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Stock Market Will Bounce Post Election, says Hobson

THE WEEK: Morningstar columnist Rodney Hobson expects a Brexit-like bounce after the June General Election, and dismisses retailer Debenhams' recent strategic review

Rodney Hobson 21 April, 2017 | 10:52AM

Retailers often have to run just to stand still and so it is at Debenhams (DEB), where a strategy review has concluded that the department store needs to drag itself into the modern online age.

I’m generally sceptical of strategic reviews as they are often a load of platitudes and I can’t help feeling that much of what Debenhams has been recommended is what you would expect a retailer to do as part of its normal business.

Sales were not too bad in the first half to March 4, up 2.9% in value with like-for-like sales marginally higher. However, margins have been squeezed and profits thus came in down 6.4%. We had been warned they would be lower but shareholders were no doubt hoping for a pleasant surprise, which was not forthcoming. Overseas the performance was mixed.

At least the dividend was maintained, though it will come under pressure unless the situation improves noticeably.

Much of the new strategy is retreat rather than advancing. Stores will be closed and there is a plan to “declutter store environment with around a 10% reduction in stock options” which I assume means wider aisles and fewer goods on sale. Perhaps Debenhams would like to clarify. Or perhaps they would rather not.

Nothing in retailing comes cheap. An extra £20 million a year will be committed to capital expenditure “to upgrade mobile systems, supply chain and invest in evolving store estate”.

The shares are down from 80p to around 50p over the past 12 months. Investors took the latest update badly and there is probably further downside. I would certainly not bet on a revival any day soon.

Comparison Site Stock Slips

It must be tough being an advertising executive: You never know what will work and what won’t. Some advertisements stick in your mind as great adverts but unfortunately you don’t notice what the product is.

Can any TV campaign have ever been more ghastly than that perpetrated by Moneysupermarket.com (MONY)? The sole purpose seems to be to demean the actors taking part. Yet it has brought people flocking to the site to seek car and home insurance at £1,000 less than their existing policies. Insurance revenue was up 23% in the first quarter of this year.

Alas, less money was made from credit card and energy switching so group revenue rose only 2% overall. However, there are plans for a new energy switching initiative and with the cost of living set to rise faster than wages, thrusting bottoms and gyrating builders may become more attractive.

The shares have slipped back after a strong run from the beginning of December. They recovered some ground after the update so I wouldn’t chase them higher at this stage but I have a nagging feeling they will eventually push above their recent peak of £3.51.

Prepare for the Politics

I won’t bang on about the General Election apart from joining the distinguished ranks of commentators who have admitted that they didn’t see it coming. As with the Brexit referendum, the news has been greeted with a fall in share prices. Once again I expect the market to bounce back and thus see this as a buying opportunity.

The most realistic scenario to work on is that Theresa May wins a large majority of well over 100 seats to push through her Brexit agenda while the resurgence of the Liberal Democrats as the only Remain party will split the opposition vote without making them the main opposition. When that happens, the new certainty about the path we are taking will in my view help the UK economy and the London stock market.

You don’t often catch the bottom of the market but I came pretty close with my first buy of the new ISA year, Dominos Pizza (DOM). The shares had been grossly oversold and it’s still not too late to catch a recovery that I am sure will continue. Meanwhile I will be looking for more companies to buy into.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

Securities Mentioned in Article
Security NamePriceChange (%)Morningstar
Rating
Debenhams PLC41.75 GBX-2.34-
Domino's Pizza Group PLC279.20 GBX-0.64-
Moneysupermarket.com Group PLC338.30 GBX-0.88-
About Author Rodney Hobson

Rodney Hobson  is a columnist for Morningstar.co.uk and author of several investing books, including The Dividend Investor and How to Build a Share Portfolio.