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HB Markets Breakfast Today including: BT Group, Electrocomponents & Investec
The markets
Market opening: Markets are likely to start the week lower, as investors cautiously watch the development of Greece’s bailout talks. FTSE futures were trading 6.5 points lower at 7.00am UK time.
New York: The addition of 243,000 jobs in January caused the unemployment rate to drop to 8.3% in the US, and sent the S&P 500 index soaring to a six-month high. The index closed 1.5% higher on Friday.
Asia: Higher-than-expected US jobs data cheered investors. The Nikkei closed 1.1% higher, while the Hang Seng was trading at -0.2% at 7.00 am UK time.
Continental Europe: Market sentiment improved, following US jobs data that indicated a recovery in the country’s economy. Consequently, the German DAX and French CAC 40 closed respectively 1.7% and 1.5% higher on Friday.
UK small caps: The FTSE AIM All-Share index closed up 0.8% on Friday. To read our latest small cap research.
Today's news
China's 2012 growth could plunge 4% if EU woes intensify-IMF
China’s growth in 2012 could plunge to half the current projection of 8.2% if the Eurozone deBT crisis deepens, according to the International Monetary Fund (IMF). A sharp recession in Europe would force the Chinese government to launch a ‘significant’ fiscal stimulus to shield the economy from an abrupt halt, the IMF added.
Greece may need more than the planned €130bn bailout
The bailout fund for Greece may need to be expanded to €145bn, €15bn more than anticipated, according to EU sources. The additional funds will be needed to recapitalise Greek banks as banks write down the value of their holdings of Greek’s sovereign bonds. Meanwhile, Greece’s budget deficit could be lower than expected, as the emergency property tax has increased government revenue. This would help Greece in its ongoing negotiations with the EU and IMF. The EU has set a deadline of today for coalition parties in Greece to accept the terms of the bailout package.
BT Group released Q3 FY2012 results (ended December 2011) on Friday. The company's net profit jumped 41% y-o-y to £491m primarily led by cost cutting measures and new contracts. The higher profit was earned on lower revenues, which declined 5.2% y-o-y to £4.77bn as the number of fixed-line calls continued to fall. Adjusted EBITDA before exceptional items increased 3% y-o-y to £1.52bn. The order book was flat y-o-y but 1.4% higher q-o-q at £1.6bn. New orders from J Sainsbury, Standard Life and the European Parliament expanded the order book. The company's pay-television business, BT Vision, added 39,000 customers during the period taking the total subscriber base to 680,000
Our view: BT's profitability has exceeded analysts' expectations. The cost cutting measures implemented to get the business into a leaner shape coupled with a focus on the fibre broadband network is helping the company earn higher profits and win new orders. Consequently, the company now expects to achieve some of its earnings targets in FY2012 instead of FY2013. Additionally, free-cash flow is expected to be £2.4bn in FY2011. The improvement in profitability and free-cash flows indicates strong momentum in the business and we reiterate our buy recommendation.
In a trading update for the four months ended January 2012, Electrocomponents reported that revenue grew 4% y-o-y supported by international sales. The international revenue (around 70% of the total) as a whole grew 5% y-o-y: sales in Asia Pacific grew by 7%, Continental Europe by 5%, and North America by 5%. In contrast, UK revenue growth was lacklustre at 1%. Sales from eCommerce, its largest revenue generator (55% of total), are benefiting from an enhanced website for the company's RS Components brand and greater marketing spending on the marketing of its search engine.
Investec's assets under management (AUM) improved slightly as of the end of December 2011 with the recent acquisition of Evolution. In its trading update, the company said volatile markets and low activity led to a challenging third quarter. During the nine-month period ended December 2011, third party AUM increased 1.9% y-o-y to £90.6bn, and customer deposits shrank 0.7% y-o-y to £24.3m, while core loans and advances declined 3.2% y-o-y to £18.2bn. At the end of 2011, the balance sheet carried £9.5bn of cash and near cash. However, operating profit before goodwill, acquired intangibles, and non-core items was 5.6% lower y-o-y during the first nine months of the fiscal year.
Eurozone retail sales
Retail sales in the Eurozone declined to 1.6% y-o-y during the month of December. An unexpected m-o-m decline of 0.4% was recorded for the same month. The figure for November was revised to -0.4% from -0.8%. The numbers were released by Eurostat, the EU's statistics office.
Our view: Retail sales for the Eurozone during the crucial December month were worse than expected and reflect the unexpected decline seen in sales numbers in Germany, released last week. The festival shopping season was hit by low consumer confidence. However, the PMI data released points to confidence returning in January.
UK and Eurozone PMI
The Markit/CIPS services purchasing managers' index for the month of January came in at 56 points for UK. This compares to 54 in December and a consensus estimate of 53. Final Eurozone Services and Composite PMI for January rose for the first time in four months to 50.4 (48.3 in December), in-line with expectations. A level above 50 is an indicator of expansion.
Our view: The PMI data for both UK and Eurozone should provide some relief to fears about the state of economic affairs. In the UK, there is reason for cheer as business confidence saw the largest ever one month rise and the employment sub-index improved the most in four years. Headline business activity index also increased for the third consecutive month. Similarly, in the Eurozone, an improvement in business and consumer confidence has boosted the PMI. Growth in the services sector is compensating for lackluster activity in manufacturing. The data highlights overall improving conditions, with faster growth in pockets. Germany's composite score of 53.9 is a five-month high level while France's 51.2 exceeded expectations. The data raises hopes that the recession in the region will be mild.
US non-farm payroll and unemployment rate
Non-farm payrolls increased by 243,000 in January, lowering the unemployment rate to 8.3% from 8.5% in December, the US Department of Labor said Friday. The service sector added 257,000 jobs compensating for the 14,000 jobs cut by the government.
Our view: The unemployment rate in January has sunk to the lowest since February 2009. The fall hints at a stronger underlying economic growth than earlier forecasts. The strong data put into question how long the Fed will keep interest rates at zero, despite its assurance of keeping them low till at least late 2014. The timing and quantum of the third quantitative easing program could also be affected. Nevertheless, we believe the Fed will stick to its original strategy of easy money, at least for now, ignoring risks to its recently announced 2% inflation target. This should, ceteris paribus, support equity markets.
US ISM non-manufacturing
The Institute for Supply Management (ISM) said its non-manufacturing activity index improved to 56.8% in January from 53% in December. This is the highest increase since February 2006. The expansion in the services sector also boosted the employment sub-index to 57.4% from 49.8% in December, mirroring the government's employment report. New orders index increased to 59.4% an increase of 4.8%.
Our view: The services sector has been expanding for the almost two years; however employment growth in the sector was lagging. With the companies adding jobs, the worries about the strength of recovery in the US should subdue.
US factory orders
Factory orders in the US increased by 1.1% in December following November's revised 2.2% (1.8% previously), the US Department of Commerce reported o Friday. Unfilled orders grew 1.4%, the highest since March 2008. Unfilled orders are a lead indicator of future demand. The orders for durable goods rose 3.0%, while that for non-durable goods fell 0.4%. Orders for capital goods increased 4.6%. Factory shipments increased 0.7% and inventories increased 0.1%. Excluding defense orders, overall factory orders excluding defence increased 1.3% in December after rising 2.3% in November.
