Profit warnings leap as economic uncertainty takes its toll

Analysis by Ernst & Young revealed a 70pc leap in the number of profit warnings, from 51 in the third quarter to 88 in the final quarter, marking the biggest jump in a decade. During the year as a whole, there were 278 profit warnings, compared to 196 the previous year.

Warnings in the quarter from the likes of retailer Mothercare and Premier Foods, the maker of Mr Kipling cakes, pushed the proportion of listed companies who put out warnings in 2011 up to 14pc, the highest since the financial crisis first started in 2008.

As cash-strapped customers curbed their spending, retail was the worst-hit sector, with 39 profit warnings issued last year, more than the whole of 2009 and 2010 combined.

But Alan Hudson, head of Ernst & Young’s UK restructuring practice, said that although consumer-facing sectors had been hit hard by the sharp fall in disposable income, there were still successful companies across these sector that were performing well.

“Shoppers are still willing to splash out on items or experiences that they value, but the pressure on consumers’ coffers means if they are spending more to create winners in one area, there will inevitably be losers in others,” he added.

Although the high street’s travails have grabbed headlines, the pain is also being felt across many other sectors. Last year, the software and computer services sector issued 31 warnings, the highest number since 2008, with a fifth of the sector cautioning on profit during the course of 2011.

“Both are highly reliant on the vagaries of spending in their end markets - primarily business and the public sector – and both are therefore highly sensitive to rising levels of uncertainty or falling levels of activity in the broader economy,” said Mr Hudson.

“This sensitivity can make both industries useful bellwethers and the sharp rise in profit warnings in both sectors at the end of 2011 was certainly indicative of a changing economic outlook.”

He added that the sharp rise in warnings across all sectors demonstrated that 2011 was a tough year for companies and that the new year was likely to continue in the same vein with the gap between the winners and losers widening.

“Many businesses are still expanding profitably, but others – the zombie companies – remain moribund by debt or defunct business models, unable to build value or gain momentum in these challenging economic conditions,” he added.

Profit warnings in the first weeks of the new year have come primarily from companies vulnerable to contract and order cancellations, as customers wait for more economic certainty before committing to further significant outlays, said Mr Hudson

“Companies in industrial, IT and support services sectors have proved vulnerable to contract delays in the past and further profit warnings are likely from these sectors until the political and economic outlook stabilises,” he added.

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The power of the people takes the economic scene, for better or for worse

Second, it is an early salute in Barack Obama re-election campaign. The time, like the United States early in the season (with gas 90 c a gallon more expensive than last year) of conduct is not a coincidence.

But the extent of the initial fall in the price of oil have shown the risk of suggesting to the markets that you may know something that they do not.

After a week in which the prospects for growth are are seen once again in most large economies, the move displayed more than a hint of desperation on the battle to resume growth.

The brazen Act of political positioning last week was supported by Nick Clegg an idea frankly ludicrous to distribute shares in banks nationalized all citizens.

The populist logic is obvious. We have in large part banks, then why not formalizes the situation with a stock certificate. Unfortunately, common sense stop there.

First of all, it would be impractical, requiring the holdings of each Government so that, assuming that the shares never rise above the price at which the Government has taken his game, a State may reimburse until each of us keeps the difference.

The amounts involved are likely to be low, so the political gain would be insignificant and the enthusiasm of the banks to communicate with millions of shareholders again and largely disengaged would be limited.

During this time, the cost of administration of the plan would be bad value for precisely the people receiving the actions in their guise as taxpayers. Talk about robbing Peter to pay Paul.

In addition, it is implausible to think that such a regime would be more successful than the privatizations of Margaret Thatcher in forging a democracy with the shareholder. Psst, Don ' t bother saying Sid. He has lost interest last time and this is his attempt to be.

Moreover, the power of the people is to have a more direct influence on Arab markets for investment, with spring and, more recently, the demonstrations in the streets of Athens.

A Greek default would be certainly inevitable without the explosion of outrage because the chronic lack of competitiveness means that there is no hope of growth never get out of the abyss. But the refusal of the people to suffer in silence means that the attempt would be made.

Perhaps the most irresistible popular movement, however, is the desire of the Chinese people to maintain the rate of growth which resulted in millions of them out of poverty in the past 30 years. The fears of the Government for social stability if this growth rate slows means that 8pc annual salary increases will remain the standard for years to come.

The power of the people means disinflation China's influence is historical.

Tom Stevenson is a Director of Fidelity International investment. The views expressed are his own.

tomrstevenson@fil.com
Twitter: @ tomstevenson63

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Spain's astonishing co-op takes on the world

The solidarity ethos has its allure given mounting research by the IMF and other bodies that the extreme gap between rich and poor was a key cause of the global asset bubble and financial crisis, as well as being highly corrosive for democracies. The GINI index of income inequality has reached levels not seen since the 1920s across the West.

