- FTSE100 ends the week on a brighter note despite recession news
- UK retail sales rise more than expected, most in three years
- Oil price approaches $83 a barrel amid geopolitical tension
- NatWest – big profit beat, loan defaults stay low
Sophie Lund-Yates, lead equity analyst, Hargreaves Lansdown:
“The FTSE 100 seems nonplussed about news the UK economy dipped into recession in the second half of last year. Inflated borrowing costs and huge spikes in the cost of living took the wind out of the economy’s sails. One reason for the market’s optimism is that this is a forward-looking measure, suggesting the outlook for company resilience hasn’t really changed too much on this news. We’ve been waiting for the shoe to officially drop, and there will be some relief it’s finally happened too.
Market sentiment is also being buoyed by better-than-expected retail sales. They’ve risen the most in almost three years, and the volume of goods sold rose 3.4% in January. This is a stark contrast to a very tough December for the retailers, and could spell that the economy is primed to slowly emerge from hibernation. These green shoots are encouraging, but we’re not totally out of the woods yet. Clothing is still a lag, suggesting consumers are still wary about spending on non-essentials. The increase in supermarkets is welcome news though, looser buying behaviour in this area indicates that the very worst of penny pinching Is probably over.
The price of Brent crude is approaching $83 a barrel as it advances for the second week in a row. OPEC+ efforts to control supply, coupled with ongoing geopolitical tension in the Middle East, means the price has been squeezed upwards. A monthly report from the International Energy Agency has pointed out that global oil demand is coming off the boil, which will be helping to stop the price from spiking further.”
NatWest – Matt Britzman, equity analyst, Hargreaves Lansdown:
“NatWest is out with a big profit beat as Paul Thwaite gets confirmed as permanent CEO. Impairment charges were better than expected as customers continued to show remarkable resilience in the face of higher inflation and interest rates. Absent any major shock to unemployment, low default rates are expected to continue over 2024.
Retail customers continue to go in search of better rates from longer-term savings accounts. But crucially for NatWest, the pace of deposit migration was significantly slower in the fourth quarter than in the prior. Perhaps a sign that the peak in migration has come and gone – good news for net interest margins.
Investors will be a little put off by NatWest giving no net interest margin guidance, especially considering income for 2024 is guided slightly lower than the consensus was looking for. This will likely be a key discussion point on today’s analyst call.
UK banks continue to suffer from a post-Brexit valuation slump. While it looks like net interest income has peaked, there are enough tailwinds on the horizon to make the sector worth attention at current valuations. NatWest’s scandal-filled end to 2023 means its valuation is even more attractive, especially considering it should be one of the biggest benefactors of its structural hedge rolling on to higher yields – an ongoing income tailwind.
Retail clients will be closely watching how things develop, given they may get a chance to snap up shares at a discounted price later this year if the government goes ahead with its plans to sell its stake. For existing investors, the ordeal will be a small blip and NatWest’s valuation should continue to trade based on its fundamentals
