Canada trade deal boosts markets
European shares were lifted by the freshly announced US-Canada trade deal but the FTSE moved against the grain, dragged down by airlines and the stronger pound.
Ryanair’s reminder to the market
Though Irish budget airline Ryanair (LON:RYA) surprised the market by cutting its revenue expectations by 12% this year much of the reasoning behind the cut was already known to investors. Oil prices have surged to their highest level since 2014, rising at a much faster pace than ticket prices. Ryanair, which has also been embroiled in labour disputes in Germany, Belgium and the Netherlands recently, has spent an additional €480 million on oil purchased this year. Most of the budget airlines are facing the same pressures and are seeing investors walk away from their shares. Even EasyJet (LON:EZJ) which managed to pick up additional passengers from Ryanair’s cancelled flights lost 5.25% on the day. British Airways parent International Consolidated Airlines also saw shares decline but at a more moderate scale.
Sterling boosted by Irish border deal
This was never going to be a quiet week for sterling as the Conservative Party gathers for its annual conference in Birmingham. The news started with the not entirely believable comments from Chancellor Philip Hammond that the UK is equipped to handle a no-deal Brexit and continued with PM Theresa May’s plans to compromise on the Irish border issue in order to reach a Brexit agreement. The former did little to move the currency market but the later boosted sterling by 0.38% against the euro and 0.06% against the dollar before it lost some ground against the greenback.
USMCA, the new NAFTA
The dollar, however, weakened against the Canadian dollar which was boosted by Canada’s freshly minted trade deal with the US. The deal with the slightly less elegant name of United States-Mexico-Canada Agreement, or USMCA, will replace the existing NAFTA and will give the US access to the Canadian dairy market while capping Canada's car exports to its southern neighbour. Taken as a sign that the US will be open to finding resolutions to its other ongoing trade disputes the deal prompted rallies across the US markets and caused the DJIA to climb 250 points.
Oil at $83
The oil market continues to position itself for the fallout of US sanctions against Iran in November but is possibly overacting given that the bulk of Iranian oil is sold to Asian countries. The biggest buyers, China, India and Turkey have already declared open opposition to the US and will continue buying the country’s oil. To make the threat of sanctions even more academic there is a loophole that allows European countries to continue buying Iranian oil if they request a sanctions waiver. Once those are granted the actual reduction of Iranian exports might prove minimal.
Deliveroo’s balancing act
Food delivery group Deliveroo is in the midst of a fine juggling act, balancing soaring expansion costs with keeping up the pace of sales growth as it gets ready for a planned IPO. The fast growing technology has now expanded over four companies and is being valued at over $2 billion. More big plans are on the table including an imminent launch of its service in Taiwan.
The company showed itself capable of impressive growth. It pumped up global sales by 116% to £277 million and saw gross profits rise to £64.3 million from £1.1 million a year ago. European sales rose 99% in the year, a growth rate considered slow compared with the 207% across other markets. But over £100 million in investments made last year meant that its pre-tax losses widened to almost £185 million from £129 million the year before.
Deliveroo has no plans of slowing down and says that it will continue investing in further expansion. And this is where the balancing act comes in. While new regions like Taiwan are likely to become a very interesting and fast growing area for the company it is questionable as to at which point the company’s bottom line will turn black – at the current pace unlikely before the planned IPO. Looking at its competitors it is clear that the expansive growth in the food delivery business can be sustained only for a relatively small number of years. Shares in London-listed Just Eat (LON:JE) which listed in 2014 rose rapidly until 2018 but are now trading at roughly the same level as they did at the beginning of the year. German listed Delivery Hero also recently warned it does not expect to break even this year or in 2019 after investments of €80 million.
But M&As are increasingly an option for keeping the pace of growth up. Delivery Hero and Dutch competitor Takeaway.com discussed a merger earlier this year boosting both of their share prices but as discussions seem to have gone quiet investors focus turned back to the widening losses.
Deliveroo is in a better position because it has a much more prominent suitor in form of Uber which is looking to aggressively expand its food delivery business ahead of its own planned IPO next year. Reportedly Deliveroo is not interested in a full takeover but rather in a stake sale that would allow it to keep its own independence. If that deal goes ahead it would create a company that is likely to sweep away smaller competitors as customers tend to use only one delivery app at a time. A Deliveroo-Uber hook up would create a company that could control large portions of the global delivery market, particularly as Deliveroo has shunned the crowded US market and Uber does not have a solid foothold in Europe.
In the meantime Deliveroo argues that with growth it has become a more efficient business as it has raised its gross margin from less than 1% to 23%.
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