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The Market
On Friday, leading blue chips in London ended the session lower, with the FTSE 100 index falling back through the key 6,400 level as Wall Street tumbled after the shock announcement from internet giant Amazon.com that it is to cut 150 jobs. The news sent shivers through markets on both sides of the Atlantic, with some pundits suggesting this could be the first sign that the internet "bubble" may be about to burst.
As it was, the FTSE 100 index ended the session down 65.4 points at 6,375.6, above its 6,354.8 day's low, but well off the highs seen around midday. The other major indices all finished in negative territory, with the FTSE Mid Cap down 39.9 at 6,271.5 and the Smaller Cap index 4.9 easier at 3,183.7. Volume was a hefty 1.585 billion shares in 110,146 transactions, swollen by the ICI placing and continued heavy trading in Vodafone AirTouch.
Volatility was, yet again, the name of the trading game in the London market. The day started off on a positive note, with a lacklustre performance on Wall Street overnight largely offset by a rally in the heavyweight drugs sector - as brokers highlighted the sector's attractions in the wake of last night's State of the Union address by President Bill Clinton. But the enthusiasm for the sector was not enough to support the wider market, with many players happy to lock in profits in both banking and telecoms issues - which have seen good gains in recent days on takeover talk.
Sentiment was dented further by the slightly stronger-than-expected Q4 UK GDP data, which helped to reawaken worries over imminent interest rates hikes, ahead of the upcoming Bank of England Monetary Policy Committee meeting, dealers said. Preliminary UK Q4 GDP data showed a 2.7 pct year-on-year rise, with services output estimated at 2.9 pct over the period.
The market's see-saw performance continued throughout the morning session, with Vodafone Airtouch - yet again - hogging the spotlight as rumour and counter-rumour circulated the market about who its German target Mannesmann might link up with next. Hopes of a strong start on Wall Street helped to provide a boost towards midday and saw the FTSE 100 index push to its day's high. But the market's renewed vigour soon proved to be short-lived. The first blow came from the much stronger-than-expected fourth quarter US GDP, which showed a rise of 5.8 per cent, and news that the employment cost index rose at its fastest pace in six months. The news reinforced expectations that the Fed will hike rates at next week's meeting, with the hawks suggesting that the US central bank may choose to make a pre-emptive strike and hike rates by a 1/2 point.
As it was Wall Street's reaction was fairly sanguine and, the hope was, that traders on both sides of the water could look forward to a quiet afternoon. But New York went into free-fall when internet giant Amazon.com revealed plans to cut jobs, prompting fears that the internet bubble - which has driven global markets to new heights in recent months - may be about to burst.
Dresdner Kleinwort Benson upgraded Glaxo Wellcome to "buy" from "hold", SmithKline Beecham to "buy" from "add" and AstraZeneca to "hold" from "reduce". AstraZeneca, however, ended 66 pence lower at 2,321 pence, as investors continued to focus on the fundamentals of the group, which include a number of key patent expiries. By contrast investors in Glaxo and SmithKline have their impending merger to look forward to.
John Menzies
John Menzies, the distribution and airport services group, reported a 144 per cent increase in pre-tax profits to £7.8 million for the six months to 30 October. Menzies Transport Services continues to expand, both by acquisition within its cargo operations and by developing new activities. Its relationship with Lufthansa remains strong, and is expected to bring further opportunities.
Menzies' Early Learning Centre is benefiting from the major restructuring undertaken in all aspects of its business, and is also opening up new routes to market. The business remains on track to return to profitability and it remains our intention to demerge the business when it believes to be in the best interest of the shareholders. While the short-term trading environment is challenging, Menzies remains confident that its strategy is sound and will lead to future growth.
Menzies' chief executive said that the key businesses of John Menzies Wholesale and MTS are performing well.
Despite the disposal of John Menzies Retail, full year results were still affected by Christmas trading, where November and December produced mixed results. In particular, THE did not benefit from any major video or music releases, and trading at THE Games suffered more than anticipated from competitive market conditions and the maturing N64 product cycle. However, Gameboy and Pokemon were highly successful and exceeded expectations. Early Learning Centre continued to win market share. November was disappointing, but in December like for like sales growth of almost four per cent was an encouraging achievement especially on top of its 15 per cent sales increase in the previous December.
