Present UK Economic Situation: Analysis And Sectorial Report

Analysis of the Present UK Economic Situation as per the end of February 2018

Discuss about the Present UK Economic Situation.

The present report is carried out for analyzing the value of investment portfolio by investing a sum of money based on the research of the stocks on FTSE 250 in the UK. The money is invested in Fund Management Plc based in the UK from the perspective of a fund manager over a period of four week. The initial investment £2 million in the portfolio is distributed equally between there selected industry groups, these are, power sectors, retail and personal consumption sectors and technology and communication including sectors. The investment analysis is carried out through evaluating the current UK economic condition and providing sectorial information related to each of the three industry groups. In addition to this, the report provides an evaluation of the investment decision on the basis of ratio analysis for determining the financial capability of the selected companies. At last, the investment analysis is carried put from 5^th March to 29^th March for evaluation of the returns generated from the trade.

The economic growth in the UK is expected to remain modest at about 1.5% in the year 2018 due to increase in the consumer expenditure and the exports. The economic growth in the UK in the year 2017 has been very slow due to increase in the inflation that negatively impacted the household spending. The UK, regarded as one of the strongest economies of the world, is currently lagging behind its economic rivals due to the European Union (EU) referendum. The economic growth in the country for the year 2017 was about 1.5% which could have been up to 2% in the absence of Brexit. The service sector is expected to depict modest growth and the manufacturing sector is also estimated to realize its momentum of growth. However the performance of the construction sector is expected to worsen due to decrease in the consumer spending power restricting the investment in the commercial property (Focus-economics.com, 2018).          

It has also been estimated that real incomes at the end of the year 2018 would be decreased by 5 per cent in comparison to that has been forecasted. The major reason for the slow economic growth of the UK is the instability in the economic market and weakening of pound due to the impact of Brexit. The reduction in the business investment is responsible for the slow growth and development in the industrials sector of the UK. The weakening of the pound has lead to increase in the imports and also decline in the wages of the labor force due to rising inflation. It has been reported by the immigration statistics that there is a sharp decline in the number of people migrated to the EU since the year 2008. This is due to reduction in the real income level of the people with the rising inflation level. The major concern as highlighted in regards to the economic growth of the UK at the end of the year 2018 is increasing economic instability as the deadline of Brexit approaches in the year 2019 (Campos & Coricelli).

Sectorial Report on Each of the Three Industry Groups: Power to include sectors

The government at present is emphasizing to implement a post-Brexit migration system at the end of the year 2018 for improving the economic condition within the UK. However, many businesses have begun transferring their business functions overseas due to the increasing concerns over the economic environment within the country due to Brexit. The country though has maintained a steady economic growth by the end of the year 2017 and it is expected to show positive growth by the end of the year 2018 also. This indicates that the economy of the UK will attain stability over a period of time in contract to that predicted by the economists due to the impact of Bexit. The economists have predicted that UK economic growth will worsen in the coming period of time due to the occurrence of Brexit. However, the country was able to stabilize its economic growth though it is increasing at a slower pace. There is presence of economic uncertainty as the time of Brexit approaches at present in the UK but yet it has maintained a positive economic growth after meeting effectively all the economic challenges. The main challenges that is present before the government as it prepares for Brexit is to promote the growth and development of the business sectors. The higher cost of inputs and labor force is having large negative impact on their business growth at present. The country at present is placing emphasis on development of growth strategies to improve the productivity of the industrial sector and thus securing its global competitive position (Borowy & Schmelzer, 2017).

The current decline in the economic growth of the UK has also caused reduction in the oil process causing the slow growth and development of the energy sector in the UK. The energy sector plays an important role in contributing to the GDP growth of the country. As such, the increase in the oil prices with the maintaining of a positive economic growth in the UK will promote the economic growth within the country. The increase in the economic expenditure of the UK is also promoting the growth and development of Gas, Water & Multi-utilities sector. However, the oil and gas sector is not providing larger returns to boost the economic growth of the UK at present due to a decline in the oil prices. The Office of Gas and Electricity markets provides license to the companies for operating within the energy and gas sector. In addition to this decline in the oil prices, the energy and gas companies of the UK are also facing challenges of reducing the greenhouse gas emissions for protecting the environment from the negative impact of the operational activities of the energy sector (Goldsmith, 2017).

