More relief than euphoria for UK markets after Scots vote No

The troubled mobile phone store owner Phones4U entered administration after EE joined Vodafone and O2 in cancelling their contracts to supply the embattled high street chain.  Vodafone share price rose after reports emerged that it and EE were looking at buying sections of Phones4U.

ASOS issued their third profit warning in less than a year, sending its share price tumbling.  There was contagion in the sector, with other retailers, including JD Sports & Next firmly down.

Crawley based TUI Travel was of interest as talk of cash returns in the wake of the £5.2bn merger with its German parent sent the tourism business flying to the top of the FTSE 100 leaderboard.  easyJet performed better after announcing that it would also pay back some cash to shareholders. The British airline, now the largest by number of passengers carried, has reached an agreement with Airbus to exercise existing purchase rights over 27 current generation A320 aircraft for delivery between 2015 and 2018. These aircraft are more efficient than the current model used and should lead to cost savings. This will mean easyJet will have a 35% larger fleet by 2019.

Weakness in resources stocks helped to dampen excitement over Scotland's No vote. Companies seeing the majority of the relief rally gains were RBS, Lloyds, Standard Life and Aberdeen Asset Management, whereas mining companies were hit by further falls in commodities prices and concern of an earlier than expected US interest rate rise.

Chinese e-commerce giant Alibaba priced its shares at $68 in the run up to the largest ever initial public offering (IPO).  Overwhelming demand saw the IPO initially raise $21.8 billion and then sent Alibaba's stock surging 38% in its debut last Friday.

Finally Tesco has lowered its forecast for first-half profit by £250m, its third warning this year, after finding a fault in its accounts, in the latest blow to the reputation of Britain's biggest grocer.

Don’t mention the … vote!

Four new polls released over the weekend continue to paint the picture of a statistical dead heat in the Scottish Independence Referendum.

There are three macro channels through which the referendum and a yes vote are likely to impact investments. A weaker pound, higher bond yields and potentially a higher equity risk premium.  We expect the pound to suffer the majority of the impact.

There are some investment managers who fear that the markets are under discounting the possibility of a yes vote. Certainly the impact to date remains muted but in the current low interest rate world it takes a lot to persuade investors to part with their equities – as we have seen with the US growth scare, Ukrainian crisis and rise of ISIS.  Also notably the pound and gilts bore up better than most expected during 2010’s hung parliament. The message is that markets are more resilient to uncertainty than investors generally might expect.

With all the focus firmly on Scotland, there was little coverage on Mark Carney’s testimony to MP’s last week. Mr Carney struck a more balanced tone than the one he has offered in recent months. He commented that the MPC would hit its target if rates rise by spring and then proceed to rise very slowly. This seems to all but rule out an increase this year, but tips the balance in favour of February in preference to May. Nevertheless, the committee’s options are still fairly open.

In company news, Harrogate-based Engage Mutual has proposed to merge with the Brighton company, Family Investments, in a deal that would create one of the UK’s largest mutuals with more than 2 million customers. The proposed merger remains subject to regulatory approval but could potentially conclude in the first half of 2015.

Share activity in Scottish institutions is livening-up

Share activity in some of the Scottish based institutions, such as Royal Bank of Scotland and Standard Life is becoming more lively following recent YouGov polls that highlighted the chance of a ‘Yes’ vote for Scottish independence is growing by the day. For some time the ‘No’ vote was supposedly leading by at least 15-20 points. This has now collapsed to low single digits and for the first time, in the last couple of days, marginally swung in favour of the ‘Yes’ campaign, suggesting the real possibility of a very close finish. The referendum will take place on Thursday 18^th September.

Investors were looking for ‘signs of life’ for Tesco after the recent profit warning and dividend cut reduced the valuation of the food retailer but the share price continues to languish at levels not seen for many years.

In the quarterly shuffle it appears that mid-cappers Direct Line Insurance Group and Dixons Carphone are likely to be promoted to the FTSE-100. This news is normally a positive and should help to boost the valuations.

Barclays is launching a new way to access bank accounts for its business customers, which identifies individuals through the unique pattern of veins in their fingers. The technology is quite distinct from fingerprint recognition and is yet another way of combating fraud as users become increasingly fed up with multiple passwords and PINs.

