FTSE 100 back in the red amid inflation update and earning season ramp up

Sophie Lund-Yates, lead equity analyst, Hargreaves Lansdown: The disheartening inflation data this morning hasn’t helped the FTSE into positive territory. While inflation is certainly moving in the right direction, it’s still higher than the market expected, which will disappoint those expecting an earlier-than-forecast interest rate cut from the Bank of England. Core inflation has also surprised to the downside, which will have added an extra layer of pressure to early trading. Investors are also reacting to news that Rio Tinto’s first quarter iron ore shipments were behind forecasts, dropping 5%. Short-term prospects for the world’s largest iron ore producer could be underpinned by higher prices, following China’s recently upbeat GDP. But the market will want a swift resolution to recent productivity delays, as the China demand trajectory remains uncertain.

The UK market is of course also still reeling from a double whammy of difficult retail news yesterday. Both Dr Martens and Superdry face serious uphill battles, in a reminder that mid-tier discretionary spending is an area of the market that remains very tough to operate in. Luxury giant LVMH announced its weakest quarterly sales growth in some time after the bell on Tuesday. A softening of Chinese demand and flatter champagne sales have stalled progress. Growth was always due to get worse before it got better for the French conglomerate, but its growth remains more resilient than immediate rivals.

As if demonstrating the uncertain outlook for China, Apple CEO, Tim Cook is making tracks to identify production hubs outside the region. Countries like Vietnam are already increasing their production of Apple products, and Cook is also considering Indonesia. Geopolitical risks are the main motivator for Apple to reduce its highly concentrated reliance on China, but these moves are unlikely to result in a total shunning of the country when it comes to Apple production. Investors should welcome the news that management are diversifying supply chains, following some clunky delays in recent memory.

Delayed interest rate cuts in the US have seen some heat removed some demand stress from the oil price, with Brent crude trading at $89.6 dollars a barrel. The higher than forecast China GDP also masked indicators that showed a slowdown in economic activity in March, with this also loosening the price. That said, the IMF has warned that Middle Eastern conflict could result in higher oil prices for longer, and this could cloud the ability of policymakers to bring inflation down in-line with targets.

ASOS – Guy Lawson-Johns, equity analyst, Hargreaves Lansdown: “As guided to by ASOS’ management, sales have taken a dive and today’s reported 18% fall in revenue might not feel like progress. In response to a tougher environment, ASOS is undergoing a significant makeover, shifting focus to profitability and cash generation. The move to enhance the balance sheet and get the business on track for a more profitable future is encouraging, but it hasn’t been easy for investors.

Behind the scenes, there are early signs that strategic ambitions are starting to bear fruit. Efforts have been made to streamline the inventory and the group have cut £593mn in stock (£7mn away from pre-COVID levels). This move has not only released cash for reinvestment elsewhere in the business but has also led to a significant improvement in free cash flow of around £240mn year-on-year. Although there is still more work to be done, once this is accomplished, it should provide ASOS with some much-needed momentum.

Under the new commercial model, improvements are also being seen in higher margin own-brand sales. The roll-out of Test & React is helping it meet customers rapidly changing preferences and build towards its medium-term target of 30% own-brand sales. Despite these operational improvements, there are still structural hurdles to overcome. It’s no secret M&S and Next have been growing sales in the third-party brands ASOS is known for, and newer entrants like Temu are taking market share from the fringes.

Successfully expanding into international markets, like the US, will be crucial for the company’s future, although this comes with its own set of challenges. In the near-term management need to closely monitor the wider impacts of its margin improvement programmes. Any compromise on ASOS’s strengths in service, such as convenient delivery and returns, could have long-term implications for growth. The current valuation suggests uncertainty in the market about ASOS’s ability to deliver.