My colleague is sure to have caught your eye by talking about the Banks being likely to benefit from a UK interest rate rise by year-end. So it’s my turn to look the other way and discuss who might suffer.  Banks profitability might indeed get a boost from being able to lend out money more expensively than what they are prepared to pay for what they have on deposit. But what about those which have a big debt load and need to borrow and indeed refinance lots, for investments that have long lead-times.

A look at my screening software, filtering for UK 100 names (excluding financials) with high debt metrics vs profits or versus stock market value shows the likes of United Utilities, Severn Trent and National Grid near the top. This is no surprise as Utilities is a classic interest rate-sensitive sector, embracing low rates and welcoming cuts, whilst disliking hikes and high rates. After all, the Investments and projects they tale on are expensive to say the least (hundred of millions of pounds, even billions) and can take years before payback can begin.

Note peers SSE and Centrica also figure on the list, but further down, suggesting they might be a little less sensitive. However, all the names mentioned are down between 5% and 8% since late June while the UK’s Sterling rallied 6% versus the USD and down between 1% and 8.5% since end-August when GBP began to strengthen 6% versus EUR. All fuelled by more hawkish discussion of too high inflation requiring a Bank of England rate hike and hopes of a better Brexit result.

Rising oil and thus energy prices has also been an issue. National Grid has just made fresh 2017 lows and both Severn Trent and SSE have revisited theirs. In comparison, over the same periods, the UK 100 index has fallen just 1-1.5% and remains +3.3% for the year. This is less than other major nation bourses, but can be explained by Sterling having rallied 10% year to date, a hindrance for the majority of profits the UK Index generated internationally.

Another sector that needs time to construct and borrows big includes names such as Hammerson, Tesco, Segro, British Land and Land Securities. Like, Rome, commercial property projects don’t get built in a day. So it’s no surprise to these Commercial Property/Real Estate Investment Trust names pretty high up on our “high debt/high interest rate sensitivity list”. After all these are expensive projects and monies needed in advance.

With sector declines of up to 10.9% amid Sterling’s bounce, this suggests these latest names might even be more sensitive than Utilities. Especially when you add in Brexit uncertainty and exposure to the UK consumer. Nonetheless, re-promotion to the UK 100 has helped Segro up 6.5% since June and hold above water for the last month. British Land has also been resilient, down just 2% since June and flat for the month, thanks to news of a supportive share buyback programme.

Tesco has actually fared exceptionally well (+9% since June, flat for the month), maintaining a June rebound from 2017 lows, fuelled by strong results from wholesaler Booker, which it is buying, persistent speculation of a bid from Amazon and a beneficiary of rebounding UK Retail Sales, even if the latter fuels inflation – a double-edged sword, supportive of both Tesco’s top line but also of a UK interest rate rise that may reign in the UK consumer.

The above example of UK Index filtering is the kind of thing we do daily for our clients. There’s nothing we like more than getting stuck into a spreadsheet (if you want a copy of the today’s, just ask), especially if it helps clients making a trading or investment decision. If you own Utility or Commercial Property/Real Estate Investment Trust shares (they do have a nice 3-6% dividend yield), , might you want to sell them or hedge your position? Do you see a short sell opportunity from further declines?  Whatever you want to do, we are here to help. Get access to our research now and receive brief, relevant and insightful material straight to your inbox.

As always, have a great weekend.

Mike van Dulken, Head of Research, 29 Sept 2017