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Buy: JD Sports Fashion (JD.)

JD Sports is now in the unenviable position of having to find a buyer for its asset Footasylum, writes Alex Janiaud.

The Competition and Markets Authority (CMA) will force JD Sports Fashion to sell rival retailer Footasylum, after arguing that the tie-up would leave shoppers worse off.

JD Sports sealed its £86m acquisition of Footasylum in spring last year. At the time, JD Sports said that its rival’s products would be complementary to its range, giving it access to a slightly older demographic.

The CMA opened its investigation into the deal in May. In September, competitor Frasers Group highlighted “the power of the ‘must-have’ brands and potential marketwide practices aimed at controlling the supply and, ultimately, the pricing of their products”. JD Sports has exclusive partnerships with sportswear giants Nike and Adidas.

The watchdog has declared that the deal would lessen competition in the UK, threatening lower quality customer service and a weaker availability of discounts. Consumers view JD and Footasylum as close alternatives, according to its survey, while Footasylum store openings were judged to have affected sales at nearby JD outlets.

The CMA’s decision takes place against a backdrop of high uncertainty for the future of high street retail, which has been ravaged by coronavirus. The UK clothing and footwear market is expected to contract by 30.1 per cent in 2020 as a result of the pandemic, according to analytics company GlobalData, with footwear forecast to be the weakest of the two sectors.

Footasylum contributed £58.7m to JD Sports’ revenues of £2.7bn for its half year to August 3 2019, making up around 2 per cent of overall turnover. Its stores generate the bulk of its income — in its last results as an independent entity, online sales contributed just under a third of its 2018 half-year revenue. Footasylum “may not prove to be strong enough to stand on its own two feet in the future”, observed GlobalData Retail analyst Pippa Stephens.

The CMA said that it had “not found evidence that the impact of coronavirus would remove its competition concerns”, but added that it was willing to give JD Sports sufficient time to dispose of Footasylum given the disruption caused by the pandemic.

JD Sports slammed the verdict, arguing that the watchdog “has completely dismissed any evidence which goes against their prejudged and erroneous interpretation of our market”. The retailer accused the CMA of failing to take into account the likely permanent impact of coronavirus upon the industry, to the detriment of smaller retailers. JD Sports is considering appealing the CMA’s decision.

BUY: AstraZeneca (AZN)

AstraZeneca’s growth rates are moving in the right direction and the dividend assurance on offer is increasingly rare, writes Harriet Clarfelt.

AstraZeneca is playing a central role in the battle against Covid-19, the disease caused by the new coronavirus. Indeed, in recent days the pharmaceuticals giant announced that it would make and distribute a potential vaccine being developed by Oxford university. The vaccine in question entered human trials on April 23 — the first to do so in Europe.

Meanwhile, the group — which produces medicines for major disease areas — is also exploring whether any of its existing drugs could be repurposed to alleviate symptoms of the virus. It is currently monitoring the effectiveness of its type-two diabetes medicine Farxiga and its blood-cancer therapy Calquence in certain hospitalised patients. At the same time, AstraZeneca and GlaxoSmithKline are collaborating with Cambridge university to scale up Britain’s diagnostics industry at lightning speed.

With such important work in mind, it is little wonder that shares in AstraZeneca have rallied in recent weeks — reaching an all-time high when news of the Oxford agreement broke. But it also helped that the group delivered strong first-quarter results 24 hours earlier, showing how it had been bolstered indirectly by the pandemic, too — with short-term stockpiling of medications, longer prescriptions and improved treatment-regiment adherence by patients.

But such benefits are temporary and will presumably pass when the current crisis ends. It is also impossible to predict which — if any — therapies or inoculations will successfully suppress Covid-19 until trial data emerges. So it's encouraging that AstraZeneca’s efforts to tackle the virus represents just one chapter in a long and increasingly upbeat investment narrative.

Back in March 2013, then recently appointed as chief executive Pascal Soriot outlined a strategy for the group to achieve scientific leadership and to return to growth as it moved through a period of patent expiries and revenue decline. And six years later, the group has achieved those goals — propelled forward by the launch of several megahit oncology and respiratory treatments.

For the three months to March 2020, total revenues rose by 16 per cent to $6.4bn (£5.15bn) — the group’s sixth consecutive quarter of growth. True, of that uplift, the aforementioned stockpiling behaviour delivered a low-to-mid-single-digit percentage benefit. But, in any case, new medicines performed “especially well” — with sales here rising by 47 per cent to almost $3bn, including new-medicine growth in emerging markets of 82 per cent to $658m.

