The Markets

Market opening: Markets consolidating after yesterday's rise could open lower today. FTSE 100 futures were trading 23.5 points down at 7:00 am. 

New York: Wall Street saw choppy, range-bound trading as investors fretted about Greece's future in the Eurozone. The S&P 500 tipped into the green to close 0.1% higher yesterday. 

Asia: Markets started on a positive note following a higher close on Wall Street. However, concerns about the global slowdown and the worsening situation in the Eurozone weighed on sentiment. The Nikkei 225 closed 0.2% up, while the Hang Seng was trading 0.3% down at 7:00 am. 

Continental Europe: Dismal data showing weakening economic activity in the Eurozone did not stop investors searching for a bargain, especially in the energy, banking and utilities sectors, after Wednesday's steep fall. Consequently, the German DAX and French CAC 40 ended 0.5% and 1.2% higher, respectively. 

UK small caps: The FTSE AIM All-Share index gained 0.6% yesterday. 

Today's news

Credit off-take in China slows 

Some of the biggest banks in China could undershoot this year's lending targets as demand for credit shrinks amidst cooling economic activity, three bank officials in the know said today. Demand for new loans was lower in April and May, and officials estimate banks could miss the government's ¥8-8.5tn target by about ¥1tn. 

ECB's Draghi urges 'courageous leap' 

European Central Bank President Mario Draghi called for a 'courageous leap of political imagination' while speaking at Rome's Sapienza University on Thursday. He urged governments not to undermine the importance of the growth pact while they focus on the fiscal compact to instil budgetary discipline. 

Company News

United Utilities (LON:UU.)

United Utilities announced results for the year ended 31st March 2012 yesterday. Revenue increased 3.4% to £1.6bn thanks to a 4.5% nominal increase in regulated prices offset by customers switching to meters and lower commercial volumes. However, pre-tax profit declined 14.3% to £280.4m, as the company increased investment in water and wastewater treatment facilities. Regulatory capital investment grew 12% to £680m. Underlying pre-tax profit dipped by £2.2m to £327m. EPS fell to 46.4p from 67.2p. The management aims to enhance efficiency to achieve the targeted dividend growth rate of 2% above RPI inflation, at least until 2015. Final dividend increased 6.7% to 32.01p per share. 

Our view: The utilities sector is not expected to be impacted by the on going weakness in the economy. Also, despite the drop in profits, the company has been able to keep its commitment of dividend growth. Attracted by the company's ability to deliver real return and higher yields compared to peers, we remain buyers of the stock. 

SABMiller (LON:SAB)

SABMiller said revenue grew 11% to US$31.4bn in FY2012 thanks to strong growth in the Latin American and African markets. Lager and soft drink volumes increased 3% and 7% respectively, on an organic basis. Organic revenue was up 7%. EBITDA swelled 12% (8% organic) to £5.6bn. EBITDA margin improved 10 basis points to 17.9%. Pre-tax profit soared 55% to £5.6bn. EPS grew 74% to US$2.66. The management expects a mid-single digit increase in input costs. They anticipate modest growth in consumer spending in the developed markets and continued robust growth in the developing markets. Dividend for the year was hiked by 12% to US$0.91. 

Our view: SABMiller's success is mainly due to its presence in emerging markets, where a younger population with rising disposable income is trading up to premium brands offered by SABMiller, spurring growth. The inclusion of Foster's has helped the Asia Pacific segment to report a 13% growth in volumes. The management said the integration was progressing well. However, it highlighted the growing trend of customers in the developed markets choosing trading down to value brands as rising inflation and low real wage growth constrain personal budgets. North America and Europe contribute about a third to SABMiller's EBITA. This, coupled with the expected increase in input cost, limits the upside potential for forecast revisions. At a premium valuation to peers, we see better value elsewhere in the sector. 

QinetiQ (LON:QQ.)

QinetiQ released results for the year ended 31st March 2012 yesterday. Underlying operating profit increased 10.9% to £161.3m despite a 13.7% fall in revenue to £1.5bn. Underlying profit margin improved to 11.0% from 8.5% in FY2011 helped by strong margin expansion at the UK service division and the global products division. Underlying pre-tax profit was up 3.2% to £118.3m. However, the management warned that the presidential election in the US could result in contract delays and reiterated that as governments re-balance budgets with spending cuts, the defense market is expected to remain challenging. Nevertheless, dividend for the year was increased to 2.9p per share from 1.6p per share. 

Our view: The restructuring plan is clearly yielding results in the form of margin improvements, despite a fall in revenue. Though the US and the UK defence budgets are expected to shrink, the alteration of the Ministry of Defence (MOD)'s veto rights could give the company more leeway in choosing clients and increase competitiveness. Also, the recent deal with Shell to supply the oil major with monitoring equipment for its natural gas fracking operations seems to be the next logical step of CEO Leo Quinn's turnaround plan for opening up another avenue for growth. 

Booker (LON:BOK) 

Booker said FY2012 total sales for the 53 weeks ended 30th March 2012 rose 9.4% to £3.9bn, driven by an increase in the number of customers and a 21% growth in internet sales. Like-for-like sales increased 6.1%. Operating profit jumped 17% to £89.6m. Pre-tax profit was up 27% to £90.8m and EPS grew 0.93p to 4.83p. The management said that the food wholesale market remained challenging with intensifying competition. However, a 'good' start to the current year makes them confident in meeting full year expectations. Total dividend increased 37% to 2.28p per share. 

ASOS (LON:ASC) 

ASOS released final results for the year ended 31st March 2012 yesterday. Revenue surged 46% to £494.9m, driven by a doubling of international retail sales which closed at £283.7m. Gross profit increased 51% to £251.9m implying a margin enhancement of 180 basis points to 50.9%. Retail sales margin improved 290 basis points to 49.5%. Pre-tax profit soared 93% to £30.4m. EPS doubled to 29.3p from 14.6p in the previous year. The management maintained a positive outlook for FY2013 which is expected to bring the company nearer to its target of £1bn in sales by 2015. 

Economic News

UK GDP

The Office of National Statistics (ONS) revised its Q1 2012 GDP estimate downwards to show a contraction of 0.3% deeper than the 0.2% reported previously. Construction activity shrank 4.8%, significantly more than the 3.0% decline reported initially. Industrial output fell 0.4% while manufacturing output remained flat. Service sector activity increased 0.1%. Personal consumption gained just 0.1%. A 1.6% increase in government spending added 0.4% to output. On an annual basis, GDP declined 0.1%. 

Our view: Economists, already sceptical about the ONS' earlier reading, were not expecting a downward revision to the GDP growth. Earlier in the week, the IMF urged the BoE to pursue a more accommodative monetary policy and expand its asset purchase programme to stimulate the stuttering economy. The BoE's minutes released on Wednesday revealed that though majority of members decided against stretching the quantitative easing programme, they were open to embarking on one, if the situation worsened. With recent inflation data showing inflation is at least not accelerating at the moment, the poor GDP data may heightened expectations that the BoE will pump in more fresh money in the near future, which in the long-term is bound to be inflationary. 

German IFO

Business sentiment index in Germany slumped 3 points to 106.9 in May, the IFO institute's survey showed yesterday. The gauge of current conditions dropped to 113.3 from 117.5 points in April touching its 21-month low. The measure of outlook for the next six months declined to 100.9 from 102.7 the previous month. 

Our view: The business climate index fell more than that expected by economists. The decline in the headline index is consistent with other morale measuring surveys. This indicates that the uncertainty in the Eurozone periphery is breaching German borders too. Though the German economy dodged a recession after recording growth of 0.5% in Q1 2012 (see below), the eroding business confidence suggests businesses expect activity to slow in the near term. 

