Morning Note: Market news and an update on Smith & Nephew.

Market News

President Trump said he’d be willing to meet with Vladimir Putin, even if Putin hadn’t yet agreed to also sit down with Ukrainian President Volodymyr Zelenskiy. Trump told reporters he was “very disappointed” with Putin’s behavior and left open the possibility of additional penalties over the war in Ukraine as soon as Friday.

Trump will nominate Stephen Miran for a seat on the Fed’s Board of Governors that expires in January. Miran supports Trump’s push to cut interest rates, and his nomination is seen as a signal of what Trump wants from the central bank ahead of his choice to succeed Jerome Powell. 10-year Treasuries currently yield 4.25%.

Gold edged up towards $3,400 an ounce. The US imposed tariffs on one-kilo and 100-ounce gold bars to reduce reliance on imports, especially from Switzerland, a move that may tighten domestic supply and lift prices. Elsewhere, China extended its gold purchases to a ninth straight month in July. Brent Crude slipped to $66 a barrel, hovering close to a one-month low, pressured by easing supply disruption concerns. 

US equities were mixed last night – S&P 500 (-0.1%); Nasdaq (+0.3%) – with Apple a notable outperformer. Japan equities hit a new high this morning (Nikkei 225, +1.8%) as investor optimism strengthened on expectations of robust earnings from domestic firms. Sony jumped more than 5% as it lifted its full-year profit forecast. Markets were more subdued elsewhere in Asia: Hang Seng (-1.0%); Shanghai Composite (-0.2%).

The FTSE 100 is currently little changed at 9,101. As expected, the Bank of England cut interest rates from 4.25% to 4.00%. The decision was finely balanced – 5 to 4 after a second round of voting – with any future cuts needing to be made gradually and carefully. The Bank see inflation peaking at 4% in next month (higher than the 3.7% forecast in June) and falling to at 2% in Q2 2027. Sterling has firmed – it currently trades at $1.3425 and €1.1525 – while 10-year gilt yields moved up to 4.55%.

Source: Bloomberg

Company News

Earlier in the week Smith & Nephew pleased the market with the release of a positive set of first-half results. The company continues to execute on its growth strategy and launched a new $500m share buyback programme. Poor operational performance in the past means the shares have been a poor performer over the medium term and consistently traded on a discount to global peers, despite the disclosure last summer of a 5% stake by Cevian Capital. However, the market responded positively to these results, marking the shares up by 15%, taking to year-to-date recovery to 35%.

Smith & Nephew (S&N) is a medical products company with three specialist global franchises: Orthopaedics, Sports Medicine & ENT, and Advanced Wound Management.

We believe the group is well placed to benefit from the increased incidence of obesity and related conditions, such as diabetes and osteoarthritis, given its strong market position in joint replacement, trauma and diabetic ulcer treatment. Meanwhile, the shift to more active lifestyles in some quarters is expected to lead to increased wear and tear on joints and more sporting injuries, a trend which should benefit S&N. Finally, the group should benefit from an ageing population, who consume more medical products and are more prone to chronic diseases, and growth in emerging markets, as a growing middle class look to access higher-quality healthcare and adopt ‘western’ lifestyles and habits.

However, over the last few years, the business has been impacted by the continued delay to elective surgeries, supply chain issues, higher input inflation, and the impact on pricing of volume-based procurement (VBP) in China. There is also a concern over the impact GLP1 weight loss drugs will have on the industry which we believe is overdone.

In addition, operational execution at S&N has been poor over the medium term with recurring restructuring charges and under-performance relative to its global rivals. In response, the company is undertaking a 12-Point Strategy for Growth Plan focused on fixing Orthopaedics, improving productivity, and accelerating growth in Advanced Wound Management and Sports Medicine & ENT. The group is targeting underlying revenue growth consistently above 5% and trading profit margin expansion to at least 20%. There is clear evidence the programme is working and the company has identified additional savings as productivity initiatives progress – the total gross run-rate savings is now of $325m-$375m in 2027. The company will disclose the details of its next phase of strategy at its Capital Markets Day in December.

In H1 2025, revenue grew 7.8% to $2961m. On an underlying basis, which strips out the impact of M&A and currency, growth was 5.0%, despite there being two fewer trading days in the period versus the prior year. In Q2 (+6.7%), all regions and all the three business units grew ahead of Q1 (+3.1%)

During the period, the group made further progress with its improvement plan, particularly in Orthopaedics. Recent product launches are driving growth across all business units – new products launched in the last five years accounted for three-quarters of the group’s first-half growth.

·       In Orthopaedics, the rate of underlying organic growth in Q2 was 5.0%, with both Global and US Reconstruction sequentially improving versus Q1. This was the fourth consecutive quarter of sequential improvement from US Reconstruction & Robotics on an average daily sales basis. 

·       Sports Medicine & ENT generated growth of 5.7%. Stripping out China, growth was 10.2%.

·       In Advanced Wound Management, revenue grew by 10.2%, helped by a rebound in Advanced Wound Bioactives.

The group’s Established (i.e., developed) Markets were up 8.2% in Q2, with the US (the largest market) up 8.7% and other Established markets up 7.4%. Emerging Markets fell 0.2% as a result of the weakening of the headwinds from China, as expected. Excluding China, EM rose by 12.2%.

The trading margin rose from 16.7% to 17.7%, as revenue leverage and accelerated operational savings more than offset external pressures. Trading profit rose by 11.2% to $523m, well above the market forecast of $496m. Adjusted EPS grew by 14.1% to 42.9c.

Trading cash flow conversion was 93%, versus 60% last year and historical levels of around 85%. Free cash flow rose from $39m to $244m, helped by a lower restructuring change.

The company has a robust balance sheet and access to significant liquidity. In the first half, net debt stayed at around $2.4bn, with gearing of 1.8x net debt to EBITDA, versus the 2.0x target. The dividend was raised by 4.2% to 15c. As a reflection of strong cash generation, the group has announced an additional return of $500m to shareholders via share buyback in the second half of 2025, while retaining leverage, and without compromising its growth plans.

Guidance for 2025 has been reiterated: underlying revenue growth of around 5% and a trading margin of 19%-20%. The outlook includes an expected net impact of $15m to $20m from tariffs in 2025, based on announced measures, and mitigations, as previously announced. The group continues to expect to drive further margin expansion beyond 2025 through continued momentum and efficiency gains.

Source: Bloomberg