Markets had drifted and the strengthened slightly as the ceasefire deadline approached. However, after the bell the US President announced that the ceasefire had been extended due to the “seriously fractured” nature of the Iranian government. At the same time, the Strait of Hormuz remains subject to the blockade, and the lack of any apparent commitment from Tehran to resume negotiations unfortunately leaves the situation live.
By their very nature markets are a discounting mechanism, based on future earnings, and investors have for the most part continued to look through the conflict to a return to normality, whenever that may happen. A strong quarterly earnings season to date has helped the overriding conviction that the world’s largest economy remains in good shape, while the fact that the conflict at the very least seems on a path of de-escalation provides some further comfort.
Yet again, the landscape has changed since the close of the US trading session, with markets likely to resume their upward path later after a mild stutter yesterday.
As expected, UK rose to 3.3% in March from 3% in February, driven by fuel prices, which was totally in line with estimates and which does little to move the dial on interest rate expectations. The broader market was close to the flatline, with limited direction from Asian markets overnight and with broker downgrades to the Autotrader being offset by gains across the commodity space providing some support.
The has nonetheless retained its attraction as an investment destination despite the tepid opening, with a gain of 5.6% in the year to date continuing to elicit some admiring glances from some of its global peer participants.
With the oil price now relatively settled at approximately halfway between the price of around $70 per barrel prior to the conflict and the subsequent spike to a high of $120, markets have erased any resultant losses. In the year to date, the remains ahead by 2.3% and the by 3.2%, while the has completely shaken off its losses to stand 4.4% higher and close to record levels.
Reckitt Benckiser Q1
The sale of the Mead Johnson Nutrition business remains high on the to-do list, but with the Essential Homes disposal complete, “Core Reckitt” is edging towards its strategic objective of concentrating on its most established and highest margin Powerbrands. These include the likes of Dettol, Harpic, Durex and Nurofen, household names with individual pricing power, making them relatively high margin products which have largely been able to fend off the threat of consumers trading down to supermarket own-brands.
The proceeds thus far have been put to good use from an investor standpoint. Net debt has been reduced, while in terms of shareholder returns, Reckitt Benckiser (LON:) is in the midst of a £1 billion share buyback programme, with a special dividend from the proceeds propelling the dividend to an eye-watering, if temporary, 9.1% yield. The underlying yield of 4.3% is nonetheless also punchy, and of clear attraction to income-seeking investors.
The Mead Johnson unit is reported to have attracted the interest of Danone, the outcome of which remains to be seen. In the meantime, growth for the remainder of the business remains on track, despite some headwinds arising from the conflict in terms of supply disruption and the seasonal incidence of lower cold and flu rates having an impact on sales. Net revenues grew on a like-for-like basis by 1.3% to £2.6 billion, comprising 2.3% of pricing growth offset by a 1% decline in volumes. By geography, the Emerging Markets region was the standout performer with double digit contributions from China and India which comfortably outstripped any weakness in Europe.
While stocks such as Reckitt will never be seen as racy or high fashion, they are nonetheless rather more solid and dependable. These defensive characteristics can come onto their own in market environments such as these. Indeed, the group is cautiously confident that it can mitigate the effects of the conflict and subsequent impact on consumer spending by pulling the levers at its disposal, such as pricing, a hedging strategy and supply chain flexibility.
The outlook of net revenue growth of between 4% and 5% for the year has been maintained, with higher adjusted operating margin expected, and weighted towards the second half of the year. The share price has made steady progress despite a decline of 18% in the year to date following the outbreak of the conflict and a poor opening reaction which has been driven by the investor focus on lower net revenue due to foreign exchange headwinds and the absence of a contribution from the former Essential Homes business, despite the increase in like-for-like sales overall. Nonetheless, the price has risen by 9% over the last year which compares to a gain of 26% for the wider FTSE 100 and, with the group being seen by many as a core portfolio constituent given its defensive qualities, the market consensus of the shares as a buy for the longer term will most likely remain intact.