US durable goods

Orders for durable goods grew 0.2% in April after declining 3.7% in March, the US Department of Commerce said yesterday. A 2.1% increase in orders pertaining to transportation offset the 2.8% fall in orders for machinery and a 34% drop in orders for military aircraft. Commercial aircraft orders, a very volatile series, rose 7.2% after dropping 46.6% in March. Orders for autos and auto parts increased 5.6%. Orders for durable goods, excluding transportation, dipped 0.6% after falling 0.8% in March. Orders for non-defense durable goods, excluding aircraft, a close lead indicator of business investment, declined 1.9% in April after declining 2.2% in March. 

Our view: The increased demand for durable goods is in line with economists' expectations. Buoyant orders for autos and auto parts suggest consumer demand is still strong. However, core durable goods orders, a proxy for business investment, dropped for the second month in April, suggesting factory activity was subdued as Q2 2012 commenced, which is a concern for a continued US recovery. 

Eurozone PMI

The flash composite purchasing managers' index (PMI) fell to 45.9 in May from 46.7 in April, index compiler Markit said yesterday. Economists' expected the reading to edge lower to 46.6. The index for services shrank to 46.5 from 46.9 in April, larger than the expected decline of 46.7. The manufacturing PMI slipped to 45.0 from 45.9 the previous month confounding economists forecasting a slight rise to 46.0. 

German GDP

The German economy expanded 0.5% q-o-q in Q1 2012 reversing the 0.2% contraction in Q4 2011, Destatis said yesterday. A 1.7% growth in exports and 0.4% increase in personal consumption contributed to the expansion. In Q1 2012, GDP grew 1.7% y-o-y following an increase of 1.5% in the previous quarter. The results were largely in line with market expectations. 

The Markets

Market opening: Markets could open higher today, after falling yesterday, as investors hunt for bargains. FTSE 100 futures were trading 45.5 points up at 7:00 am. 

New York: Wall Street recouped early losses amid rumours that EU leaders would agree on a concrete plan to stabilise Greece and an EU-wide bank deposit guarantee. The S&P 500 recovered a little more than 1.5% to close up 0.2% yesterday. 

Asia: Contraction in the Chinese manufacturing sector for the seventh month following yesterday's dismal data from Japan fanned fears of a slowdown in Asia. Inaction at the EU summit also weighed on the sentiment. The Nikkei 225 closed 0.1% up, while the Hang Seng was trading 0.2% down at 7:00 am. 

Continental Europe: Markets closed deep in the red as hopes of EU leaders outlining any new plans to tackle the region's crisis at the Brussels summit faded and the World Bank lowered China's economic growth forecast. Both, the German DAX and French CAC 40 slid 2.3% and 2.6%, respectively. 

UK small caps: The FTSE AIM All-Share index shed 1.7% yesterday. 

Today's news

Chinese manufacturing sector may have shrunk in May 

The preliminary reading of the Chinese manufacturing purchasing managers' index stood at 48.7 for May compared to the final reading of 49.3 in April. This is its longest run of sub-50 reading since the global crisis, HSBC/Markit said today. 

EU in favour of Greece's stay, but plans for exit 

At the informal summit in Brussels, EU leaders backed retaining Greece in the Eurozone, but want Athens to keep its commitment of implementing the bailout terms. However, the Eurogroup Working Group, comprising senior officials aiding Eurozone finance ministers, has been asked to draw up contingency plans in the eventuality of Greece's exit. Leaders also failed to present new measure to stimulate the region's flagging economy and support job creation as France and Germany differed on the issue of joint Eurobonds and aggressive policy. 

Company News

Burberry (LON:BRBY)

Burberry announced preliminary results for the year ended 31st March 2012 yesterday. Total revenue grew 24% to £1.9bn driven by a 32% growth in retail revenue. Retail sales now contribute 68% of total revenue up from 64% in FY2011. Comparable store sales growth was 14% as the strong momentum of H1 2012 (16%) waned in H2 2012 (12%). Wholesale revenue increased 9% to £478.3m. Operating margin expanded to 16.4% from 15.6% in the previous year. Adjusted pre-tax profit was up 26% to £376.2m and reported pre-tax profit increased 24% to £366.0m. EPS improved to 59.3p from 46.9p in FY2011. The company plans to expand retail space by around 12-14% with a bias towards large store formats in core markets of London, Chicago and Hong Kong. The capital expenditure is expected to be around £180-200m. The phasing of revenue and investment is expected to impact operating margin in H1 2013, but the management expects to deliver a modest margin improvement for the year. They proposed a 25% hike in dividend to 25p per share. 

Our view: Burberry's sales, which were resilient till H1 2012, wobbled in the last two quarters as the impact of slowing global economic conditions affected growth in the Asia Pacific, where Burberry generates around a fourth of its revenue. Growth in Asia Pacific helped the retailer offset decline in sales in the US and Europe. Tourists are a major source of revenue for the luxury retailer and the grim outlook for global economic growth is expected to dampen tourism activity too. Additionally, the management's warning on short-term pressure on margins is likely to put any upward revision to forecasts on hold. This leaves the shares that have appreciated 12% since the beginning of the year, fairly valued. 

FirstGroup (LON:FGP)

Yesterday, FirstGroup released preliminary results which showed FY2012 revenue advanced 4.1% to £6.7bn and operating profit surged 45.2% to £448.0m. Pre-tax profit more than doubled to £279.9m from £126.5m. EPS saw a similar increase to 42.7p from 20.0p. The substantial jump in profit was due to easy comparisons thanks to a one-time £147.8m charge in 2011. Excluding this loss, pre-tax profit dropped 1.1% y-o-y. The company is accelerating the disposal of some UK bus division assets as low demand, high fuel cost and shrinking subsidies impact profitability. The operating profit at the bus business fell to £134.4m from £148.8m in FY2011 and the operating margin contracted to 11.6% from 13.1%. The management expects the performance at First Transit to improve and expects continued growth and margin improvement at Greyhound. The management re-iterated its commitment to increasing dividend by 7% in FY2013. Management proposed increasing full year dividend by 7% to 23.67p per share. 

Our view: Around 60% of the UK bus revenue is generated in the northern part of the UK, which has been particularly vulnerable to rising unemployment and cut in government spending. Falling margins at the division, which contributes a third of total operating profit, has been a drag on the group's profits and the repositioning of the portfolio could help margins to expand. Though the recovery in the US and repositioning of the UK bus portfolio could help the business, the near term outlook remains uncertain, prompting us to retain our hold rating. 

Great Portland Estates (LON:GPOR)

Great Portland Estates released preliminary results for the year ended 31st March 2012 yesterday. Net asset value increased 11.9% to 403p per share as the underlying value of its portfolio grew 9.2%. The company signed 88 new leases which will generate a rent of £25.2m per year. Pre-tax profit fell to £155.2m from £261.0m. EPS plunged to 50.2p from 83.8p in the previous year. The management does not expect the turmoil in the UK and Eurozone markets to affect the London commercial property market, given the low supply of new space. The management increased total dividend by 2.4% to 8.4p per share. 

