Burberry down on margin warning, and BT faces pension deficit issues

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“It’s another miserable day with rain soaking the UK, heightened tensions in the Middle East dominating the news, and stock markets falling around the world once again,” says Russ Mould, Investment Director at AJ Bell.

“When there are only four stocks rising on the FTSE 100 and one of them is a boring old utility company, you know investors are feeling grumpy.

“The FTSE fell 1.6% to 6,893 as investors offloaded shares in oil producers and miners, perhaps taking profit in areas that have done well this year and locking in gains in case markets get even worse from here.

“Yesterday’s US inflation shock fuelled the growing belief that central banks will have to take action sooner rather than later when it comes to raising interest rates. The world wanted economic recovery, but it appears to be happening too fast and the actions required to cool it down aren’t favourable to stock markets.

“The US tech-heavy Nasdaq index is in danger of seeing all of its year-to-date gains wiped out. It is now only trading 2.6% higher since the start of January and pre-market indicative prices would suggest it is in store for another red day today.”

Burberry

“The market can be so short-sighted at times, fretting about near-term issues that could actually create benefits longer term.

Burberry’s shares have slumped on news that operating margins will be hit by increased investment and costs normalising in its new financial year.

“It needs to spend money now to make more money down the line which is perfectly normal business practice. The market doesn’t see it that way, hence the negative share price reaction.

“Expectations have been very high for Burberry to prosper in 2021 and 2022 as a wealth of pent-up demand is unleashed, creating a massive spending boom with luxury goods being an obvious beneficiary.

“It is still feasible to expect this to happen, although there remains uncertainty over the pace of Asia’s tourists being able to get back on planes to travel to other parts of the world and spend big on items such as those offered by Burberry.

“China has been one of Burberry’s best regions in the past financial year for sales. It therefore cannot afford to upset people in the country, something that was tested earlier this year when Burberry and H&M were embroiled in a row over one of the world’s biggest cotton producing regions.

“Beijing sought to penalise Western brands that refused to source materials from Xinjiang because of accusations of worker abuse. Burberry lost one of its celebrity brand ambassadors, Chinese actress Zhou Dongyu, who criticised the business for not publicly stating its stance on cotton from Xinjiang.

“There is clearly a reputational issue at stake and Burberry will need to tread carefully to make sure it does not upset a large swathe of customers in China, but equally it must show that it takes environmental, social and governance issues very seriously.”

BT

“Telecoms giant BT may feel a clearer picture has emerged as several major issues facing the business have been resolved but it seems investors don’t necessarily love what they see.

“The company effectively has three significant drains on its financial resources. These are its substantial pension commitments, the rollout of fibre broadband and funding the acquisition of content rights for its BT Sport channel.

“The latest valuation of the pension reveals a massive deficit which will require hundreds of millions of pounds worth of funding every year.

“The company’s net debt pile is also pretty eye-watering, and the surprise isn’t really that dividends remain off the table for now but that they are likely to come back in the current financial year. The UK’s new super deduction tax on capital expenditure is clearly doing a lot of the heavy lifting here.

“All told though, there should be no surprise that the company wants to bring on board a partner to help meet the costs of its expanded fibre ambitions.

“There was no mention from BT today of the sale or partial sale of its BT Sport arm which had been rumoured in April.

“However, the renewed £4.8 billion TV deal agreed overnight for Premier League rights (in which Sky and Amazon are also participants) is a reminder of the kind of outlays required to feed the BT Sport machine.”

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