Mondragon weathered the 2009 slump in machine tools, car components, and its other cyclical niches by putting 20pc of full staff leave for a year at 80pc pay, with names chosen by lottery. Some of its 256 co-ops froze pay, others took a 10pc cut.

The membership rule is that all new workers must put up €13,400 in share capital, which they can borrow from the group’s Caja Laboral, one of the few Spanish savings banks in robust health.

Profits are largely reinvested or sunk into research centres, though a chunk is spent on social projects. Worker dividends are paid into retirement accounts. The whole system is run by an elected Congress, known as "the supreme expression of sovereignty".

Such an egalitarian venture creates all kinds of problems. "We can’t offshore, so we have to keep climbing the technology ladder and improve core engineering here," said Mr Ugarte.

The group is stepping up investment in thermal insulation, and water purification, and grinding machines for the aerospace industry. Its machine tool arm Danobat has bought Newall in Peterborough.

If a co-op keeps losing money, it is given three years to come up a credible plan, but ultimately workers have to be retrained and found other work. Paid-up 'Co-operativitistas' cannot easily be fired. The wider headcount fell by 7,000 during the crisis, but they were outsiders in building.

So far none of Mondragon’s plants in China, India, Latin America or the rest of Europe have opted for co-op status. "We encourage them to be owners of their future, but they are afraid of the obligations that go with it," said Mr Ugarte.

Mondragon pays global staff the market wage, which creates an odd disparity with the Spanish mother company. Mr Ugarte said the net effect of overseas expansion has boosted jobs at home, still 84pc of the total.

America’s United Steelworkers has sought help from Mondragon in creating its co-ops, hoping to emancipate itself from a Wall Street that "hollows out companies by draining their cash and shuttering plants". Yet it is unclear whether the model can easily be exported.

Mondragon’s strength comes from the powerful clan ethos of the Basques, the oldest nation in Europe with a tightknit global diaspora (Nevada, Idaho, Argentina, Brazil) and a unique pre-historical language. Linguists doubt claims that Basque is linked to old Etruscan or Berber dialects.

Recent studies of DNA suggest that the Basque have a very close genetic profile to the Irish and Welsh, who also pre-dated the Celtic agrarian settlements of the 6th Century BC.

There is a dark side to Mondragon. The town is a cauldron of ETA terrorist sympathies. A socialist politician was gunned down in broad daylight two years ago, and the mayor has still declined to condemn the act. The Corporacion adamantly denies any links to ETA, insisting that it is "radically opposed to intolerance and any type of violence". There is now hope of a lasting peace settlement in any case.

"The Myth of Mondragon", based on fieldwork by anthropologist Sharryn Kasmir, argues that political tourists from all over the world have been willing to overlook the subtle forms of peer pressure and worker stress in the valley.

Yet the movement is still flourishing half a century after critics said it would never survive. It generates 3pc of Spain's industrial output of the Basque region and generates annual sales of €24bn. Almost 60pc of its heavy production is exported.

As chairman Jose Maria Aldecoa puts it, with a Churchillian twist: "the co-operative model is absolutely flawed, but it has shown itself the least flawed in a crisis of values and models".

Banking and Finance vacancies at Telegraph Jobs

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Sage takes wooden spoon as bid talk fades

Sage - the biggest loser in the blue chip index on Friday - has been a strong performer in the past few weeks amid gossip it could soon be fending off bids from either SAP, Microsoft or a private equity firm.

However, yesterday UBS downgraded the stock to "sell", arguing it is sceptical about the recent M&A speculation. Michael Briest, an analyst at UBS, said: "We do not see any obvious trade buyers, and feel financial buyers would be unlikely to make a compelling return above 300p at currently accepted leverage levels."

He also said Sage's new chief executive, Guy Berruyer, faces a number of issues including the need for a coherent software-as-a-service strategy; competition from financial buyers for strategic assets; and the maturity of its support-led growth model.

Overall, the FTSE 100 fell sharply in morning trade but recovered in the afternoon despite worse-than-expected US jobs figures. The blue-chip index eventually closed down just 4.52 points at 5657.61. The FTSE 250 lost 40.71 points to 10724.91.

Fresnillo gave up 41p to £12.48 as Bank of America Merrill Lynch downgraded the stock to "underperform" from "neutral".

However, the rest of the mining sector was on good form despite falling base metal prices. Xstrata gained 36p to £12.96 and Anglo American rose 61½p to £27.26.

In the banking sector, Barclays drifted lower as traders chewed over news that Normura sold 220m shares in the bank for Abu Dhabi's Sheikh Mansour bin Zayed Al Nahyan as part of a complex derivatives trade to protect against a loss in value of his 6.3pc stake. Some analysts, though, thought it was actually Nomura that was seeking to hedge its exposure to the bank. Barclays shares lost 6.8 to 297¼p.

Broker downgrades weighed on Autonomy. Panmure Gordon, for example, cut it to "hold" from "buy", while UBS lowered its rating to "neutral" from "buy".

