Experts’ Roundtable: Chinese Markets Lifted and UK Government Borrowing Hits Record

* Chinese, Hong Kong markets lifted by stimulus hopes.

* UK government finances come under pressure.

* Unilever posts solid half-year growth.

* Wheat soars after Russian attack on grain port.

* Compass Group lifts revenues 15% in Q3.

Experts’ Roundtable: Chinese Markets Lifted and UK Government Borrowing Hits Record

Steve Clayton, head of equity funds, Hargreaves Lansdown:

“Chinese stocks rose by 2% overnight, while Hong Kong’s Hang Seng index added 4% after traders became optimistic that Beijing will take steps to boost the flagging Chinese economy. A key session in the Politburo saw Chinese leaders flagging that more would be done to support the economy, leading to property and technology sectors racing ahead. In Hong Kong, shares in Tencent and Alibaba both rose by 5% or more.

The UK Government’s finances are coming under pressure, according to Fitch, one of the leading global ratings agencies. It forecasts that the combination of debts taken on in the pandemic, and current high inflation, will take the UK’s debt interest bill to £110bn in 2023. That will represent over 10% of Government revenues and is the highest burden seen in any high-income nation. Historically, the UK has raised around a quarter of its borrowings in the form of index-linked bonds. These track the rate of inflation and pay out more when prices are rising.  With inflation proving stubbornly high, the Government’s funding costs have been pushed sharply higher. Fitch has put a rating of double A minus on the UK’s debts and warn that this rating could be revised lower within the next two years.

Following the breakdown of the international deal to secure global access to Ukrainian wheat, Russia has attacked Ukrainian wheat-exporting ports along the Danube river. Wheat futures prices pushed higher, rising almost 3% in Chicago, to their highest level since February, but still below their initial post-invasion peak of 2022.

Unilever reported 9% underlying sales growth in its half year report and declared a quarterly interim dividend of 37p per share. The company reported growth of 6% or better in all geographic regions and sales volumes holding up despite higher prices, except in Europe where price rises of over 15% proved too much for many consumers. It was a different story across the Atlantic though with North American volumes pushing ahead. The market welcomed the numbers, pushing the stock 5% higher in early trade.”

Matt Britzman, equity analyst, Hargreaves Lansdown commented:

“Consumers shrug off further price hikes as Unilever’s new CEO has the pleasure of delivering strong results to the market this morning. Second-quarter volumes proved especially resilient as big-hitting brands like Vaseline and Dove, plus new entrants in the premium beauty segment, helped underlying sales surpass expectations.

Margin expansion was good to see, especially given the hefty impact of cost inflation and the continued investment in marketing that a brand powerhouse like Unilever simply has to keep up. Things should get easier from here as costs are expected to ease over the second half. That’ll give room to take the foot off the pedal when it comes to price hikes – good news for consumers, and it should release some pressure on volumes.

On Compass Group – the third quarter update points in the right direction. The group reported Q3 revenue growth of 15%, most of it driven by volumes. One of the world’s leading contract catering operators, Compass Group earns most of its revenues in North America and offers an insight into the health of the world’s largest economy. Strong though the numbers were, some investors had hoped for even more after an even stronger growth rate in the first two quarters of the financial year. The stock gave up 2.5% of value in early markets this morning.”

Derren Nathan, head of equity analysis, Hargreaves Lansdown commented:

“Compass Group is continuing to deliver in 2023. Its sheer scale enables it to achieve value and efficiency in contract catering, enabling it to win new business and put up prices. Inflation is one factor driving the strong environment for outsourcing. The ever-growing burden of red tape is another. An earnings multiple of over 20x might seem a little punchy for what, on the face of it, some might consider a boring business. But 30% profit growth would seem anything but boring, particularly given current economic pressures. That does add some pressure to hit its numbers but, so far, Compass hasn’t dropped the ball and its not resting on its laurels either.

Whilst performance is more than respectable in established North American and European markets, it’s seeing faster growth in less developed markets. Meanwhile, strong cash flow generation is allowing the Group to take advantage of acquisition opportunities and make distributions to shareholders. But debt has also been creeping upwards, so keep an eye out for any progress on that front too when the full year outcome is announced.”