It’s been a strange few months since the Brexit vote, with the FTSE 100 gaining 14% to reach 7,017 points since the fateful day. In reality, the pound has fallen by a similar amount, so all that’s really happened is that we’ve seen adjustment to take care of that, but who’s benefited the most?
Supermarket revival
Three months ago, who’d have expected Tesco (LSE: TSCO) to be leading the way? At 210p today, the shares are up 42% since mid-June, to top the 3-month leadership board, and they have given us their longest winning streak since the slide of the last few years subsided.
Interim results made a big difference, including a 3.3% rise in total sales, with UK like-for-like sales up 0.6% — that’s not massive, but it’s positive and suggests the slump in sales might genuinely, really, finally be over. Excluding exceptionals, operating profit rose by 60% and debt is steadily coming down.
Tesco should be a largely Brexit-safe bet, and though it does have operations overseas, the bulk of its profit still comes from the UK — and if forecasts turn out right, that proportion is set to increase.
The farce over Tesco’s temporary removal of Unilever products from its shelves reminds us that a rise in the rate of inflation is certain after the pound has collapsed, though it will hit all equally — but one risk is that a cost-of-living squeeze might drive more people into the open arms of Lidl and Aldi again.
So should we buy now? I have to admit I’m still a bit twitchy about forecast P/E multiples of 29 and 22 for this year and next, when the long-term FTSE average is around 14. But strong earnings growth forecasts give us PEG ratios of 0.2 and 0.6 for 2017 and 2018, respectively and that’s the sort of level that implies a decent growth valuation.
The return of commodities
Glencore (LSE: GLEN) is one of our other big winners, with a cracking 230% gain since the dark days of late January. Previously struggling with debt, and under pressure from declining commodities prices and fears of a slowdown of demand from China, the company looked like it could be in trouble.
But the Chinese are resilient, and despite the foot coming slightly off the economic growth accelerator, we’re still looking at GDP growth of around 6.7% per year, at the most recent reckoning. Commodities prices appear to be reaching the end of their slump too, with iron ore up from its December low, copper stable for a few months now, and oil back up around $50 a barrel — all signs that demand is picking up.
But the possibly saving move Glencore has made has been to dump assets and get out from under its crushing mountain of debt. As of interim time this year, the company had “largely achieved our asset disposals target of $4-5 billion“.
And now, after a few years of crumbling earnings, the City’s analysts reckon we’re set for a return to earnings growth. Last year’s loss should turn into positive EPS of 6.2p this year, and there’s a further 60% growth penciled in for 2017.
Glencore’s P/E rating looks a bit daunting at the moment, and a ratio of 25 for next year looks tough — but coming off a cyclical bottom, it would only take a couple more years of recovery for the P/E to drop far enough to look cheap.
