A fuss about nothing? Renault thinks so. It says it is “good news for Renault” that investigators have not found Volkswagen-style cheat devices during emissions tests on company’s cars. So how come Renault’s share price recovered only half the 20% fall that followed reports that anti-fraud investigators had raided three of the carmaker’s plants?
One answer: the corporate statement wasn’t quite a definitive boast that everything is très jolie under the bonnet. Renault could, for example, have said its board is completely confident that investigators will find nothing because there is nothing to find. Instead, there was a curious sentence about how the “on-going tests open the way for improvement solutions for future and current Renault vehicles”. Solutions to which problem?
At least Ségolène Royal, France’s energy and ecology minister, seemed to leave no room for ambiguity. “There is no fraud at Renault,” she said. “Shareholders and employees should be reassured.” Maybe they will be. Maybe the €2.5bn wiped off Renault’s stock market value on Thursday will be wiped on again.
It remains a safe bet, however, that investors will continue to fret about what fresh horrors will be revealed from the global car industry. Outsiders know two facts that may be relevant. First, this is an industry where expertise is sometimes shared to trim research budgets. Second, the top crew at Volkswagen say they didn’t know a thing about the cheating software and, if utter ignorance was the true position, managements elsewhere may also be in the dark.
Renault, to be clear, may be a model of corporate virtue on emissions – judgment will have to await the investigators’ findings. But, as an industry, carmakers seem to have devoted more resources to working out how to pass emissions tests, rather than exploring ways to reduce noxious emissions themselves. No wonder the industry and its regulators aren’t trusted. After the Volkswagen scandal, share prices can choke on the mere whiff of anything odd.
Tesco’s unanswered questions
As shoppers flock back to Tesco, investors don’t. OK, the shares rose 6% on Thursday as trade at Christmas beat the City’s gloomy expectations. But, at 168p, the share price is roughly where it was soon after chief executive Dave Lewis arrived in autumn 2014. By contrast, this time last year, the shares were heading towards 240p as the market thought it sensed a rapid bounceback.
One half-decent Christmas will raise spirits, but, over the past year, shareholders have had to recognise how long it will take to improve Tesco’s financial fortunes. Lewis listed several admirable qualities behind the strong(ish) Christmas – sharper prices, better customer service and fewer empty shelves – but none of those improvements are free from the retailer’s point of view.
Note the important line in the statement: Tesco is trading “in line” with profit expectations for the financial year of £930m at the operating level. Translation: any trading gains will be “invested”, as retailers misleadingly put it, for the benefit of customers rather than directed towards shareholders.
That is a correct order of priorities since it was obvious to everybody that Tesco needed to regain its competitive edge. But the big question for investors – what level of profit margin can be achieved while being competitive? – remains unanswered. Tesco used to run on 5% until the customers decided they were being ripped off. Last year the figure was 1%. In the new world, 2% or 3% should be possible, but the difference between the two is wide in profit terms when your UK turnover is £48bn.
Signs of stability reduce the risk of a rights issue to reinforce Tesco’s balance sheet, but that danger was probably passing anyway. Real progress, for shareholders as opposed to customers, will come only when Lewis starts talking about restoring the dividend at a decent level. That moment still feels some way off.
FCA needs personality transplant
“Recent interventions by HM Treasury and other bodies have raised questions from directors regarding the board’s independence.” So says the Financial Conduct Authority in a report on the effectiveness of its board. You can understand why the directors are puzzled about what it means to be an independent regulator. It was George Osborne, not them, who last year ousted the last FCA chief executive, Martin Wheatley.
The chancellor was within his rights, it should be said – his powers of intervention are part of what the FCA coyly calls “a complex and demanding stakeholder landscape.” But the episode underlined how, under the UK’s “twin peaks” model of financial regulation, the Bank of England towers over the FCA. The Bank will always be the senior posting, but the FCA badly needs its next boss to be a big personality.
