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Sky signals further growth

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A glance at the above chart of the FTSE 100 shows it has been a week of extreme volatility as escalating concerns about China triggered further weakness in equities.

Illustrating the depth of concern, the CBOE Vix volatility index, often referred to as Wall Streets “fear gauge”, jumped to 53.29, its highest since the financial crisis in 2009. The index fell back to 33.12 later in the week, but remained significantly above its historical average of 20. Commodity prices came under further pressure, as Brent oil fell to a fresh six-year trough of $42.5 a barrel, while copper and aluminium also dropped to multi-year lows.

Markets recovered from Monday’s panic-led falls, as investors took the view that the recent sell-off had been overdone and China eased monetary policy. The People’s Bank of China cut both its deposit and lending rates by 25 basis points and lowered the reserve ratio requirement for banks by 50 basis points.

Some argue these moves are still insufficient to provide lasting support, although the government appear willing to do whatever it takes to stabilise growth at 6.5% to 7%. The central bank still has room to cut rates, while other monetary and fiscal measures can be utilised to support the economy.

Meanwhile, the impact of the recent market turmoil on US monetary policy, could lead to US interest rates being lower for longer. Deflationary pressures in China are growing and Beijing seems more willing to export this deflation to the rest of the world, so inflation is likely to remain low for a prolonged period.

As recently as mid-June, a US rate hike of 25 basis points was fully priced in. That has now been pushed back to the second quarter of 2016, while there is a good rationale to expect the Bank of England to hold off tightening policy until the second half of 2016.

Robust economic data suggests the US is resilient enough to weather the forces roiling stock prices, with a firming housing market and growing consumer confidence, alongside nearly five years of steady job creation. US consumer confidence rose in August to its highest level since January, reflecting optimism about an improving labour market, while new home sales picked up pace in July, rising 21% from a year earlier.

On a domestic front, data showing an unexpected pick-up in UK retail sales and an increase in mortgage approvals offers encouraging signs on the domestic economy. The CBI’s latest retail survey revealed a more upbeat picture on the high street than expected, with a balance of 24% of retailers reporting improving sales in the year to date, with further improvement expected next month. The business lobby group also upgraded its forecasts for UK growth to 2.6% this year and 2.8% next year, up from its June forecast of 2.4% and 2.5% respectively.

Technical analysis of the FTSE 100 illustrates to acute sell-off experienced in August, with the index losing almost 1000 points in just two weeks. After a capitulation moment on Monday, the market has been building a base, with support seen at 5850. After hitting their lowest level in four years, the oscillators are trending out of oversold territory, indicating improved momentum and the start of a new trend. Resistance could be felt at 6415 and 6550, while support can be seen at 6025 and 5850.

In conclusion, the recent China-led rout appears to be the result of a lack of confidence in policymakers. Many economists believe China is growing at a slower rate than officials reported, while the desperation of recent measures, designed to support the economy have unnerved some investors.

The FTSE 100 is now back at levels last seen in 2012 despite the economy making good progress since then. Employment and wages are improving, while growth is gathering pace and interest rates look set to remain low for the foreseeable future. Given the strength of recent corporate earnings and the ability to buy several blue-chips with yields in excess of 6%, I believe we will look back on this low volume sell-off as a great buying opportunity.

Following what has been one of the most aggressive sell-offs in history, several blue-chip stocks that have recently reported strong earnings, have retraced to attractive technical levels. Sky plc (LON:SKY), the home and mobile entertainment group which owns Sky News, recently announced an 18% increase in full-year operating profit, yet the shares have slipped back to multi-month lows. The results are the first set of full-year figures since Sky completed the takeover of its sister companies in Germany and Italy, which took the number of countries in which it operates to five.

Full year results on 29th July, revealed the UK’s largest pay-television company said operating profit in the year to 30th June was £1.4 billion, as it recorded the highest growth in its UK customer base for more than a decade. Organic customer growth of 506,000, took the total number of customers in the UK and Ireland to more than 12 million for the first time. Playing a part in this healthy rise in the customer base is a churn rate of less than 10% across each of Sky’s European markets, the lowest rate Sky’s recorded for 11 years.

Sky is successfully transitioning to a mixed delivery system from its original subscription satellite broadcast model, with an increase in the number of products across its portfolio. Alongside its broadband and fixed-line telephony, Sky has started to achieve significant revenues from its Sky Store too, with revenues up by 77% over the year. It has also struck a partnership with Telefonica to offer mobile phone services under the Sky brand, with the launch expected next year.

Sky is learning from the likes of Netflix and Amazon by ramping up its drama content. Sky’s report claims that it has 35 dramas in production, including a crime drama called The Last Panthers and a co-production with HBO and Canal+ called The Young Pope.

Announcing a 3% hike in the dividend, Jeremy Darroch, Sky’s chief executive, said: "The past 12 months have been an outstanding period of growth for Sky. It’s clear that the steps we have taken to broaden out our business are paying off. By distributing our content over multiple platforms and launching new products and services, we are now able to offer something for every household. The strength of the customer response is evident in our results.”

The Murdoch family, who own over 39% of Sky, has reportedly knocked back two approaches for its stake in Sky from Vodafone and the French media giant Vivendi, stoking speculation they are planning a fresh attempt to take full control of Britain’s top pay-television operator. The recent elevation of James Murdoch, former chief executive and chairman of Sky, to chief executive of Fox, and the election of a Conservative government has put the issue back on the agenda for other Sky investors.

 

The chart of Sky illustrates the strong performance of Sky, an upward trend that has been in place since September 2008. Weakness in the wider market has dragged Sky back to historical support and the 200-day moving average, which should provide a level for the shares to build on. Meanwhile, the oscillators are recovering out of acutely oversold territory, suggesting a sharp improvement in momentum.

Operational performance has been strong in all areas, such as new customers, new product subscriptions and retention of consumers. Strong growth in new businesses reinforces Sky’s market leading position and the chart signifies a good buying opportunity to take advantage of its upward trend. At the time of writing the share price is 1022p, with near-term targets seen at 1063p, 1098p and 1150p, while traders might consider a stop-loss below support at 991p to minimise risk.

This report was written by Mark Allen – Head of Derivatives at SI Capital Stockbrokers. The writer does not hold a position in Sky, but client accounts may. The material in this report has come from SI Capital’s internal data sources and Sky’s corporate website.


 

 

 

 

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