Telecom Plus (LON:TEP) 

Telecom Plus released final results for the year ended 31st March 2012 yesterday. Pre-tax profit increased 11.8% to £30.7m on a 12.6% increase in revenue to £471.5m. The customer base expanded to 415,000 from 371,000 in FY2012. EPS was up 12.3% to 33.8p. The number of services supplied grew 18% and average number of services availed by customers increased to 3.63 from 3.43 in FY2011. The number of customers requesting four or more services doubled. The management expects to increase the number of services supplied by around 20% in FY2013, but profit growth is expected to be limited to 10%. In FY2014, the management expects to see the benefits of current investments with a pre-tax profit growth of around 18%. The management proposed a 23% increase in dividend to 27p per share. 

Economic News

UK Bank of England minutes

Minutes of Bank of England's Monetary Policy Committee (MPC) released yesterday showed members unanimously agreed to keep interest rates at record lows of 0.5%. However, David Miles was the lone voter in favour of increasing the Bank's asset purchase programme by another £25bn. While the other eight members voted against such an expansion, many said the decision was 'finely balanced'. 

Our view: Though the MPC does not seem to be in favour of lowering rates further, it kept the option to pump more fresh money into the economy open. The larger than expected deceleration in inflation in April should give the BoE more leeway to consider stimulating the economy with additional asset purchases after the UK reported a GDP contraction of 0.2% in Q1 2012. On Wednesday, the IMF urged the BoE to consider lowering interest rates and embark on more quantitative easing as the economy had not responded as expected and the risks of stagnation remained high. 

UK retail sales

Retail sales in the UK fell 2.3% m-o-m in April reversing the upwardly revised 2.0% (1.8% reported initially) increase of March, the Office of National Statistics said yesterday. Heavy rains in April caused a 5.2% decline in sales of clothing and footwear and fuel sales declined 13.2%. On an annual basis, retail sales contracted 1.1%. In the three months to April, sales slowed to 0.2% from 0.7% in Q1 2012. 

Our view: The drop in retail sales was significantly worse than the 0.8% decline expected by economists. Warm weather in March and panic buying of fuel, ahead of the fuel-tanker drivers' strike had buoyed sales in March. However, adverse weather conditions coupled with continued high unemployment, inflation, falling real wages and an uncertain economic outlook seems to have weighed on consumers making them reluctant to spend and could put the UK at risk of an extended recession. 

US house price index

The Federal Housing Finance Agency (FHFA)'s home price index indicated that home price in the US increased 1.8% m-o-m and 2.7% y-o-y in March. In Q1 2012, home prices rose 0.6% vis-a-vis Q4 2012 and 0.5% y-o-y. 

Our view: The rise in home prices was better than the 0.3% increase expected by economists. Rising property prices add to the string of other housing sector indicators suggesting a firming recovery in the sector. Rising employment and lower mortgage rates has brought houses within reach of a larger proportion of the population, which should help consumer sentiment and spending. 

US new home sales

Sales of newly built homes in the US grew 3.3% m-o-m to an annual rate of 343,000 in April, the US Department of Commerce said yesterday. This beats economists' expectations of the sale pace increasing to 335,000. New home sales surged 9.9% y-o-y. 

The Markets

Market opening: Markets could open lower as investors take a cue from weak Asian trading and await the outcome of the EU summit today. FTSE 100 futures were trading 66.5 points down at 7:00 am. 

New York: Wall Street rose early on upbeat US housing data, but gave up the gains amid growing uncertainty over Greece. Consequently, the S&P 500 closed flat yesterday. 

Asia: Investors, worried about weak Japanese trade data and wary of the results of the EU summit today, avoided riskier equity investments. This pushed markets in the red. The Nikkei 225 fell 2.0%, while the Hang Seng was trading 1.8% down at 7:00 am. 

Continental Europe: China's pledge to boost infrastructure investment and positive housing data from the US lifted the sentiment. Indices rose amid hopes of EU leaders revealing plans to spur economic growth and address the region's crisis. The German DAX and French CAC 40 closed 1.7% and 1.8% higher, respectively. 

UK small caps: The FTSE AIM All-Share index gained 1.6% yesterday. 

Today's news

Eurobonds issue to dominate EU summit today 

EU leaders meet today in Brussels to discuss ways to stimulate the region's economy and speed up job creation. However, the question of Eurobonds and their utility in combating the crisis is likely to dominate, setting the stage for a showdown between France and Germany. Though both favour growth, France advocates the use of EU funds, while Germany prefers austerity and structural reforms. France's President Francois Hollande would push for mutually underwritten Eurobonds, whereas Germany's Chancellor Angela Merkel thinks the bonds should be issued only after a closer fiscal union. Italy, Spain and the European Commission support France, while the Netherlands, Finland and Austria back Germany. 

Company News

Vodafone (LON:VOD)

Vodafone released results for the year ended 31st March 2012 yesterday. Revenue grew 1.2% to £46.4bn. Like-for-like revenue growth was 2.2%. Group services revenue edged 0.3% higher to £42.9bn as a 3.7% increase in service revenue from Africa, Middle East and the Asia pacific compensated for the 0.6% fall in Europe. Vodafone's India business grew 19.5%. Adjusted operating profit dipped 2.4% to £11.5bn due to higher commercial costs associated with customer migration to smartphones. Net profit plunged 11% to £7.0bn and EPS declined 9.6% to 13.74p. The management expects FY2013 adjusted operating profit to be in the range of £11.1bn to £11.9bn. Cash flows are expected to be in the range of £5.3bn and £5.8bn due to the weakness of the Euro and loss of dividend following the disposal of SFR. It proposed a final dividend of 6.47p per share taking total dividend to 13.52p per share inclusive of a special dividend of 4p per share, an increase of 51.9% y-o-y. The company has completed 91% of its £6.8bn share buy-back programme. 

Our view: Vodafone's upbeat performance in emerging markets helped it meet analyst revenue expectations. The acquisition of C&W Worldwide is expected to help expand business-to-business offerings and improve data services. We expect this and the increasing demand for data services with the adoption of smartphones to offset the declining revenue in the euro-crisis hit nations of Italy and Spain. 

Marks & Spencer (LON:MKS)

For the 52 weeks to 31st March 2012, sales at Marks & Spencer increased 2% to £9.9bn thanks to a 5.8% rise in international sales. Total sales in the UK grew 1.5% with like-for-like (LFL) sales growth of 0.3%. Food sales increased 3.9% and 2.1% on LFL basis. General merchandising sales fell 0.9% on a reported basis and 1.8% on an LFL basis. The company witnessed an 18% increase in multi-channel sales. However, net profit declined to £513.1m from £612m in FY2011. Adjusted pre-tax profit slid to £705.9m from £714.3m the previous year. Management said the deteriorating economic environment has forced it to revise the FY2013 revenue forecast downwards to between £1.1bn and £1.7bn from £1.5bn to £2.5bn envisaged in November 2010. It has also curbed retail space expansion in the UK to 3% in the current year and 2.5% the next year effectively investing £200m less. Over the next three years, the management plans to invest £50m more in the international business aiming to reduce the retailer's dependency on the UK operations. It targets opening about 100 stores in the next 18 months. Nonetheless, full year dividend was kept unchanged at 17p per share. 

Our view: M&S is trying to wean its operations away from the UK and concentrate on expanding its international and online presence. Though the company plans to reduce investment in the UK, its focus is expected to remain on the smaller 'Simply Food' outlets, as the upbeat performance at the food division in FY2012 is expected to continue driving future growth. We believe the management's downward revision to revenue forecasts is now better aligned with analysts' expectations. We remain buyers of the stock attracted by its relatively secure dividend yield of 5.5% and an attractive valuation. 

