Only registred members can create thier own customized alerts.
Trader Talk is produced by a team of active traders, analysts and various derivatives professionals from multiple organisations. Trader Talk provides comment on equities, commodities, and other financial instruments based on both technical and fundamental analysis.
International expansion boosts order book at Balfour Beatty
Equities started the week with their biggest one-day fall since the Japanese earthquake in March, as Eurozone contagion fears returned to haunt investors.
Italy became the next Eurozone country to be engulfed by the fear that recently surrounded Greece, Ireland and Portugal. A downgrade of Ireland’s debt to “junk” status by Moody’s, the credit ratings agency, put further pressure on the financial sector.
The heightened fears sent the Euro to a four month low against the dollar and five year credit default swaps in Greece, Portugal, Ireland and Italy to record highs. Italy however, received a vote of confidence on Wednesday as Fitch Ratings said the country’s debt will likely remain on a sustainable path as long as the government adheres to its fiscal targets.
US Federal Reserve chairman Ben Bernanke, in a testimony to congress, said the Central Bank stood to ease monetary policy further if the economy deteriorates. The comments suggest that policymakers are actively mulling further stimulus, causing an immediate rally in risk assets.
However as a result, Moody’s put the US’s AAA credit rating on watch for possible downgrade, citing the possibility of further quantitative easing and lawmaker’s inability to raise the US debt ceiling. The lack of progress in Washington is fuelling fears that the world’s biggest economy might default on some of its debts.
Global economic data has been relatively encouraging this week and pressure on the Bank of England to raise interest rates has eased as inflation showed an unexpected fall in June. The consumer price index fell to 4.2% last month, against consensus forecasts of no change from May’s figure of 4.5%.
Chinese economic growth also soothed concerns over a sharp slowdown in emerging markets. Annual gross domestic product grew 9.5% in the second quarter of 2011, above estimates of 9% and indicates that despite the policy tightening China’s economy looks set to grow by around 9% this year.
Technical analysis highlights the recent volatility with the blue chip index spiking between key support and resistance levels. The recent rally of over 400 points in the past fortnight ran out of steam just shy of major resistance at 6100 and profit taking immediately took the index back to secondary support at 5800, before closing above primary support at 5865. A break below 5800 could trigger a sharp retracement back to the June low at 5640.
Having rolled over in overbought territory, the oscillators suggest the index has further to fall before finding a more solid base. Volumes are low and while the market is being driven by short-term changes in sentiment surrounding Europe, I would expect the choppy trading between these key levels to continue.
In conclusion, the acute swings in sentiment that come following each major data release and changes in countries credit ratings are becoming increasingly difficult to trade as the fear surrounding them intensifies.
Contagion is likely to spread from one country to the next and back again until finance ministers come to a longer-term more encompassing solution. Perhaps some form of quantitative easing from the EU/IMF is needed, although against the rules, whereby they purchase the debt of the indebted economies, thus relieving the short-term pressure.
Global data and the back-drop for equities as an asset class remains encouraging, but the longer this debt crisis goes on, the harder it is likely to be for equities to move higher at least over the summer. If investors are selective and avoid the sectors clouded with negative sentiment, I believe there is still money to be made in the current market.
Balfour Beatty (Epic: BBY) is a one-stop provider of infrastructure services and the world’s leading fixed-rail contractor, an area that requires significant spend over coming years.
Recent acquisitions in the US, with the purchase of Parsons Brinckerhoff a couple of years ago and the announcement in June to buy US construction company Howard S Wright, demonstrates the strategy to expand and diversify into other regions. Balfour is also a leading utilities management and maintenance provider in Hong Kong and other emerging markets.
A trading statement on the 6th July showed trading was in ine with expectations. The UK division was better than feared and its order book was due to improve in the second half of the year. The balance sheet is strong, with cash at the year end expected to be almost £550 million, which will facilitate in driving organic growth.
The shares are trading on 8.7x forecast earnings and return a well covered 4.6% dividend to shareholders. A privately owned finance initiative, with assets worth more than £650 million, is also underpinning the market capitalization of £2.1 billion.
The above chart of Balfour Beatty highlights the recent weakness with the shares losing 15% this year. Historical support at 300p is a key level and the rising RSI suggest that buying momentum is building.
The recent share price weakness has been based on fears of trading weakness, which now appears unfounded. International diversification will help reduce country specific risk and the strong balance sheet should enable the company to expand through selective acquisitions.
At the time of writing the share price is 307.6p and near term targets seen at 323p, 334.5p and 357p, with a stop loss marginally below the recent low at 291p.
This report was written by Mark Allen – Head of derivatives at Simple Investments Stockbrokers. The writer does not hold a position in Balfour Beatty, but client accounts may. The material in this report has come from Simply Charts and Balfour Beatty’s corporate website.