On a more positive tack, Marks & Spencer benefited from several broker upgrades. Credit Suisse raised its rating to "neutral" from "underperform". Tony Shiret, an analyst at Credit Suisse, said: "The market nearly always buys into strategy until it does not work, so now seems a good time to take a more open-minded stance in the run-up to the interims [results] on November 9." The shares edged up 1 to 411p.

On the mid-cap index, Thomas Cook's plans to merge its high street travel and foreign exchange business with the Co-operative Group's lifted its shares 6.1 to 185¾p.

Heritage Oil climbed 24 to 346p thanks to positive broker comment. UBS took up coverage of the stock with a very bullish piece and a 430p price target. Melanie Savage, an analyst at UBS, said the company was her "top pick" of the European exploration and production sector. "Heritage provides exposure to relatively low-risk, high-impact exploration upside in Iraqi Kurdistan and Malta in the near term," she said.

JP Morgan Cazenove was also positive on Heritage. Analysts at the broker said: "Following completion of the Ugandan asset sale and payment of a 100p per share special dividend, Heritage has rescaled itself to be a high-impact explorer, but with a proven track record and very strong balance sheet."

Mining company Petropavlovsk dropped 51p to £10.20 after it cut the size of the Hong Kong initial public offering of IRC, its iron ore unit, by half to $249m due to disappointing demand. In a statement, the company said: "The total demand from investors exceeded IRC's minimum requirements for the shares to be issued by it, but did not meet the company's highest expectations."

Investors were also rattled earlier this week as the Petropavlovsk warned of delays in receiving equipment at its Pioneer gold mine and said it was striving to meet an ambitious production target.

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Sage takes wooden spoon as bid talk fades

Sage - the biggest loser in the blue chip index on Friday - has been a strong performer in the past few weeks amid gossip it could soon be fending off bids from either SAP, Microsoft or a private equity firm.

However, yesterday UBS downgraded the stock to "sell", arguing it is sceptical about the recent M&A speculation. Michael Briest, an analyst at UBS, said: "We do not see any obvious trade buyers, and feel financial buyers would be unlikely to make a compelling return above 300p at currently accepted leverage levels."

He also said Sage's new chief executive, Guy Berruyer, faces a number of issues including the need for a coherent software-as-a-service strategy; competition from financial buyers for strategic assets; and the maturity of its support-led growth model.

Overall, the FTSE 100 fell sharply in morning trade but recovered in the afternoon despite worse-than-expected US jobs figures. The blue-chip index eventually closed down just 4.52 points at 5657.61. The FTSE 250 lost 40.71 points to 10724.91.

Fresnillo gave up 41p to £12.48 as Bank of America Merrill Lynch downgraded the stock to "underperform" from "neutral".

However, the rest of the mining sector was on good form despite falling base metal prices. Xstrata gained 36p to £12.96 and Anglo American rose 61½p to £27.26.

In the banking sector, Barclays drifted lower as traders chewed over news that Normura sold 220m shares in the bank for Abu Dhabi's Sheikh Mansour bin Zayed Al Nahyan as part of a complex derivatives trade to protect against a loss in value of his 6.3pc stake. Some analysts, though, thought it was actually Nomura that was seeking to hedge its exposure to the bank. Barclays shares lost 6.8 to 297¼p.

Broker downgrades weighed on Autonomy. Panmure Gordon, for example, cut it to "hold" from "buy", while UBS lowered its rating to "neutral" from "buy".

On a more positive tack, Marks & Spencer benefited from several broker upgrades. Credit Suisse raised its rating to "neutral" from "underperform". Tony Shiret, an analyst at Credit Suisse, said: "The market nearly always buys into strategy until it does not work, so now seems a good time to take a more open-minded stance in the run-up to the interims [results] on November 9." The shares edged up 1 to 411p.

On the mid-cap index, Thomas Cook's plans to merge its high street travel and foreign exchange business with the Co-operative Group's lifted its shares 6.1 to 185¾p.

Heritage Oil climbed 24 to 346p thanks to positive broker comment. UBS took up coverage of the stock with a very bullish piece and a 430p price target. Melanie Savage, an analyst at UBS, said the company was her "top pick" of the European exploration and production sector. "Heritage provides exposure to relatively low-risk, high-impact exploration upside in Iraqi Kurdistan and Malta in the near term," she said.

JP Morgan Cazenove was also positive on Heritage. Analysts at the broker said: "Following completion of the Ugandan asset sale and payment of a 100p per share special dividend, Heritage has rescaled itself to be a high-impact explorer, but with a proven track record and very strong balance sheet."

Mining company Petropavlovsk dropped 51p to £10.20 after it cut the size of the Hong Kong initial public offering of IRC, its iron ore unit, by half to $249m due to disappointing demand. In a statement, the company said: "The total demand from investors exceeded IRC's minimum requirements for the shares to be issued by it, but did not meet the company's highest expectations."

Investors were also rattled earlier this week as the Petropavlovsk warned of delays in receiving equipment at its Pioneer gold mine and said it was striving to meet an ambitious production target.

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