This meant that AstraZeneca’s overall product sales jumped by 15 per cent to $6.3bn, underpinned by increases across all three therapy areas — with oncology up by 33 per cent to $2.5bn, ‘new CVRM’ (cardiovascular, renal and metabolism) up 7 per cent to $1.1.bn, and respiratory and immunology up by just over a fifth to $1.6bn.

Hold: Virgin Money UK (VMUK)

The group’s common equity tier one ratio reduced further to 13 per cent, although that is still above a regulatory minimum of 9.9 per cent, writes Emma Powell.

Virgin Money UK reported a half-year pre-tax loss after recording an additional £164m provision for bad debts expected in the wake of an economic downturn. More than half of that provision related to business lending, which accounted for 11 per cent of the overall loan book. Further pressure will mount on profits this year from the reduction in the Bank of England base rate, with the lender guiding towards a net interest margin of between 1.55 and 1.60 per cent in 2020.

That margin declined to 1.62 per cent, compared with 1.71 per cent at the 2019 half-year, due to continued pressure on mortgage pricing. The lender has eased back on writing new mortgages, which resulted in a 1 per cent decline in the value of the book, although that was offset by growth in personal and business lending.

However, margin compression meant the reduction in operating costs following last year’s merger was offset by a fall in income and the cost-to-income ratio was held flat at 57 per cent. Operating costs at the full year are guided to come in higher than consensus expectations at up to £920m due to coronavirus-induced expenses.

Analysts at Investec placed forecasts under review, but prior to these results expected adjusted net tangible assets of 242p a share at the September 2020 financial year-end.

Chris Dillow: Oil’s message

The skill of investing lies not merely in knowing things. Instead, we must know what is relevant. We know the oil price is close to a 17-year low. The question is: so what? Only if this fact tells us anything about future returns does it matter for investors. So does it?

The efficient market hypothesis says it doesn’t. It says that all current information — and especially something so salient as oil prices — should be already embedded in prices and so should not predict future returns.

But the efficient market hypothesis is called a hypothesis for a reason — because we must test it. And, to a limited extent, the hypothesis is wrong because the oil price has predicted some returns in the past.

For years, there has been a negative correlation between the price of Brent crude and the change in the All-Share index in the following six months. Low oil prices in 1989, 1993 and 1999 led to good returns, for example, while high prices in 2008 and 2012 led to equities falling. Overall, since 1988 the correlation has been minus 0.17. That’s not a lot, but it is statistically significantly different from the zero predicted by the efficient market hypothesis. Low oil prices, then, have tended to be mildly good for equities, and high prices bad. Each $10-per-barrel lower oil price has been associated, on average, with returns being 0.5 percentage points higher than average in the following six months.

There are two FTSE sectors where this is especially the case: oil and gas, and mining. Since 1988, each $10-per-barrel lower oil price has led on average to returns on mining stocks being 1.4 percentage points above average in the following six months.

The story behind these numbers is simple: investors overreact. They interpret a drop in the oil price as a symptom of weak global demand and so sell equities, especially cyclicals such as miners. In doing so, though, they are more likely to sell too much than too little, perhaps because they underestimate the ratio of noise to signal in oil prices. The upshot is a tendency — only that — for shares to fall too far when oil prices fall and so recover in the following months.

There are, however, two huge caveats here. One is that for most FTSE sectors there is indeed no significant correlation between the oil price and subsequent returns. For most shares, the efficient market hypothesis is (in this context) correct. The oil price tells us nothing about the future and so should not influence our decisions either way.

Second, what is true in normal times is sometimes not true in crises (and vice versa). One reason to believe this is the case now is that the low oil price is not mere noise but a signal: global demand is significantly weaker and more uncertain — a fact that should justify lower equity prices perhaps for several months.

On the other hand, however, oil’s recent fall has attracted a lot more attention than its gyrations usually do. And when people pay a lot of attention to anything, they are more likely to overreact to it. This suggests equities will rise over the next few months.

Overall, the evidence points to a case for buying equities now, or at least oil and miners. But the evidence is not terribly strong — and perhaps certainly not strong enough to overcome reasonable levels of risk aversion to these sectors. Perhaps the best response to low oil prices, therefore, is to do nothing — a course of action that is very often wise.

Chris Dillow is an economics commentator for Investors Chronicle

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