Monday, December 11

Chancellor picks goodies selectively from his autumn statement bag



Philip Hammond is clearly keen to tell us he has a populist touch. Even George Osborne never issued a formal pre-announcement of the goodies in his bag.

The new chancellor’s approach takes the Treasury’s news management operation to new heights (or depths, depending on your point of view) but Hammond has at least created a talking point by slapping a ban on the upfront fees letting agents charge their tenants.

Everybody can applaud that measure – or, rather, everybody apart from the agents, but they have only themselves to blame. Upfront fees have become divorced from the costs of arranging a tenancy and are instead a means to gouge the tenant.

London-based Foxtons charges £420 per tenancy, which is essentially a fee for printing out a standard letter and is ridiculous given the princely cut of the rent normally enjoyed by the agent.

Foxtons and its ilk can, of course, attempt to recoup their £420 fees by pushing them onto landlords but one suspects they won’t succeed in full. Landlords, who already pay the same fee for their own letters from Foxtons, are better equipped to negotiate or take their business elsewhere. Hammond’s reform is pro-competition, which means the reform stands a better chance of making a small difference.

Hammond’s other selected highlights are less flashy. It’s hard to know if “an additional £1.4bn to deliver 40,000 affordable homes” really amounts to “a major housing package”. The Treasury didn’t bother to define the period in which the new homes will be built. But, in any case, central government intervention of some size was necessary. Data from the Department for Communities and Local Government showed last week that the number of affordable homes built in England in 2015-16 fell to its lowest level for 24 years. In that context, Hammond’s new £1.4bn may be merely a sticking plaster.

A boost in the national living wage, which applies to workers aged 25 and over, from £7.20 to £7.50 is, perhaps, just good housekeeping. If Hammond is to make progress towards Osborne’s target of £9 by 2020, increases have to happen annually. But a 4.2% rise from April 2017 will delay for lower-paid workers the squeeze on real incomes that will arrive with the inflationary impact of a lower pound.

One knock-on effect, of course, will be higher prices in pubs, bars, hotels and restaurants. Those operators must look after themselves but note the nuanced account offered by the pub and restaurant chain Mitchells & Butlers on Tuesday. Its pre-tax profits, down by a quarter to £94m in the past year, were impacted by wage inflation; on the other hand, it said competitive pressures have now reduced as the rate of openings of rival new restaurants has “slowed considerably” since the national living wage was introduced in July last year. That suggests the market is adapting quickly to the impact of higher wage bills.

The picture is less clear among care homes and in the social care sector, where Hammond’s concerns ought to be concentrated. Osborne introduced a voluntary 2% social care precept into the council tax bills to alleviate cost pressures but reports from local government suggest social care budgets are over-stretched, severely so in some cases. The official checklist of measures in Hammond’s autumn statement contained no hint of further offsetting measures.

Maybe they will follow, but one suspects not. The point of issuing edited highlights in advance is to try to maximise the applause so that the complaints are drowned out. Hammond is playing a grubby game. Maybe the rest of his bag contains some real horrors.

The post-Brexit currency-fuelled fizz in the share prices of some of the FTSE 100 index’s big dollar-earners is evaporating. Diageo went from £18 to £22 after the vote but now it is £20. Unilever raced to £36, now it’s £31.33, virtually where it stood on the day before the referendum.

The same is true of contract caterer Compass Group – after hitting £15, the shares have returned to £13.26.

What’s going on? In part, president-elect Trump has changed the investment weather. If US infrastructure is now the thing, suppliers of raw materials to the construction industry are the place to be. The share prices of the big miners have been a roll for the past fortnight.

The other half of the story is that dull but reliable consumer-related stocks like Diageo, Unilever and Compass weren’t obviously bargains at their currency-inflated highs. Put another way, investors want to see more than just a translational currency boost.

On that score, Compass had few fresh excitements to offer in its full-year numbers. Operating profit margins were flat at 7.2% and underlying operating profits rose 5.6% to £1.44bn. The shares fell 5%.

The reaction is churlish in the sense that Compass’ dull reliability and steadily improving dividend (up 7.8%) are virtues. It remains a high-quality company that is likely to reward long-term owners via steady annual revenue growth of 4% to 6% plus strong cash generation. But it is rated at 22 times earnings. That is not cheap in any currency.