Homeserve (LON:HSV)

Homeserve released preliminary results for the year ended 31st March 2012 yesterday. Revenue increased 14% to £534.7m. Both adjusted operating profit and adjusted pre-tax profit grew 8% each to £128.2m and £126.0m, respectively. Adjusted EPS for the year was 28.0p vis-a-vis 25.9p in 2011. The company reported the commencement of a formal investigation by the Financial Services Authority (FSA) into selling and complaints handling practices in the past. The management said it plans to reduce the UK customer base to 2.2-2.4m during FY2013. Management declared a 10% increase in dividend to 11.3p per share. The stock lost 29.2% yesterday. 

Our view: Though the company and FSA have been holding informal talks since October 2011, when an internal probe highlighted the company's flawed sales practices, a formal probe is likely to damage Homeserve's reputation further. The management said addressing the issues of mis-selling products was taking longer and costing more than originally anticipated. Additionally, the management's decision to limit customer acquisition in the UK is expected to lower earnings in the near term. We continue to be sellers until visibility in the FSA probe improves. 

Kcom (LON:KCOM)

Kcom released results for the year ended 31st March 2012 yesterday. Underlying revenue fell 2.0% to £387.3m as a 1.1% growth in the KC division failed to compensate for the 2.7% decline in revenue from the Kcom unit. However, diminishing operating costs helped underlying EBITDA rise 2.5% to £77.9m. Profit before tax surged 55.3% to £51.1m resulting in a 66.9% increase in EPS to 7.41p. The management increased the final dividend by 6.8% to 2.67p per share taking annual dividend to 4p per share, reflecting an 11.1% y-o-y increase. The management expects performance to be in line with market expectations and reiterated its commitment to increase dividend by a minimum of 10% over the coming years. 

Victrex (LON:VCT)

Victrex announced results for H1 2012 ended 31st March 2012 yesterday. Despite a recovery in Q2 2012, de-stocking in Q1 2012 led to 4% lower sales volume of 1,377 tonnes resulting in a 2.1% drop in H1 2012 revenue to £105.6m. Gross margin declined 200 basis points y-o-y to 66.8%, but was unchanged from H2 2011 reflecting increased input costs. Pre-tax profit declined 4% to £46.2m and EPS was 2% lower at 41.6p. Nonetheless, the management increased interim dividend by 13% to 9p per share. The pick-up in activity in Q2 2012 has continued, boosting the management's confidence about the positive underlying trend in the polymer solutions business. In H2 2012, the Invibio business is expected to make further progress in developing and emerging markets. 

Economic News

UK inflation

Consumer prices in the UK increased 3.0% in April slowing from 3.5% growth in March, the Office of National Statistics (ONS) said yesterday. Prices decelerated more than the 3.1% expected by economists, due to a slower rise in prices of transport, clothing and off-license alcohol. Core prices, excluding volatile prices of food and energy, increased 2.1% in April following a 2.5% jump in March. 

Our view: The ONS said the drop in inflation was influenced by the timing of Easter. Though the slowdown in inflation will provide some relief to consumers' on a tight budget, the lack of increase in wages means their real disposable income is still shrinking. The Bank of England (BoE) recently raised concern over the stickiness of inflation and revised its forecast, saying inflation is expected to stay above the targeted 2% level till mid-2013. If this drop in inflation continues, the BoE would be in a better position to expand its asset purchase program to support the struggling economy. 

Eurozone consumer confidence

Consumer confidence in the Eurozone rose to -19.3 in May from -19.9 in April (-19.8 reported earlier), the European Commission said yesterday. However, it added that high inflation and unemployment continue to weigh on consumer sentiment. 

Our view: The rise in consumer morale surprised economists who expected it to worsen to -20.5. Though the Eurozone managed to avoid falling back into recession in Q1 2012, recent economic data suggests weakening of activity in the region; this indicates a grim outlook for job creation. Increasing uncertainty over Greece continuing to be a member of the Eurozone has deepened the crisis. This raises doubts over the sustainability of the improvement in consumer confidence in the region. 

US existing home sales

Sales of pre-owned homes in the US rose 3.4% to an annual rate of 4.62m in April, the National Association of Realtors reported yesterday. Existing home sales for March were revised downwards to 4.47m. The median price of homes increased 7.6% m-o-m and 10.1% y-o-y to US$177,400 in April. Housing inventory expanded 9.5% to 2.54m, representing 6.6 months' supply at the current sales pace. In April, the proportion of foreclosed and distressed property sales declined to 28% of total sales for the month vis-a-vis 37% a year earlier and 29% in March. 

Our view: The increase in sales of existing homes was in line with the consensus estimate. Increasing unit sales and rise in the median selling price of pre-owned homes suggest the US housing market is firming. The rise in prices was supported by a fall in sales of distressed properties, which now constitute less than a third of total sales. 

Eurozone OECD economic outlook

In its bi-annual report yesterday, the Organisation for Economic Co-operation and Development (OECD) said the crisis in the Eurozone has the potential to offset the US- and Japan-led economic recovery in the developed world. The OECD urged EU leaders to ease off austerity in order to limit the slowdown in the region from dragging the global economy. The OECD estimates Eurozone's economy to contract 0.1% in 2012 before expanding 0.9% in 2013. Germany could lead the pack, with 1.2% growth in 2012 and 2.0% growth in 2013. In contrast, the US is expected to grow 2.4% this year and 2.6% in 2013. 

US Richmond Fed manufacturing index

The manufacturing general-business index compiled by the Federal Reserve Bank of Richmond fell to 4 in May from 14 in April. The sub-index of shipment declined to 0 in May from 18 in the previous month, while the new orders index dropped 12 points m-o-m to 1. However, the employment index rose to 16 from 10 in April. Service sector activity also weakened, with the revenue index dipping to -2 from 0 in the previous month. However, the services sector employment sub-index jumped to 10 from 0 in April.

The Markets

Market opening: News of ECB's €100bn aid to Greece's central bank could reassure investors and help markets open higher today. FTSE 100 futures were trading 38 points up at 7:00 am. 

New York: Wall Street shrugged off last week's losing streak as buying in technology and commodity stocks helped the S&P 500 gain 1.6% yesterday. 

Asia: Reports that China is increasing infrastructure investment, bargain hunting and hopes that EU leaders would renew efforts to tackle the region's crisis helped market build on yesterday's gains. The Nikkei 225 closed 1.1% higher, while the Hang Seng was trading 1.3% up at 7:00 am. 

Continental Europe: Investors bought banking and commodity stocks that were made attractive by last week's sell-off. However, concerns of a chaotic exit by Greece kept a lid on gains. The German DAX and the French CAC 40 gained 1.0% and 0.6%, respectively. 

UK small caps: The FTSE AIM All-Share index ended 0.6% up yesterday. 

Today's news

France to propose common Eurobonds at EU meet tomorrow 

France's president Francois Hollande will propose issuing common Eurobonds at the informal meet of EU leaders in Brussels tomorrow. Some analysts think this to be the best method to restore market confidence. Germany, which stands to bear the largest chunk of the bill, vehemently opposes the idea, but is increasingly isolated as Italy, Spain and the European Commission support Hollande's proposal. 

China to focus on infrastructure to spur growth 

Beijing is fast-tracking infrastructure projects and may also consider advancing some of next year's projects to spur investment and sustain the growth momentum. Premier Wen Jiabao recently said, China would review fiscal and monetary policies to maintain growth and this is the first indication of implementation. Recent data showed the economy may slow for the sixth consecutive quarter, with growth falling below 8.0% for the first time since 2009. 