Northern Rock
Northern Rock, the mortgage and savings bank, announced that it has experienced strong demand particularly in the final quarter of the year resulting in a very strong year end pipeline. The residential lending market has remained buoyant throughout 1999 and is anticipated to remain so in 2000. In this market Northern Rock achieved net lending of £1.6 billion. Its proportion of lending to first time buyers has increased to 23 per cent in line with its plans, whereas the re-mortgage business has fallen to 27 per cent.
Meanwhile, the move away from longer term fixed rate products in favour of short-term fixed, discount and cashback products has continued. The "together" product has accounted for 14 per cent of new mortgage applications. Northern Rock anticipates strong demand for such 'credit bundling' going forward. The group's home equity release product has also shown encouraging signs of success and expects lifestyle products to become increasingly popular and an important feature of its new lending.
Northern Rocks commercial and unsecured portfolios have developed strongly during the year resulting in net lending of £188 million and £184 million respectively. These portfolios provide premium rates of income and will be expanded further in the coming year.
On the retail-funding front, fixed rate bonds and base rate tracker accounts continue to be popular and the banking group will continue to develop innovative products that meet consumer demands. Northern Rock has detected early signs of a softening of competitive pressures in the UK retail funding market which will be beneficial in the coming year if sustained.
Northern Rock's existing Guernsey based operation has a strong franchise with year end balances of £1.7 billion. Subject to regulatory approval Northern Rock intends to open a similar operation in the Bahamas to provide access to new sources of personal savings, particularly in US dollars, but also as a contingency for Guernsey. Opportunities for further expansion into European savings markets is also to be considered by the company.
Non-retail funding is expected to remain fundamental to the group's funding strategy. In the coming year international marketing activities will continue particularly in Europe and the United States. Northern Rock will also be seeking SEC registration which will benefit investor diversification, maturity and price of non retail funding in the United States in the future.
Northern Rock will further centralise its mortgage processing operations by reducing the number of processing centres. The cost savings to be derived from these actions are to be invested in improving its service to customers and enhancing efficiency thereby enabling higher volumes of lending. e-commerce: By May it will have completed facilities for on-shore, mainstream money transmission and cash deposits, by June for protection insurance and by July for all personal credit and mortgage products.
At the year end, Northern Rock had 352 properties in possession compared with 451 at the end of December 1998. Other loan portfolios continue to perform extremely well, with only 0.7 per cent of its commercial loans and 2.1 per cent of its personal unsecured loans three months or more in arrears.
Loss provisions in the year amounted to £11.9 million representing 0.08 per cent of mean advances to customers compared with 1998 when loss provisions were £16.3 million. The balance sheet remains well protected by general provisions amounting to £27.9 million.
At 31 December 1999 Northern Rock's total capital amounted to £1.4 billion resulting in a total capital ratio of 13.8 per cent. Tier 1 capital was £884 million and the Tier 1 ratio 8.7 per cent. The comparable restated ratios at 31 December 1998 were 12.6 per cent and 9.1 per cent respectively.
During 2000 Northern Rock will commence a rolling share buyback programme which will enhance both earnings per share and return on equity. Under this programme Foundation shares held by The Northern Rock Foundation will be bought back at the same price as, and in the same proportion to, ordinary shares. The group anticipates a programme of £150 million in 2000 including the buyback of Foundation shares.
Northern Rock's chairman said that Northern Rock has established three strong sources of funding; securitisation, non-retail funding and its retail franchise. These, together with improvements in distribution and processing systems, will support strong growth in lending volumes in the current year. Meanwhile, it will continue to develop its commercial and personal lending portfolios and remains confident that its traditional and new residential lending products will perform well. Furthermore, the company welcomes regulation as it aims to be at the leading edge of consumer transparency and customer service. Cost efficiency remains at the core of Northern Rock's performance and this enables the group to offer attractive products to its customers. Now, that retail margins have stabilised, volume growth should support higher returns to shareholders.
Please note that the value of investments, and income (if any) yielded by them, may fall as well as rise, and you may not recover the full amount of your original investment. Past performance is not necessarily a guide to the future.
James Dimech DeBono is a qualified accountant with a strong academic background in quantitative financial economics and a keen interest in investment management. He can be contacted by e-mail: JamesDebono@CompuServe.com
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