It has been a week of big news on the economic front with the main story being the surprise rate cut by the ECB and their commitment to buying bonds to boost the European economy. What was meaningful was that the ECB vote over policy change was not unanimous, implying that the German Bundesbank had been outvoted again. With disparate economic performance in the Eurozone the importance of struggling nations standing up to the Bundesbank is paramount and indications that it will do so are welcome.

Markets stable ahead of possible eruptions

The FTSE 100 broke through the 6,800 mark for the first time since July this week. This may have been partially driven by comments from Mario Draghi, the European Central Bank president, who insinuated an increased chance of Quantitative Easing from the ECB. In the US, economic data told a story of a reasonably robust economy where the 2^nd quarter GDP figures were revised higher from 3.9% to 4.2%.

The Russia/Ukraine conflict escalated further when Russian troops were accused of entering Ukraine with tanks and heavy weaponry. Russia continued to deny any involvement, despite the evidence being seemingly indisputable! Undeterred by such significant geopolitical concern, most markets fell by less than 1% in response.

The Insurance company RSA, who have offices in Horsham, have been given a boost by analysts from Bank of America Merrill Lynch this week, who upgraded the stock from a ‘neutral’ to a ‘buy’ recommendation. They believe that new boss Stephen Hester’s cost-cutting measures will have a positive impact on profitability and cite RSA’s strong balance sheet and slight discount to the sector as further advantages.

Aviation companies such as discount airline Easyjet will be watching events concerning Icelandic volcano Bardarbungo intently as they hope flight paths will not be affected. Recent eruptions have caused the Icelandic Met Office to raise its aviation warning level to red, sending Easyjet shares 1.33% lower on fears over flight cancellations.

The woes of the British supermarkets continued this week, as Tesco issued an unscheduled trading update, cutting its interim dividend by a massive 75% as well as its 2015 profit target. Sainsbury’s and Morrisons were down also, with investors clearly concerned over the impact of a price war on profit margins. 

Doubts over 2014 Interest Rate Rise

The S&P 500 hit a 2 week high this week after weaker than expected retail sales figures pushed back expectations for the first rate hike.  Slowing auto demand suggests disappointing wage growth is to blame.  It’s a similar story closer to home with the Bank of England quarterly inflation report confirming the gap between inflation and salaries is widening. The market now expects the first rate rise in Q1 2015, although Barclays and Deutsche Bank still expect November to be the lift off date.

The battle between Carillion and Balfour Beatty continued this week.  After Balfour rejected a recent merger proposal, Carillion issued a reply to the rejection and brought forward its first half results. Decent results were overshadowed by a statement highlighting the significant cost synergies thought to be achievable by combining the two groups.  It’s now up to Balfour shareholders to persuade its board to come up with a creditable alternative to remaining independent or succumb to Carillion’s advances, creating a major new UK force in support services and construction. However, Balfour have since issued another statement reiterating their rejection of the merger proposal.  Carillion is now faced with the options of a hostile bid or walking away.

G4S, which has its head office in Crawley, released first half results which were better than expected. Underlying pre-tax profit was up 6% and organic revenue growth up 4.1%.  Improvements in both emerging and developed markets were partly offset by a rise in corporate costs.  A 25% increase in cash flow from operations suggests that management are slowly getting to grips with the company.

Centamin Egypt announced its first dividend to investors despite weak production volumes from its Egyptian gold mine.  It maintained full year guidance which suggests the company is confident delivering more output in the second half of the year. There was no update on the on-going court battle in Egypt over its licence to mine, but profit sharing with the Egyptian government is likely to begin in 2016.

Markets Stay Firm on the ‘Hole’

It was a very good week for US data, with the manufacturing PMI and better than expected job numbers, sending the S&P500 to another record close - something it hasn't done since July.  That said all eyes were on Janet Yellen’s announcements following the Jackson Hole symposium where the great and good of the central banking world meet on an annual basis.