Company News

British Land (LON:BLND)

British Land released results for the year ended 31st March 2012 yesterday. Net asset value per share grew 4.9% to 595p and net assets increased to £5.1bn from £4.9bn in FY2011. Underlying pre-tax profit was up 5.1% to £296m. Underlying net profit increased 3.9% to £265m while reported net income dropped to £480m from £840m due to a substantial fall in property valuations. Occupancy improved 20 basis points to 98.0% with occupancy at the UK retail spaces stable at 98.3% and offices up at 98.0%. Like-for-like (LFL) rental income grew 1.5% driven by a 2.5% LFL growth in office rent. EPS halved to 53.8p from 95.2p in FY2011. The management expects property values to be variable in the near term given the slow economic growth in the UK and ongoing debt crisis in the Eurozone. However, shortage of quality office and retail space gives the management confidence about creating further value. The company declared total dividend at 26.1p per share, similar to 26.0p in FY2011 and announced increasing FY2013 quarterly dividend to 6.6p per share. 

Our view: British Land's London office portfolio, about a third of the total portfolio, is expected to continue commanding premium rental. However, the company derives around 61% of rental income from its retail portfolio. The current economic environment in the UK, with high unemployment and depressed real wage growth, poses significant headwinds to the retail industry, subduing the outlook for the growth of retail space. The ongoing recession in the UK and the uncertainty in the Eurozone have eroded business and consumer confidence further, causing both retailers and companies to shelve expansion plans. With this uncertainty blurring vision for the near term, we prefer adopting a cautious stance and see better opportunities elsewhere in the sector. 

BTG (LON:BGC)

For FY2012, BTG reported a pre-tax profit of £23.0m, after recording a loss of £10.8m in FY2011, helped by a 77% surge in revenue to £197.0m. The move to sell anti-poison drugs directly in the US and royalties from J&J for Zytiga boost revenue. EPS increased to 4.4p from 3.4p in FY2011. The company achieved encouraging results from Phase III trial of Varisolve and plans to submit a new drug application in the US at the end of 2012. BTG expects to benefit from the commercial launch of Voraxaze in FY2013 and expects revenue to be between £180-£190m. 

Our view: The commercialisation of Voraxaze, which received approval in January 2012, is expected to replenish BTG's cash flows. Also, the company is clearly benefitting from the shift to direct sale of its products. The licensing and biotechnology division are expected to bring in healthy cash flow through royalties. We like the sustainable cash generative nature of the company's business model and its promising pipeline, making us buyer of the stock. 

Mitie (LON:MTO)

Mitie announced results for the year ended 31st March 2012 yesterday. Operating profit increased 7.2% to £111.7m on revenue of £2.0bn, up 5.9% y-o-y. Organic revenue grew 5.4%. Pre-tax profit advanced 8.9% to £94.5m. EPS surged 10.2% to 20.5p. The order book expanded 26% to £8.6bn and around 83% of the forecasted revenue for FY2013 is secured. In January, the company acquired Utilyx, an energy and carbon consultancy, to expand its energy services offering which contributes 34% of revenue. A strong order book and a diverse client base in the public and private sector gives the management confidence about continued progress and it proposed a 6.7% increase in dividend to 9.6p per share. 

Our view: Mitie ended the year with strong momentum in organic growth and a robust order book. We see great potential for this company in the future. The increasing squeeze on public finances and the private sector's drive to achieve operational efficiency by outsourcing non-core activities is fuelling the trend of outsourcing. Mitie, with its long-standing relationship with its clients, is set to benefit from this trend. However, priced at 10.3x 2013 earnings versus the industry average of 10.9x, we believe Mitie is fairly valued. 

Ryanair (LON:RYA)

Ryanair reported results for the year ended 31st March 2012 yesterday. Revenue grew 19% to €4.3bn as the number of passengers carried rose 5% and average fares increased 16%. Despite a 30% surge in the cost of fuel leading to a 13% escalation in unit costs, net profit increased 25% to €503m. Excluding fuel, per unit costs were flat despite a rise in employees' pay, increased Eurocontrol fees and airport costs. The management issued a profit warning saying increasing fares will not compensate for the rise in the company's fuel bill to €320m causing profits to drop around 20% to €400-€440m for FY 2013. It also warned of increasing competition from growing bases in Hungary, Poland, provincial UK and Spain. After completing a share buyback worth €125m in March the management declared full year dividend of €0.34 per share. 

Our view: While issuing a profit warning for the next year, CEO Michael O'Leary identified the recession in the UK, slowdown in the Eurozone, government spending cuts, adverse movement in currencies and intensifying competition as the concerns plaguing the aviation industry. He said escalating fuel cost are expected to be a drag on earnings as last year's rise in fares would be impossible to repeat in FY2013, given the weak economic environment. However, since other carriers too are expected to face similar fate, Ryanair's low cost base could shield it from greater damage. Nonetheless, considering the management's adverse profit guidance, downward revisions to consensus estimates are likely and we cut Ryanair's rating to hold. 

ITE Group (LON:ITE)

ITE Group reported acquisition fuelled revenue growth of 29.4% to £68.6m. Like-for-like sales grew 9%. Underlying pre-tax profit increased 44.4% to £13.1m and reported pre-tax profit grew to £6.3mn from £3.5 in H1 2011. The company completed two acquisitions in Ukraine, Autoexpo and the Beauty portfolios, and small in-fill acquisitions in India. Over the next year, the company plans to expand through acquisitions in India and Turkey. As of 18th May, FY2012 booked revenue stood at £156.2m ahead of £137.1m in the previous year. The management raised interim dividend to 2.1p per share from 1.9p per share in H1 2012. 

Economic News

UK Rightmove house prices

The asking price of houses in the UK remained unchanged m-o-m in May after rising 2.9% m-o-m in April, Rightmove said yesterday. The average selling price of homes was stable at £243,759 as both demand and supply shrank. Buyers jittery over the impact of the recession and rising mortgage rates refrained from purchases. Additionally, the supply of homes plunged 10% m-o-m as incentives to sell property declined. On an annual basis, home prices climbed 2% decelerating from the 3.4% rate of change seen in April. 

Our view: House prices stabilised as buyers lost incentive to purchase with the expiration of the stamp duty holiday. The gloomy economic outlook eroded confidence among both buyers and sellers, causing housing prices to stagnate in May and persuaded consumers to wait on the sideline in the near term. 

US Chicago Fed national activity index

The Chicago Fed national activity index rebounded to 0.11 in April from -0.44 in March as the sub-index of production rose to 0.36 from -0.31, the Federal Reserve Bank of Chicago reported yesterday. However, this rise failed to stop the three-month average from slipping to -0.06 in April from 0.02 the previous month. 

Our view: The three-month average dropped to negative for the first time since November. This indicates growth in economic activity was subdued and inflationary pressure is likely to decrease in the near term. 

Eurozone construction output

Construction output in the Eurozone expanded 12.4% m-o-m in March reversing the 10.4% decline in February (previously reported as a 7.1% drop), Eurostat said yesterday. German construction activity rose 30.7%, while that in France and Italy picked up 17.8% and 9.5%, respectively. However, on an annual basis, construction activity fell 3.8%. 

Market opening: Markets could open lower today despite G8 support for Greece and the Chinese premier’s comments regarding economic growth. FTSE 100 futures were trading 5.5 points lower at 7:00 am.

New York: Fears over the Eurozone continued to play on investor sentiment, causing all ten sectors in the S&P 500 to close the week in the red. The S&P 500 shed 0.7% on Friday to end the week 4.3% lower.

