FTSE flat on inflation reading, Persimmon suffers labour shortages and Boohoo buys stake in Revolution Beauty

“The FTSE 100 was flat on Wednesday as UK inflation came in higher than expected,” says AJ Bell financial analyst Danni Hewson.

“Unlike the US, where there is evidence surging prices have started to peak, inflationary pressures look pretty entrenched in the UK with further increases in energy prices still to come.

“The inflation reading will only add to conviction that the Bank of England will hike rates a further 50 basis points at the next opportunity – providing consumers with a double whammy of rising food and energy bills as well as higher mortgage costs.

“Expectations for higher rates prompted strength in the pound. That’s typically not helpful for the FTSE as it is stuffed full of companies that do business abroad, meaning strong sterling hits the relative value of these overseas earnings.

“Banks were notable risers on an anticipated benefit from a continued increase in interest rates.

“Turnaround specialist Leo Quinn continues to make progress at Balfour Beatty, despite rising costs. A corporate ‘Mr Fix-it’, Quinn has positioned the construction services business to take advantage of a resilient infrastructure sector and turned what was a bit of a basket case into an increasingly well-oiled machine.

“Since Quinn took the helm at the start of 2015 Balfour Beatty’s shares have advanced 45%. A respectable showing given the impact of disruptive events like Brexit and the Covid pandemic.”

Persimmon

“Rising house prices may be continuing to insulate Persimmon’s margins from rising costs but shortages of skilled labour and materials are putting pressure on volumes.

“The sector is often keen to point to under-resourced planning departments as a constraint on growth and extra red tape associated with river pollution appears to be playing a part too.

“Although Persimmon is confident of a recovery in volumes in the second half, it is easy to understand why the market is being cautious.

“For some time Persimmon, and other housebuilders, have been running very fast to escape pressure on their margins. Cranking back into gear rapidly in the wake of the pandemic, they have been enjoying the benefit of a consistently buoyant property market.

“Now it looks like they could be overtaken by inflationary pressures amid the first signs mounting mortgage costs and cost-of-living pressures are finally having some impact on house prices.

“The appetite for change prompted by the pandemic – including gaining more indoor and outdoor space and potentially some accommodation for home working – has been a powerful driver for people to buy a new home.

“However, there is a limit, and as the pressure on people’s finances grows it is going to become increasingly difficult for them to afford to move house.”

Boohoo / Revolution Beauty

“Everyone loves a bargain when they go shopping and retail companies are the same. Retailers don’t really want to cut their prices unless it means shifting large volumes, but what they do enjoy is buying rival businesses at a discount, either in part or full.

“For years, Frasers was the king of this strategy, waiting with its chequebook as soon as any retailer went into administration. But in recent years we’ve seen Next take strategic equity stakes, while Boohoo and ASOS have been keen to buy companies or brands off the scrapheap.

“Boohoo might be facing slowing demand as its customers battle the cost-of-living crisis, yet that hasn’t stopped it taking a strategic stake in troubled make-up seller Revolution Beauty. The target recently ran into problems with its auditors over accounting issues, causing the share price to collapse.

“While we still don’t know the outcome of this probe, Boohoo clearly didn’t want to put an opportunity to waste and has bought 7.1% of the business while the shares were going cheap.

“Boohoo bought assets from Debenhams last year as part of a plan to be a bigger player in the beauty products industry. Owning a slice of Revolution Beauty could speed up this strategy, particularly if it uses its status as a large shareholder to get good deals on product supply.”

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