UK stocks suffer election hangover as ITV slumps

The Trump trade triumphed, as investors basked in the glow of a pro-growth agenda which could inject further gains into an already robust US economy.

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The tide certainly lifted all boats, with each of the main indices breezing past previous record highs, with the small-cap index also posting significant gains.

Companies caught in the buying frenzy ranged from mega cap technology stocks such as Tesla Inc (NASDAQ:TSLA), which added over 14%, to the banks, where there were gains of 13% and 11.5% for Wells Fargo & Co (NYSE:WFC) and Morgan Chase respectively.

Investors were largely attracted by the possibility of lower tax rates, deregulation and domestically favoured policies such as strong tariffs on international trade, all of which are currently being seen as stimulative to the economy.

The possibility that any such spending spree by the new President could result in an addition to the already ballooning deficit, let alone inflationary pressures given the possibility of another consumer rush to goods and services, are clearly concerns which have been left until another day.

In the meantime, the Dow Jones has now added 16% this year, the S&P500 24% and the Nasdaq 26%.

The news also spilled over to the UK, where the FTSE100 recorded decent gains on a couple of fronts. On the one hand, an estimated 70% of earnings in the index come from overseas, with a large proportion of that number from the US, while the strengthening US dollar – weakening sterling in the process – was another boost for the index as earnings become more valuable when repatriated to the UK.

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The mood was less euphoric in opening trade today, although the market added to its previous gains. This was despite a raft of earnings which disappointed investors, from the likes of BT Group (LSE:BT.A), Auto Trader, Howden Joinery while Rolls-Royce also slipped coming into high expectations.

Stocks being marked ex-dividend, including HSBC and Unilever, added to the downward pressure, limiting the progress of the premier index but adding to the positive momentum which has left the FTSE100 ahead by 5.8% so far this year.

ITV Q3

In investment terms, ITV remains a tough watch, weighed down by the endlessly deep pockets of some of its competitors in the streaming space, as well as still feeling the after-effects of the previous writers’ and actors’ strike in Hollywood.

Group revenue in the year to date has fallen by 8%, while total advertising revenue is expected to drop by between 6% and 7% in the final quarter, partly due to the strong comparative of the 2023 Rugby World Cup, although for the full-year growth of around 2.5% is expected.

For some considerable time, ITV has had the strategic challenge of lessening its reliance on advertising revenues, and the Studios and ITVX businesses are showing signs of picking up the slack over the longer term.

The Studios business has had a stream of quality content which it has been able to distribute both within the UK and overseas, most recent examples being the likes of Rivals for Disney+ and Ludwig for the BBC.

The group expects record earnings for the year as a whole and a margin of between 13% and 15% as efficiency gains kick in and a significant delivery schedule rolls out in the final quarter, continuing the creative and commercial momentum. In the meantime, however, revenues so far this year have fallen by 20% to £1.22 billion, with additional cost savings of £20 million providing scant solace.

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The other area of potential growth is the ITVX unit, where digital advertising revenue has risen by 15% in the year to date and streaming hours by 14%, propelled by the popularity of the likes of Love Island and the Euros football tournament.

Elsewhere, net debt has reduced from £515 million at the end of June to £437 million at the end of September, while the £235 million share buyback programme, enabled by the previous sale of the BritBox stake, is ongoing. This has also enabled the continuation of a progressive dividend policy, where the current yield of 6.9% is punchy enough to attract the attention of income-seeking investors.

Despite the progress which is being made within ITVX and Studios, investors remain skittish on prospects, as evidenced by an initial share price reaction which reflects the broader and more obvious concerns around general advertising revenues. ITV has flitted in and out of the premier index over recent times, and although the shares have risen by 10% over the last year, as compared to a gain of 15% for the wider FTSE250, over the last three years a decline of 35% has been more telling. The market consensus of the shares as a cautious buy, however, perhaps offers some positive hope that the group can deliver its own strategic progress.