Asia: The Chinese premier’s comments about the need to fine tune fiscal and monetary policy to aid growth cheered investors, who also welcomed the show of support to Greece’s place in the Eurozone by G8 leaders. The Nikkei 225 rose 0.3%, while the Hang Seng was trading 0.3% down at 7:00 am.

Continental Europe: Markets ended the week with largest weekly losses since November after the downgrade of 16 Spanish banks by Moody’s and Fitch’s rating cut on Greece. The German DAX ended 0.6 lower and the French CAC 40 0.1%.

UK small caps: The FTSE AIM All-Share index closed 1.1% lower on Friday.

Today’s news

Chinese buyers seek postponement of coal, iron ore shipments

In the latest sign of a slowdown in China and its influence on global raw material prices, Chinese consumer are deferring and defaulting on shipment contracts of iron ore and coal causing downward pressure on prices of these raw materials.

G8 wants Greece to stay in the Eurozone

In a meeting on Saturday, the leaders of G8 nations unanimously supported retaining Greece in the Eurozone, but did not offer a concrete plan to combat the crisis. They also agreed that steps need to be taken to shield the global economy from the Euro debt crisis, and promote financial stability, economic growth and job creation. The leaders highlighted the need to balance austerity and monetary stimulus in Europe to bring the region’s economy back on track, thereby implying a support to the idea of common bonds by Eurozone governments.

Company News

London Stock Exchange (LON:LSE)

The London Stock Exchange announced results for the year ended 31st March 2012 on Friday. Revenue at £679.8m was 10% higher y-o-y due to strong performance at all four divisions. Operating profit jumped 27% to £358.5m and adjusted pre-tax profit grew 35% to £400.6m. Reported pre-tax profit, which includes recognition of profit from FTSE, surged 169% to £639.7m. EPS multiplied more than four times to 193.6p while adjusted EPS increased 36% to 100.6p. The management expects to make further progress driven by integration of recent acquisitions resulting in cost and revenue synergies. They increased total dividend for the year by 6% to 28.3p per share.

Our view: The acquisition of the remaining 50% stake in FTSE has augmented the bottom-line. Also, shareholders cleared the acquisition of a controlling stake in LCH.Clearnet. This acquisition not only gives the company access to crucial clearing house operations but also helps it ride the wave of structural and regulatory changes in the US and Europe that propose to shift over-the-counter traded products to exchanges. Thus, the deal strengthens LSE’s position compared to peers. These successful acquisitions, after previous failed acquisition attempts, such as Canada’s TMX Group, operator of the Toronto Stock Exchange, open up prospective avenues for growth. Furthermore, the recent drop in valuation provides an attractive entry point.

Mitchells & Butlers (LON:MAB)

Mitchells & Butlers released results for the 28 weeks ended 7th April 2012 on Friday. Total revenue increased 6.3% to £969m with like-for-like (LFL) revenue growth of 2.7%. Food LFL sales grew 3.4% and drink LFL sales increased 2.2%. Operating profit was 1.5% ahead y-o-y at £138m. However, high energy and food inflation lead to a 0.7% drop in net operating margin to 14.2%. Pre-tax profit declined by £1m to £42m. Basic EPS fell 0.3p to 8.8p. The company expects cost pressures to ease during the second half of the year, but anticipates the consumer environment to remain challenging.

Our view: Mitchells & Butlers made progress and revenue beat consensus estimate. However, the uncertain outlook and leadership vacuum blurs our view on the company. The management has acknowledged that the outlook for the business remains uncertain given the challenging consumer environment. Executive Chairman and acting CEO, Bob Ivell has not yet announced a CEO after the seat fell vacant in March 2011. Mr. Ivell is also in the process of finding non-executive directors for the company after shareholders voted against the re-election of the incumbent directors backed by the company’s largest shareholder Joe Lewis.

Blinkx (LON:BLNX)

Blinkx announced results for the year ended 31st March 2012 on Friday. Revenue grew 73% y-o-y to US$114.4m. Gross profit surged 40.2% to US$60.4m. The acquisition of lower margin businesses, Burst and PVMG, resulted in a decline in gross margin to 53% from 65% in FY2011. Reported pre-tax profit dropped to US$1.9m from US$6.1m reflecting the acquisition costs of the aforementioned entities. Adjusted pre-tax profit increased to US$10.7m from US$8.3m in FY2011. Adjusted basic EPS increased to US$0.036 from US$0.03. The share gained 5.3% following the announcement of the results.

John Menzies (LON:MNZS)

John Menzies issued a trading update for the four month ended 30th April 2012 on Friday. Trading has been in line with expectations with both, aviation division and distribution division, trading ahead of the previous year. At the aviation division, like-for-like (LFL) ground handling volumes increased 2% and LFL cargo volumes decreased 7%, but contracts won in the previous year ensured a 4% increase in absolute terms. The distribution operations are on track to deliver the budgeted savings for the year. Despite the logistical challenges expected during the London Olympics, the management expects sales at the distribution division to increase in the period leading to and during the Games.

SIG (LON:SHI)

SIG, in an interim statement covering four month to April 2012 said, sales per day were slightly ahead y-o-y despite tough comparatives and adverse weather conditions in Europe and the UK. Sales were also impacted by the depreciation of the Euro vis-a-vis the Sterling pound. There has been a slight improvement in gross margins. Geographically, sales per day in Europe grew around 3.0% benefitting from strong sales in France and Benelux, while sales in Germany were slightly ahead of previous year. Sales per day in the UK decreased around 1%. Sales in Ireland were significantly lower than the previous year. The company opened ten new branches during the period, three each in UK and Germany and the remaining in France. The management expects overall volumes in 2012 to be uneven and slightly lower than the previous year.

Economic News

German producer prices

The rise in factory gate prices in Germany slowed to a 0.2% m-o-m and 2.4% y-o-y in April, following a 0.6% m-o-m and 3.3% y-o-y gain in March, Destatis said on Friday.

Our view: Producer prices rose slower than the 0.3% m-o-m and 2.5% y-o-y increase expected by economists. Prices at factory gates are a precursor to consumer prices. Easing prices in Germany could provide welcome relief to the European Central Bank, which is caught between the choice of managing inflationary pressure in Germany while maintaining an accommodative monetary policy to help spur growth in rest of the Eurozone.

US revisions to factory and durable goods orders

On Friday, a revised report by the US Department of Commerce showed factory orders plunged to -1.9 in March (as against the previously reported -1.5) from 1.5 in February. The figure for February was earlier reported at 1.1. Durables goods orders for March were revised upwards to -3.9 from -4.0, while the number for February was revised to 2.0 from 1.9. Orders for durable goods, excluding transport, slipped to -1.3 in March compared to -0.8 reported previously. Revisions for February showed a milder fall to 1.8 from 2.0.

The Markets

Market opening: Weak Chinese housing data along with fear that the Eurozone could disintegrate and concern that the US recovery is ebbing may cause markets to open deep in the red today. FTSE 100 futures were trading 97.5 points lower at 7:00 am. 

New York: Disappointing economic data and the escalating crisis in the Eurozone clouded investor sentiment, causing the S&P 500 to close 1.5% lower yesterday. 

Asia: Investors retreated into their shells on the back of weakening Spanish banks and falling property prices in China. The Nikkei 225 closed 3.0% lower, while the Hang Seng was trading 2.6% down at 7:00 am. 

Continental Europe: The ongoing political uncertainty in Greece and the Spanish growing banking trouble sparked a sell-off in European stocks. Consequently, both the German DAX and the French CAC 40 shed 1.2% yesterday. 

