Weekly outlook: Priips debated; UK banks bonanza; and US Fed minutes

The key events for UK wealth managers for the week starting 18 February

Three of the UK’s biggest banks – HSBC, Lloyds and Barclays – report Q4 2018 earnings this week. Of the three, Lloyds is likely to be watched most closely given its health is seen as a proxy for the state of the UK economy.

AJ Bell investment director Russ Mould said: “Results-wise, Lloyds is clearly going to be an important benchmark because it is so exposed to the UK economy.”

People will also be closely watching the Federal Reserve minutes on Wednesday, but from a UK perspective, unemployment and wage growth figures, published on Tuesday, are likely to be the main talking point.

In terms of other company results, Reckitt Benckiser reports on Monday, while Rathbone Brothers and Centrica post on Thursday and Pearson rounds out the week on Friday.

Monday 18 February

Reckitt Benckiser full-year results

Reckitt Benckiser, the consumer goods giant responsible for products including Cillit Bang, Dettol and Strepsils, kicks off the week with its full-year results.

Shareholders will be keen for an update on its restructuring plans following the acquisition of Mead Johnson, a US baby food and milk nutrition company, in 2017 which some feel has got off to a slow start. They will also be wondering what the firm’s next strategic step is given chief executive Rakesh Kapoor has announced he is stepping down some time in the next 12 months.

“One or two shareholders are disappointed he has done a massive deal and then decided to step down in fairly short order afterwards,” said Mould. “Underlying growth has been slowing and they have the acquisition to bed down, so one or two issues for the company to address with its full year results on Monday.”

Tuesday 19 February

HSBC publishes Q4 2018 earnings

Analysts from the Share Centre note that HSBC’s focus is increasingly geared towards Asia which might come as a relief to investors noting the recent bullishness among fund managers for emerging markets, despite the ongoing trade spat between the US and China.

“With around 43% of profits coming from Hong Kong and increasing investment in China, there is a need for the uncertainty to be removed,” they said. “As ever with banks there will be a focus on costs, the performance of its investment banking division and the group’s outlook for the year ahead.”

Mould noted HSBC’s UK exposure, saying if the bank’s top line isn’t growing, it will be looking at a cost-cutting story.

“What everyone is hoping and praying for is that the restructuring charges and litigation and conduct costs that have bedevilled all the banks, particularly PPI, if those costs start to come down their earnings should start to go up.”

German Zew index

According to Mould, the publication of the Zew index, which gives an indication of economic sentiment, on Tuesday is timely following the “very average” Q4 GDP and production numbers posted by Germany recently.

Germany’s GDP shrank in Q3 2018 and stayed flat in Q4 so year-on-year Q4 GDP growth was just 0.6% which is the slowest since the European debt crisis of 2012/13.

“Whether that’s just a blip because of new vehicle emission testing that has gunned up the works for the auto industry or something Trump and trade tariff related, or something suggesting the global economy is hitting the buffers, we are going to find out. Most people, I think, are sat in one of the first two camps and praying it is not the last one.”

Wednesday 20 February

Lloyds Banking Group Q4 2018 earnings

The second big UK bank to unveil its Q4 earnings, Lloyds, had a “torrid” 2018 according to Share Centre analysts, with its shares tumbling about 25%. The analysts expect the market will be looking at areas such as cost cutting, its net interest margin – difference between the rate it borrows and lends – dividends and more information on its strategy plan.

“With its business being predominately UK and as a large mortgage provider, any comments regarding the housing market and Brexit will be worth noting. There may also be an update on recent rumours that it intends to beef up its presence in wealth management.”

The results come a week after documents seen by the Financial Times revealed the Schroders/Lloyds wealth management tie-up is likely to result in the employment of 700 advisers and an increase in assets under management from £13bn to £25bn.

Debating draft Priips EU exit regulations 

A parliamentary General Committee is due to debate a statutory instrument (SI) that seeks to remedy any issues relating to the European Union Packaged Retail and Insurance-based Investment Products (Priips) regulation after Brexit.

