Market report: China property woes, hangover from US producer prices and l’Occitane surges on bid speculation

by | Aug 14, 2023

  • Troubles at real estate giant Country Garden trigger fresh worries about the Chinese economy.
  • FTSE 100 opens slightly on the back foot, as investors assess wider impact of property problems.
  • Oil prices dip back amid expectations of lower demand, with Brent Crude below $86 a barrel.
  • Hangover from stronger producer prices expected to continue to weight on US investors.
  • Shares in beauty company l’Occitane surge in Hong Kong amid expectation the company will be taken private.
  • Fresh anger directed at Northumbrian Water as it ups payouts to chief executive and investors amid continued sewage discharges.

Susanah Streeter, head of money and markets, Hargreaves Lansdown:

‘’Worries about deeper cracks appearing in the Chinese property sector kept the FTSE 100 on a losing streak in early trade, as concerns continue to swirl about the health of the world’s second largest economy. Problems are piling up at real estate giant Country Garden, which not only warned of multibillion-dollar losses, but also missed key interest payments on its debt and is suspending trading on 11 of its onshore bonds. There had been high hopes that stimulus from the Central Bank might bolster the fragile state of the sector, but policies have underwhelmed investors and have failed to quell continuing troubles across the property landscape which risk spreading to other sectors. Fresh uncertainty about what lies ahead for the Chinese economy and expectation of lower demand for energy in the vast country has prompted falls in oil prices, with Brent Crude dipping below $86 a barrel after a run of gains since late June. That’s put pressure on oil giants BP and Shell in early trade, while miners also fell back amid forecasts of lower demand for metals. Sentiment is likely to hinge on Tuesday’s data sets on industrial production, employment and retail sales with investors anxious to see if deflation risks becoming embedded in the economy, after consumer prices fell in July.

The hangover from a stronger-than-expected dose of producer price inflation in the US is still causing some headaches, with investors again cautious about calling time early on interest rate hikes. Unease about the impact of higher rates on consumer spending is likely to continue to weigh on companies whose valuations are so highly tethered to growth projections. A shiny new phone, or keys to a pricey EV will hold less appeal for middle income earners, facing ongoing pressure on household budgets.

However, a smaller ticket beauty treat does appear to still hold appeal in tougher times. Shares in beauty retailer I’Occitane have taken on more shine, surging in Hong Kong, after confirmation that the controlling shareholder is considering taking the firm private. A rosy set of recent results has clearly buoyed the confidence of Reinold Geiger in the company’s further growth potential, particularly with the success of its Brazilian brand Sol de Janeiro, which saw sales growth of 135% over the past year. Geiger is gunning for a greater global presence and a bigger slice of the beauty pie currently dominated by big players like L’Oréal and Estee Lauder, and in the luxury space LVMH. Although the company has poured cold water on speculation that the buyout price could come in at as much as HK$35 a share, it did confirm the potential offer price wouldn’t be less than HK$26 a share, which is why the share price has jumped 9% to trade just above at HK$27 a share.

Fresh ire is being directed towards Northumbrian Water after reports that the company sharply increased dividend payments to overseas investors and also gave its chief executive a 65% increase in her bonus. The payouts came even though the firm sank to a loss, was named as one of six worst performing companies by Ofwat, and discharged sewage into bathing waters for 963 hours last year. The payouts appear to have been made possible by a sustained bout of financial engineering of increasing debt which in turn has wiped out profits and helped trigger a rebate from the regulator. It’s far from surprising that campaigners like Fergal Sharkey have swapped mics for megaphones to decry corporate greed and regulatory incompetence.’’

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