FTSE 100 analysis: UK economy contracts in May – Top UK stocks

Josh Warner
By :  ,  Market Analyst

FTSE 100 struggles

The FTSE 100 is struggling to find higher ground this morning and is trading marginally lower in early trade. .

The FTSE 100 yesterday experienced its best daily gain in 2023, driven by the welcomed inflation data out of the US that has raised hopes that we are reaching the end of the current cycle of rate hiking, although the mood could change today considering on how US initial jobless claims and PPI data comes in later.

Elsewhere in the economic calendar, we have eurozone industrial production figures this morning and the ECB monetary policy meeting accounts this afternoon.


UK GDP falls

We discovered this morning that UK GDP fell 0.1% month-on-month in May, compared to the 0.2% growth we saw in April. While down, that was better than the 0.3% fall anticipated by economists.

The contraction was driven by a 0.6% month-on-month fall in industrial output, which was sharper than the 0.4% drop pencilled-in by economists as rising rates bite. Manufacturing output also contributed after falling 0.2%, but this was softer than the 0.5% fall estimated by economists.

That meant the UK economy stagnated and grew 0% in the three months to May, suggesting the UK economy is struggling. Much attention will be paid to the June figures when we will find out how the economy fared in the second quarter.


FTSE 100 analysis: Where next for the UK 100?

The UK 100, which tracks the performance of the FTSE 100, has rebounded strongly since hitting eight-month lows last week, which sent the RSI into oversold territory.

The index is on course to climb back above 7,450 and look to test the falling trendline if it can keep up the recent momentum. Any renewed pressure could see it slip back toward last week’s lows.

Can the FTSE 100 keep rebounding?


Top UK stock news

Barratt Developments is down 3.4% after warning it will build fewer houses in the new financial year in response to softer demand thanks to higher interest rates. It said it delivered a ‘strong performance in a challenging year’ during the 12 months to the end of June, stating it expects to deliver profits in-line with expectations. It built 17,206 homes in the year, down from 17,908 the year before. The housebuilder said net private reservations per sales outlet fell to 0.55 in the period from 0.81 the year before, while its order book has also shrunk to 8,995 homes from 13,579 a year ago. Demand is being hit by rising interest rates, which is pushing up the cost of mortgages. Barratt said it should deliver adjusted pretax profit of around £880.6 million, which would be down from the £1.05 billion reported in the previous financial year. Barratt warned it will only build between 13,250 to 14,250 homes in the new financial year as it responds to lower demand.

Watches of Switzerland is up 5.4% after delivering record revenue and profitability in the year to the end of April as demand for luxury watches holds up. Sales climbed 25% to £1.54 billion, partly boosted by favourable foreign exchange, and its pretax profit jumped 23% to £155 million. It reiterated its guidance for the current financial year, aiming for 8% to 11% sales growth at constant currency while keep margins broadly flat, but said it is ‘significantly ahead of where we expected to be’ when it outlined its long-term plan back in 2021. It said it will provide an update on its long-term plan this Autumn.

Dr Martens is up 3.6% after revealing trading has been in-line with expectations since the start of the new financial year. The boot maker said its direct-to-consumer business has seen good growth in EMEA and APAC, but this countered lower wholesales revenues. It said addressing its performance in Americas, where sales have continued to fall, is its ‘number one priority’ this year but warned its DTC business here may not recover until the second half.

Recruiter Hays is down 0.9% after it said net fees fell 2% in the three months to the end of June as candidates become less confident in moving jobs. Fees from placing permanent roles were down 9% but this was countered by a 4% rise in fees for finding temporary workers. It reiterated that full year operating profit should meet expectations at around £196 million despite tougher market conditions, which would be down from the £210.1 million reported in 2022.

Wood Group is down 1.2% after it said it remains on track to deliver full year results in-line with expectations after reporting a 15% rise in first half revenue to $2.9 billion. Adjusted Ebitda rose 6% to $195 million. It said it expects to generate positive free cashflow in the second half after suffering from an outflow in the first. ‘We are making good progress in delivering on the growth strategy we outlined last November. Trading shows continued good growth and margins in line with our expectations,’ said CEO Ken Gilmartin.

Spirent Communications is up 1.5% after it saw a recovery in customer spending and order intake in the second quarter following a slow start to the year. Its order book has grown 6% since last December to $304 million. It left its full year outlook unchanged but said results will be more weighted to the second half.

Domino’s Pizza Group is up 3.6% after appointing Andrew Rennie as its new chief executive from August 7. He spent over two decades at the Australian-listed Domino’s Pizza Enterprises, where he held roles such as CEO of France and Belgium and then Australia and New Zealand. Current interim CEO Elias Diaz Sese will go back to a non-executive role as a result.

Diploma is up 3.8% after it said organic revenue grew 9% in the first nine months of the financial year, led higher by greater volumes. Overall revenue grew 21% in the period and its operating margin was ‘strong’ and in-line with expectations. It reiterated its hopes to grow annual organic revenue by 7% and deliver an operating margin of 19%. It also announced it has bought Distribuidora Internacional Carmen for £170 million. The company sells fluid power solutions to the European aftermarket. It said it is a ‘strong strategic fit’ and has been bought at an ‘attractive valuation’ at a multiple of just 9x 2023 Ebitda.

Renewi is down 0.3% after revenue and earnings came in lower than last year in the first quarter as expected as recyclate prices have fallen since peaking over a year ago. Prices have now stablilised but are slightly higher than the historical average. It said its commercial unit has seen steady volumes in Belgium while the Netherlands is seeing some pressure on volumes because of easing construction activity. ‘At this stage of the year, the group expects to deliver full year results in line with market expectations and remains confident in the group’s growth opportunities in the medium term as legislation encourages the transition to circular economies,’ said Renewi.

Review platform operator Trustpilot is down 1.7% after revenue rose 15% in the first half at $85 million and said it squeezed out adjusted Ebitda of around $3 million compared to the $5.4 million loss seen the year before. Annual recurring revenue rose at a faster rate of 21% to $180 million. Total bookings were 13% higher at $98 million. It reiterated its goal of growing its topline by a mid-teen percentage over the full year, but said like-for-like adjusted Ebitda should be at the top end of expectations.

The Gym Group is up 3.4% after revealing positive trends seen in the first half have continued, leading to further growth in memberships. Revenue was up 18.5% in the period at £99.8 million as the number of members rose to 867,000 from 790,000 the year before. Plus, the average amount of revenue earned from each member rose 8% to £18.81.

Experian is up 0.1% after it said revenue grew 5% in the first quarter with organic revenue growth coming in at the same level. Latin America was particularly strong but it delivered higher sales across all regions. ‘Our growth expectations for the full year are unchanged reflecting the strength and diversity of our business. We continue to expect organic revenue growth of between 4-6% and modest margin accretion, all at constant exchange rates and on an ongoing basis,’ said Experian.

Computacenter has been downgraded to Neutral by Citigroup. The stock is down 0.9% at 2,172p this morning.

Softcat has been upgraded to Buy at Citi and given a target price of 1,600p. The stock is down 1.4% at 1,368.19p.

NatWest has been downgraded to Underperform by Mediobanca and given a 260p price target. The bank is trailing 0.7% at 241.80p today.

Hunting has been upgraded to Buy by Berenberg, which said the recent pullback looks overdone. The stock is up 1.3% at 264p in early trade.


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