After Thursday's hefty fall, investors dip their toes back into market but mood still cautious
After Thursday's decline, leading shares recovered some of their poise, with mining and banking shares among the main gainers and luxury goods group *Burberry* subject to bid speculation.
As investors regain their nerve and head for riskier assets once more, the *FTSE 100* has added 47.15 points to 6338.69. On Thursday it slumped more than 103 points, or 1.6%, after hints from the US Federal Reserve it might put the brakes on its QE3 bond buying programme, while in Europe there were downbeat service sector reports.
And with the Italian election to come this weekend and a deadline for the US to sort out its spending cuts and tax rises looming, the mood is still cautious. Rebecca O'Keeffe, head of investment at Interactive Investor, said:
Financial markets in Europe have been very sanguine so far this year, but Europe's underlying problems are far from over. Like a bad B-movie zombie, Berlusconi is once again rising from the dead, threatening the people of Italy with a potential right-wing victory in this week-end's elections or, worse still, a return to no overall control.
In the US, there is just one week left for politicians to avoid the automatic sequester. So far, Republicans are resisting attempts by the President to introduce new tax measures, insisting that the debate is purely a question of spending cuts. Without a compromise, deep cuts to both the defence budget and an arbitrary selection of domestic programs will kick in on 1 March. Market opinion has swung from expecting that the sequester wouldn't happen to believing that it doesn't matter, but in combination with the year-end tax increases, the sequester's spending cuts could trim as much as 2% points from US GDP this year. Even after this week's correction, this impact does not appear to be priced into the market.
Among the recently hard-hit miners,* Kazakhmys* has climbed 25p to 699p and *Anglo American* has added 45p to £19.68.
*Barclays* is 3.7p better at 310.15p as Investec raised its price target from 340p to 345p and its recommendation from hold to buy. Ian Gordon at Investec said:
We remain unwilling to join the growing ranks of the "Barclays £4 club"– on a 12 month view, we do not regard 1.1 times 2013 estimated total net asset value as a credible aspiration in a transitional year. However, we do see the post-results retracement as overdone in both relative and absolute terms. After huge out-performance up to and including 12 February, Barclays has been the sector's worst performer since then. We tweak our forecasts to capture benefit from the £/$ collapse, and upgrade back to buy.
We caution that our target price is a 12-month view, and, this time around, we expect it to take 12 months, and not 12 days, for shareholders to enjoy the around 15% total return we now forecast.
*Lloyds Banking Group* is up 0.49p at 54.46p but *Royal Bank of Scotland* has bucked the sector's rising trend, down 1.5p at 345p on talk it could shut 22 branches in India with the loss of 200 jobs.
As for Burberry, the luxury goods group has jumped 35p to £14.03 with traders citing a recent note from Berenberg suggesting it could be a target for LVMH. It said:
We believe that Burberry is a target for trade buyers looking to add a quintessentially English luxury brand with best-in-class digital execution, a 100% free float coupled with opportunities to reduce a high operating cost base resulting in a Retail/Wholesale earnings margin more in line with peers.
In particular it suggested that LVMH, with acquisition firepower of more than £10bn, could easily do a deal:
This is not the first time we have advocated that LVMH should acquire Burberry. Given the margin pressure faced by LVMH across several divisions, we believe that an return on invested capital-accretive deal not only for the fashion and leather goods division but for the group as a whole would be welcome.
We appreciate that the Burberry brand is not as high-end as brands such as Hermès or Berluti, yet Burberry brings many strategic positives to LVMH at a time when we believe the group needs time to assess and implement how it will turn around LV's brand, sales and profit momentum.
Still with retail, *J Sainsbury* has jumped 6.3p to 344.1p after Citigroup raised its rating from neutral to buy. Analyst Alastair Johnston said:
We want to buy value grocers (low PE, asset backing, leveraged buyout potential) and to buy UK, not continent: trade-weighted pound down5% and euro up 8% over last 6 months should drive food UK food inflation/continental dis-inflation in 2013. We expect Morrison and Tesco earnings to disappoint. We think Sainsbury fits.
We choose Sainsbury, upgrading our rating to buy and target price to 385p (from 315p).... We think the more than 4% dividend yield can be maintained.
But *G4S* has dropped 4.5p to 285.3p, the biggest faller in the leading index after a downgrade from HSBC. The bank moved from neutral to underweight, saying:
We think the market is disproportionately focused on G4S' UK public sector travails, which is 10% of group revenues. Instead, a much bigger risk is building. Manned security pricing is very weak in many developed markets, which makes cost recovery difficult and squeezes gross margins. Reported by guardian.co.uk 8 hours ago.