HellermannTyton, registered in Crawley, released strong half year results, slightly ahead of expectations. Revenues grew by 9.3% to €292.4m with pre-tax profit rising by 42.1% to €40.9m. Improvements were seen across all regions, but were slightly hampered by currency movements.

The saga between Carillion and Balfour Beatty continued this week with Balfour rejecting the fourth approach.  This led to Carillion announcing they will walk away from the deal.

Quindell, with operations in East Grinstead, found itself under further attack this week responding via the website to more allegations of wrong doing.  Following this they issued seemingly robust half year results that saw revenue more than double to £357.3m, with pre-tax profit standing at £123m. Despite this the shares fell on the day and finished the week 6.3% down.  Clearly investors still have doubts.

The housing market appears to be continuing at full steam with Bovis Homes reporting 3530 homes sold in the first 32 weeks, 41% higher than the same period in 2013. They also sprung a surprise detailing its plans to pay an enhanced dividend of 35p in 2014 and at least 35p in 2015.

D3O, Portslade based makers of advanced orange goo made national press this week with a glowing review of its new wonder-material.  With familiar qualities, D3O is soft when handled slowly but stiffens on impact, making it appropriate for a range of domestic and industrial usage.  A company clearly on the up! 

Little good cheer in another week of geopolitical worries

Despite the current market malaise and worrying geopolitical news, shares in Intertek, the multinational inspection and product testing company with operations in Haywards Heath, were buoyed by upbeat analyst comments in the wake of decent half year results. Intertek has been struggling of late as the company attempts to exit from low margin contracts, whilst facing a slowdown in new orders from the oil and gas industry. Export bans and bad weather have also taken their toll. Having fallen by 18% from the last trading update in May investors reacted positively to news of a potentially better second half.

It wasn’t such a pretty picture for the likes of InterContinental Hotels. The shares were marked lower on their half-year figures that were not expected to result in significant market upgrades. A bias to mid-market brands like Holiday Inn has helped the company outperform the industry in tough times. The hotel group has also seen good growth exposure to China and the Asia Pacific region, with an attractive pipeline of new rooms.

Staying with the fallers, Royal Mail shares reached their lowest level since its initial public offering. Some analysts now believe Royal Mail will miss its 2015 margin guidance, coming under increasing, albeit well-flagged, competitive pressures by rival TNT Post UK.

The newly merged consumer electronic group, Dixons Carphone, created from the £3.8bn. tie-up of the high-street phone retailer and PC World owner succumbed to wider market weakness and closed lower on its stock market debut as a newly merged company. 

In a week of trade war talk, military escalation in Russia / Ukraine and new tensions in Iraq it is not surprising that holding gold is gaining appeal once again. The flight to safety was also evident in the bond markets, with the yield on 10-year US Treasuries testing its lowest level since May.

Pets at Home, Taylor Wimpey, Rightmove, J Sainsbury, Tesco, IAG and US jobs data

There was some good cheer from a few companies, which have operations in the Sussex region. Pets at Home was a climber after posting a better than expected increase in sales for the first quarter. The housebuilder, Taylor Wimpey, was also favoured on news that it will boost its 2015 special dividend to a £250m payout. Rightmove followed its lead by raising its interim dividend by 2p to 13p.

Following on from Tesco’s woes J Sainsbury found itself on the wrong side of an analyst’s report, unfortunately in this instance from its own house broker. A downgrade by a house broker usually has more weight with investors, as they generally tend to be more positive about their clients’ prospects. In Sainsbury’s case Morgan Stanley’s retail experts were unsettled by the recent changes at rival Tesco and believe Sainsbury’s control over its destiny has weakened.

British Airways owner IAG has moved into profit for the first half of the year after an improved performance from its Spanish airline, Iberia. Group passenger numbers increased to 35 million from 29 million in the first half of 2013. Iberia’s restructuring continues to have a positive impact on the group and 16 new aeroplanes have been ordered for the Spanish airline.

More broadly world markets were on the back foot during most of last week as concerns about the stability of Portugal’s banking system weighed as did worries about Russia, Gaza and the Argentine debt default. Elsewhere the US added 209,000 jobs in July, adding to optimism that the country’s economy is roaring once more. The biggest job gains were in professional business services and manufacturing jobs. Some economists had been expecting even better data but nonetheless this was a decent enough number and certainly welcomed in a week of worrying geopolitical news.

