Hello, and welcome to the Week Ahead, your weekly destination for discussion and analysis of what's coming up this week that may be of interest to investors.

It is another busy week for UK companies, with many reporting results for the period ending 31 December (or 31 January for those retailers which like to make sure they capture the Christmas numbers in their annual results). We’ll also get retail sales data on Friday, which could give an interesting picture of the health of the market. This is a topic we covered in our weekend newsletter, with the verdict being perhaps the retail market isn’t in as bad a position as some might think. You can read the newsletter online here.

Indeed, it is a busy week for economic indicators, with UK inflation data released on Wednesday. The OBR currently expects the central case for CPI to drop more rapidly than it did last year. Although last month's inflation figures had CPI at 4%, the OBR predicts it will be at the 2% target in 2024 and even below it in 2025. Let’s not hope the correction doesn’t become an over-correction.

Hot on the heels of the inflation data will come the interest rate decision from the Bank of England. At the last meeting, the committee voted by a majority of 6–3 to maintain base rate at 5.25%. However, the dissenters disagreed with which way interests should go next. Two members went for a 25 basis point increase to 5.5%. One member preferred to reduce the rate by 25 basis points to 5%. Since then, the economic data has been variable. Wages were slightly higher than expected, inflation numbers were slightly lower than expected, and GDP was weaker than forecast, giving mixed signals.

Most predictions suggest the first rate cut will occur in May or June, so the most likely outcome is that interest rates will be held this week and markets are currently pricing this in. But there is some uncertainty, given the differing data and opinions of the monetary committee, so it’s worth watching for any changes on Thursday. A rate cut, could provide some stimulus to the FTSE, but any further delays are not likely to go down well.

Insurers in the spotlight

A number of the UK’s insurers will be announcing their numbers this week, including Direct Line, which is another one of the UK companies currently facing a takeover. Last week, the offer from Ageas was upped slightly to around 237p/share. However, management at Direct Line responded by saying:

”The Board considered the Latest Proposal with its advisers and continues to believe the Latest Proposal is uncertain, unattractive, and that it significantly undervalues Direct Line Group and its future prospects while also being highly opportunistic in nature. Accordingly, the Board unanimously rejected the Latest Proposal.”

So, the board will be under pressure to show the undervaluation. Given that the focus of many UK large-cap investors is on income and that the company stopped paying dividends in 2023, whether they can re-instate a dividend will be of particular interest.

As it will be for Phoenix , which currently yields over 10%. Some brokers have been doubting the company's ability to keep these payout levels. However, a trading statement at the start of February said:

“The Group has therefore delivered c.£1.5bn of new business long-term cash generation in 2023, achieving its 2025 target two years early.”

An increase in the dividend payout may prove the naysayers wrong and drive a re-rating. But there are concerns around the decline in closed book business. Instead, the growth is coming from the pensions and savings division which **delivered net fund flows of c.£4.5bn in 2023, nearly double the prior year (FY22: £2.4 billion), supported by c.£2bn of new scheme assets.

In contrast, Prudential currently pays just a dividend which yields just 2%, with the payout not recovering from the COVID period. So, here, the focus will be on whether the retained capital can drive growth again.

Lookout for: Comment on dividend payments

Can quality retail continue to shine?

Last week’s GDP figures showed an economy in better health owing partly to a recovery in high street retail sales. That trend was reflected by Next in its Christmas trading statement which showed retail (non-online) sales rising in the final quarter and flat in the second half as a whole (well ahead of the expectations set out in the first half numbers).

As ever, Next’s trading update was very detailed, so numbers this week are unlikely to move the share price. But management was cautious about being too enthusiastic about the outlook back in January amid fears that the demand of recent months might dry up once inflation begins to erode pay rises. Any change from that position this week might provide an interesting indication of the state of the economy.

But Next’s shareholders should be on the lookout for any softening in the online side of the business. Revenues here rose 9% in the final quarter and 7.7% in the second half as a whole, which was also well ahead of the expectations set out in the first half of the year. It’s this online division which has provided the growth in the business in recent years. And there are arguments to be made that the growth needs to be maintained if the company is to justify a price to earnings ratio of 14.

Lookout for: Growth in the physical retail space and read across to the wider economic conditions

Can Nike compete with the upstarts?

It wasn’t long ago that Nike led the way in elite running shoes. Carefully crafted at the company’s elite training centre in Oregon, the Nike Alphafly was the trainer of choice to propel marathon runners to new records. Now it’s facing competition. Neither Saucony nor Brooks are new brands (both founded around the turn of 20th century), but a mixture of technical and marketing investment means they’re gaining market share from the previous leaders. And then there is Hoka which was founded in 2009 and named after the Maori word meaning ‘to fly’ - which the ultra-runners who have embraced the brand claim that the shoe helps them do.

Getting elite athletes to wear their gear has been key to the Nike brand-building exercise. The company signs expensive endorsement deals with athletes and teams and this has helped it build a brand whose patents and trademarks are valued at $250m.

But the marketing space for brands in the sports apparel industry has changed alongside the rise in social media. Today, companies don’t need high paid sports stars - better to find amateur athletes with a massive Instagram following. This is the model which has helped the likes of Gymshark and Lulu Lemon take market share in the fast growing athleisure space.

Amidst the challenges, Nike’s revenue has grown from $39.1bn in 2019 to $51.2bn in 2023, but that growth has come at a cost. The company has had to spend more on marketing and advertising to keep ahead of its peers, meaning operating margins have stumbled in the last few years.

And the market has noticed. Shares have fallen 37% in the last year, but still trade on 25 times forecast earnings. It looks like there could be further to fall.

Lookout for: A rise in marketing spend and any decline in the value of the patents and trademarks (which could lead to a financial impairment).