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25 January 2020

The UK market shows resilience but is there any fizz left in Fevertree?

Saul Fulda, Investment Analyst, Redmayne Bentley

Speaking at the annual meeting of the World Economic Forum in Davos, UK Chancellor Sajid Javid announced that the government is to prioritise a trade deal with the EU rather than the US, and outlined plans to tax US technology giants. Possibly a negotiating ploy aimed at appeasing EU leaders, his comments could nevertheless frustrate the US President, Donald Trump, who has pledged his support for a UK-US trade deal. President Trump may have declared that “America is winning”, calling for optimism to celebrate the recent successes of the US economy, but it was data relating to the UK economy, and particularly its resilience and ongoing commercial appeal, which caught my attention.

UK employment figures signalled a new record high, with 208,000 jobs being added to the workforce in the three months leading up to November 2019, almost double the 110,000-rise predicted by economists. Concurrently, the number of people out of work dropped by 7,000 keeping the unemployment rate steady at 3.8%. The longevity of this steady decline in unemployment, which has overridden wider market uncertainty surrounding Brexit, must be admired. With the latest figures covering the period prior to the general election, there is a high probability that we will witness continued strength in the UK labour market further down the line. The recent clearing of political uncertainty has instilled confidence into UK businesses and overseas investors and job creation should naturally follow. 

In line with this, Facebook, the world’s largest social media group, has emphasised its support for the British technology sector by announcing the creation of 1,000 jobs in Britain this year. This should further boost the City’s confidence and stimulate similar actions by other corporate powerhouses. That over 1,000 European financial firms applied to enter Britain between 2018 and 2019, further demonstrates the power and attraction which the City of London possesses, irrespective of the Brexit outcome.

In addition, the International Monetary Fund is forecasting Britain to be the fastest growing G7 European economy in both 2020 and 2021, with a 1.4% and 1.5% GDP growth respectively. With Boris Johnson pledging high levels of infrastructure spending, and a boost to education, defence and health care budgets, there is a good chance that these figures could be further upgraded, notwithstanding the diminishing chances of a potential rate cut. Together with the surfacing of renewed confidence and overseas investment, this puts the UK economy in advantageous position to tackle any potential challenges 2020 may bring.
 
Fevertree, the premium tonic maker, suffered a sharp blow on Monday following its full-year trading update. The group saw double-digit revenue growth across the US and Europe, but the decline in UK growth signals that Britain’s love affair with gin and tonic could be over. Fevertree has beaten analysts’ expectations over the past three years, but the continued sales and profits upgrades caught up with the business. Share price plummeted by c.25% on Monday and now lies far below the 200-day moving average, possibly catching the attention of potential suitors. However, the business remains an attractive proposition – its brand strength and market-leading position, which sits alongside its impressive international expansion, should not be dismissed in the face of the negative headlines.

Following Boohoo’s strong trading update last week, its largest rival, Asos, posted impressive results, delivering 20% sales growth over the past quarter and propelling its shares by over 10%. The news will be welcomed by investors who underwent a torrid 2019 following a profit warning and warehouse issues. Despite the growing digitisation of the high street, the global demand for inexpensive fashion is driving down margins, which fell by 170 basis points for Asos and by 70 basis points for Boohoo. Despite sales increasing, margins are being squeezed which raises questions over the efficiency and sustainability of the business models of both companies.

Finally, there seems no end to Ted Baker’s fall from grace. Profit warnings, balance sheet errors, and harassment scandals have tarnished the company over the past year, and this week the group revealed that the value of its inventory had been overstated by £58 million. The shares, which were trading above £20 in February 2019, have now lost around 84% of their value. There are limited options left for Ted Baker, with privatisation seeming the most sensible: running the business without the pressure of shareholders, together with the chance to start afresh with a new management team, should kick-start this falling giant.  
 
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 UK market shows resilience but is there any fizz left in Fevertree?

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