Associated British Foods rides the storm and housebuilder Berkeley cautious on Brexit and Covid risks

“The FTSE 100 and oil prices both traded at nine-month highs this morning as focus increasingly turns to the boost vaccines can give the economy in 2021 – despite some concern about the roll-out of Pfizer’s vaccine,” says Russ Mould, Investment Director at AJ Bell.

“A bipartisan package of fiscal stimulus in the US also looks closer to launch date as the two sides hammer out a compromise.

“In the oil sector relief that OPEC and its affiliate Russia have reached a deal on output seemed to outweigh any disappointment that production will increase from January – albeit modestly.

“The news follows days of wrangling where the market might have been fearing a repeat of the episode at the start of the coronavirus crisis when Saudi Arabia and its Russian counterparts seemingly decided a global pandemic was a good time to launch a price war in the crude market.

“Shares in BP and Royal Dutch Shell, still heavyweights in the FTSE 100, both saw solid gains on Friday morning.

“Certainty on Brexit remains elusive – deterioration in the talks could be last-minute theatrics or could genuinely mean the chances of a deal are receding. We should know sooner rather than later.”

Associated British Foods

“The retail sector is praying for a good Christmas sales period and it now has three weeks in which to shift piles of goods. This is particularly important for Associated British Foods because it doesn’t sell Primark clothes online, so it needs as many people through its doors as possible now that lockdown restrictions have been eased in various parts of its operating regions.

“The latest trading data is encouraging with news of strong Primark sales since markets reopened. Extended opening hours have made it easier for customers in the Republic of Ireland and England to shop when they want – even at 3am if they can’t sleep and fancy loading up their shopping basket, thanks to a select number of stores temporarily opening 24 hours a day.

“There is always a risk that opening stores round the clock is a waste of time as it costs more to keep the lights on and to pay staff than is taken in sales during the late night to early morning shift. However, ABF clearly thinks that’s a gamble worth taking in case there is enough pent-up demand from people to want to shop in non-traditional hours.

"After all, so many of its stores have been shut at various points in the year that it would seem silly not to make that extra effort now as a way of playing catch-up.

“What ABF lacks in the online channel for Primark, it makes up for elsewhere in the business. It has a competitive edge over other retailers by being a diversified company and not reliant on one sector. The company’s interests in grocery, food ingredients and agriculture have provided a safety cushion this year and trading in the non-clothing activities has been very promising.

“For years people have asked why ABF doesn’t separate Primark into a standalone entity. This year has given the answer – diversification really pays.”

Berkeley

“Over many years Berkeley has been the star performer in the housebuilding sector, but it has lost some of its shine after sounding a cautious note alongside its first half results.

“The culprits behind this guarded outlook are wearily familiar – Brexit, which still hangs in the balance, and covid-19.

“Berkeley management can see what all of us can; the housing sector is buoyant thanks to pent-up demand from lockdown, people are moving to get more space or a different set-up having experienced weeks at a time indoors this year, and a temporary stamp duty holiday is providing a tailwind to sales activity.

“However, unemployment is mounting and if an unruly Brexit further dents consumer confidence then this will eventually lead to pressure on the property market.

“In this context – and while the company has confirmed guidance and has robust forward sales to back this up – a more pronounced than usual bias towards the second half for profit may be making people slightly nervous.

“Sometimes this can be a recipe for eventual disappointment as a company is unable to make up a shortfall in the second half.

“A key factor the company does have in its favour is an exceptionally strong balance sheet. This underpins its income credentials and means it has a very big buffer against any looming downturn in the market.”

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