Life in the Shadows
Better economic news in the UK is being largely overshadowed by the wider global picture, which is fair enough. Nonetheless, we should be pleased with the inflation and unemployment figures this week, a fact reflected in a rise above 5,700 points on the FTSE 100 index.
The consumer price index recorded inflation at 2.4% in June, down from 2.8% in May and a bigger drop than expected. Although that is still 0.4% above the 2% central target it is the lowest level since November 2009 and a massive improvement on the ceiling-busting rates we have seen since then.
Fuel prices, which were a major factor in soaring inflation, have fallen back. This is a vital factor as prices on the garage forecourt feed through into the wider economy. Until we reach the point where consumer prices are rising more slowly than wages, the squeeze on consumer spending will hold back the economy, especially as sensible people are trying to reduce their debts.
There is a sting in the tail. Clothing and footwear prices were down 4.2% year on year, a remarkable fall and one that bodes ill for clothing retailers. The new team running fashion at Marks & Spencer (MKS) could hardly be taking over at a worse time.
The unemployment figures are, as usual, a masterpiece of obscurity but they do at least show an extra 181,000 in employment over the three months to May. Even the real figure of 96,000 is encouraging at a time when the country remains in a four-year-long recession.
It is not entirely clear what lingering effect the Olympic Games will have. We have already seen that the completion of most of the advanced work has led to a boom and bust cycle in the construction industry and no doubt there will be an after effect in unemployment numbers when the temporary recruits are laid off.
It is a great pity that, in the meantime, G4S could not have taken more people out of the dole queue for a month or two but perhaps some of those who originally signed up dropped out when they realised that taking temporary work meant they would be penalised because the system makes it so much harder to get back onto benefits.
All in all, we have an economic picture of life in the UK getting no worse and possibly improving a fraction. How many countries in Europe wish they could say the same?
Not So Safe and Sound
The sharp fall in the share price of security group G4S (GFS) raises the issue of whether there is an opportunity to buy in on the cheap. It is true that the Olympics fiasco will damage the group's reputation but the impact will probably wear off quite quickly.
G4S remains heavily in favour with the coalition, as it did with the Labour government, as a 'partner' for putting government work into the private sector no matter what it costs or what goes wrong. It also has a worldwide presence, employing more than 650,000 people across 125 countries, for whom the issues surrounding the games will be less evident.
However, it is a considerable worry that the board is claiming it did not know the extent of the problems until early July. Either the board knew way back before reassuring shareholders that all was well in May, or it ought to have done.
One can forgive chief executive Nick Buckles for his botched attempt to buy Danish rival ISS last year. Chiefs have failed in takeovers and lived to tell the tale, as we discovered at Prudential (PRU), but only if there is a plan to make up for the debacle. Buckles has failed the test and shows no sign of falling on his sword. Forcing him out could cost £21 million on top of the £35-50 million hit from having to bring in soldiers as security guards. Talk about rewarding failure.
Even without considering all these worries, investors should note that G4S is trading on a yield of less than 4%, and a forward P/E of more than 10x at the lower share price around 250p. There are better prospects with better management.
In fact, if I were looking for a recovery prospect after a sharp share price fall, I would much prefer waste management group Shanks (SKS), currently trading at around 80p after starting the year above 90p.
Shanks is suffering on two fronts: its exposure to Europe and its exposure to the construction industry.
I can't say that I propose to buy in at this stage as there could be further for the shares to fall. This week's trading statement said only that trading was in line with expectations before currency movements, and with the euro slipping that is not particularly reassuring. Profits will remain under pressure from customers trying to force down the prices they pay for the company's services.
Nonetheless, the hazardous waste side is doing well and generating electricity from waste is a nice little earner.
The yield is around 4.3%, not bad but not overwhelming. It could be worth watching Shanks for a better chance to buy in at, say, 70-75p.
Market Performance (July 16-20)
FTSE 100 Index: -0.25%
FTSE 250 Index: +1.13%
FTSE UK All Share Index: -0.04%
FTSE Small-Cap Index: +0.45%
FTSE AIM 100 Index: -1.74%
FTSE Fledgling Index: +0.63%
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