AT THE HEART OF HIRE
OUR ‘GOLDILOCKS’ ECONOMY
EHN’s financial analyst, Nick Spoliar of WH Ireland, discusses the UK economy’s macro upside, global negatives, and considers the outlook for hirers to be middling to good.
The latest Organisation for Economic Co-operation and Development (OECD) commentary on the global economy has landed on our desks and lauds the UK economy, which is a 360° turn from the views it held earlier during the last Parliament. This positive view is scarcely surprising given the ‘Goldilocks’ (not too hot, not too cold, just right) success which the UK economy has enjoyed, with GDP expected to tick along for the next 24 months at 2.4% (Bank of England: 2.5%) and real wage growth accelerating to 3-4% and feeding into domestic economic growth. Interest rates will stay low - with the first rise from current horizontal rates pushed forward well into next year or, even, 2017, following the Governor of the Bank of England’s most recent words. And behind this is a continuing low rate of inflation, forecast to remain under 1% during the coming year.
Sadly, the OECD sees a very different picture when it looks across the globe - growth well below its long-run average and the problems of emerging markets figuring large. Hence the gloomy headlines in the press. Global trade is said to have slowed dramatically; and looking forward, the picture is mixed, with the US solid (+2.4%, unchanged on last year), but China continuing to slow, and the emerging economies still decelerating, albeit at a more moderate pace. The overall impact is to prompt negative revisions in the global growth forecasts, shaved from 3.0% to 2.9% and global trade growth for the current year expected to be 2% (3.4% last year).
UK COMPANIES SHOULD BENEFIT
What does all of this portend for UK Business plc? From an equity markets point of view this sounds like relative upside for the 250 and AIM, which has more domestic exposure, less so for the FTSE, which is more exposed to the world at large. Internally-focused UK companies should benefit from the decent UK economy, with more money in the pockets of UK consumers with which to buy cars, meals, household goods and, indeed, houses. Also, the expectation
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of a swifter taper in the US means that sterling should continue to weaken against the US dollar and, maybe, the Euro, which is more good news for exporters, if not for tourists.
Does this mean champagne all round for the hire industry? That might be going too far. There is unquestionably macro upside. Big infrastructure projects should continue to drive demand for many varieties of rented equipment. The patchy construction market adds some complexity, while there will be the implications of the living wage for some parts of the supply chain. Builders’ merchants Travis Perkins and SIG have published negative updates.
Looking further forward, with good prospects for a growing consumer economy, it seems hard to believe that the construction market will fail to benefit in the coming 12-18 months, particularly given the strong consensus that the UK must find a way of building more than the 140,000 houses constructed in 2014. Putting it all together, the prospects seem benign with longer term potential for sparkle.
Into the mix - stop press - we should add half year results, from Speedy, for the period to end September show sales down 13%, EBITDA -32% and pre-tax profits -81% following the issues that the hirer experienced earlier in the year. Speedy made a poor start to the year and, as its statement admits, business improvement programmes were not well executed.
At the point of writing, the share price is up on these results, with consensus forecasts having been only marginally eroded following their publication. Speedy is described as fundamentally a sound business; and big cost savings underpin the forecasts rather than any bold assumptions about the markets, which seems sensible given the competitive pressures which the company continues to flag.
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