Today's edition of the Saxo Morning Call features the SaxoStrats team discussing the continuing weakness of the US dollar as commodity prices recover ground and in the wake of key US equity indices hitting all-time highs Thursday.
Article / 10 November 2014 at 13:44 GMT

The Week Ahead: FTSE rally to fade as IPO flurry ebbs

Chief Executive / Prime Wealth Group
United Kingdom
By Patrick Butler

The FTSE 100 was marginally up last week:


The UK market is still 2.69% down year to date and has only made up about half of the ground lost in the slide during the latter half of September and first week of October. In contrast, the S&P 500 has retraced all its losses and touched new highs last week before a marginally disappointing nonfarm payrolls number on Friday. Indeed, it is up 9.63% year to date.

The stronger performance of the US markets reflects a number of factors:

  • The US economy is now strong enough for the Fed to to have halted quantitative easing altogether. 
  • The US deficit is dropping. 
  • Reductions in defence expenditure are supporting the deficit drop as is the stronger economy. 
  • On-shoring of manufacturing activities is being underpinned by energy prices far lower than in Europe or Asia. 
  • Energy independence is assured so there is less worry about developments in the Middle East or on Russia’s western borders than in Europe or even, Asia. 
  • The United States is relatively unaffected by the Eurozone angst impacting the whole of Europe, whether in or out of the currency bloc.

This week we anticipate that the rally of the past month will start to peter out on the FTSE. Although rumours over a potential bid for BP had the UK market buzzing on Friday, the general excitement over possible mergers and acquisitions and IPOs has palpably fizzled. 

The economic headwinds – snail’s pace growth in Europe which could tip into recession (despite the European Central Bank’s trillion-euro bond-buying programme), an excessive structural deficit, a slowing housing market, a cut-throat retail sector, currency pressures on exporters, in particular, manufacturers – are all putting pressure on UK share prices. 

Now is a time to be particularly selective buying equities. Even if purchasing for yield, there are dangers; in particular that dividends could be cut or eliminated in certain cases, so careful analysis is the order of the day.

On Wednesday this week, for instance, Sainsbury announces its interim results. We expect sales to have dropped and underlying profit before tax to be down between 10% and 15%. Various measures will probably be taken to address the malaise. 

The new giant-store-opening programme will almost certainly be abandoned and the dividend will, in our opinion be cut by anything from a third to a half. This will free up cash which can be used to lower prices in the key “value segment” where Aldi and Lidl are murdering the traditional players and to expand the company’s online business and convenience stores. 

Given the determination with which we believe Sainsbury’s new CEO, Mike Coupe is tackling the need to reduce capex and running costs and invest in fighting back to rebuilt profit before tax, the shares are starting to look attractive – but anyone buying them on the basis of the current dividend yield is, we believe, in for a rude awakening later this week.

Another company reporting, this time on Monday, is Aveva Group plc. The company, which should never be confused with Aviva, the insurance and asset Management Company, provides, in its own words “mission-critical solutions to some of the world’s biggest engineering companies and Owner Operators.” 

Aveva’s software is used in applications from shipbuilding to the construction of nuclear power stations. “Demand in our end markets is driven by long terms secular trends, such as the growing global demand for oil & gas and the steadily increasing consumption of energy. Aveva has successfully established a truly global infrastructure and is exposed to the world’s fastest growing economies. Aveva is a technology leader within these markets.”

The problem is that Aveva is heavily exposed to an industry currently reeling from the reduction in energy prices and slack demand. What’s more, the growth markets of the recent past, some of the major emerging markets, are now anything but high-growth. In September Aveva issued a shock profits warning, indicating that contract renewal delays, weak demand and currency moves would hurt results, cutting its interim revenue estimate to £84m to £90m, down on the £108.5 million in the first six months of last year. The shares dropped 25% following this announcement.

Goldman’s analysts recently highlighted the company’s vulnerability to weakness in the oil and gas industries, and analysts at Investec cut their price target from 1600 pence to 1350p on Wednesday (though they still rated the stock a hold). The stock closed at 1395p on Friday at the year’s low. We believe it can fall further. The company works in markets that are under severe pressure and is likely to see demand drop further as cost-cutting pressure in the energy sector increases. A further fall towards 1250p is, we believe, likely (and bear in mind that this stock hit just 510.40p in February 2009).

