CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 73% of retail investor accounts lose money when trading CFDs with this provider (Saxo Bank). You should consider whether you understand how CFDs, FX or any of our other products work and whether you can afford to take the high risk of losing your money.

How are global events affecting UK companies?

In this research report our Senior Analyst takes a look at some of the most pressing global events that are impacting UK companies.

He has identified the following themes:

Commodity collapse is a problem for Blue Chips

Resource heavy, blue chip companies are exerting a downward pull on UK blue chip stocks and we have yet to see evidence of “bottoming out” in commodities despite 5 year lows in some cases.


Copper prices currently reflect 36 months of oversupply conditions.  China represents 45% of global demand and therefore a “hard landing” in China is impacting copper prices.

Iron Ore

Global supply is expected to rise from 600m metric tonnes in 2014 to 730m by 2017 (source: HSBC). Iron ore import demand is skewed to China (66% demand). The concern is that the China’s slowdown / over supply that has depressed prices, will persist to 2018.

Crude Oil

In October 2014 the Saudi Oil Ministry changed its policy, abandoning its “swing producer” role insisting the market finds “equilibrium” – the price where supply/ demand clears. Crude oil has been in freefall since then with interludes of failed rallies. The Saudis are trying to knock out higher cost US production, restoring its market share and reducing reliance on China/Japan. The problem is shutting down production in high cost countries, such as Russia and the USA, has been slow. A supply glut is now adding about 1m-1.5m barrels per day to global inventories.

Low dividend cover for oil majors & miners

Earnings forecasts for 2015 and 16 have been declining, however since the Royal Dutch Shell Q2 results, (20th July 2015) a sharper more bearish focus has been applied. Shell had been the most optimistic oil major but even it suddenly changed its tune, recognising that oil would remain “lower for longer”.

The issue has become which oil major or miner is “willing and able” to hold their dividend in this price environment, assuming it persists over 2015 and 2016? A case in point is BP, where Earnings Per Share (EPS) and Dividend Per Share (DPS) are converging in 2015 at around 26p-27p leaving virtually no dividend cover.

Company FY 15 EPS Forecast FY15 DPS Forecast FY16 EPS Forecast FY16 DPS Forecast Comment
Anglo American $0.941 $0.85 $1.075 $0.85 Weak cover
BP 26.28p 25.71p 30.43p 25.71p Weak cover
BHP Billiton 93.46p 80.72p 51.53p 80p Cut is likely
Glencore 6.28p 11.49p 9.84p 10.93p Cut is likely
Royal Dutch Shell 124.21p 120.63p 146.3p 120.7p Weak cover
Rio Tinto 178.95p 138.67p 185.06p 145.2p Stable

Source: Fidessa plc

Ex – growth; why is it a problem?

A company is ex-growth when it is no longer growing profits or Earnings Per Share (EPS). The company is not growing profits, this can occur for many reasons such as lower revenues, higher costs and higher taxes. If there is no growth the company’s value declines substantially.

Beware of any company that tells you, “profits are sharply down but everything is fine and it will be better in 6-12 months’ time”.

Beware of any company that says “we promise to continue to pay dividends at the same level despite the fact that the company is earning a lot less profit”. Whilst possible in the short term, it is not possible in the longer term. This statement should raise red flags. A company that pays out more than it earns is essentially paying profits out of reserves, i.e. out of capital reducing its balance sheet. It is worth noting in the above table all of the companies HAVE YET to cut their dividend despite sharp drops in EPS.

Beware of forgetting a basic premise of the equity market; that earnings are vital. No rational investor will pay more for a company with lower profits. Companies making less money are less valuable. The market will price in lower profits via a lower share price as it recognises lower future earnings.

Company FY 13 EPS Actual FY 14 EPS Actual FY 15 EPS Forecast FY16 EPS Forecast COMMENT
Anglo American $2.08 $1.73 $0.941 $1.075 EPS halved
BP 47.78p 51.67p 26.28p 30.43p EPS halved
BHP Billiton 166.6P 154.96p 93.46p 51.53p EPS – 40%
Glencore 10.49p 13.14p 6.28p 9.84p EPS -52%
Royal Dutch Shell 204.5p 186.7p 124.21p 146.3p EPS – 33%
Rio Tinto 345p 262.7p 178.95p 185.06p EPS -32%

Source: Fidessa plc

Substantial drops in EPS for integrated oils and mining companies have occurred from 2013 to 2015 and current projection are in most cases of just modest EPS recoveries in 2016.

