FTSE100 slips despite better than expected UK GDP

Since I last posted more than 3 weeks ago, we’ve seen some significant moves in financial markets with fresh record highs for the FTSE100, DAX and S&P500, while also overseeing further rate cuts from the ECB and Bank of England, while the Federal Reserve kept rates on hold.

The more buoyant tone for equity markets appears to have been driven by a combination of softer yields, dropping to the lowest levels this year on a combination of concerns about weaker growth, which has prompted expectations that some central banks might be forced to cut rates by more than expected than was the case only a few weeks ago.

A weaker US dollar has also helped as markets reassess the risks around President Trump’s tariff approach.

This week’s results and broad overview

The fall in yields has been most noticeable in the UK with the 5-year yield falling from a peak of 4.65% in January to a low of 4.08% earlier this month, although we are back at 4.25% now.

This will be a welcome relief for the UK government at a time when the prospect of higher yields threatened to completely erode the Chancellors budgetary fiscal headroom.

While this is good news in one context, the reason for the decline is less so, in that markets are interpreting this in the way of lower growth prospects, necessitating lower tax receipts, which in turn increases the prospect of more rapid rate cuts from the Bank of England.   

We already know the UK economy is struggling and is probably already in a technical recession, with public sector borrowing already higher than many forecasts, while leaked growth forecasts from the OBR, due to be published in March suggest that the Chancellor of the Exchequer is on course to miss her fiscal targets. What the markets give with one hand in the form of lower yields, the OBR takes away with the other in the form of lower growth forecasts. Who could possibly have predicted that?

Having seen the UK economy contract in September and October barely eke out a gain of 0.07% in November, this week’s December GDP numbers, although showing an expansion of 0.4%, point to an economy that has continued to struggle, as this surprise December boost saw the economy expand by 0.1% in Q4. While on a political level this will be treated as a good news story, when you dig a little deeper, things are slightly more complex.

The December boost came about because of an increase in state spending, notably in the services of health and social work.

On a more positive note, we did see hospitality activity pick up with accommodation and food services rising 0.4%, somewhat ironic since the Chancellor's budget measures when they kick in will hit these sectors the hardest. Retail activity on the other hand did struggle which is worrying given that Q4 tends to be a strong quarter.

Construction was positive, although whether that can be sustained remains to be seen, although this week’s trading numbers from Barratt Redrow does offer scope for optimism.

All in all, there are some silver linings but today’s numbers can’t disguise the fact that the UK economy is struggling and, on a GDP, per capita basis, the economy is slowing. Downing Street may well herald today’s numbers as progress but they are merely putting lipstick on a pig.

As for markets, we've seen a much better performance this past few weeks with the FTSE100 achieving new record highs, tempting me to revisit a topic I looked at the end of last year, and the prospect of a possible move towards 9,000 by the end of this year.

It remains true that UK stocks are cheap, some more than others.

This week’s full year results from BP, Unilever and Barclays have seen a mixed reaction, with BPs full year results overshadowed by the news that activist investor Elliott Investment Management has built up a sizable stake in the UK oil major.

This shouldn’t be too much of a surprise given how BP has underperformed its peers in the last 2 years as oil and gas prices retreated from their post Russian invasion of Ukraine peaks.

BP’s underperformance has primarily been a consequence of the policies of its previous CEO Bernard Looney and carried over to some extent by new CEO Murray Auchinloss who tried to put lipstick on a pig by claiming that the oil company was on course to deliver value over volume in this year’s numbers, although in a concession to shareholders, management dropped the pledge to reduce oil and gas production by 2030, which was brought in by his predecessor Bernard Looney.

Nonetheless the reluctance to pare back its commitment to renewables has hurt its share price as well as its profitability.

BP’s problem is it appears to want to be all things to all men when it comes to the energy transition when the reality is that the profits simply aren’t there. The contrast in fortunes this year compared to last is best illustrated in the profit numbers for its gas and low carbon energy division year to date, compared to 2023.

Profits for this division in 2024 fell from $14.08bn to $3.57bn, and at the end of last year the declines in the share price prompted speculation that continued underperformance could signal takeover interest, as we headed into 2025. Also slipping to a loss was customers and products which last $2.4bn in Q4

This week’s Q4 and full year numbers have merely served to underline the underperformance after the oil major slipped to a $1.95bn loss, dragging annual profits down to $750m a sharp fall from last year’s $16.18bn.

The interest from Elliott could well be the catalyst that crystallises a realisation that BP has to put profits and its shareholders first and stop pandering to the green lobby. Auchinloss could well fund that his tenure as CEO depends on it. We should know more about Elliotts intentions at the shareholder day on 26^th February.

Barclays shares have slid sharply on the back of today’s Q4 and full year results which broadly beat expectations.

Full year pretax profit rose to £8.1bn, with Q4 profits coming in at £1.7bn, a 70% increase on the same quarter last year.

Profit attributable to shareholders also rose 24% with the bank announcing a £1bn share buyback with the bank keeping guidance for 2025 unchanged from previous forecasts, which appears to have prompted the sell off. Some context is required here in the context of the sell off, which while disappointing on the face of it comes at the end of a 45% share price gain from the lows seen in August last year and which saw the shares hit their highest levels since May 2013 earlier this week.

Unilever shares have also taken a nosedive after reporting their own set of full year numbers which got a broad thumbs down from the markets today, sending the shares back to levels last seen in July last year. Today’s market reaction is concerning given that management announced a 6.1% rise in the quarterly dividend, and a €1.5bn share buyback i

On any metric sales growth of 4.2% is solid, with an 12.6% rise in underlying operating profit also reasonably acceptable. Margins also look solid at 18.4%, a 14.7% increase.

It would appear that an uncertain outlook with respect to 2025, with management expecting a slow start to 2025, with subdued market growth in the near term. Underlying sales growth of between 3% and 5% for 2025 and an increase in underlying operating margin to 19.6% in H2 appears to suggest a management who are keen to hedge their bets 

The company has also taken the decision to spin off its ice cream business in the form of a separate listing based in the Netherlands, with secondary ones in the UK and US in another blow to the UK as it looks to attract new primary listings, although chatter that Chinese fast fashion retailer Shein could list in London this year is welcome news, and something to look forward to despite the prevailing doom and gloom