HM Treasury is using SIs to ensure that the UK continues to have a functioning financial services regulatory regime in any scenario relating to the UK’s departure from the EU.

Priips regulation came into force across the EU on 1 January 2018, introducing a standardised disclosure document, a Key Information Document (Kid), to be provided when packaged investment or insurance-based investment products are sold to retail investors.

The SI being debated will effectively create a regime for the preparation and provision of Kids which are made available to UK retail investors. According to the government’s website, the UK Priips regime introduced by this SI will be operationally equivalent to the EU Priips regime on exit day, so that firms manufacturing or advising on Priips for sale to UK investors will continue to be subject to the same obligations as they are currently.

Fed policy meeting

Mould said markets continue to believe that the US central bank will be less aggressive with monetary policy this year, even though this seems at odds with much of the economic data, let alone President Trump’s proclamation of an ‘economic miracle’ in his State of the Union speech.

“There remains the depressing possibility that US policy makers are backing off in the face of late 2018’s stock market volatility but there could be another explanation, which is that the foundations of America’s economic growth may not be as robust as they seem.”

Mould observed aggregate borrowing to cover mortgages, credit cards, student loans and car loans rose for the 18th straight quarter in Q4 2018 to reach a new record high of $13.5trn. Elsewhere, ballooning US government debts, at both the federal and state level, mean that America has never been more indebted.

“It may not be a coincidence that as US debt has increased, the peaks and troughs in headline US borrowing costs have become successively lower.”

Thursday 21 February

Barclays Q4 2018 earnings

“The weakness in the share price over the past year tells its own story,” said the Share Centre analysts of Barclays. “Much of the concern revolves around the bank’s strategy and the significant part that the investment banking division plays.”

They noted the bank saw some good news in October with equities and fixed income trading better than expected, and that the banks has returned to dividend growth. However, the recent news that activist investor Edward Bramson has taken a stake in the company suggests that pressure may be applied on chief executive Jes Staley to change his strategy.

Mould also noted Bramson’s arrival at Barclays and his wish to downsize the investment bank. “Another weak number from Barclays investment bank will raise the pressure on Jes Staley,” he said.

Public sector net borrowing

According to Mould, chancellor Philip Hammond seems to be slowly turning on the taps and there are indications the UK won’t meet its borrowing target this year. The figure will be watched closely by the gilt market, but with the BoE sitting on £435bn of gilts it is not as straightforward a market as it was, he added.

“Normally you would expect the gilt market to be more sensitive to borrowing figures than it has been for the past few years,” Mould said. “The annual deficit has been coming down even if the aggregate deficit is still going up.”

People will also be looking at the figures for any hint that the government is looking to end austerity, he added. “You are seeing signs in Spain and Italy, Trump has gone for the tax cut, so there are signs fiscal stimulus is moving back onto the political agenda.”

Rathbone Brothers final results

In its previous update, published on 10 January, Rathbone Brothers said its funds under management had grown 12.8% in Q4, from £39.1bn to £44.1bn at the end of December, despite market conditions and volatility.

The asset manager also saw net inflows increase in 2018, totalling £8.5bn, up from £2.1bn in 2017. This includes the £6.8bn of assets from the acquisition of Speirs and Jeffrey and the remainder from opening funds under management and administration. Analysts will be watching how the integration of Speirs and Jeffery has progressed.

Friday 22 February

Pearson Q4 2018 earnings release

Nick Train favourite Pearson recently updated the market on trading, along with guidance for 2019 and again highlighted pressure on its important US higher education business. The Share Centre noted after a period of recovery the shares have started to plateau as analysts concerns over the year ahead grew.

Mould noted that Pearson was one of the best performing FTSE 100 stocks last year. This was a stark contrast to 2017 during which the academic publisher saw two profit warnings and cut its dividend.

“It needs to prove that was just a blip caused by excess inventory of American school text books rather than the long-term trend towards lower college admissions in the US,” said Mould. “In particular, it needs to prove it is re-positioning itself for a digital world where it can combat open educational sourcing when students put books online which people can then share and don’t pay for. If you’re the publisher, is not what you want to see.”

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