GlaxoSmithKline, Tesco and update on Britain's economy

Earnings news at GlaxoSmithKline (GSK), unsettled investors and the share price dropped to levels not seen in over a year. Having earlier told the market to expect an increase of as much as 8% the company warned its earnings are more likely to be flat this year. Like many other global companies, Britain’s biggest drugmaker has been hurt by the strong pound, which was partly responsible for its recent disappointing second quarter results. GSK employs over 97,000 people in over 100 countries and has a sizeable operation in Worthing.

Another global company and large employer in Sussex that came back on the ‘radar screen’ was Tesco. It shares have also fallen to a year low on news of the departure of their chief executive and yet another profit warning. Apparently Tesco’s participation in the year’s supermarket price war has proved ineffective, with the group remaining 6% more expensive than Asda on branded products. The failure of the company’s ‘Build a Better Tesco’ UK strategy 3 years on from its launch was another reason for the CEO’s exit.

Britain’s economy is now bigger than it was at its pre-financial crisis peak, after official data showed gross domestic product increased by 0.8% in the second quarter of the year. It may not always feel like it but our economy is growing faster than those of every other developed country, which has recently been confirmed by the International Monetary Fund, who upgraded their forecast from UK growth to 3.2% this year and 2.7% in 2015, describing the numbers as an ‘upside surprise’. However, the IMF warned in its quarterly World Economic Outlook that the crisis in Ukraine and continued unrest in the Middle East risked creating an oil price spike that could destabilise the global economy.

Back to a bit of local news and good cheer – it was a pleasure supporting the Juice 107.2 Appeal and their ‘Biggest Breakfast’ event. Thank you to all those Sussex coffee shops and restaurants that kindly helped to make the morning a great success.

Sports Direct, AbbVie, Shire, Meggitt, ITV, Trinity Mirror, 21st Century Fox and Time Warner

Last week drew to a close in a subdued manner following the Malaysian Airways disaster on Thursday afternoon and further news of Israel’s offensive in Gaza.

In the UK, the British Retail Consortium reported a surprisingly weak set of like-for-like sales numbers for June. That came ahead of the announcement that inflation had surprisingly increased to an annual rate of 1.9% in June. This news has added fuel to the fire in terms of when the Bank of England will move on interest rates. That said, the core inflation measure has been unusually volatile over the last four months, swinging 0.4 percentage points per month, so any conclusions should be made with caution. Expectations that a first rate hike could now come as early as the end of 2014 has lifted Sterling further.

On the company front, Sports Direct beat earnings estimates with a 15% increase in annual underlying operating profits. However, the stock sank into the red as the company said recent strong trading was offset by England's disappointing performance at the World Cup. Mike Ashley, the group’s controversial controlling shareholder was also in the news this week after he turned down his controversial inclusion in the group’s bonus plan for 3,000 of its permanent employees.

Takeover activity remains high with the US drug company AbbVie taking over Shire Pharmaceuticals in a deal that values the group at £32bn. Elsewhere, aircraft parts maker Meggitt was boosted by takeover speculation as was ITV and Trinity Mirror. Deal-making in the media sector is definitely picking up, with Twenty-First Century Fox making a play for Time Warner, which was rebuffed.

A number of large companies will be updating the market this week, however it is likely that geopolitical concerns will continue to occupy investors’ minds for a while longer yet.

IAG, easyJet, TUI Travel, Thomas Cook, Greggs, SSP and Banco Espirito Santo

On a poor week for the wider stock market, UK airline shares lost further altitude, following a profit alert from rival Air France-KLM. International Airlines Group (IAG), owner of British Airways and Iberia, and the low-cost carrier, easyJet, slid after its Paris-based peer slashed guidance for full-year earnings, due to overcapacity issues on its long-range routes.

The alert dented investor confidence in other travel-related stocks. Local Crawley-based TUI Travel also felt the pinch, as did Thomas Cook. Dealers said that nervousness about the Middle East, particularly a possible invasion of Gaza by Israel, also weighed on sentiment towards the sector.

