Morning Note: Market news, The Autumn Statement, and an update from Deere.
Market News
US equity markets ticked higher last night in thin trade ahead of today’s holiday: S&P 500 (+0.4%); Nasdaq (+0.5%). This morning in Asia, markets also moved up: Hang Seng (+0.5%); Shanghai Composite (+0.6%). Nikkei 225 (closed). Chinese developers rallied on signs of more government support.
The FTSE 100 is currently trading 0.1% higher at 7,481. Companies trading ex-dividend this morning include British Land (3.36%), Imperial Brands (2.76%), Land Securities (1.43%), National; Grid (1.88%), RS Group (1.09%), Scottish Mortgage (0.22%), Vodafone (5.23%).
Japan was shut, meaning cash Treasuries won’t trade until tomorrow. The 10-year currently yields 4.40%. Mortgage rates in the US continued their slide, reaching the lowest level since mid-September. The average for a 30-year, fixed loan dipped to 7.29% from 7.44% last week, Freddie Mac said. Gold slipped to $1,995 an ounce, while Sterling trades at $1.2523 and €1.1466.
Brent Crude trades at $81 a barrel. Discord between OPEC+ members will probably raise volatility in the oil market, but it’s unclear how this will affect broader policy or whether it may have any impact on Saudi Arabia, ING said. Uranium prices in the US surged past $80/pound for the first time since January 2008, soaring past pre-Fukushima disaster levels amid high demand and risks to supply. However, that’s still well below the 2007 peak of $136/pound.
Source: Bloomberg
Autumn Statement: Key Points at a Glance.
Jeremy Hunt declared Britain’s economy “back on track” yesterday as he unveiled the government’s tax and spending plans in the House of Commons in a bid to boost the party’s fortunes in the polls ahead of the General Election next year.
Here is a closer look at the key points in the Chancellor’s statement:
Inflation prediction:
The Office for Budget Responsibility (OBR) predicts an average inflation rate of 2.8% by the end of next year and 2% by 2025.
Economic growth:
The OBR sees “overall” UK growth in 2023 of 0.6%. Growth of 0.7% is expected in 2024, doubling to 1.4% in 2025.
Investment:
A further £500m will be invested over the next two years to fund further “innovation centres to help make Britian an AI powerhouse”.
A “new simplified” tax relief for research and development will combine the existing R&D Expenditure Credit and SME schemes. Through that merged scheme, the Chancellor said he will also cut the rate at which loss-making companies are taxed from 25% to 19%.
National Insurance cut by 2%:
The headline rates of national insurance are being cut by 2%.
Class 2 National Insurance will be abolished, which will save £192 a year for the self-employed.
Class 4 National Insurance will be cut from 9% to 8% on earnings between £12,570 and £50,270.
State pension to rise by 8.5%:
State pension payments are to rise by 8.5% to £221.20 a week, worth almost an extra £900 a year. The triple lock will be “honoured in full”.
Also announced is a £320m plan to help unlock pension fund investment for technology and science schemes.
£4.5bn fund to boost green technology:
£4.5bn will be committed to green technology in a bid to keep Britain “at the forefront of the global transition to net zero”. Around £2bn will go to the car industry.
Defence spend:
The government will meet its NATO commitment of spending 2% of gross domestic product (GDP), the measure of everything produced in the economy, on defence.
Alcohol duty freeze:
All alcohol duty will be frozen until August with no increase in duty on beer, cider, wine, or spirits.
No Inheritance Tax cut:
It was widely speculated that the Chanceller would slash Inheritance Tax to help wealthy homeowners. But he has decided against such a move – pushing back a possible move until next spring, likely having been warned by Red Wall Tory MPs that it would have been unwise to be seen to help the rich during the cost-of-living crisis.
No change to Income Tax
It was also speculated that the Prime Minister and Chancellor considered a shock cut to income tax in recent days. However, the chancellor opted to cut National Insurance instead in a last-minute move.
Company News
Yesterday lunchtime, Deere & Company released results for the financial year to end-October 2023. Profitability was ahead of market expectations, but the guidance issued for FY2024 was somewhat disappointing. In response, the shares were marked down by 3% in US trading hours.
Deere is a global agricultural and construction equipment company with annual sales of more than $61bn. The group has a strong track record of innovation, a comprehensive distribution infrastructure, and a global after-market capability. The group’s strategic aim is to outpace industry growth and generate a mid-cycle operating margin of 15%.
The business is benefitting from broad trends based on population and income growth, especially in developing nations, which are driving agricultural output and infrastructure investment. In addition, technological advances and agricultural mechanisation are expanding existing markets and opening new ones by helping customers increase their productivity, profitability, and sustainability.
The company believes it has incremental addressable market opportunities of more than $150bn that can be targeted through engaging with more customers and increasing levels of connectivity. The focus is on helping customers manage higher costs and increasingly scarce inputs, while improving their yields, using Deere’s integrated technologies.
In the near term, the market environment has started to deteriorate due to higher interest rates and squeezed budgets.
During the latest financial year, worldwide net sales and revenue grew 16% to $61.3bn, while net sales of equipment rose by 16% to $55.6bn. In the final quarter to 31 October, worldwide net sales and revenue fell by 1% to $15.4bn, while net sales of equipment were down by 4% to $13.8bn, versus market expectations of $13.6bn.
Net income rose by 43% in the year to $10.17bn, above the top end of the group guidance range of $9.75bn-$10.00bn. In the final quarter, net income only grew by 5% to $2.37bn.
The Production & Precision Agriculture segment includes large and certain mid-size tractors, combines, cotton pickers, sugarcane harvesters and loaders, and soil preparation, seeding, application and crop care equipment. During the final quarter, sales fell by 6% to $7.0bn due to lower shipment volumes partially offset by price realisation. Operating profit improved by 6% to $1,836m, mainly due to pricing. The margin rose from 23.4% to 26.4%.
The Small Agriculture and Turf segment includes certain mid-size and small tractors, as well as hay and forage equipment, riding and commercial lawn equipment, golf course equipment, and utility vehicles. During the final quarter, sales fell by 13% to $3.1bn, with lower shipment volumes partly offset by higher pricing. Operating profit was down 12% to $444m, with the margin little changed at 14.4%. Construction & Forestry sales grew 11% to $3.7bn, while operating profit grew by 25% to $516m.
The group’s Financial Services division reported adjusted net income down 18% to $190m, due to unfavourable derivative valuation adjustments, less-favourable financing spreads, and a higher provision for credit losses.
Deere’s balance sheet is robust, with net debt of c. $55bn, a level consistent with supporting a credit rating that provides access to low cost and readily available funding. The group has a policy to raise its dividend “consistently and moderately”, targeting a 25%-35% payout ratio of mid-cycle earnings.
Looking forward, the group’s end markets are expected to fluctuate, with high borrowing costs and squeezed budgets prompting farmers to cut spending on farm equipment. Net sales are expected to decline in FY2024 by 15%-20% in Production & Precision Agriculture, 10%-15% in Small Agriculture and Turf, and 10% in Construction & Forestry. Earnings are forecast to be $7.75bn to $8.25bn, as volumes return to mid-cycle levels. This is well below the current analysts’ average expectations of $9.33bn.
Source: Bloomberg