What about other large UK Corporates?

A brief review of a selection of UK large corporates gives a mixed picture with the majority (4/7) of companies below expecting lower EPS in 2016 compared to 2013 hence not growth businesses.

Barclays has grown EPS but some of this effect is lost due to its 1:4 rights issue in 2013. Prudential and HSBC have seen EPS growth.

Overall it is a mixed /marginal EPS picture from the UK other large caps in terms of EPS growth in 2016.

Company FY 13 EPS Actual FY 14 EPS Actual FY 15 EPS Forecast FY16 EPS Forecast COMMENT
Astra Zeneca 263.55p 123.29p 182.07p 182.41p EPS lower
Barclays 21.84p 25.41p 21.84p 25.41p EPS growth
GSK 104.52p 70.7p 78.01p 87.97p EPS lower
HSBC 40.48p 44.97p 54.57p 56.77p EPS growth
Prudential 62.22p 89.94p 103.97p 126.57p EPS growth
Standard Chartered 122.84p 95.62p 72.9p 93.45p EPS lower
Vodafone 45.92p 68.16p 22.19p 6.91p EPS lower

Source: Fidessa plc

What this means for the average investor

The reversal in the UK equity market is a “correction” that feels worse due to movements in large cap oil/ gas and mining companies that reflect profit declines and likely 2016 dividend adjustments.

We would avoid all commodity related equities as many commodities are likely to remain oversupplied in the short-term.

UK core inflation in June (0%) and July (0.1%) limit companies’ ability to lift prices and price competition makes us weary of retailers of any description, though there should be a marginal uplift for retailers from the Chinese Yuan devaluation.

Generally we are avoiding UK department stores, food retailers and online retailers.

Global GDP growth is a concern, with China now seeing a slowdown. GDP forecasts remain near 7% is clearly a misprint. A more honest number would restore confidence that at least the stats are reliable. Unfortunately we do not anticipate the Chinese government will “come clean” and declare an honest GDP number.

As such we expect China linked equities to remain under pressure.

This will pressure South East Asia linked equities such as HSBC and Standard Chartered though the near 20% drop in these companies looks enough for now.

We are weary in the short-term of emerging market exposure due to clear political problems in Brazil, Russia and China and corruption issues in important SE Asian markets such as Malaysia (whose Prime Minister has been found with US$690m in his personal account from a state company). The expected US Fed funds rate hike could see further repatriation of funds from Asia.

In Summary

The profit declines seen in the UK 100, company reports and EPS downgrades have to be watched. The case can be made for businesses that are UK/ EU and US centric that are less reliant on growth from China/ SE Asia related issues.

Overall this is a time for extra due diligence when considering what to invest in. Consider the points raised in this report for their impact on both the near and longer term and how they will affect the balance of your own portfolio.

This is not to say there are not opportunities. Providing you have a well-diversified portfolio that is not overexposed to these issues, then you may be able to add stocks that now represent value as the market over reacts to the global events we’re currently seeing.

Speak to your own broker or investment adviser, make use of their experience of these kinds of market conditions and ask as many questions to help you understand your own situation.

If you don’t have one, or simply would like a second opinion, then CSS Investments offer a free ‘Strategy Review’ session with one of our professional investment advisors.

We focus on your goals, objectives and consider the best structure that will suit your needs. We then outline your options and suggest a structure that you can use to create your investment plan.

To arrange a Free Strategy Review:

Call one of CSS Investments’ Account Executives on 020 7264 2360

Or email

Visit  for more information about other services we have to help our clients make the most of their stock market investments

Subscribe to our Award-winning Newsletter

We provide daily market data in the form of our award-winning newsletter, The Morning Call and The Market Close.
You can subscribe to this information at any time to help you make the most of your investment.

Quick Sign-up

Get Started with CSS

Open an Account

Subscribe to our award winning daily newsletter

Voted "Best Market Newsletter" in 2012, 2014, 2015 and 2017 by the City of London Wealth Management Awards

Subscribe to our newsletter (Popup)

By signing up to our free email, you are consenting to receive these promotions. The newsletter is sent up to three times per day during the week and up to once per day over the weekend and is directed at UK residents. The newsletter contains company news, market movements, CSS research and promotions and breaking economic news. Occasionally our newsletter will contain advertisements from trusted partners. However, we will never give, sell or rent your email address to any other companies. If you want to stop receiving our free emails you can unsubscribe at any time by clicking on the link at the bottom of each email. You can read our privacy policy here.

No, thank you I am already subscribed