Market Watch 19.04.2021

1. Tough sanctions on Moscow. The confrontation between Washington and Moscow reached another level last week when US president Joe Biden has imposed tough new restrictions against Russia, including measures targeting its government debt. Sanctions targeting state debt have a long history, the first round of restrictions being imposed by the Obama administration in response to Moscow’s 2014 annexation of Crimea. They have been seen as a “nuclear option” for the US against Russia. The anti-Russian measures from the Biden administration also involved the expulsion of 10 Russian diplomats and sanctions against 38 entities, individuals, and companies accused of taking part in actions to interfere in US elections and conducting cyber-attacks. For the first time, the US formally blamed SVR, Russia’s foreign intelligence service, for the SolarWinds hack, which affected at least nine federal agencies and 100 companies. It is assumed that the hack gave Russia the possibility to spy on or interrupt more than 16,000 computer systems worldwide. The new sanctions will not facilitate the relations between the two countries. The US president declared that the US wanted a stable and predictable relationship and was “not looking to kick off a cycle of escalation and conflict with Russia”. The sanctions will test the Russian finance ministry’s plans to soften the impact of restrictions against its sovereign debt. After the call between Biden and Putin, Moscow’s benchmark Moex stock index was down 0.6%, while the market’s dollar-denominated RTS index was 1.8% lower. In this new confrontation among the two Great Powers, the EU and NATO both issued statements expressing “solidarity” with the US on the sanctions.

2. A common target between US and China. The divergences between the US and China might reach a common point in the next period. The two countries have agreed to work together to combat climate change despite the tensions over Beijing’s assertive policies on Taiwan or the South China Sea and over human rights in Hong Kong and Xinjiang. “Both countries recall their historic contribution to the development, adoption, signature, and entry into force of the Paris Agreement through their leadership and collaboration,” they said in a joint statement. From the beginning, US President Joe Biden’s climate policy has departed sharply from his predecessor Donald Trump’s administration, bringing the US back into the Paris Agreement and setting a new climate target for 2030. In the statement, the countries committed to co-operating in several actions. This includes the United Nations Framework Convention on Climate Change, the Paris agreement, and the COP26 climate change conference being held in Glasgow in November. The meetings came against after intensifying clashes between Washington and Beijing as Joe Biden’s administration maintains a challenging position towards China. The US opposes Beijing’s actions to reduce the autonomy of Hong Kong and human rights abuses against Uyghurs and other Muslim minorities in Xinjiang, and other moves took by China. The time will say if the new cooperation regarding climate change will be a productive one or the divergences among the two countries will continue to persist. Some environmentalists believe that a US-China agreement on climate change is far from being guaranteed.

3. Vote of confidence in GSK. The US activist fund, Elliot Management has taken a “significant” position within British pharmaceuticals company, GlaxoSmithKline, putting the future of the firm in question, as GSK has vastly underperformed relative to its peers, during the vaccine race. It is known that the position that Elliot has taken ranges in the billions, perhaps the future prospect of GSK’s breaking up of the business appears preferable to them. Since 2017, when current CEO Dame Emma Walmsley took over, many shareholders have become concerned with the firm’s trajectory and this has been reflected in the company’s share price; down 14% since Walmsley, which is significant as competitors, for example AstraZeneca, have increased substantially within the same period. Despite this, investors were pleased with Elliot’s proposed stake in the business, culminating in a share price increase of 5.7%. Shareholders most likely see this as a new opportunity for GSK who has been falling short of its rivals, especially in terms of R&D investment within its drugs field.

That said, opinions of Walmsley are not all negative. Her proposed splitting of the business into two key sectors, consumer health and a medicine/vaccine oriented component has led to some feeling that it is the best course of action, as a means of subdividing the company into two main entities. However, which entity Walmsley presides over has raised concerns for shareholders as they feel, due to her previous experience in consumer health; she would be better suited for the aforementioned business segment. Investors must watch out: the business split could result in changes to fundamentals, mainly dividend yields. Investors in GSK will have become complacent with an above average yield of 6%, which, could be slashed in the aftermath of Covid-19 and wishes of management use retained earnings as a method of organic growth in the form of the proposed business split.

4. Deliveroo CEO admits there’s still work to be done. Deliveroo, the online food delivery firm, is probably one of the LSE’s biggest listings in years. Yet investors were left disappointed. By Friday, the stock was hovering around 260p, having tumbled since it listed roughly two weeks ago. This is in stark contrast to the actual growth and profitability of the firm itself. Orders have doubled to 71 million in Q1, suggesting an appetite for the firm’s services, sparked of course by the existence of locked down society. CEO Will Shu has stipulated that the volatile environment is the root cause behind his company’s stock disenchantment. He acknowledges that in order to placate investors, he has a “lot of work ahead”. Yet, with reference to competitors, Deliveroo has a competitive advantage, fully realised because of the pandemic. People are restricted from going to restaurants; so, Deliveroo essentially brings the restaurant to them, to a moderate extent of course. Naturally, many sole trader restaurants have initiated their own form of bringing their products to consumers: Deliveroo deals with more franchised firms, with bigger brand names and corporate images. Similarly, in terms of staying afloat, Deliveroo can boast of a cash position of £1.5 billion, a cash position of almost Berkshire proportions. Shu admits that he is unsure of where the company will be positioned after Covid-19 but is confident in Hong Kong and its growth. With as hefty a cash position as Deliveroo has, this could definitely be put to good use in the form of organic growth and as well as perhaps some form of diversification into other food markets.

5. UK GDP Recovery. The UK economy grew by 0.4% in February, figures by the Office for National Statistics has revealed this week. This should be caveated with the fact that the economy is still 7.8% below potential output (pre-pandemic levels). The construction sector provided the most in terms of growth, as lockdowns allowed building to go on relatively uninterrupted. Similarly, production grew by 1.0% in February, a rebound somewhat when compared to 1.3% contraction in January. Furthermore, the services sector creeped up by about 0.2% but many of these customer-oriented companies will continue to bring the growth rates down until the Prime Minister opens the UK economy fully in the month of June. As could be imagined, the UK economy is still producing below its pre-pandemic level, and it will take time for this to alter. Yet, there are grounds for opportunity as many firms are boldly awaiting the economy to reopen. Provided everything runs smoothly – which it should – as poverty and loss of livelihoods costs lives as well, I would think that the UK economy will reach its pre-pandemic output level relatively quickly, as there is spent up demand whereby consumers are buzzing to increase their consumption on goods and services. This has been partly achieved by the furlough scheme which ensures that the public have money to spend on said goods and services.

Thank you to James Ballentine for his collaboration and in-depth analysis!

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