Tesco should reap longer-term benefits from its hard work during the pandemic, and is time finally up for Intu?

“Governments and central banks continue to shield equities from the bad news on fresh spikes in coronavirus and evidence of the economic damage wrought by the pandemic,” says AJ Bell Investment Director Russ Mould.

“That explains a strong end to the week for the FTSE 100 which is up more than 1%. The question is how long fiscal and monetary largesse can keep the rally going.

“The upcoming second quarter results season could result in a collision with reality as the impact of Covid-19 really hits corporate profits.

“Earlier in the year the commodities markets offered early warning on the impact of the virus and it is notable that safe haven gold continues to shine above $1,760 per ounce while fuel of the global economy, oil, is starting to hand back some of the gains seen in recent weeks.”

Tesco

“There will be a time when we look back at the pandemic and realise that Tesco went above and beyond to keep the nation’s fridges and pantries stocked.

“In the past few months it has managed to greatly increase the number of homes to whom it can deliver online orders, keep its shelves stocked with the items everyone has needed, and provide jobs to many people who suddenly found themselves out of work.

“The rewards of these efforts are laid out in its latest trading update which shows big growth in food sales and a surge in online business which is likely to have resulted in more households switching their loyalty to Tesco as the supermarket where it is generally easier to get delivery slots than its rivals.

“While these growth achievements have incurred extra costs, from a strategic perspective Tesco will have gained a lot of credibility among the public which will certainly help in its fight against the discounters Aldi and Lidl.

“It shouldn’t really matter that profits have been held back by higher costs as this issue is likely to be outweighed by the longer-term benefits Tesco can enjoy if has managed to attract customers from rivals and secured their future loyalty.”

Intu Properties

“It appears time is up for shopping centre owner Intu Properties. Already in a sorry state before coronavirus, the pandemic and effective shuttering of its sites has tipped it over the edge.

“With the expiry on a debt covenant waiver expiring at midnight and little sign of an agreement being reached with its lenders, calling in the administrators looks an inevitable next step.

“A constituent of the FTSE 100 as recently as 2017, the company is now a penny stock and valued by the market at less than £20 million.

“This is an acknowledgement from investors that the company’s net borrowings of more than £4.5 billion will swallow it up.

“Some of the factors which have led the company to this point have been out of its control, but others have been of its own making.

“A shift to online shopping has hit rental income and valuations at its out-of-town shopping malls and Covid-19 has clearly had a devastating impact.

“However, the business took on too much debt and in hindsight was buying up assets at the wrong time in the early to mid-2010s. The fact several suitors took a look at the business in the last couple of years before walking away should have set alarm bells ringing.

“The chances of a white knight riding to the rescue are practically non-existent at this point, with the future of Intu’s assets likely to be more akin to vultures picking over its carcass.”

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.