US 2, UK 0. It’s the sort of football score we have come to fear but I’m actually talking about interest rate rises. The US has managed two, albeit they were a whole year apart. The UK has managed none – in fact, that score line should read minus one as rates here were reduced after the Brexit vote.
What is significant is that the Federal Reserve has given a clear indication that it expects three more rises in 2017. It is not really so long ago that the Fed was agonising over whether the US economy could stand a rates rise, not only because of its own fragility but also because to the potential impact of any slowdown elsewhere, especially in China.
I have no doubt that the Fed will proceed cautiously, raising rates by a quarter point at time, but it is clear that this will be the trend from now on and I confidently expect the Bank of England’s monetary policy committee to bite the bullet next year as well. Companies that have failed to get their debt down to manageable proportions will be badly stretched.
Normally rising interest rates are bad for shares but I expect the effect to be muted. Banks are clearly intent on punishing savers in order to widen their profit margins so I do not see how savings accounts will suddenly become more attractive than equities.
I have retained my faith in the stock market as the place to be throughout the tumultuous past year. I carry that attitude into 2017.
Telecoms Merger Proves a Success
I thought the first half results from electricals and phones group Dixons Carphone (DC.) were pretty decent. Sales were up 5%, which actually translated into an 11% improvement in sterling terms, and pre-tax profits rose 19%. Net debt was down sharply, which could be useful as interest rates start to rise, and the interim dividend was raised from 3.25p to 3.5p.
There is a question mark over the way that like-for-like sales were calculated but even if the 5% claimed was an exaggeration there was undisputable some growth and in the age of online sales I place less much importance on LFL than I did 20 years ago.
I must admit I was doubtful when Dixons Retail and Carphone Warehouse merged two years ago as I was not sure how well they would fit together but I was sufficiently won over to invest in the shares subsequently. I don’t regret doing so.
The stock market was, however, rather less impressed than I was. The fly in the ointment was the line that “we have been planning for the possibility of more uncertain times ahead”. It is quite right that any company should do so but why did investors ignore the bits about “we have still not seen any effect on consumer demand as a consequence of Brexit” and “we remain optimistic about our ability to continue to gain market share in all our key markets”?
Chief executive Seb James stresses that he is taking action “just in case”. I like a business leader who is alive to the world around him.
The shares fell heavily on the day of the results, paused for breath then slumped again. I really do not see why they should now be trading at around 340p when they stood at 500p last January but I am steeled for the possibility that they will slip further.
The prospective yield for the current year is 3.1% and the P/E is around the market average, reassuring though not overwhelming. Every fall is a buying opportunity.
Mind the Gap
This is my last column before the Christmas break – next Friday is effectively Christmas Eve as far as the London Stock Exchange is concerned – but this year I am taking a complete rest for three months rather than three weeks. I will be back on March 31 with batteries fully recharged. In the meantime, I wish all readers a merry Christmas and a prosperous start to the New Year.
