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Monitise looks upwardly mobileJuly 26 2014, 7:00am
A glance at the above chart of the FTSE 100 shows it has been another strong week for equities, as renewed optimism about the outlook for the US economy helped offset the political pressures that dominated the headlines last week after the downing of Malaysia Airlines’ flight MH17.
The S&P 500 reached a record all-time high of 1989.23, within striking distance of the psychologically important 2000 level, as strong second-quarter earnings boosted sentiment. According to Reuters, 25% of the S&P 500 companies have now reported, with 75% of them announcing better than expected results.
Another factor behind the enduring resilience in markets is the supportive backdrop for equities, with improving global growth, inflation is under control and accommodative monetary policy has been adopted by the world’s central banks.
The outlook for UK monetary policy, however, attracted particular attention this week after the minutes of the Bank of England’s July meeting showed the Monetary Policy Committee voted unanimously to keep rates on hold, although they revealed a serious discussion of the case for an early rate hike.
August’s MPC meeting coincides with a new set of economic forecasts from the bank, which could provide a catalyst for the first MPC members to vote in favour of a rate rise, although analysts now favour a rate hike in November, with slow and steady additional tightening of 25 basis points per quarter thereafter.
Domestic data has been mixed with retail sales growth accelerating in July and expectations for August also improving, while factory orders slowed more than forecast this month. The CBI survey’s monthly total order book balance slowed to +2 this month from +11 in June, below expectations for a balance of +8. Exports were the main reason for the decline, with the balance of export orders falling to -16 from -2, as appreciating Sterling rendered our exports less appealing.
British consumer confidence also dipped for the first time in 2014, with the possibility of the Bank of England raising interest rates cited as the main factor. The overall index of consumer confidence compiled by Lloyds Bank eased one percentage point to 145, while Markit’s monthly Household Finance Index also slipped.
Meanwhile, continued improvement in Chinese data heightened demand for emerging market assets, boosting the performance of the heavy-weight mining sector. China’s factory activity expanded at its fastest pace in 18 months in July as new orders surged, the latest indication that the economy is picking up as government stimulus measures kick in. The HSBC/Markit Flash Manufacturing PMI rose to 52 from June’s final reading of 50.7, beating forecasts of 51 and the highest reading in 18 months. There was also good news on the outlook, with the sub-index of new orders reaching 53.7.
Technical analysis of the FTSE 100 illustrates the recent strength with the blue-chip index moving above the 50-day moving average and resistance at 6800. The rising oscillators indicate the improved momentum and have further to run before becoming overbought, with a re-test of the highs at 6880 seen as the next logical target, while support is seen at 6800, 6770 and 6695. Investors should, however, be mindful that the major US indices are struggling to assertively break above their recent highs and the 2000 level on the S&P 500 is likely to provide a major talking point.
In conclusion, supportive global monetary policy, optimism over corporate earnings and improved emerging market data continues to support the demand for equities. Rising headwinds, however, are seen coming from the heightened chance of the Bank of England raising rate earlier than previously expected and Russia’s deteriorating relationship with the west, with further international sanction likely. I believe the FTSE will re-test its recent peaks before the next retracement is seen.
Technology stocks have drifted lower over recent months, accentuated by comments from Janet Yellen, Federal Reserve Chairwoman, that valuations in the sector were stretched. A related stock I have been monitoring closely is Monitise (Epic: MONI), the mobile payments company, which has lost half its value due to sector weakness and a disappointing update.
Monitise’s mobile platform is used by banks, retailers, mobile networks and over 30 million consumers to securely transfer money. A trading statement on 8th July revealed the company is still growing rapidly, just not as quickly as it had told the market it would, with revenue now forecast to increase by about a third this year to £96 million instead of previous guidance of £102 million.
The company blamed the downgrade on a surprisingly quick shift from its previous licensing model to its new subscription based one, while some investors questioned its £55 million purchase of Marko Media, owner of MyVoucherCodes.co.uk, as a discounting and ticketing business isn’t an obvious fit for Monitise.
On a positive note, its first half sales rose two-thirds to £46.5 million and it reduced its cash loss by 31% to £10.2 million. The groups bank, pay and buy platforms boasted 30 million users at the end of June, 30% more than a year ago, while the value of its transfers any payments rose 120% to £88 billion on an annualised basis.
It has also partnered with computing powerhouse IBM and over 30 Visa Europe banks have signed up to its payment solutions, enabling Visa cardholders to send money to each other using their mobile phones.
Mobile devices were used for 34% of the UK’s online retail sales in the first quarter of this year, up from 20% a year earlier and analysts believe smartphones could account for £14.2 billion in purchases of goods and services in 2018, up from £4.8 billion in 2013.
The company has lost half of its value since January, which looks like an overreaction. After building a base above 40p, the rising oscillators indicate an improvement in momentum, with the MACD histogram stepping into positive territory.
Monitise is a market leader in a fast moving market, with high-profile partners and a strong debt-free balance sheet, which intends to achieve profitability in 2016. At the time of writing the share price is 43.0p and I believe the recent consolidation has presented an opportunity to acquire a quality growth stock. Targets are seen at 47.8p, 52.2p and 60.9p, while a stop-loss at 39.8p should be considered to protect downside.
This report was written by Mark Allen – Head of Derivatives at Simple Investments Stockbrokers. The writer does not hold a position in Monitise, but client accounts may. The material in this report has come from Simple Investments internal data sources, Simply Charts and Monitise’s corporate website.