Tesco’s once again undermines confidence in the equity market

It rather looks as if those who were hoping that the equity market was going to quietly sleep walk into the New Year may have those views tested over the next few days. The Vix has spiked sharply at the start of the week, as the euphoria of last Friday’s better than expected data has filtered away. Treasury yields that spiked across the board on Friday have slowly drifted lower again.

Tesco’s took additional turn for the worse today after it issued yet another profit warning. The stock retested the lows of a few weeks ago on the announcement before recovering a little later in the day. This company, which had been the bedrock of so many portfolios over the years, continues to cause pain. The initial blame for Tesco’s woes was largely put down to the impact of competition from the likes of Lidl, but that would now seem to be only part of the problem. The incoming chief executive has blamed the latest profit shortfall on the introduction of measures to improve relations between Tesco’s and its suppliers. There have always been anecdotal stories suggesting Tesco’s in particular used its dominant position to put pressure on its suppliers, it looks like that policy may have benefitted in the short term but has had implications for the longer term. Tesco’s banking division was considered by many to be a potential source of growth in the coming years, it would appear that they also had something of the banking culture in the company, rewarding short term profitability at the expense of creating long term value. For what was considered to be such a blue chip company to fall so spectacularly from grace undermines for many an unsophisticated investor confidence in equities as an asset class.

The FTSE 100 appears to be taking the brunt of all the bad news at present, blue chip companies faltering, commodity prices being hit and uncertainties over next year’s general election. True to form into this mix Martin Weale reiterates his view in today’s Telegraph that he believes the Bank of England cannot delay in raising interest rates. Mr Weale has consistently held the view, almost from 2011, that interest rates in the UK need to be raised; we still believe he will remain in the minority for a while yet. Despite the strength this year of the UK economy, the FTSE 100 has consistently been one of the worst performing of the major developed indexes in the past 12 months.