On Tuesday, Land Securities plc, the Real Estate Investment Trust, will announce interim results and on Wednesday, British Land will do the same. Investors in Land Securities will want to know how the company plans to earn a decent return on the “full price” which it admitted paying when it used part of the sale proceeds from recent disposals to buy a 30 per cent stake (which has now been increased through a further indirect participation) in the Bluewater Kent shopping complex.

Investors in both companies will want to know their view on the London office market, where rental growth is likely to remain firm given the shortage of supply for the next twelve months. We have no strong views on the immediate share price outlook for either company. Both appear fairly priced relative to their underlying portfolio values. Much depends on the outlook for the coming twelve months – on which we should have a clearer picture following the interims.

On Tuesday Vodafone announces its half-year results which we anticipate will show ebitda fell by more than 4% to around £6.4 billion. Simultaneously, we should get some colour on its so-called Project Spring investment programme in next generation mobile and on its plans to reverse the decline in its traditional mobile business.

Key statistics and events:

Monday 10th November 2014
UK corporate earnings announcements: Afarak Group (AFRK)Interim Result, AVEVA Group PLC (AVV) Interim Result, Bank Pekao Sa (85PL) Interim Result, Lonmin PLC (LMI), Ceres Power Holdings PLC (CWR)Final Result, Carr's Milling Industries PLC (CRM) Final Result, Cherkizovo Group(ojsc)AGM/EGM, Redrow PLC (RDW) AGM/EGM, Kofax PLC (KFX) AGM/EGM, Hammerson (HMSO)Trading Statement, Just Retirement Group PLC (JRG) Trading Statement, Redrow PLC (RDW) Trading Statement, Dignity PLC (DTY) Trading Statement.

Tuesday 11th November 2014
 UK corporate earnings announcements: Oxford Instruments PLC (OXIG) Interim Result, Liontrust Asset Management PLC (LIO) Interim Result, Land Securities Group Plc (LAND) Interim Result, Hayward Tyler Group (HAYT) Interim Result, Trifast PLC (TRI) Interim Result, Speedy Hire PLC (SDY) Interim Result, Blinkx PLC (BLNX) Interim Result, BTG PLC (BTG) Interim Result, Vodafone Group PLC (VOD) Interim Result, Fenner PLC (FENR)Final Result, Jupiter Energy (JPRL)AGM/EGM, Qatar Investment Fund PLC (QIF) AGM/EGM, Stewart & Wight PLC (STE) AGM/EGM, Dunelm Group PLC (DNLM) AGM/EGM, Craneware PLC (CRW) AGM/EGM, Friends Life Group Limited Ord Npv (FLG)Trading Statement, CRH PLC (CRH) Trading Statement, Menzies (John) PLC (MNZS) Trading Statement, Sportech PLC (SPO) Trading Statement, Taylor Wimpey PLC (TW.) Trading Statement, Morgan Advanced Materials (MGAM) Trading Statement.,

