It’s Make Or Break Time for Tesco PLC, But Is The FTSE 100 About To Bloom?

It’s the New Year so what better time to have a look at some investments that have the potential to outperform in 2015.

Two ‘investments’ in particular come to mind: Tesco (LSE: TSCO) and the FTSE 100 more broadly.

Is Tesco moving into the fetal position?

You’re probably sick of hearing all the ins-and-outs of Tesco’s latest plans to salvage shareholder value, so I’ll lay the basic blue-print out as quickly as I can. There are essentially seven changes the company wants to make:

It’ll close 43 stores, cancel 49 stores in the pipeline for development, shut down its defined benefit pension scheme, and sell its broadband business to TalkTalk. In store it’s going to cut prices, cut back on its product offerings, and boost the number of staff available to customers.

It’s an interesting move by CEO Dave Lewis. He’s now shown his cards. He realises that, as is (at Tesco’s current size), the store can’t compete with Aldi and Lidl. The supermarket chain has to downsize and, in the process, slash prices. It’s essentially decided to compete head-on with the discounters.

This Fool doesn’t see it as an ‘aggressive’ strategy, though. It’s Aldi and Lidl that are the ones being aggressive. This Fool sees it as more of a defensive strategy. Low prices have made the market a ‘harsh’ place to do business. Tesco is simply putting itself in a position to survive the current environment. When the economy picks up, which it will, there will be scope for it to expand once more.

I think that’s basically how the share market has viewed Tesco’s move, too. The stock rocketed up on Thursday (up around 12%), then fell back a little on Friday. The market’s essentially saying, ‘you had to do something, and we’re glad you’ve finally done it, it seems okay, so now let’s see if it works’. Tesco hasn’t been sidelined just yet.

Meanwhile, over in Europe…

Economics is a funny thing. Programmes designed to stimulate an economy can do the opposite. That’s what we’re seeing in the Eurozone at the moment. Attempts by the European Central Bank (ECB) to prop-up the single-currency block, through debt support and government bailouts, haven’t led to strong economic growth or confidence among consumers. In fact consumers are still hunkered down. We know this because official figures show prices in December were 0.2% lower than the same month a year earlier. Europeans aren’t spending big.

It’s prompted speculation ECB boss, Mario Draghi, will unveil a ‘no holds barred’ quantitative easing (QE) programme after the central bank’s meeting on the 22nd of January.

What we know about monetary stimulus plans of this nature is that sometimes they work, and sometimes they don’t. What we also know is that stock markets like them … a lot.

The market rallied over 1% last week on the deflationary news in the Eurozone and the implications that that might have for QE and the share market. I suspect that equity markets will only continue to rise if the ECB actually moves on QE. It may even mirror, to some degree, what we’ve seen on Wall Street over the past few years, especially if the Bank of England continues with its £375 billion stimulus program.

There’s obviously not as strong a link between the ECB moving on QE and the FTSE 100 rising, and the Bank of England making a policy change, and that affecting stocks, but the link is obviously there. Indeed ,common sense would suggest that stocks listed on the FTSE 100 with more exposure to Europe may benefit more than those with less.

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David Taylor has no position in any shares mentioned. The Motley Fool UK owns shares of Tesco. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.