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.
Insure a premium yield at RSA
Equities started the week on the front foot after President Barack Obama said US Congress had agreed a last-minute deal to raise the federal debt ceiling, preventing a default of the world’s largest economy.
The early momentum soon faded amid concern that the deal would not be enough to placate the rating agencies, who warned that the proposed $2.4 trillion spending cuts over a decade, may not be enough to prevent them downgrading the US from its prized triple A credit rating.
The fading sentiment was then battered by economic data from the influential Institute for Supply Management index of manufacturing activity. National factory activity in July fell to 50.9, the lowest level for two years and well below the 54.9 expected by analysts.
Of more concern was the sharp drop in new orders to 49.1 last month, the first time it has been below the 50 mark, which separates contraction from expansion, since July 2009. The data reinforced fears highlighted by last weeks poor US GDP figure that the economy is slowing.
The prolonged period it took for US policymakers to conclude on its debt debate unsettled investors and highlighted the extent of government debts around the world, reigniting sovereign debt fears in Europe. Growth fears also prompted investors to shift their concerns from the peripheral nations to the larger economies in Europe, as a global slowdown would further damage the struggling austerity-shackled countries.
Italian and Spanish 10-year government bond yields climbed above 6% to Euro-era highs, edging closer to the untenable 7% level, triggering concerns that they may be forced to seek financial assistance. A successful Spanish bond auction on Thursday did however help relieve some fears.
Two of the three leading ratings agencies Moody’s and Fitch said they will maintain their triple A rating for the US debts following the last-minute deal to avert default, but both put a negative outlook on the country. This is good news, but the downbeat sentiment in the market is causing investors to fear that slowing growth could trigger the negative outlook to get converted into a downgrade.
Corporate earnings perversely continue to come in largely ahead of expectations, with blue-chips such as HSBC, Aviva, Unilever and Standard Chartered coming in ahead of forecasts despite the backdrop of a slowing macro-economic environment.
Technical analysis illustrates the recent weakness with the FTSE 100 breaking below key support levels. A new 2011 low at 5202, following more than a 700 point fall in the past four days, suggests the sideways trading range of recent months, may be giving way to a new downtrend. The oscillators are however at extreme oversold levels, which have historically proved timely entry points.
Previous support is now likely to provide resistance at 5600 and 5400, with new support seen at 5190 and 5100.
In conclusion, the cocktail of negative news flow alongside last weeks negative US GDP revisions add to the gloom surrounding the market. The break of key technical levels is a concern, but with extreme oversold indicators and the feeling of maximum fear and panic not far away, it could be a great time to buy the market.
RSA (LON:RSA), one of the UK’s largest insurers was one of the many companies to beat expectations when they reported on Thursday of this week, suggesting there is still value to be had in the market.
The general insurer posted operating profit of £467 million for the six months up to the end of June 2011, up 22% on the year and above an average forecast of £391 million. A vast improvement in the underwriting business helped boost profits, as strong discipline meant it escaped large claims following a string of brutal environmental disasters across the world in the first half of 2011.
Despite the macro-economic backdrop, the group remains confident of a strong performance in 2011, with continued expansion in profitability at its international division and double digit premium growth in emerging markets.
In the UK, RSA saw premiums rise by 7% in the first half to £1.57 billion, non-UK grew by 10% and emerging markets, which have been a focal point for the company recently, remains on track to double premiums to around £2.2 billion by the end of 2015.
The group announced the departure of chief executive Andy Haste, who has been at the company for eight years and masterminded the turnaround. His successor Simon Lee, currently head of the international business, looks like a good replacement and an ideal candidate to continue driving international expansion.
The company also raised its interim dividend by 7% to 3.3p and brokers now expect a full-year figure of 9.5p, returning an 8% annual return to shareholders. The shares go ex-dividend of the 3.334p interim dividend next Wednesday, which should also attract income investors in the few days before.
Following the recent falls, RSA trades on a lowly 8.5x forecast earnings and with profits growing faster than expected combined with a healthy progressive dividend yield of 8%, I think the company is under-valued.
The above chart of RSA highlights the extent of the recent weakness with the shares falling 17% in the past two weeks. Now within close proximity of two-year lows at 114p and with the oscillators at the lowest they have been in recent years, a long trade with a tight stop loss offers an attractive risk/reward bias.
At the time of writing the share price is 118.1p and near term targets are seen at 124.5p, 131p and 135.75p, with a stop loss marginally below the two-year low at 112.5p.
This report was written by Mark Allen – Head of derivatives at Simple Investments Stockbrokers. The writer does not hold a position in RSA, but client accounts may. The material in this report has come from Simply Charts and RSA’s corporate website.