Wednesday 12th November 2014
UK corporate earnings announcements: Sainsbury (J) PLC (SBRY) Interim Result, SSE PLC (SSE) Interim Result,  MirLand Development Corporation PLC (MLD) Interim Result, Heath (Samuel) & Sons PLC (HSM) Interim Result, Burberry Group PLC (BRBY) Interim Result, Workspace Group Plc (WKP) Interim Result, CSR PLC (CSR) Interim Result, FlyBe (FLYB) Interim Result, Telefonica Sa (TDE) Interim Result, Tracsis PLC (TRCS)Final Result, Macau Property Opportunities Fund Ltd (MPO)AGM/EGM, Barratt Developments PLC (BDEV) AGM/EGM, Picton Property Income Ltd (PCTN) AGM/EGM, Alternative Asset Opps PCC Ltd (TLI) AGM/EGM, Hays PLC (HAS) AGM/EGM, Avingtrans PLC (AVG) AGM/EGM, Henderson Eurotrust Plc (HNE) AGM/EGM, Digital Globe Services Ltd (DGS ) AGM/EGM, Prudential PLC (PRU) AGM/EGM, Partnership Assurance Group (PA.)Trading Statement, 
Safestore Holdings PLC (SAFE) Trading Statement, Interserve PLC (IRV) Trading Statement, Group PLC (MONY) Trading Statement, Kier Group PLC (KIE) Trading Statement, Derwent London (DLN) Trading Statement, Brit Plc Ord Gbp2.00 (BRIT) Trading Statement, G4S PLC (GFS) Trading Statement, Aberdeen Asian Smaller Co Inv Trust (AASC)ex dividend.
Thursday 13th November 2014
 UK corporate earnings announcements: SABMiller PLC (SAB)Interim Result, SOCO International PLC (SIA) Interim Result, Vedanta Resources PLC (VED) Interim Result, Infinis PLC (INFI) Interim Result, Great Portland Estates PLC (GPOR) Interim Result, Caledonia Mining Corp (CMCL) Interim Result, Biofrontera Ag Ord Npv (di) (B8F) Interim Result, Atkins (W S) PLC (ATK) Interim Result, Norcros PLC (NXR) Interim Result, Ithaca Energy Inc (IAE) Interim Result, New World Resources PLC (NWR) Interim Result, London Stock Exchange Group PLC (LSE) Interim Result, AB Dynamics Plc Ord 1p (ABDP)Final Result, Thorpe (F W) PLC (TFW)AGM/EGM, Transense Technologies PLC (TRT) AGM/EGM, Swallowfield PLC (SWL) AGM/EGM, Kier Group PLC (KIE) AGM/EGM, Wetherspoon (J D) PLC (JDW) AGM/EGM, Ted Baker Plc (TED)Trading Statement, Rexam PLC (REX) Trading Statement, Spirent Communications PLC (SPT) Trading Statement, Premier Oil PLC (PMO) Trading Statement, Genel Energy (GENL) Trading Statement, UTV Media PLC (UTV) Trading Statement, Howden Joinery (HWDN) Trading Statement, Gulf Keystone Petroleum (GKP) Trading Statement, Catlin Group Ltd (CGL) Trading Statement, MedicX Fund Ltd (MXF)ex dividend, Maven Income and Growth VCT PLC (MIG1) ex dividend, Polar Capital Global Healthcare grwth & Inc Tr PLC (PCGH) ex dividend, Picton Property Income Ltd (PCTN) ex dividend, Royal Dutch Shell (RDSB) ex dividend, Royal Dutch Shell (RDSA) ex dividend, Panther Securities PLC (PNS) ex dividend, Just Retirement Group PLC (JRG) ex dividend, DX Group Plc Ord 1p (DX.) ex dividend, Braemar Shipping Services PLC (BMS) ex dividend, Allocate Software PLC (ALL) ex dividend, Action Hotels (AHCG) ex dividend, British Sky Broadcasting Group PLC (BSY) ex dividend, Burford Capital Ltd (BUR) ex dividend, CareTech Holdings PLC (CTH) ex dividend, Craneware PLC (CRW) ex dividend, Home Retail Group PLC (HOME) ex dividend.

Friday 14th November 2014
UK corporate earnings announcements: New Europe Property Investments PLC (NEPI)Interim Result, Castings PLC (CGS) Interim Result, Romgaz (SNGR) Interim Result, Genus PLC (GNS)AGM/EGM, Ludgate Environmental Fund Ltd (LEF) AGM/EGM, Matchtech Group PLC (MTEC) AGM/EGM, OAO Severstal GDR (SVST) AGM/EGM, Strategic Equity Cap. (SEC) AGM/EGM, Drax Group PLC (DRX)Trading Statement, Alpha Pyrenees (ALPH) Trading Statement, IMI PLC (IMI) Trading Statement, Hill & Smith Holdings PLC (HILS) Trading Statement, Aggreko PLC (AGK) Trading Statement, Rotork PLC (ROR) Trading Statement, Restaurant Group (The) PLC (RTN) Trading Statement.

– Edited by Clare MacCarthy

Patrick Butler is chief executive of Prime Wealth Group. His look at the week ahead for UK equities appears every Monday on – the home of social trading.


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