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“The FTSE 100 starts a new week in a similar fashion to the way if finished the previous one as the index drops firmly below 7,000 to its lowest level since July, dragged down by the mining sector,” says AJ Bell Investment Director Russ Mould.
“There’s plenty for the market to fret about and those arguing the markets were looking frothy are seeing some of that froth disappear as a brewing crisis in China, surging gas prices in Europe and concerns about stagflation combine to sink stocks.
“The ‘don’t panic’ message from the Government on energy prices is starting to sound worryingly like Corporal Jones from Dad’s Army as the UK faces a whirlwind whipped up by low levels of energy storage, huge global demand for LNG and Vladimir Putin’s machinations as the amount of gas pumped from Russia is constrained.
“The fear is that in adding to inflationary pressures it could threaten the UK’s recovery from the pandemic.
“More significant from the perspective of world markets is the concerning situation with huge Chinese property developer Evergrande which appears to be teetering on the precipice with concerns about contagion from the situation infecting the wider economy in China.
“This is particularly bad news for miners. Any downturn in China would have significant implications for commodities demand given its status as the world’s largest consumer of many minerals and metals. The situation also has uncomfortable echoes of 2015 when fears about Chinese debt prompted a big and broad-based market correction.
“A combination of inflation and a global slowdown, namely stagflation, is the big fear stalking investors and this will need to be addressed if the markets are to recover their poise.”
Prudential
“Is another big member of the FTSE 100 wavering in its commitment to the index? Insurance giant Prudential’s decision to do a big fundraise purely in Hong Kong can be seen in the context of a longstanding pivot towards Asia but it could lay the groundwork for a dramatic break from the UK in the future.
“Activist investor Third Point, supportive of Prudential’s demerger of its US business Jackson Life, has also pushed for the group to eliminate its London office.
“While Prudential has rebuffed this suggestion for now you could certainly envisage a scenario where its increasing footprint in Africa and Asia, something the newly raised funds are intended to augment, leads to questions about just where it should have its primary share listing.
“In forging ahead with the Hong Kong fundraising it feels like Prudential has cleared a plane for take-off in the middle of a raging storm given the current volatility in the market.
“Management clearly has its eye on the long term and is prepared to look through the current turmoil as big opportunities are targeted from the growth in banking, insurance and investment products in Asia and Africa.”
SSE
“It’s increasingly fashionable for companies to be broken up as activist investors put pressure on businesses to extract hidden value. Not every campaign works, but activists have a pretty good hit rate.
“SSE has already gone through some steps to streamline its operations with the sale of its retail energy division, but Elliott Management believes it can go further by selling its renewable energy operations.
“Having kept quiet for a while the market speculated on what might happen, SSE has now put out a statement saying there is no decision to break up its business.
“There are two ways to interpret this statement.
“On one hand, the words ‘there is no decision’ might imply that some consideration might still be given to a break-up – as in there is no decision yet.
“On the other hand, the company says it already has a clear strategy and has promised to give all the details on spending and the how this might drive growth at the half year results in November. It doesn’t want an activist investor getting in its way before investors have had a chance to digest the plan for future value generation.
“A lot of the big oil companies are in the market for renewable energy assets as they seek to transition away from fossil fuels, which means there would be eager buyers for SSE’s renewable energy operations.
“Activist investors are known for their persistence so one can be sure that Elliott won’t give up following the energy group’s latest statement.”
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