Forward-looking statements

“It is not what you say that matters but the manner in which you say it; there lies the secret of the ages.” – poet William Carlos Williams.

Management teams must sometimes be puzzled by the share price reaction when they announce results to the stock market. For example, occasionally ‘record’ results can be rewarded by a fall in the share price! However, as important as the results are, it can be the accompanying outlook statement that can have a greater impact. This is because markets are forward-looking, so what management teams say, or omit to say and how they say it, can have a significant effect.

A company might say that the current full year profit outlook is ‘in line’ with expectations. However, some statements may imply a less certain outlook by stating ‘broadly’ in line with expectations, and analysts might interpret this softer tone as a message to trim their profit forecasts slightly. Some companies may allude to a ‘satisfactory’ start to the year, but that can be open to interpretation. Perhaps clearer, are those that say results are expected to be ‘significantly or materially’ above or below market expectations. This is generally taken to be more than 10%, but then requires further analysis as this might be anywhere from 10% to 20% or more!

Management teams can also be caught out by referencing the wider macro-economic outlook, particularly if they allude to ‘uncertainty’ or ‘challenging’ conditions and this can create an adverse share price reaction.

Some larger companies try to be helpful by including a range of forecasts compiled from analysts that cover the stock. For example, ‘results are expected to be in line with compiled consensus analyst expectations of £102.5m, with a range of £100m to £105m.’ The bullish analysts will tend to be at the upper end and the bearish analysts will be at the lower end. Smaller companies however, struggle with this approach due to the lack of analyst coverage.

The timing of results guidance is also key. A company may have had a ‘slow’ or ‘soft’ start to the year, but its order pipeline may make it confident about achieving the full year outlook. It is likely therefore, to note that it expects full year results to be ‘second half weighted.’ This can make the market nervous. It’s a bit like football – your side is down one-nil at halftime, but will hopefully score twice in the second half. Sadly, the opposition usually has a different idea!

In summary, management teams must choose their words carefully! We prefer management teams that under-promise and over-deliver. Even if it means that the shares sometimes don’t react positively on results but, that can then be a good buying opportunity for long-term investors.

What have we been watching?

Global equities continued to climb higher, driven by the latest encouraging US inflation data. The US market recovered to hit a fresh high and this fed through to European markets with Germany and the UK also touching record highs. Markets have been increasingly doubtful about a US interest rate cut this year after a run of higher-than-expected numbers but the slight dip in US inflation in April has re-ignited hopes, with futures now suggesting the possibility of two cuts by the Federal Reserve in 2024. The chance of a US interest rate cut in September is now 60%. Elsewhere, the European Central Bank is expected to cut rates as soon as June while some members of the Bank of England are hinting at a cut this summer although it is still unclear if this will be June or Autumn. The chance of a June UK interest rate cut remains around 60%. Meanwhile, UK equites continue to be supported by ongoing takeover activity. Within commodities, copper, traditionally seen as a barometer of global economic health, hit a record high, although this appears to be driven by the global shift to electrification and renewables – both big users of copper.

The Biden administration went ahead with the rumoured tariffs on some Chinese manufactured goods. The border tax imposed on imported Chinese EVs has been raised from 25% to 100% while that on solar cells has increased from 25% to 50%. Tariffs on certain steel and aluminium products will triple to 25%. In a tit-for-tat move China has launched an anti-dumping probe into imports of plastics used in electronics and cars from the US, EU, Taiwan, and Japan. Meanwhile, President Putin and Xi Jinping praised their friendship and deep ties in a joint appearance before the media in Beijing. The two leaders said they wanted a political solution to the ‘Ukraine crisis’ without saying what that might be. Xi Jinping also called for a two-state solution to the war in Gaza.

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UK wage growth, excluding bonuses was 6% in the three months ended March, however unemployment was slightly higher at 4.3% leaving the Bank of England with some head scratching about a possible June interest rate cut.

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US inflation in April slowed to 3.4% from 3.5% the previous month, while core inflation dipped to 3.6%. Higher rents and petrol prices were the main drivers of inflation. Meanwhile, import prices increased by 0.9% in April driven by fuel imports. US retail sales fell in April, adding to recent weaker US economic growth concerns.

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Japan’s economy contracted by 0.5% in the first quarter of 2024 partly reflecting the impact of the earthquake at the start of the year, although the data was a bit weaker than expected.

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China saw inflation tick up to 0.3% in April. Meanwhile, China announced plans to issue its first batch of ultra-long bonds worth a total of 1trillion Yuan to help fund investment plans and stimulate the economy. Meanwhile, reports suggest that the authorities are considering using state-owned enterprises to purchase unsold homes from distressed property developers with loans from state banks. These properties would then be converted into affordable housing.

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Brent oil was steady around $84.

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Finally, kicking the can down the road? Data from the Bank of England shows a surge in ultra-long mortgages among the under thirties as they struggle to get on the property ladder at a time of higher interest rates. While the good news for the younger generation is that life expectancy is increasing, the bad news is that 42% of these mortgages have an end date beyond state pension age.

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Read Last Week’s Alpha Bites – China’s Goldfinger

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Alpha Portfolio Management is a trading name of R C Brown Investment Management PLC which is authorised and regulated by the Financial Conduct Authority.