what came out from the Provident Financial holding.”
The disappointing set of results from Provident Financial, WPP and Dixons Carphone do act as a warning and serve as a reminder that “earnings growth is needed to support the valuation of the index,” said Lowcock.
“Any wider profit warnings could put pressure on the FTSE 100,” meaning the UK is not out of the woods yet.