Retail and personal consumption including sectors

The increase in the consumer spending and the changing economic condition is likely to promote sales growth within the major retails sector such as clothing, footwear, electrical, health and beauty. The market value of the retails sector has reached to about 417 billion Euros at the end of the year 2017 and the value is expected to rise in the future for the year 2018. The Office For National Statistics have predicted that the increase in the volume of food sales is expected tor promotes the growth and development within the retail industry of the UK in the future context. It can be depicted from the below figure:

As depicted in the above figure, the retail sector is presently is in a phase of growth expansion and thus the investors can realize higher returns from investing in this sector. The sector is presently providing higher returns in comparison to other sector of the UK. The financial position of the companies operating within sector is good as compared to those of operating in other industrial sectors within the UK. However, the increasing competition level with the sector can reduce the overall profits earned by the companies. In addition to this, the retailers in the UK for continuing their long-tern growth and development need to reduce their operational cost and improve the efficiency. This is required to meet the challenges of reduction in the consumer spending due to slower pace of economic growth within the country. The consumers are becoming increasingly cautious about the spending due to the presence of political uncertainty within the country due to Brexit. These factors can negatively impact the retail sales in the year 2018 as consumers are waiting for inflation to subside that will cause an increase in their consumer spending level (UK retail sales growth continues in July, 2017).

The information and communications sector in the UK is regarded to be one of the fastest growing sectors within the country. The sector is estimated to be larger in comparison to the rest of Europe with gaining strengths from its electronic systems, communication, data management and analytics, data centers, cloud services, artificial intelligence, semiconductor design and sensors. The innovation in the smartphone market as it is estimated that about 92% of the adults in the UK will have smartphone over the next five years will further support the growth and development in the IT sector of the country in the year 2018 (Cullinan, 2016). The sector at present have presence of about 8000 companies that have good financial position due to higher sales realize from the growth in the Smartphone and internet market within the UK. The mobile market is regarded to be largest in overall Europe having about 80 million subscribers (Deloitte predicts UK telecommunications sector trends for 2018, 2018).

Technology and Communication Including Sectors

Also, there is relative increase in the number of consumers using mobile payment method that is further leading to the growth and development within the IT sector of the UK. The recent investment promoted by the government for improving the broadband network within the Europe will also promote the growth and development of the IT sector. As such, the sector can be regarded to be highly feasible for investment purpose as it is estimated to provide higher returns in the future context (Communications industry in the UK: investment opportunities, 2018).

Rationale of the investment made in portfolio in regards to the economic situation and industry sector analysis

The analysis of the economic growth in the UK and the information gained after sector based analysis will facilitate in decision-making regarding the investment in a particular sector to the fund manager. The investment rationale will help in selecting a particular stock that will provide highest returns from an investment. The analysis of the economic growth of the UK has depicted that it is still recovering from the phase of inflation and economic downfall. The economic growth of the country has experiences a large decline due to rising political and economic uncertainties due to its decision of leaving the European Union known by the term Brexit. The country through have recovered from the phase of inflation and squeezing consumer spending but still its pace of economic growth is slower. .However, it can be said from the current positive economic growth maintained within the country that it will recover from the phase of economic downturn soon and is expected to provide higher returns on the investment. The sector base analysis has helped in gaining an in-depth evaluation of the growth in the power, retail and IT sector of the UK. It has been analyzed from the various sources of information that power and utility sector of the UK is currently not in phase of good economic growth due to decline in the oil process (Campos & Coricelli, 2017).

However, the increase in the oil process with the economic reviver within the UK is expected to promote the economic output of the sector. Therefore, investors need to be careful while investing in the stocks of energy companies of the UK and should invest for long-term rather than for a short period of time. The retail companies have maintained a positive growth despite of the slow economic recovery and therefore investors are recommended to invest in retail sector. However, they need to gain an analysis of the impact of inflation on the consumer spending at present before taking the investment decision. The investors can presently invest in the retails sector for realizing larger returns as the future economic uncertainties due to occurrence of Brexit can negative impact the consumer spending power. At last, the analysis of the information and communication technology sector has revealed that its is one of the faster growing sector and the further large-scale increase in mobile and internet services by the population of the country will promote its future growth. Therefore, investors can gain larger returns in the future by investing in the sector (Ma, Pan & Zhang, 2017).

