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HB Markets Breakfast Today including: Vodafone and Close Brothers
The markets
Market opening: Markets are likely to see a higher opening today, as Greece’s debt restructuring talks progress. The FTSE futures were 18 points higher at 7.00 am UK time.
New York: Stronger earnings from Microsoft and IBM, and a rare miss by Google attracted attention towards tech stocks. The S&P 500 closed flat (+0.07%) on Friday.
Asia: Investors took a breather from last week's rally, as they eagerly awaited the conclusion of Greece's debt talks. Markets barely moved. The Nikkei closed flat (-0.01%) today, while the Hang Seng was trading at +0.9% at 7.00 am UK time.
Continental Europe: Cautious investors ended a strong week on a muted note as they shunned risky equities ahead of Athens’ weekend talks with its creditors. The German DAX and the French CAC 40 both closed 0.2% lower Friday.
UK small caps: The FTSE AIM All-Share index gained 0.1% on Friday. To read our latest small cap research now, click here.
Today's news
Private debt holders could accept a 65–70% haircut
As part of Greece's debt restructuring deal, private creditors could voluntarily agree to write-off about 65–70% of their Greek bonds while swapping the existing debt for a long-term offering, sources close to the negotiations said. Participation in the restructuring needs to be voluntary to avoid triggering a payout of insurance against the default. This could start a chain reaction spreading large-scale contagion to Euro debt markets. Greek Finance Minister, Evangelos Venizelos, would now present the proposal to Eurozone Finance Minsters for approval.
Germany supports financial transaction tax in the Eurozone
Germany said it would support the implementation of a financial transaction tax across the 27 EU member countries; however, if the UK's veto halts such a tax, it was open to implementing the tax in the narrower 17-member Eurozone.
Close Brothers (LON:CBG)
Close Brothers released a pre-close trading update for H1 2012 to end-January. The Banking division saw its loan book grow 9% to £3.8bn in the five months to 31st December 2011. However, the Securities division's retail market-making business saw lower profits on flat y-o-y volumes as investors preferred lower risk blue-chip stocks that carry narrower margins. Assets under management shrank £1.2bn between July and December. The German subsidiary Seydler made a small loss.
Our view: The Banking division’s performance was clouded by losses in securities. Management acknowledged that investors’ poor risk appetite weighed on earnings during the five-month period. Trading conditions in H2 2012 are expected to remain uncertain, they added. We think that the timing is still a little premature for investment in stocks in this sector, and we would avoid holding Close Bros for now.
Vodafone has won the legal battle against India's tax authorities after the Supreme Court of India ruled that the Vodafone's May 2007 US$11.2bn deal to acquire a 67% stake in Hutchison Essar from Hong Kong-based Hutchison Whampoa cannot be taxed, because the deal was structured as a transfer of shares between two entities based outside of India (in The Netherlands and the Cayman Islands respectively), though an exchange of Indian assets was involved. India's revenue department had claimed that Vodafone was liable to pay about US$2.2bn, as tax on the deal. Separately, Essar may be a beneficiary of the verdict, as it may claim about US$880m from the Income Tax department that Vodafone withheld in anticipation of a possible tax claim.
Our view: Gartner estimates the Indian wireless market, the second-largest in the world, to be growing at about 28%, reaching 872m active users by 2015. Vodafone's maket share in India is about 17%. We believe the Vodafone Group will be able to effectively lock into India's growth, and the Indian operation will become an important motor to growth at the Vodafone group level. We maintain a BUY on the stock.
UK retail sales
Retail sales in the UK increased 0.6% m-o-m and 2.6% y-o-y in December, the Office of National Statistics reported on Friday. The increase follows a revised 0.5% (0.1% previously) slump in November. Retail sales increased 1.1% q-o-q sequentially. Retail sales (ex-fuel) climbed 0.6% m-o-m and 1.7% y-o-y in December.
Our view: The surge in retail sales is not likely to be sustainable, as the increase was supported by heavy discounting by retailers, in turn pressurising their margins. The outlook for the retail sector will be bleak for a few more months, as unemployment and falling real wages cause consumers to trim budgets.
Germany producer prices
Factory prices in Germany decreased 0.4% m-o-m and increased 4.0% in December, Destatis said on Friday.
Our view: The dip in producer prices was contrary to expectations of a 0.1% increase. Though the decline is partly attributable to the base effect, it suggests that inflation could ease in the coming months paving the way for the European Central Bank to take a more active role in combating the region's debt crisis.
US existing home sales
Existing home sales increased 4.6% m-o-m in December to 4.61m units, the National Association of Realtors said on Friday. The increase helped pre-owned home inventories drop 9.2% to 2.38m. The median sales price increased 0.3% to US$164,500 in December
Our view: Though the increase in pre-owed home sales was less than the 5.2% expected, this is the best move since January 2011, and it indicates that the housing sector – the last area of the US economy to show any signs of recovery – may also finally be at a turning point. An improving labour market and interest rates at historical lows should allow future months' data to confirm an uptrend.