Today's news

Spain's crisis escalates; Moody's downgrades 16 banks 

Ratings agency Moody's cut the credit rating on sixteen Spanish banks, including Banco Santander and Banco Bilbao Vizcaya Argentaria, citing ballooning losses on loans, the recession and the government's diminished ability to bailout banks. Separately, a newspaper reported large withdrawals of deposits from Bankia, triggering a sharp sell-off of the bank's shares. 

Less impetus for QE if UK's recession is mild - BoE's Fisher 

In an interview published yesterday, BoE policymaker Paul Fisher said despite the contraction in the past two quarters, the recession in UK seems to be mild, reducing the necessity for more asset purchases. However, Fisher added that he would support the recommencement of the programme if risks emerge again. 

Aviva (LON:AV.)

The interim statement released by Aviva showed total sales declined 3% y-o-y to £9.7bn as long term savings sales fell 5% to £7.5bn in Q1 2012. The general insurance and health net written premiums were unchanged y-o-y. The combined operating ratio for the general insurance business was 96% compared to 97% in Q1 2011. The internal rate of return for the life insurance business was 13.3%. The management said performance during the quarter was in line expectations. Executive Deputy Chairman and acting CEO John McFarlane said appointment of a new CEO could take at least a year. 

Our view: CEO Andrew Moss stepped down after shareholders rejected his remuneration package. Aviva was particularly hit by its exposure to the Eurozone, where it generated around 40% of its operating profit last year. The crisis in the region not only affected sales but also eroded its capital base. Acting CEO John McFarlane said he is undertaking the strategic review of the company. Many analysts expect Aviva to sell off its US operations or even undergo a de-merger of its life and general insurance units. With the near-term outlook for the insurer fuzzy, but following the last few months de-rating of the stock we feel much of the negative expectations are in the price. 

Cookson (LON:CKSN) 

In an interim statement covering the first four months of the year, Cookson said trading has been in line with management expectations. Despite losses at the fused silica business, operating profit was slightly ahead y-o-y. The management expects the solar panel market to recover in H2 2012. The economic outlook remained challenging. Customers and industry analysts' estimate the company's end market to grow at mid-single digit in 2012 as pick-up in activity in North America and Asia-Pacific compensates for the slowdown in Europe, they added. The company completed the acquisition of Metallurgica in March and the disposal of the US operations of precious metals processing division in May. It also commenced the review of a potential demerger of its two main divisions, engineered ceramics and performance materials. 

Our view:Talks of breaking up Cookson after activist fund Cevian Capital started building a stake in the company was confirmed in yesterday's statement. The company will also admit Christer Gardell, a managing partner at Cevian Capital, on its Board. The de-merger of the two main divisions is expected to unlock value for shareholders as the respective divisions sharpen focus on core activities to drive performance. We expect the de-merger to trigger an uptick in the stock which is currently trading at a considerable discount to peers. 

Kesa (LON:KESA) 

Kesa Electricals issued a trading update for the period 9th January to 30th April 2012 and for the financial year ended 30th April 2012, yesterday. Between 9th January to 30th April 2012, revenue fell 4.6% in local currency and 5.5% on a like-for-like (LFL) basis. Poor performance in the latter half of the year resulted in a full year revenue decline of 1.6% in local currency and 3.5% on a LFL basis. During 9th January to 30th April 2012, weak market conditions in the vision division, i.e. TVs, DVD players, etc, hurt growth, while white goods and multimedia registered positive sales growth. Gross profit margins fell around 100 basis points reflecting competitive market conditions and product mix. CEO Thierry Falque Pierrotin said that volatile and weak trading conditions in most markets, particularly Italy and Spain, affected the performance. The stock fell 13.6% to close at 46.76 p yesterday. 

Our view: Kesa Electricals is still not out of the woods. Last year, when the company sold off Comet stores to investment firm OpCapita for a nominal fee, it was assumed that things would start to look better in the future. However, that was not to be since conditions in the Eurozone continued to worsen and affected performance. Though the management has assured that the underlying pre-tax profit for FY2012 would be around the mid-point of the range of current market expectations, we still think visibility is too low to change our view. 

Premier Oil (LON:PMO) 

Premier Oil released a trading update for the period covering 1st January to 17th May 2012 yesterday. In the four month to April, average production increased to 56.1 kboepd vis-a-vis 36.7 kboepd in the previous year. Production in the last four weeks averaged 62.7 kboepd thanks to higher contributions from Vietnam and Indonesian oil assets. Further, the Huntington and Rochelle projects in the UK are expected on-stream in Q4 2012. The company also received approval for the Solan Field Development Plan in the UK. The Pelikan and Naga projects in Indonesia have been sanctioned by partners and the Dua project in Vietnam was approved by Santos and the company in April. CEO Simon Lockett was confident of achieving the 2012 production guidance of 60-65 kboepd with an exit rate of 75 kboepd. 

Our view: Premier ended last year with a drop in average production to 40.4 kboepd from 42.8 kboepd in 2010. However, with new projects coming on-stream, Gajah Baru in Indonesia and Chim Sao in Vietnam, the company's production received a major boost. In fact, further discoveries made in the Anoa Deep, have even raised the potential on Natuna Sea Block A in Indonesia. It has also discovered gas in the previously untested area of the Kadanwari Block in Pakistan. Given the high possibility of converting these discoveries into productive assets, we keep a buy rating on the company. 

TalkTalk Telecom (LON:TALK)

Yesterday, TalkTalk Telecom released results for the year ended 31st March 2012. Underlying pre-tax profit surged 21.4% to £233m despite a 4.4% decline in revenue to £1.7bn. Underlying profit after tax increased 30% to £159m translating into a 33% jump in EPS to 18p. Reported net profit increased more than four times to £138m from £35m in FY2011 and reported EPS jumped to 15.6p from 3.9p in the previous year. In Q4 2012, net customer losses were limited to 13,000 down from 43,000 in Q3 2011. The management raised the medium term EBITDA target to 25% and expect the revenue to grow at a compound annual rate of 2%, as they plan expanding the network, add new services and increase operational efficiency. They raised the annual dividend by 61% to 9p per share and pledged to increase dividend by at least 15% p.a. in FY2013 and FY2014. The stock gained 19.8% yesterday. 

The Markets

Market opening: Markets could open higher as expectations of Prime Minister David Cameron's assurance that the economy and banks would be shielded if the Eurozone collapses restores investor confidence. The FTSE 100 futures were trading 13 points up at 7:00 am. 

New York: The Wall Street closed in the red as negative headlines from Greece outweighed positive domestic economic data. The S&P 500 ended 0.4% lower yesterday. 

Asia: Japan's stronger than expected GDP growth bolstered investor sentiment. However, the gains were capped as ECB blocked loans to some Greek banks. The Nikkei 225 closed 0.9% up, while Hang Seng was trading 0.9% higher at 7:00 am. 

Continental Europe: Continued uncertainty in Greece kept investors on the back foot for the third consecutive day. However, a late recovery blossomed on positive economic news from the US. The German DAX slid 0.3%, while the French CAC 40 gained 0.3% yesterday. 

UK small caps: The FTSE AIM All-Share index closed 1.4% lower yesterday. To read our latest small cap research, click here.

Today's news

Draghi talks tough on Greece, citizens pull out deposits 

The ECB said that it would temporarily stop lending to some of the Greek banks to curb risk and that undercapitalised banks were referred to the ELA (Emergency Liquidity Assistance) instead. ECB chief Mario Draghi talked tough saying that he would not compromise on key principles to keep Greece in the 17-nation euro area. Separately, George Provopoulos, Chief of central bank of Greece, informed that €700m had been withdrawn from the system since 7th May 2012. 

