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Throughout June and July the markets were entranced almost exclusively by Greece. Evidently there’ll be no Grexit this time round, although snap elections could come at any time. Nonetheless, markets have largely moved on to other drivers - notably a slowing China and the prospect of a possible first US interest rate hike in September.
The Chinese government’s desperate attempts to kick start an economic rebound in the world’s number one consumer of commodities has put immense pressure on raw materials producers, notably the UK miners. The fact is that affected companies need to adapt to a new environment. Which of these traditional market giants will leverage today’s high technology and big data resources first to cut costs and weather the storm?
Companies have again (and continue to do so through August) been updating us on their recent performance. Share prices are reacting, as they always do, with bigger than expected moves both up and down based on the sales and profits growth reported. What’s more, the outlook can often be more important than the reported figures, as was the case with Apple (AAPL) in July when $50bn was wiped of its market cap.
UK Banks have been in the spotlight with provisions made for yet more regulatory wrist slapping (will they ever be free of it?) while the Government is busy selling off its stakes in Lloyds (LLOY) and RBS (RBS). We’re also starting to see high valuations and increased competition in the tech sector – what does this mean for chip designer ARM Holdings (ARM), which licences its blueprints to most of the world’s smartphone, tablet and PC manufacturers?
There’s never been a better time to ride short term volatility around results, but we’re also excited to see what will emerge from the other side of challenging macro-economic times. Are sinking oil prices finally starting to bite the oil majors? Will they benefit the airlines?
Are we due some difficult yet gutsy decision-making from the UK Index miners? Are UK defensives set to become more volatile? Read on for our stock-specific musings on all these questions and more.
Top picks for the quarter include:
ARM Holdings, Barclays, BP, BT, GlaxoSmithKline, ITV,
International Consolidated Airlines, Lloyds Banking Group,
Rio Tinto & Vodafone.
The oil major continues to grapple with the fallout from the Gulf of Mexico oil spill and low crude prices that look set to remain low and perhaps fall further, but cost cutting measures and continued good performance in downstream activities has enabled the company to maintain its dividend and retain the support of shareholders, just. Has a line been drawn under Deepwater Horizon, making BP the buy opportunity of its class?
Will shares rally back towards 13-month highs of 526p? or fall beneath support to 13-month lows of 364p?
Bloomberg Broker Consensus, BP: 24% Buy, 61% Hold, 15% Sell;
Consensus target: 453p (+16%)
BT (BT.A) and fellow dwarf-killer Sky (SKY) have been making life hell for smaller sector players like Talktalk Telecom (TALK) as they use their size and financial resources to undercut each other in such a way as to effectively freeze out the smaller, less resilient competition. Furthermore, each is calling for Ofcom to investigate the other – Sky being accused by BT of overcharging a captive pay-tv market while BT being accused by Sky of unfairly dominating the sector through its control of telephone lines. Sky has suggested BT should spin off its Openreach department – which oversees maintenance and extensions of the copper and fibre optic network on which BT’s competitors depend, but (in short) it looks as if that will be too complicated to execute any time soon. BT 1, Sky 0?
Will shares break out above resistance to Aug 2001 highs 504p? or will they pull back towards the channel floor 440p?
Bloomberg Broker Consensus, BT: 48% Buy, 32% Hold, 20% Sell;
Consensus target: 504p (+8%)
GSK is in the process of consolidating itself as a market leader in vaccines while simultaneously divesting much of its pharmaceutical business. In July, the company’s Mosquirix malaria vaccine (note the first ever malaria vaccine. In the world, ever) won approval by the European Medicines Agency. A move towards vaccines and newer products is offsetting the waning sales of hitherto ‘blockbuster’ product Advair, a respiratory drug. CEO Andrew Witty is slating a return to profit growth in 2016 with Q2 results supportive of such rhetoric. Shares at lows - could now be the time to jump on the wagon?
Will shares break out towards 2015 highs 1650p? or will they pull back towards the channel floor 1330p?
Bloomberg Broker Consensus: 23% Buy, 51% Hold, 26% Sell;
Consensus target: 1470p (+5%)
CEO Adam crozier praised the BBC’s Strictly Come Dancing, a show that is seen by many as the type of trashy mass entertainment best left to commercial rivals. The UK government published a green paper suggesting the Beeb may be better off delivering ‘distinctive, quality’ programming rather than competing (which it does not need to do - our taxes fund it) with the likes of ITV.
The point is, ITV’s viewing figures are dwindling and if the BBC were to axe the rating chasing shows like Strictly, then presumably its viewers would move over to those that are pushing them hard. ITV shares are currently trading around all-time highs and, even if the latest results were good, the future’s not necessarily bright for ITV. Remember what we said about the outlook? It could go either way such that both long and short opportunities may present themselves here.
