The Labour government now has a second economic event that it can count as a fortunate and well timed development. The first was certainly the Q4 2009 GDP figure of 0.1%, which marked the end of the recession. The second is the biggest drop in unemployment for over three years, as total unemployment for the three months to January fell by 33,000 to 2.45m. Perhaps the only reason that there was not more cheer on this issue is that there are so many different jobless statistics around. The same could be said of the housing market. Just as the DCLG was reporting that house prices rose 2.2% in January, Rightmove revealed that March saw the smallest rise in offer prices for this month of the year at 0.1%, as more sellers entered the market. This is clearly a worrying development for the economy as a whole as recovery is so closely linked to rising values. Perhaps even more worrying was the suggestion by the EU that the £19bn of budget cuts the UK has already planned should be doubled if the nation’s economic fortunes are not going to be severely damaged and the precious triple A rating threatened.
Just for a change there was quite a mixed selection of sectors represented by the winners and losers in the FTSE100 over the past seven days. There were also some surprises. Perhaps the biggest was the best performing blue chip, Royal Bank of Scotland (RBS). The part or rather more accurately, almost fully government owned bank, was in demand as investors realise that at least in some senses the regulatory environment for the sector is benign. Evidence of this came from the Office of Fair Trading as it gave banks the opportunity to put their own houses in order regarding unauthorised overdraft charges. It was also clear that overall the market had also given the recent bank reporting season the thumbs up. Close behind RBS was knowledge management software group Autonomy (AU.). It was in positive focus in the wake of the launch of a new software tool designed to help retailers profile their customers. Quality and safety solutions group Intertek (ITRK) was also wanted as it announced new additive treatment services for the petroleum industry. It also helped that the company has recently been a rumoured takeover target. Broker comment also provided a boost, with B&Q owner Kingfisher (KGF) in the sights of HSBC. In raising the stock from neutral to overweight the broker suggested that “competitive advantages should yield over the long term structurally higher returns for shareholders, while its underused balance sheet offers potential for international expansion and/or sector consolidation.” In the same sector Argos owner Home Retail Group (HOME) received a positive re-evaluation of the previous week’s trading update, as Numis Securities deemed the final quarter of 2009 to have been a strong one for the High Street giant. It was also the turn of out of fashion telecoms group BT (BT.A) to find favour, this time at the hands of Citigroup. It raised its rating on the stock to "buy" from "hold" with an increased target price of 150p, up from 145p on the basis that the post-results fall in BT's shares was overdone. The broker’s view is that earnings recovery should continue on the back of cost savings and economic recovery. Other shares that have done well over the past week are those like oil sector services group Petrofac (PFC) and energy generator Aggreko (AGK), both of whom released strong results earlier this month.
The current fundamental position at flag carrier British Airways (BAY) is no less than a soap opera of the most intriguing and controversial kind, with a cast of characters that includes everyone from the PM downwards. While Gordon Brown condemned the cabin crew’s proposed strike action, there was at least agreement between BA and the unions regarding the multibillion pound pension deficit that the company is currently running. Under this deal pension entitlements would be scaled down. Of course there are many other strings to BA's fundamental bow including the tie-up with American Airlines and Iberia. At least this area seems to have reached some kind of stable solution as some flight slots have been given up in return for clearance from the EU to form an alliance. But what is most interesting is how the next few weeks at the company are going to pan out. The latest is that BA intends to fly 60% of its passengers during the strike periods at the end of this month, with the number of volunteers left to provide a service during the industrial action not yet certain. What is interesting that the shares are at the top end of the recent range, something which suggests that at least for the time being investors are not too concerned about the effects that recent events and those of the near future could have on this troubled company.
On the downside there was hardly anything positive for traders to look at in terms of the offering from security services provider G4S (GFS). The other problem was not only the way that it delivered a weaker sales growth outlook, but also the threat of a share placement to depress the stock price. This left the shares down nearly 10% in a matter of just a few days. For hedge fund manager Man Group (EMG), there was not only the headache of another poor near-term performance from its AHL fund, but also fading takeover speculation and a re-rating by Morgan Stanley of the earnings outlook and the price target to 260p from 340p. Medical equipment group Smith &Nephew (SN.) saw its shares remain on the back foot, even though brokers were not that concerned, as the market did not seem to appreciate the recent loss of a patent lawsuit regarding foam implants. Other defensive players were also in the FTSE 100 laggards list, including GlaxoSmithKline (GSK), International Power (IPR) and Scottish & Southern Energy (SSE). The bulls were also still being hit at Morrisons (MRW) as the company awaits the corporate strategy of its new CEO. If there was a surprise among the underperformers, it came with the appearance of Xstrata (XTA) as the mining giant was one of the few members of its sector not to flourish it at least in share price terms over the past week. This was as Barrick Gold sought to include Xstrata in a lawsuit over the control of a Chilean gold and copper project.
On the commodities front, even though Gold is currently being weighed down by fears that China will introduce more overt measures than of late in an attempt to cool its economy, for the time being bulls of the yellow metal have focused on the weakness of the US as the driver for this market.
On the FX front, few would have expected a “bear squeeze” on the pound. Clearly though, the UK currency had fallen too far and too fast, and the better-than-expected unemployment data and a dovish statement by the Federal Reserve in the wake of its March interest rate meeting meant that at least for the time being, short covering is the watchword.
The Galvan Research Team has this week picked out mining giant Vedanta Resources (VED), which remains a key long play on both its sector and emerging market growth qualities, particularly in India. The positive effects of the RBS price target hike to 3,850p, and the fact the new price target is over £10 above the current share price and £8 over our 3,000p technical target puts the shares into our buy basket. Elsewhere, we are sellers of cruise operator Carnival (CCL), which we believe may have overestimated the strength of its market in raising prices, even if it is a marketing move to get customers to book their holidays before the actual date the price rises come into force. Given that Carnival has already admitted that prices have not recovered to 2008 levels, we believe the move is too risky at this stage of the economic cycle. Sell.
You can read our in depth view on these stocks and a raft of research to help with your trading by visiting the Galvan website.
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Thu, 1st Jan - * UK and Ireland focused renewable energy developer Kedco has signed a non-binding Heads of terms agreement with the Foresight Group to help finance its 12MW Enfield Biomass Combined Heat and Power (CHP) project located in