Shares in Greggs slid after announcing that its third biggest shareholder, Troy Asset Management, had offloaded its entire 5.4% stake in the baker. Some 5.5m shares are understood to have been sold at 536½p apiece.

SSP, the business behind the Upper Crust and Caffe Ritazza food chains, which has a number of outlets in Sussex, made a successful debut as a listed company with a market value of just under £1bn. Shares in the group, which is led by former WH Smith boss Kate Swann, were priced at 210p, 5.5 times oversubscribed and initial trading was at a premium. Private equity-owner EQT is expected to remain as a major shareholder.

Wall Street has retreated from its recent highs, following the FTSE 100 and European bourses lower amid worries about the health of the Portuguese financial system and other peripheral eurozone nations. Investor concerns are centred on Portugal and the health of Espirito Santo Financial Group (ESFG) and Banco Espirito Santo (BES), the country's biggest-listed lender which has an investment banking business in London.

As equity markets were sold-off investors took shelter in the precious metals miners and physical gold and silver were back in demand.

easyjet, Mothercare, Saga, Sports Direct, Poundland and US jobs data

It has been a volatile week for easyJet, the budget airline. A downgrade from analysts and a sharp fall was followed by a minor recovery, after strong passenger numbers for the month noted a 92% load factor – the measure of aircraft capacity utilisation.

Takeover excitement boosted Mothercare - American company Destination Maternity has had two approaches rejected by the British company and some analysts believe the news could draw out other potential bidders.

Saga missed out on the wider market rally after receiving a lukewarm reception from analysts at some of the banks that floated the company. The initial public offering of the over-50s insurer and travel group is widely regarded as a high-profile flop. Sold to investors at 185p, shares in the company disappointed on their first day of trading and then fell below the flotation price. The main sticking point for many investors at the time of the float was that Saga was being valued as a leisure stock, and not an insurance one. The company has a strong consumer brand, but it is insurance that faces the most scrutiny with the vast majority of its earnings coming from financial services.

Sports Direct, was one on the big risers last week on news that shareholders had backed the retailer’s third attempt to hand founder Mike Ashley a £200m bonus. Analysts think that resolution of this issue removes a degree of uncertainty around the business and the company can now re-focus on the longer-term growth story.

Strong first-quarter numbers from Poundland, which has a number of stores in Sussex, sent shares in the recently-floated retailer upwards.

The encouraging American jobs data inevitably boosted markets on the other side of the Atlantic, with the Dow Jones Industrial Average breaking through the 17,000 level for the first time.

Barclays, TUI Travel, housebuilders, retailers and geopolitical fear

This will be another week to forget for Barclays after more controversy embroiled the firm. Shares fell following news that New York’s special securities regulator was to sue the bank for allegedly misleading its institutional investors using its “dark pools” in favour of high frequency traders. The idea of a dark pool is that it allows investors to be anonymous when they trade big blocks of shares. Barclays’ shares were weaker over fears for the imposition of fines as well as a loss to future business and yet more damage to its reputation.

TUI Travel, which has its headquarters in Crawley, found some strength following news that the group was to enter an all-share merger with its German parent company TUI AG.

Housebuilders, such as Persimmon and Barratt Developments, were generally relieved to hear of softer than expected measures from the Bank of England to cool the housing market. This news temporarily lifted pressure on the sector that had been braced for potential reactionary measures under increasing political pressures.

Burberry was another share that found some strength, supported by an upbeat research note on the luxury goods retailer from Barclays noting the smooth transition of management. However, the same broker was less enthusiastic about fellow retailer Marks & Spencer informing their clients that “consistent clothing market share losses undermine the management’s turnaround plan”. They claimed that those investors expecting M&S to buy back shares, boost its dividend, or receive a takeover approach by a private equity group are likely to be disappointed.

Despite some positive news for the economy, most markets had a flat week.  In months past we would have attributed it to fears of earlier rate hikes but instead this is being described as a response to fears of escalation in the Middle East. Geopolitics seems to have trumped monetary policy and a Chinese slowdown as the greatest fear on the minds of investors as evidence by a number of recent investor surveys.