Will shares break out and make new all-time highs north of 280p? or will they fall back towards 13-month lows 170p?
Bloomberg Broker Consensus, ITV: 55% Buy, 35% Hold, 10% Sell;
Consensus target: 284p (+2%)
Though the UK bank’s results were in order on 31 July, investors reacted badly to the provision of an extra £1.4bn for PPI mis-selling claims. The total cost of its PPI nightmare is now a massive £13.4bn, two thirds of its £20bn 2008 bailout package. Could this be the last tranche of provisions? £1.2bn in statutory profits reported on the same day (implying 38% growth) came in below consensus, while we’re sceptical about the bank’s decision to consider a share buyback rather than a special dividend for those already invested. But all this is only relevant to those seeking a long term value investment. As an investor interested in capital returns, you may be interested to hear that brokers are still tipping the stock for 100p plus, implying 17% upside from here.
Will shares recover towards 6-year highs 90p and above? or will they break down towards the channel floor 82p?
Technical observations
Bloomberg Broker Consensus, LLOY: 45% Buy, 38% Hold, 17% Sell;
Consensus target: 92.5p (+11%)
Low oil prices have clobbered those drilling for the stuff, but airlines have loved it. Add in a good old bit of M&A and you have a potential winner in IAG, whose share price has retreated in the wake of confirmation that it will buy Irish flag carrier Aer Lingus (with Ryanair recently agreeing to sell its considerable stake to the owner of British Airways), shareholders likely mindful of the large capital outflows that will be needed to complete the deal. But in the long run, IAG has simply bought another airline. With oil set to stay low for the foreseeable future, both of the UK 100 carriers (IAG and EasyJet) are well worth a look for opportunities long and short.
Will shares bounce back towards 6-year highs 90p and above? or will they break down towards the channel floor 82p?
Technical observations
Bloomberg Broker Consensus, IAG: 81% Buy, 15% Hold, 4% x Sell;
Consensus target: 643p (+16%)
The chip designer posted good Q2 results but the share price suffered after Apple’s (AAPL) outlook for the remainder of the year fell short of analysts’ expectations with Apple shares losing 6.6% on 22 July. But ARM does not rely solely on Apple for royalties from chip licences. In fact, market research firm IHS forecast that one quarter of all the world’s PCs will contain an ARM licenced processor in 2015. Could the hit ARM took after Apple’s results actually present a buying opportunity? Or will investors see this as a call for caution, worried about another tech bubble like the one that burst at the turn of the century?
Will shares rebound towards highs 12-month highs 1232p? or will they break down towards support around 800p?
Technical observations
ARM - Bloomberg Broker Consensus: 72% Buy, 14% Hold, 14% Sell;
Consensus target: 122p (+23%)
Everyone’s waiting for that announcement - a merger between Vodafone and Liberty Global (LBTYA). Shares in the UK mobile operator engaged in some big moves in May/June when speculation was rife about a tie-up, and are currently holding their own around 235p with markets having all but lost interest for the time being – no news of a merger forthcoming and both companies looking to play down reports of a blossoming friendship. Many feel that Vodafone must find a complimentary partner to be able to compete in the European quad-play market. But perhaps VOD has other ideas.
Will shares continue trending up towards June highs 258p? or will they pull back towards support around 180p?
Technical observations
VOD - Bloomberg Broker Consensus: 47% Buy, 41% Hold, 12% Sell;
Consensus target : 242p (--%)
Shares in UK listed miners are currently trading around historic lows, with some at all-time lows. From a technical standpoint, investors may find the considerable upside potential attractive. On the other hand, ongoing US Dollar strength and concerns over growth in major commodities consumer China are looking set to keep commodity prices under pressure for some time yet, which could stifle hopes of a recovery. Rio Tinto impressed with its results on 16 July as production increased and the company continued to invest. That’s all good, but unfortunately RIO has no control over demand, which is still proving elusive in the absence of Chinese economic growth. For a more detailed report on all the UK Index miners, click here
Will RIO embrace technology to find a way out, or will one of its competitors? Will shares recover towards Feb 2014 highs 3640p? or will they break down below support around 2400p?
Bloomberg Broker Consensus, RIO: 38% Buy, 50% Hold, 12% Sell;
Consensus target: 2920p (+21%)
Markets appear to be lapping up news that Barclays is to cut 7000 investment banking jobs by the end of 2016 while the UK bank is set to become smaller and less competitive as a result. Lower costs (via savings on wages and property) and reduced risk are seemingly encouraging buyers to the stock, but is confidence waning in the UK banking sector’s ability to compete at the highest levels?
Will they continue on towards highs of 297p and above, buoyed by a move away from high risk investment banking? Or will they pull back towards lows around 200p?
Technical observations
Bloomberg Broker Consensus, BARC: 63% Buy, 27% Hold, 10% Sell;
Consensus target: 303p (+5%)
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