TLW TULLOW OIL PLC
Particulars	2013	2014	2015	2016	2017
Revenue	2646.9	2212.9	1606.6	1360	1884.6
EBIT	351.3	-1482.2	-1037.2	-751.3	24
Net profit	216.1	-1639.9	-1036.9	-597.3	-188.5
Current assets	2069.3	2086.6	1841	2461.6	2324.3
Current liabilities	1432.3	1339.2	1581.8	1648.5	1354.5
Inventory	193.9	139.5	107.2	155.3	168
Total assets	11508.6	11421.7	11347.8	10801.7	11028.5
Total liabilities	6185.7	7425.7	8192.9	8571.6	8322.5
Net interest	151.5	204.4	251	306.5	317.6
TLW TULLOW OIL PLC
Ratios	2013	2014	2015	2016	2017
Net Profit Margin	8.16%	-74.11%	-64.54%	-43.92%	-10.00%
Current ratio	1.44	1.56	1.16	1.49	1.72
Quick ratio	1.31	1.45	1.10	1.40	1.59
Return on assets		-14.30%	-9.11%	-5.39%	-1.73%
Debt ratio	1.86	1.54	1.39	1.26	1.33
Interest coverage ratio	2.32	(7.25)	(4.13)	(2.45)	0.08
EPS	0.19	(1.71)	(1.14)	(0.66)	(0.15)

(London Stock Exchange, 2018)

The ratio analysis carried out for the TLW TULLOW OIL PIC will facilitate in evaluating the performance of the company that operates in the energy sector of the UK. It can be seen from the net profit ratio of the company for the period 2013-2017 that its profitability position is declining and it is running at loss. The current ratio is increasing which depicts that its current assets are increasing to current liabilities that can be positive sign for its future growth. Also, its return on assets ratio has also shown a sharp decline and negative growth indicating the company inefficiency to utilize its assets for generating income. The debt ratio has also decline indicating that it is utilizing less use of financial leverage in financing its operations. The interest coverage ratio has also reduced depicting the company less use of debt in comparison to equity for funding its operational activities. This can be a sign of positive growth for the company with the future increase in the oil prices. The Earning per Share (EPS) of the company has decreased form the period 2013-2017 indicating that its ability to generate value for the shareholders has reduced due to decline in its profitability position (Drake, 2006).

DOMINO’S PIZZA GROUP PLC
Particulars	2012	2013	2014	2015	2016
Revenue	240.52	268.9	294.38	316.79	360.58
EBIT	42.24	19.75	52.98	71.46	83.13
Net profit	29.88	11.48	41.69	57.56	65.24
Current assets	69.33	71.55	74.65	89.72	75.42
Current liabilities	52.42	61.39	78.59	71.34	84.39
Inventory	7.33	4.25	4.83	6.21	9.24
Total assets	181.78	166.43	165.2	185.45	256.37
Total liabilities	112.47	101.85	91.8	87.77	149.21
Net interest	0.26	0.6	0.56	0.12	0.71
DOMINO’S PIZZA GROUP PLC
Ratios	2012	2013	2014	2015	2016
Net Profit Margin	12.42%	4.27%	14.16%	18.17%	18.09%
Current ratio	1.32	1.17	0.95	1.26	0.89
Quick ratio	1.18	1.10	0.89	1.17	0.78
Return on assets		6.59%	25.14%	32.83%	29.53%
Debt ratio	1.62	1.63	1.80	2.11	1.72
Interest coverage ratio	162.46	32.92	94.61	595.50	117.08
EPS	6.35p	3.57p	8.63p	11.90p	13.10p

(London Stock Exchange, 2018)

Domino’s Pizza Group PLC belongs to the retail and personal consumption sector of the UK. The company profitability position has increased from the year 2012-2016 which indicates that it is realizing higher profits. The current ratio has decreased indicating that its current liabilities have increased in comparison to the current assets position. The quick ratio has also reduced indicating that the company ability to meet its financial obligation from the use of short-term liquid assets has declined. This is not a good sign for the positive growth of the company. The debt ratio is increasing which states that it is adopting larger use of debt in comparison to equity for financing it assets. The interest coverage ratio has also reduced indicating that it is not able to effectively manage its debt (Drake, 2006). The EPS ratio is increasing which depicts that the company is able to provide large value to its shareholders in comparison to the money invested by them.

