Barclays’ Epstein shock, and Centrica recovery tripped up by commodity price slump

“A negative market reaction to news from some of London’s largest listed companies, together with some very large caps trading without the rights to their dividend, dragged down the FTSE 100 index by 0.8% to 7,473,” says Russ Mould, Investment Director at AJ Bell.

“Centrica’s full results missed expectations at the revenue line and it warned about earnings for the new financial year. Barclays shocked the markets by saying UK regulators are probing its chief executive Jes Staley over links with Jeffrey Epstein; and BP and Royal Dutch went ex-dividend.

“European and Asian markets were also weak albeit by a lesser extent. Last night on Wall Street US shares rallied, including a 0.7% rise in the S&P 500.

“On the currency markets, the pound rose 0.2% against the US dollar to $1.2978 and among commodities, Brent Crude oil traded 0.7% lower at $55.42 per barrel."

Barclays

“It is unfortunate for Barclays that a better-than-expected set of full year results and fairly upbeat guidance is being overshadowed by an FCA probe into CEO Jes Staley’s relationship with the late disgraced financier Jeffrey Epstein.

“For now Staley has the backing of the board, with the investigation ongoing.

“That’s not to say the results themselves were entirely without blemish, perhaps most significantly the company’s investment banking operations is generating a pretty weak return relative to other parts of the business.

“This adds grist to the mill for activist investor Edward Bramson who has been pushing through his Sherborne Investors vehicle for a sale of this division.

“Running an investment bank requires a lot of capital and earnings can be volatile. While Sherborne remains a significant shareholder this issue is unlikely to go away, particularly given Barclays’ cost to income ratio compares unfavourably to the peer group.

“The company’s decision to back away from its 10%-plus return on equity target for 2020 had been signalled at the third quarter stage but may still come as a disappointment to the market.

“On a more positive note, the lingering headache of PPI at least appears to be behind the company and it committed to its progressive dividend strategy, and the possibility of share buybacks, after hiking the payout today.”

Centrica

Centrica is a turnaround story still in its infancy and the company’s full results show there is a long way to go before the utility company is in a better shape for the next phase of its life.

“Customer churn and increased competition from independent energy providers have been some of its key problems in recent years. It is therefore very pleasing to see growth in customer accounts, more positive feedback from customers and a slowdown in the number of people moving their UK energy supply accounts to competitors.

“Sadly this positive momentum for the consumer-facing operations has been clouded by its oil, gas and nuclear operations where it warns that earnings are likely to be hit by lower commodity prices.

“Centrica’s oil and gas operations are up for sale, so the sooner it can offload them, the better. That would shift the market’s focus back to the consumer-facing business.

“Unfortunately the decision to write down the value of the oil and gas production assets means it may have to sell them for a lower price than the market might have previously expected. It’s a similar story for its nuclear assets which are also up for sale.

“The British Gas owner belongs to a group of large companies on the stock market which have gone from solid, dependable businesses to ones with big question marks over what they might look like in the future.

“Oil and gas producers BP and Royal Dutch Shell are under pressure to shift to renewable energy and how investment requirements might impact future dividend payments. Tobacco companies British American Tobacco and Imperial Brands have so far failed to deliver the expected growth in next-generation products such as vaping; and Unilever is battling a slowdown in sales growth and is offloading parts of its business.

“Centrica belongs to this group of ‘challenged’ FTSE 100 members because the public have been turning their back on the British Gas brand and management seemed to have lost focus in recent years. It has a plan to get back on track but the journey is likely to be very bumpy.”

These articles are for information purposes only and are not a personal recommendation or advice.


The daily market update is written by Russ Mould, AJ Bell’s Investment Director and his team. The article highlights the movement in the main index, winners and losers on the day and any macro-economic announcements.