Investor spotlight: Market volatility and three ASX with UK connections

This issue of Investor Spotlight is brought to you by IG, with Kyle Rodda, Market Analyst and ausbiz presenter.

In this week’s article, we look at what happened last week in UK financial markets, how it might impact market sentiment locally, and three stocks that have business connected to the United Kingdom.

What caused the sell-off in UK assets?

The UK economy has been plagued by high inflation, due to a combination of supply and demand dynamics. On the supply side, the UK economy has been hit acutely by the war in Ukraine, and the subsequent surge in energy prices. Inflation in the UK has hit as high as 10.1%, with many analysts predicting it could surge towards 20%.

In an effort to ease the cost of living pressures, the new UK Prime Minister, Liz Truss, announced a suite of measures in a “mini-budget”, which included sweeping tax cuts. On aggregate, the budget fuelled fears that it would add to already strong demand and put even greater upward pressure on inflation.

UK Gilts - or the country’s government bonds – tumbled, as market participants priced in higher inflation expectations along with the necessary increase in the supply of bonds in the market to fund the additional spending.

Yields rise as prices fall therefore the move hit the value of these assets while also increasing the cost of service debt. The move to Gilts was the largest in history.

Due to the rapidity of the move, several UK pension funds, which pay out defined benefits to their members, found themselves in a margin call because of the leverage they had on these positions. To stump up the cash required, these funds sold other assets, like local and global equities, sparking a cascade effect in international markets.

In order to stabilize the situation, the Bank of England quickly intervened, halting its planned quantitative tightening program - or the selling back of the bonds it purchased during the pandemic – and promised to backstop the Gilt market until it returned to normal market conditions.

What happened to the pound?

As investors dumped UK bonds, they also sold the pound, with nervous investors buying the US dollar in a search for relative safety. The GBP/USD hit an all-time low, touching 1.0382 briefly, before springing back as markets stabilized and confidence returned – however, brief it may prove to be.

GBP/AUD daily chart

Interestingly, the pound also fell considerably against the Australian dollar, despite the latter's propensity to depreciate during times of market turmoil. It fell briefly to levels not seen since the Brexit referendum, before bouncing to above where it was prior to the sell-off in Gilts. Currently, key support is around 1.6850, while key resistance is just above the spot at 1.740.

Three UK-sensitive stocks on the ASX

Given the turmoil in UK markets currently, the natural question to ask is now a good time to invest in UK businesses. On the one hand, the profits of some of these companies might benefit from a fall in the exchange rate. On the other, the potential economic impact and volatility in markets could undermine the value of many companies.

Here we look at three companies with ties to the UK.

• Janus Henderson Group (JHG)

Janus Henderson Group is a global asset manager with a dual listing on the London Stock Exchange (LSE) and ASX. It has assets under management of around or slightly below $US400 billion.

The company’s stock has been a major underperformer this year, owing in large part to the highly correlated drop in global asset markets in 2022. So big has the drop been in the company’s share price, it has recently fallen out of the ASX 200 index. The stock is down over 46% year to date.

Analysts are largely bearish on the stock’s outlook. It has a consensus sell rating amongst eight surveyed analysts, with five offering that recommendation, two suggesting a hold, and one a buy. Interestingly, the consensus price target remains above its current price, at $34.95.

The technicals meanwhile are looking very bearish. The stock is trending lower, and last week, broke a key level of support around $32.60. That level now acts as resistance, with the next level of support possibly around $28.85.

Janus Henderson Group weekly chart

• Virgin Money UK (VUK)

Virgin Money UK is a dual-listed holding company of several finance companies. It’s a small-to-medium sized company, which derives most of its revenues from retail banking. With the lift in interest rates and risks to UK growth, Virgin money stock has underperformed over the past 12 months.

The risk of a credit squeeze and greater pressure on households from UK government policy has seen the company’s shares take another leg lower. Despite this, the broker community maintains a slightly bullish bias on Virgin Money stock - though it may yet still experience downgrades after last week’s events.

Of four analysts, two have to buy ratings, one a hold, and one a sell, with a price target of $3.34. The technicals look far less favourable for Virgin Money UK shares.

Momentum is skewed to the downside and the trend clearly lower. Crucially, the price has broken a key level of support at $2.20, with the next clearly level of support around 1.85.

Virgin Money UK weekly chart

• Ramsay Healthcare (RHC)

Ramsay Healthcare is an Australian-based company with a dual listing on the ASX and LSE. It owns and operates hospitals and health care clinics across the globe, with significant business in Australia and the UK, amongst other countries. Ramsay is one company that could benefit from the exchange rate impact on its profits. According to its recent full-year results, the company’s revenues in the UK doubled to $A1.2 billion.

This was despite major disruptions caused by the pandemic, including staff shortages, higher operating costs and inflationary pressures. These issues were prevalent across the broader business in the financial year, too; with company management suggesting that Analysts are mixed towards Ramsay health care, with the stock currently holding a consensus hold rating.

Of 17 analysts, seven have a buy rating, eight hold, and two sell. The price action looks very ugly for Ramsay Healthcare. The company’s full-year results sparked a considerable sell-off in its shares, pushing it to lows not seen since the start of the pandemic.

Currently, the price is resting on support at around $57.00.

Ramsay Healthcare weekly chart