WILLIAM HILL PLC
Particulars	2013	2014	2015	2016	2017
Revenue	1486.5	1609.3	1590.9	1603.8	1711.1
EBIT	299.6	280.8	221.6	224.1	-44.7
Net profit	223.1	205.3	187.2	163	-84.2
Current assets	272.7	282.2	342.9	291.7	393.4
Current liabilities	328.6	369.8	663.2	410.1	477.9
Inventory	0.2	0.1	0.1	0	0
Total assets	2413.9	2380.6	2346.7	2442.7	2362
Total liabilities	1390.6	1220.3	1130.9	1217.2	1299.3
Net interest	39.9	42.7	38.3	45.9	35.1
WILLIAM HILL PLC
Ratios		2014	2015	2016	2017
Net Profit Margin	15.01%	12.76%	11.77%	10.16%	-4.92%
Current ratio	0.83	0.76	0.52	0.71	0.82
Quick ratio	0.83	0.76	0.52	0.71	0.82
Return on assets		8.56%	7.92%	6.81%	-3.50%
Debt ratio	1.74	1.95	2.08	2.01	1.82
Interest coverage ratio	7.51	6.58	5.79	4.88	(1.27)
EPS	25.20p	23.60p	21.60p	18.90p	27.60p

(London Stock Exchange, 2018)

William Hill Plc belonging to technology and communication sector of the UK has reported a decline in its profitability position form the year 2014-2017. The company has also maintained a steady growth rate in the current ratio and quick ratio. This indicates the company has just maintained a equal balance of its assets and liabilities. The return on assets has decreased indicating that it is not able to utilize its assets effectively for generating sales. The debt ratio has increased indicating more use of debt by the company. However, it has maintained steady growth in the EPS indicating that the company is able to generate value for the shareholders.

EUROMONEY INSTITUTIONAL INVESTOR PLC
Particulars	2013	2014	2015	2016	2017
Revenue	404.7	406.56	403.41	403.11	386.92
EBIT	105.33	103.34	123.12	47.45	43.43
Net profit	72.74	75.6	106.07	32.84	39.19
Current assets	97.68	98.46	110.14	170.35	127.8
Current liabilities	246.75	221.35	211.12	249.39	267.47
Inventory	0	0	0	0	0
Total assets	626.55	662.61	689.28	772.24	776.57
Total liabilities	301.04	313.71	251.09	303.25	488.93
Net interest	4.31	1.56	1.35	1.11	4
EUROMONEY INSTITUTIONAL INVESTOR PLC
Ratios		2014	2015	2016	2017
Net Profit Margin	17.97%	18.60%	26.29%	8.15%	10.13%
Current ratio	0.40	0.44	0.52	0.68	0.48
Quick ratio	0.40	0.44	0.52	0.68	0.48
Return on assets		11.73%	15.69%	4.49%	5.06%
Debt ratio	2.08	2.11	2.75	2.55	1.59
Interest coverage ratio	24.44	66.24	91.20	42.75	10.86
EPS	57.88p	59.49p	83.42p	24.31p	32.74p

(London Stock Exchange, 2018)

Euromoney belongs to the information and communication sector of the UK and its profitability position has improved from the period 2013-2017. The current and quick ratio of the company has increased indicating that it has maintained a sufficient amount of current assets for meeting its financial obligations. The return on assets ratio has decreased indicating that its inefficiency for utilizing assets to generate sales. The debt ratio has also decreased indicating less use of leverage while its interest coverage has also declined indicating that it is not able to meet its interest expenses adequately. The EPS ratio has also declined which means that it is not able to create profit for the shareholders.

MONEYSUPERMARKET.COM GROUP PLC
Particulars	2013	2014	2015	2016	2017
Revenue	225.55	248.13	281.73	316.41	329.7
EBIT	44.52	63.86	80.45	91.15	94.9
Net profit	34.48	52.76	63.43	73.53	78.1
Current assets	63.03	73.77	49.1	83.92	78
Current liabilities	36.12	63.82	48.32	54.8	52.9
Inventory	0	0	0	0	0
Total assets	249.84	249.66	221.74	249.52	232.4
Total liabilities	116.08	101.54	55.95	63.14	62.4
Net interest	1.01	1.53	0.24	0.66	0.8
MONEYSUPERMARKET.COM GROUP PLC
Ratios		2014	2015	2016	2017
Net Profit Margin	15.29%	21.26%	22.51%	23.24%	23.69%
Current ratio	1.75	1.16	1.02	1.53	1.47
Quick ratio	1.75	1.16	1.02	1.53	1.47
Return on assets		21.13%	26.91%	31.21%	32.41%
Debt ratio	2.15	2.46	3.96	3.95	3.72
Interest coverage ratio	44.08	41.74	335.21	138.11	118.63
EPS	6.40p	9.70p	11.60p	13.50p	14.40p

(London Stock Exchange, 2018)

This company also belongs to information and communication sector and as indicated from the table of ratio analysis its net profit margin has increased from the year 2014-2017. The current ratio and quick ratio have declined indicting that its current assets position is not adequate to meet the current liabilities. The return on assets is increasing indicating that it is effectively using the assets for generating sales. The debt and interest converge ratio is also increasing which is not good for the future growth of the company. However, its EPS have increased over the period indicating that is able to realize large value for the shareholders ((Bragg, 2012).

