GlaxoSmithKline: Reasons for UK Investors to be Cheerful

THE WEEK: Morningstar columnist Rodney Hobson says despite continuing wobbles, the FTSE 250 is a full 2,000 points higher than it was in February

Rodney Hobson 29 July, 2016 | 1:30PM
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Don’t you just love it when official figures confound the economists? We were braced for disappointing second quarter GDP figures in the UK after a slowdown in the first three months. After all, the economy was put on hold until we got the referendum out of the way, wasn’t it?

Shell, like BP, needs oil back to $60 a barrel soon

Well no, apparently not. Growth of 0.5% was better than the 0.4% recorded in January to March and better still than the 0.3% forecast. Given that the first calculation of GDP tends to get revised higher subsequently, I take it we are not in recession yet.

Ah, but the doomsters say, only one week of the 13 came after the Brexit vote was announced, so the second quarter doesn’t really count. I have started to worry that we will talk ourselves into a recession, despite news of more investment in the UK from companies such as GlaxoSmithKline (GSK).

However, I suspect that so many companies will use Brexit as an excuse for poor performance that we will stop worrying about it. The B-word was mentioned this week in relation to travel and holiday companies, most notably EasyJet (EZJ) and Thomas Cook (TCG), but I feel that this is a minor part of their problems.

The profit warning issued by EasyJet immediately after the referendum looks increasingly like a case of getting your retaliation in first. Terrorist attacks in France, Germany, Tunisia and Egypt are a far bigger concern. While I think that the bad news is fully reflected in the lower share price, I wouldn’t want to take the risk of investing in a company that bounces up and down so readily, a comment that applies to most of the sector.

In contrast, it may be time to look at engineering, which could benefit from the lower pound. GKN (GKN) figures looked pretty good and the yield of 3.2% is attractive if not exceptional. Its overseas earnings are now translating into more pounds. The shares are well down from early last year and are worth a look below 300p.

It may be too late, though, to consider trying to get into more domestically oriented stocks, the ones that suffered post-referendum. The FTSE 250 Index has recovered most of the losses suffered in the heavy crash at the end of June. Despite continuing wobbles, it is a full 2,000 points higher than it was in February.

Are BP’s Fortunes Turning Positive?

Each time I relent on the warning I issued six years ago, and often repeated, not to touch BP (BP.) shares, the oil giant puts out another dampener. Profits plunged 44% in the second quarter despite a sharp reduction in costs in the industry’s supply chain.

There were, however, some pluses. With crude prices stabilising, the latest three months were actually an improvement on the first quarter. Secondly, we really may at last be seeing the end of provisions to cover the massive costs of the Deepwater Horizon disaster, which haves now topped $60 million. More importantly, BP is pressing ahead with nine major new oil projects in places as far apart as the North Sea, India and Trinidad.

It may seem mad to embark on spending while the crude price remains so subdued but this could be the time to do it, hoping that new fields will come on stream as energy prices recover.

At around 425p the shares have recovered quite far enough from the lows of the past 12 months but if you have stuck with them so far then hang on. The worst is very much over. I’m now actually more worried about Royal Dutch Shall (RDSB), in which I have held shares for several years to enjoy the dividend. Profits there were down 72% and the takeover of BG leaves a debt mountain. Shell, like BP, needs oil back to $60 a barrel soon, which is unlikely to happen.

Rodney Hobson is a long-term investor commenting on his own portfolio; his comments are for informational purposes only and should not be construed as investment advice.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
BP PLC388.60 GBX1.85Rating
easyJet PLC511.80 GBX-0.89Rating
GSK PLC1,309.50 GBX0.73Rating

About Author

Rodney Hobson

Rodney Hobson  is a columnist for Morningstar.co.uk and author of several investing books, including The Dividend Investor and How to Build a Share Portfolio.

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