CMC Markets shares plunge after trading lull prompts profit warning

CMC Markets has warned on profits after clients' enthusiasm for trading waned during the summer, making the spread betting and online trading company the latest to suffer from a slowdown following the pandemic investing boom.

The news sent the FTSE 250 group’s shares down by more than a quarter on Thursday after it said that “subdued” market activity in July and August resulted in less trading from both new and existing clients.

CMC, which benefited from market volatility earlier in the pandemic as people traded more, warned that it expected net operating income for the 12 months to March 2022 to be between £250 million (€291 million) and £280 million (€326 million) if current market conditions continued for the rest of the year. That is down from a figure of “in excess of £330 million” that CMC set out in a trading update in late July.

Shares fell as much as 28 per cent on Thursday morning, hitting their lowest level in just over a year.

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CMC, like other investment businesses, was buoyed by a surge in trading during the first year of the Covid-19 pandemic as markets whipsawed and as traders stuck at home deployed higher levels of savings.

But there are concerns this fillip is coming to an end.

Slowdown

Last month, the UK’s largest investment platform Hargreaves Lansdown warned that the pandemic surge in trading would not last, sending its shares down 11 per cent on the day.

CMC’s business is based more on fees from trading than long-term investing, meaning it is more exposed to market volatility according to analysts, although the group has taken steps to branch out into other areas such as non-leveraged stockbroking.

It recorded net operating income of almost £410 million (€477 million) in the year to March 2021, alongside record profits, as volatility encouraged clients to trade more.

CMC’s chief executive Baron Peter Cruddas, who with his family owns a 62 per cent stake in the company, credited “Covid-19 related volatility and heightened levels of interest in the financial markets” for a jump in new customers in 2020. “Our strategy allows us to attract and retain these new clients,” he said earlier this year.

Many investment businesses had prepared for trading and client interest to drop more than usual during the summer lull as Covid lockdowns ended in the UK. However, the scale of the hit to its income prospects exceeded CMC’s expectations.

Stuart Duncan, analyst at Peel Hunt, said the decline probably reflected a combination of factors including “reduced volatility, fewer reasons to trade, and clients taking holidays as restrictions have eased”, but that higher client numbers following the pandemic meant CMC could rebound quickly if market activity picked up. However “CMC cannot escape the slowdown in trading activity”, he warned.

CMC also said the share of client income that it retains after external hedging costs had dipped “moderately below” its 80 per cent minimum target, which could further squeeze its income. But it added: “Beyond the recent moderation in market activity, the group continues to have confidence in the long-term growth opportunities of the business.” – Copyright The Financial Times Limited 2021