Sectors	Companies	Buy Price	Shares	Total Buy Value	Sell Price	Shares	Total Sell Value	Profit/Loss	Profit/ loss %
		05-Mar-18	In units	in pound	29-Mar-18	In Units	in pound
Oil & gas Producers	TLW TULLOW OIL PLC	182.75	540	98,685	196.00	540	105,840	7,155	7.25%
Travel & Leisure	DOMINO’S PIZZA GROUP PLC	306.50	1,700	521,050	327.82	1,700	557,294	36,244	6.96%
Travel & Leisure	WILLIAM HILL PLC	316.00	675	213,300	330.30	675	222,953	9,653	4.53%
Media	EUROMONEY INSTITUTIONAL INVESTOR PLC	1,204.00	550	662,200	1,224.00	550	673,200	11,000	1.66%
Media	MONEYSUPERMARKET.COM GROUP PLC	260.40	1,650	429,660	286.80	1,650	473,220	43,560	10.14%
Cash				75,105
Total			1,924,895			2,032,507	107,612	5.59%

(London Stock Exchange, 2018)

The above table depicts the overall performance of each of shares in their respective segments and profits generated by each of shares as on 29^th march 2018. The investment has been made on 5^th of March in each of shares depending upon the company performance and it is has been evaluated through above table that overall performance of the portfolio has remain at average. The company Tallow Oil PLC that belongs to power group and oil and gas produce sector has provided the holding period return of 7.25%. The Dominos Pizza Group and William Hill belong to retail and personal consumption group and particularly they fall in travel and leisure sector of this group. The holding period return provided by Dominos pizza and William Hill is 6.96% and 4.53% respectively that clearly shows retail group has provided average profits in the portfolio as compared to other shares in the portfolio. The overall holding period return that the portfolio has generated in very short period of time was 5.59%. So it can be said that adequate construction of portfolio helps the investors in minimizing the risk and generating good return in very short period of investment also (Bragg, 2012).

The main purpose of the investment through use of portfolio is to maximize the overall returns and to minimize the risk associated with each share. The companies in each sectors has been selected on the basis of their performance analysis and maximum amount of investment has been made in those shares that shows excellent performance during the last few years. At the last date when all the shares in portfolio are sold it has been realised that some of companies has shown outstanding performance in short duration of time while some companies whose provide good return in longer period of time has failed to generate required return in given investment period. So overall it can be said that investment through use of portfolio has successfully helped in achieving the investment strategy (Brooks, 2015).

Conclusion

The complete analysis of above report indicate that whatever the market condition is within each group of industries, the use of portfolio as the strategy tool for making the investment always reduces the overall risk and gives the optimum profit on the investment. Same can be understood through above investment strategy where portfolio has been made after analyzing the market performance of each companies and it has provided very good return in shorter period of time.

References

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Bragg, S. (2012). Business Ratios and Formulas: A Comprehensive Guide.John Wiley & Sons.

Brooks, R. (2015). Financial management: core concepts. Pearson.

Campos, N. & Coricelli, F. (2017). The Economics of UK-EU Relations: From the Treaty of Rome to the Vote for Brexit. Springer.

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Goldsmith, C. (2017). The UK’s oil and gas sector is starting to show signs of growth. Cityam.com. Retrieved 14 April 2018, from https://www.cityam.com/267047/uks-oil-and-gas-sector-cautiously-optimistic-future-growth

London Stock Exchange. (2018). DOMINO’S PIZZA GROUP PLC. Retrieved 14 April 2018, from https://www.londonstockexchange.com/exchange/prices/stocks/summary/fundamentals.html?fourWayKey=GB00BYN59130GBGBXSTMM

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London Stock Exchange. (2018). TULLOW OIL PLC ORD. Retrieved 14 April 2018, from https://www.londonstockexchange.com/exchange/prices-and-markets/stocks/summary/company-summary-chart.html?fourWayKey=GB0001500809GBGBXSTMM

London Stock Exchange. (2018). WILLIAM HILL PLC. Retrieved 14 April 2018, from https://www.londonstockexchange.com/exchange/prices/stocks/summary/fundamentals.html?fourWayKey=GB0031698896GBGBXSTMM

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