After Thursday's decline, leading shares recovered some of their poise, with mining and banking shares among the main gainers and luxury goods group *Burberry* subject to bid speculation.
As investors regain their nerve and head for riskier assets once more, the *FTSE 100* has added 47.15 points to 6338.69. On Thursday it slumped more than 103 points, or 1.6%, after hints from the US Federal Reserve it might put the brakes on its QE3 bond buying programme, while in Europe there were downbeat service sector reports.
And with the Italian election to come this weekend and a deadline for the US to sort out its spending cuts and tax rises looming, the mood is still cautious. Rebecca O'Keeffe, head of investment at Interactive Investor, said:
Financial markets in Europe have been very sanguine so far this year, but Europe's underlying problems are far from over. Like a bad B-movie zombie, Berlusconi is once again rising from the dead, threatening the people of Italy with a potential right-wing victory in this week-end's elections or, worse still, a return to no overall control.
In the US, there is just one week left for politicians to avoid the automatic sequester. So far, Republicans are resisting attempts by the President to introduce new tax measures, insisting that the debate is purely a question of spending cuts. Without a compromise, deep cuts to both the defence budget and an arbitrary selection of domestic programs will kick in on 1 March. Market opinion has swung from expecting that the sequester wouldn't happen to believing that it doesn't matter, but in combination with the year-end tax increases, the sequester's spending cuts could trim as much as 2% points from US GDP this year. Even after this week's correction, this impact does not appear to be priced into the market.
Among the recently hard-hit miners,* Kazakhmys* has climbed 25p to 699p and *Anglo American* has added 45p to £19.68.
*Barclays* is 3.7p better at 310.15p as Investec raised its price target from 340p to 345p and its recommendation from hold to buy. Ian Gordon at Investec said:
We remain unwilling to join the growing ranks of the "Barclays £4 club"– on a 12 month view, we do not regard 1.1 times 2013 estimated total net asset value as a credible aspiration in a transitional year. However, we do see the post-results retracement as overdone in both relative and absolute terms. After huge out-performance up to and including 12 February, Barclays has been the sector's worst performer since then. We tweak our forecasts to capture benefit from the £/$ collapse, and upgrade back to buy.
We caution that our target price is a 12-month view, and, this time around, we expect it to take 12 months, and not 12 days, for shareholders to enjoy the around 15% total return we now forecast.
*Lloyds Banking Group* is up 0.49p at 54.46p but *Royal Bank of Scotland* has bucked the sector's rising trend, down 1.5p at 345p on talk it could shut 22 branches in India with the loss of 200 jobs.
As for Burberry, the luxury goods group has jumped 35p to £14.03 with traders citing a recent note from Berenberg suggesting it could be a target for LVMH. It said:
We believe that Burberry is a target for trade buyers looking to add a quintessentially English luxury brand with best-in-class digital execution, a 100% free float coupled with opportunities to reduce a high operating cost base resulting in a Retail/Wholesale earnings margin more in line with peers.
In particular it suggested that LVMH, with acquisition firepower of more than £10bn, could easily do a deal:
This is not the first time we have advocated that LVMH should acquire Burberry. Given the margin pressure faced by LVMH across several divisions, we believe that an return on invested capital-accretive deal not only for the fashion and leather goods division but for the group as a whole would be welcome.
We appreciate that the Burberry brand is not as high-end as brands such as Hermès or Berluti, yet Burberry brings many strategic positives to LVMH at a time when we believe the group needs time to assess and implement how it will turn around LV's brand, sales and profit momentum.
Still with retail, *J Sainsbury* has jumped 6.3p to 344.1p after Citigroup raised its rating from neutral to buy. Analyst Alastair Johnston said:
We want to buy value grocers (low PE, asset backing, leveraged buyout potential) and to buy UK, not continent: trade-weighted pound down5% and euro up 8% over last 6 months should drive food UK food inflation/continental dis-inflation in 2013. We expect Morrison and Tesco earnings to disappoint. We think Sainsbury fits.
We choose Sainsbury, upgrading our rating to buy and target price to 385p (from 315p).... We think the more than 4% dividend yield can be maintained.
But *G4S* has dropped 4.5p to 285.3p, the biggest faller in the leading index after a downgrade from HSBC. The bank moved from neutral to underweight, saying:
We think the market is disproportionately focused on G4S' UK public sector travails, which is 10% of group revenues. Instead, a much bigger risk is building. Manned security pricing is very weak in many developed markets, which makes cost recovery difficult and squeezes gross margins. Reported by guardian.co.uk 8 hours ago.