Trailer for Shell’s second quarter spooks investors, and Redrow pleas for Help to Buy existing scheme extension

“The biggest quarterly drop in UK GDP in more than a generation helped contribute to a downbeat feel for the markets on Tuesday,” says AJ Bell investment director Russ Mould.

“Combined with the warning from the World Health Organisation that the worst of the coronavirus pandemic was yet to come and it’s easy to see why investors would be feeling nervous.

“Under the circumstances a 0.4% drop for the FTSE 100 to around the 6,200 mark looked a measured response.

“Sterling remained under pressure against the dollar, at around the $1.2285 mark, while oil prices gave up some ground with the Brent benchmark nearing $40 per barrel. Gold continued to shine with the safe haven metal reaching $1,774 per ounce.

“After a quarter which has seen the best performance for global equities in more than a decade, reflecting the sharp recovery from the lows seen in March, the next few months could prove a lot more complicated.”

Royal Dutch Shell

“For Shell the coronavirus has not just been a short-term headache. It is proving to be a long-lasting migraine and the level of pain being experienced by the business is evident in today’s teaser for its second quarter results.

“The scale of the write-downs to the value of its assets are eye-catching and reflect the significant drop in energy prices linked to the pandemic, though of perhaps more concern is the ongoing impact on its integrated natural gas business.

“A big part of Shell’s strategy in the 2010s was built around increasing its exposure to gas and it was the key driver behind the mega-merger with BG in 2016.

“This has given it substantial exposure to the liquefied natural gas (LNG) market and the typical three to six month lag in LNG prices responding to the oil price means the company is only just beginning to feel the pain here.

“In previous periods of oil market turbulence Shell’s trading and refining businesses have normally helped provide a bit of stability but the wholesale reduction in demand for energy products means these parts of the group are really struggling too.

“Continuing spikes in infections and the possibility of a Covid-19 second wave mean any recovery in demand is likely to be patchy.

‘Perhaps the only silver lining for Shell is that the unprecedented nature of the times we are living through is allowing management to take difficult decisions for the future.

“These include cutting its dividend for the first time in eight decades, slashing jobs and accelerating its transition to cleaner sources of energy.”

Redrow

“Housebuilders have become addicted to the Government’s Help to Buy scheme and Redrow is the latest player to plead for more.

“Having warned that its earnings will be hit this year because of Covid-related issues, Redrow has now called for the Government to extend the existing scheme beyond its current March 2021 end date.

“As it currently stands, the scheme will switch from April 2021 to one only available to first-time buyers and Redrow believes it should really be available to a broader range of property purchasers.

“Help to Buy has been a major boost to housebuilders’ sales and there is a growing fear that many companies are too dependent on it. Take it away and housebuilders’ earnings could potentially suffer, despite there being an imbalance between supply and demand causing a housing shortage in the country.

“Redrow’s shares have tanked on its latest update despite analysts having already forecast for pre-tax profit to fall by 43% to £233 million in the year to June 2020.

“The big clue as to why the market is disappointed lies in the revenue guidance of £1.34 billion. That is below the analyst consensus forecast of £1.46 billion and so profit is likely to be lower than current market estimates, particularly as it flags extra costs and impairments associated with a decision to reduce exposure to London. Notably the volume of homes completed in the financial year is significantly down on 2019.”

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.