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02 February 2020

The Coronavirus may be spreading fear, but UK consumers remain confident

Saul Fulda, Investment Analyst

This week has been overshadowed by fears over the spreading and impact of the coronavirus outbreak. Market indices across the globe suffered downturns, hitting consumer and business confidence in a panic-filled week. As world leaders attempt to keep the epidemic in check, European and American stock markets have successfully recouped some of their losses.

The US earnings season saw encouraging results: Apple posted record quarterly profit, sending its shares to record highs; Microsoft beat analysts’ expectations, driven by strong performance in its cloud business; and, McDonald’s revenue broke through the $100 billion barrier for the first time. Donald Trump will likely point to the positive news coming from Wall Street to bolster his re-election campaign, even as the impeachment proceedings continue. That the Federal Research Board opted to keep rates unchanged from their current 1.5% to 1.75% range, may leave Mr Trump disappointed, but highlights the underlying resilience and energy behind the US economy.

On the domestic front, the UK motor industry has witnessed more depressing news, with the announcement that annual car production has fallen by 14% to a decade low of 1.3 million. The shift away from fuel-guzzling diesel engines, alongside the fall in demand from China, hit UK export figures and subsequent production levels. The movement towards green-energy vehicles, taking demand away from traditional petrol and diesel automobiles, will continue to play an important role in this slowdown, until the supply of such new-generational vehicles catches-up with demand, pushing down the cost of electric cars.

On a more positive note, Wizz Air’s shares flew higher this week following a positive trading update. The group posted 24% revenue growth and 42% profit growth, alongside stronger passenger numbers and lower C02 emissions. The company’s agreement to expand into Abu Dhabi is particularly noticeable and offers future growth prospects in previously untapped territories. However, drilling down into the figures poses some eerie questions. With ancillary revenues, up by 36%, providing the thrust behind profit growth, and with average ticket revenue per passenger decreasing by 6.2%, the sustainability of the low-ticket high-add-on model seems dubious. 

The drinks giant Diageo also released a market update this week, reporting slim revenue and profit growth, and downgrading organic revenue guidance towards the lower end of the 4-6% range. The group has been hit by increased volatility in India and Latin America. Although China delivered double digit growth for the period in question, the coronavirus outbreak is likely to disrupt the Chinese and travel segments of the business. Additionally, Diageo saw declining sales of Gordon’s Gin in the UK suggesting that the country’s Gin & Tonic revolution is over.

LVMH Moët Hennessy – Louis Vuitton SE, the world’s leading luxury goods group, reported full-year results for 2019. The group withstood the troubles in Hong Kong to deliver 15% revenue and profit growth, driven by strong performance in the fashion and leather goods division. LVMH’s recent entry into rosé wines and the agreement with Tiffany & Co, together with its phenomenal brand power are likely to propel growth and make 2020 a positive year.

In other news, a recent survey by IHS Markit found that pessimism had eased since December’s general election and a survey from the Recruitment and Employment Confederation revealed that expectations for economic conditions and hiring and investment decisions have improved. A consumer confidence survey from PWC further emphasised rising consumer positivity across different age groups and geographies. These findings paint a positive picture of the UK economy, and given the upward trajectory for business investment and economic growth, the Bank of England’s decision to keep rates steady at 0.75% seems sensible and appropriate.
 
Please note that investments and income arising from them can fall as well as rise in value and you may lose some or all the amount you have invested. Past performance and forecasts are not a reliable indicator of future results or performance. Please note that this communication is for information only and does not constitute a recommendation to buy or sell the shares of the companies mentioned.
The Coronavirus may be spreading fear, but UK consumers remain confident
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