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HB Markets Breakfast Today including: Debenhams, Hays, Marks and Spencer plus others
The markets
Market opening: Investors could book profits today after the rally yesterday amid cautiousness about the Euro debt crisis. The FTSE-100 futures were trading 21 points lower at 7.00 am UK time.
New York: Much thanks to the increase in China's copper imports and Fitch not intending to downgrade France, the S&P 500 rose 0.9% yesterday.
Asia: Optimism about the US and Chinese economies offset persistent worries about the Eurozone. The Nikkei rose 0.3%, while the Hang Seng was trading at +0.5% at 7.00 am UK time.
Continental Europe: European markets rose led by banking stocks after Fitch said France's AAA rating was safe. The German DAX and French CAC 40 gained 2.4% and 2.7%, respectively, yesterday.
UK small caps: The FTSE AIM All-Share index closed 1.9% higher yesterday.
Today's news
No downgrade for France in 2012 - Fitch
France may not be downgraded in 2012, unless the Euro crisis escalates, Ed Parker, head of EMEA sovereign ratings at Fitch Ratings, said in an interview. He added that Austria could also be spared a rating cut. The country's exposure to more stable and growing economies in eastern Europe (namely, the Czech Republic, Slovakia and Poland) offset the risks associated with its exposure to the recently-downgraded Hungary.
Alcoa, Chinese data indicate metal demand increasing
Aluminium producer Alcoa said demand for metals is expected to increase in 2012, sending a wave of optimism in global markets. The company reported better-than-expected fourth quarter revenues. Meanwhile, China reported a record 12.6% m-o-m surge in copper imports in December.
Further easing in policy needed - US Fed officials
Despite signs of economic recovery picking up in the US, Federal Reserve officials said that more monetary easing may be required to give a boost to the "frustratingly slow" growth and bring down the "stubbornly high" unemployment rate.
Company News:
Retailer Marks & Spencer said total sales excluding VAT increased 2.4% in Q3 2012 in a trading update released yesterday. International sales increased 8.1%. Total UK sales excluding VAT increased 1.8% with food sales increasing 4.5%, but sales of general merchandise declining 0.8%. Like-for-like sales in the UK increased 0.5%, while that for food sales increased 3.0%. General merchandise like-for-like declined 1.8%.
Our view: Food sales and international business continue to drive growth at M&S. Though discounting is expected to pressurise margins, cost reduction will cushion the impact on the bottom-line. The company's exposure to the emerging markets will help offset the soft growth in UK's market. We believe the company is well placed to weather a weak economic environment and reiterate our BUY recommendation, highlighting the well-covered dividend yield (5.8%).
Support services and construction company, Interserve, announced a trading update for the year ended 31st December 2011 yesterday. The company declared that it won £400m more contracts taking the total major contracts won during 2011 to £1.9bn. Management said the company's performance was in line with expectations. The equipment services business is showing signs of recovery with increased activity in Australasia, the Pacific Rim and Saudi Arabia. Increased competition and margin pressure impacted the performance at the construction division, while the support services division continued to drive the company's growth. The company has been selected by the Ministry of Justice in its new framework for the provision of custodial services across the prison estate.
Our view: The company is expected to benefit from the increase in outsourcing as pressure on government finances increases. Further, Interserve has a well diversified business spanning across geographies and sectors. We believe that the company has a resilient business model which is poised for growth in spite of the economic downturn and reiterate our BU recommendation.
Debenhams, the department store, issued an interim trading statement for the 18 week period ended 7th January 2012 yesterday. Gross total sales increased 0.5% and like-for-like sales increased 1.4% including VAT and were flat excluding VAT. Like-for-like sales including VAT for the month of December improved 6.5%. Management expects gross margins for the year to be flat, indicating that discounts have not eroded profit margin.
Our view: Despite growing sales and consistent profit margins, we expect the retail sector to be impacted by decline in consumer spending in the near term. We take a selective approach to the sector and have a Hold recommendation for Debenhams.
Hays (LON:HAS)
Recruitment company, Hays released a trading update for Q2 2012 ended 31st December 2011 yesterday. Net fees grew 9% y-o-y. Organic growth in net fees was 8% y-o-y. International business, which forms 70% of net fees, grew 15% y-o-y and 11% y-o-y on a like-for-like basis. Net fees from Germany and France increased 28% and 20% respectively, propelling the 20% y-o-y growth in Continental Europe and Rest of the World. Performance in the UK and Ireland declined (net fees fell 7% y-o-y) as private sector net fees shrank by 4% and public sector net fees reduced 16%. The decline in the UK and Ireland was stable when compared to Q1 2012. Net fees from temporary placements increased 14% y-o-y and that from permanent placement increased 3%. Management reiterated rival Robert Walters' view that 2012 will be a challenging year as global economic uncertainty erodes employer and candidate confidence.
Infrastructure company, Balfour Beatty, released a trading update for the year ended 31st December yesterday. The order book remained unchanged at about £15bn in 2011, with increase in orders at support services and US construction offset by a decline in orders at the UK construction division. The management said that trading conditions in the company's core markets - the UK, continental Europe and the US - are expected to remain challenging during 2012.
Economic News:
China trade balance
China's trade surplus increased to US$16.5bn in December compared to US$14.5bn in November. Exports increased 13.4% y-o-y following a 13.8% y-o-y increase in November. Growth of imports slowed to a 26 month low of 11.8% y-o-y after growing 22.1% y-o-y in the previous month. Imports for domestic consumption slowed to 13.5% in December (+27.4% in November) and imports for processing trade registered a sluggish increase of 6.2% (11.0% in November). Trade balance for the year contracted to US$155bn from US$183.1bn in 2010.
Our view: Slowing growth in imports and exports reflects slowing domestic and global demand. Cooling domestic demand in a time when China is trying to rebalance its economy towards domestic demand and consumer imports raises hopes that the central bank will ease monetary policy.
US wholesale inventories
Wholesale inventories in the US increased 0.1% m-o-m and 10.5% y-o-y in November, the Commerce Department said yesterday while revising the increase in October downwards to 1.2% from 1.6% reported earlier. Sales at the wholesale level increased 0.6% m-o-m. The inventory-to-sales ratio, which measures the time taken (in months) to clear shelves at November's sales pace, was steady at 1.15.
Our view: After October's healthy gain in wholesale inventories, economist had expected a 0.5% gain in November. Lesser than expected gain in wholesale inventories and inventory-to-sales ratio near record lows of 1.13 suggests that businesses doubt demand will hold strong and are unwilling to stock up on inventories. Economists could also revise their Q4 2011 GDP growth forecast downwards.
UK RICS house price balance
The Royal Institution of Chartered Surveyors (RICS) house price balance improved to -16.0 in December from -17.0 in November, contrary to economist expectations of a fall to -19.0. House prices decreased in all regions except London, where prices increased despite supply of new homes reaching the highest levels seen since January 2005. New buyer enquiries declined to 2.0 from 7.0 in November, while expected sales decreased to 0 from 4.0 in November. Demand is reeling under the pressure of UK's deteriorating economic condition and the instability in the Eurozone, RICS said.
France industrial production
Industrial production in France expanded 1.1% m-o-m and y-o-y in November, more than economist expectations. The increase follows October's weak 0.1% m-o-m growth. A 1.3% m-o-m and 2.2% y-o-y increase in manufacturing production boosted industrial production. Factory production was expected to fall 0.4% m-o-m and 0.1% y-o-y.