Japan grows 1.0% in the first quarter 

Japan's economy grew 1.0% in 1Q 2012 versus a flat 4Q 2011, due to rebuilding of the tsunami-battered northeast, good private spending and improved export sales. The GDP growth beat consensus estimates of 0.9% 

Land Securities (LON:LAND)

Land Securities released results for the full year ended 31st March 2012 yesterday. Basic NAV per share increased 4.1% to 921p. The adjusted net asset value grew 4.5% to 863p per share. Adjusted EPS was up 8.5% y-o-y at 38.5p. Revenue profit jumped 9% to £299.4m as rental value increased 1.2% y-o-y across like-for-like portfolio. However, pre-tax profit plunged 58% to £515.7m mainly due to lower valuation of investment properties during H1 2012 vis-a-vis the previous year. Consequently, basic EPS declined 58.4% to 67.5p. The management stressed that the outlook remained uncertain, but increased full year dividend by 2.8% to 29p per share. 

Our view: The crisis in the Eurozone and the recession in the UK is eroding business confidence, leading to a decrease in demand for new office and retail space. Land Securities said both demand and supply for new office space was lower than its expectation. Also, except for London, property values in the UK are weakening. Nonetheless, Land Securities' sizeable portfolio comprising of prime properties in London could benefit significantly once the markets start looking up. However, with poor near term visibility poor, we retain our hold rating. 

SSE (LON:SSE)

SSE released results for the full year ended 31st March 2012 yesterday. Revenue increased 11.9% to £31.7bn. Adjusted pre-tax profit grew 2% to £1.3bn and adjusted net profit increased 7.7% to £1.1bn. Adjusted EPS was 112.7p, 0.4% higher y-o-y. Operating profit at the retail divisions fell 19.1% to £321.6m as average gas consumption and average electricity consumption in the UK declined 19.9% and 6.9%, respectively. Operating profit at the wholesale division increased 6.4% to £607.9m and that at the network division rose 6.7% to £737.1m. The management indentified rising global energy prices, economic uncertainty and the weather as the major issues related to the company's operations. Higher average wholesale gas prices, reducing consumption and winter storms affected the three divisions. However, they pledged to withhold a rise in energy prices till at least October 2012. Dividend increased 6.8% to 80.1p per share. For FY2013, the management aims to declare dividend of at least retail price index +2%. 

In a separate press release, the company announced the acquisition of Northern Ireland based Phoenix Supply Limited for £19.1m, excluding working capital related adjustments. Phoenix supplies natural gas to 130,000 customers in Northern Ireland. 

Our view: Despite the economic headwinds and falling consumer demand, SSE's FY2012 performance was ahead of analysts' expectations. With the acquisition of Phoenix, the company not only added 130,000 customers but also branches out into Northern Ireland, opening up potential opportunities of cross selling. We particularly like the company's consistent, above inflation, growth in dividend. At a dividend yield of 6.4%, the highest among peers, SSE a one of our favourite high yielding stocks. 

Compass Group (LON:CPG) 

Results released for six months ended 31st March 2012 showed that Compass Group earned £8.6bn in revenue, 8.6% higher than the previous year driven by strong performance in North America (up 10.1%) and fast growing and emerging markets (up 17.4%). Revenue from Europe and Japan grew 3.3%, with organic revenue declining 0.4%. Organic revenue grew 5.0%. Underlying operating profit increased 8.8% to £617m. Underlying pre-tax profit grew 7.7% to £572m and reported profit before tax jumped 10.0% to £581m. Underlying EPS at 22.4p was 9.8% higher y-o-y. The £500m share buy-back programme is expected to be completed by the end of 2012. The management kept their outlook for the remaining year unchanged. They declared an interim dividend of 7.2p per share, 10.8% higher than H1 2011. 

Our view: The economic situation in the Eurozone was a drag on the performance. The company's exposure to the Eurozone is declining in favour of operations in North America and emerging markets. Compass Group is benefitting from the increased adoption of outsourcing, especially in the North American healthcare and education sectors. In addition, the company's presence in emerging markets is expected to drive growth going forward. Furthermore, CEO Richard Cousin's drive to streamline business by selling off underperforming operations and keep a sharp focus on costs is likely to improve margins further. Considering these factors we expect Compass to outperform peers. 

ICAP (LON:IAP)

ICAP reported H1 2012 results yesterday. Revenue declined 3% to £1.7bn. Operating profit margin was stable at 22%. Pre-tax profit dropped 7% to £217m and net profit plunged 27% to £137m. Nonetheless, the operating profit for the electronics operations increased 4% to £127m despite a 1% fall in revenue to £301.0m. Basic EPS stood at 21.1p, down 26% y-o-y. The management said though trading activity increased towards the end of 2011, the resurfacing of the Eurozone crisis and regulatory uncertainty depressed activity in April and May. The management achieved cost savings of £20m and expects to save another £50m by the end of March 2014. They've recommended a final dividend of 16.0p per share taking the total dividend to 22.0p per share, up 9.3% y-o-y. 

Our view: Despite the cost saving initiatives, the loss of revenue has had a significant impact on the bottom line. Also, though the increase in dividend indicates the management's confidence in the business, they acknowledged the adverse impact of the Eurozone crisis and the fuzzy regulatory scenario on trading volumes. With the economic and regulatory environment not expected to improve anytime soon, we see limited opportunity for the broker to recover lost ground. 

Interserve (LON:IRV)

Yesterday, Interserve held its annual general meeting and released an interim statement for Q1 2012. The company won new contracts worth around £600m with improved revenue visibility of £1.6bn for 2012 and £1.0bn for 2013. The management expects trading to stabilise in 2012 as compared to 2011. Trading through April has been in line with expectations, they added. 

Bovis Homes (LON:BVS)

In an interim management statement released yesterday, Bovis Homes said, in the nineteen weeks to 11th May, net private registrations increased 33% y-o-y to 783 driven by a 23% increase in average number of sales outlets and a 9% improvement in sales per sales outlet. The number of visitors to the company's sites increased 51% y-o-y. The company reported that a better sales mix will enable it to realise a y-o-y increase in average selling prices. It expects this improvement to continue in H2 2012 resulting in higher average selling prices for the full year. The management was confident of achieving a return on capital of around 7.5% in FY2012 compared to 5% in 2011, thanks to anticipated efficiency improvements and more legal completions at higher selling prices for lands acquired during the downturn allowing better profit margins. 

The Markets

Market opening: Low risk appetite due to the political turmoil in Greece could cause markets to open lower today. The FTSE 100 futures were trading 15.0 points down at 7:00 am. 

New York: With no corporate or economic data releases, investors fretted over Greece's uncertain future and slowing growth in China. The S&P 500 closed 1.1% lower yesterday. 

Asia: The uncertain situation in Greece eroded the risk appetite among investors and the Nikkei 225 closed 0.8% lower, while Hang Seng was trading 0.4% up at 7:00 am. 

Continental Europe: Greece's political deadlock and concerns about its future in the Eurozone led to widespread sell-off of risky equities. The German DAX fell 1.9% and the French CAC 40 shed 2.3% yesterday. 

Today's news

Greece's President proposes technocrat government 

Leaders in Greece meet President Papoulias today to discuss his proposal for a government of technocrats after no political party won a clear majority during the elections on 6th May. However, the leftists, who believe they can win a majority in the re-election, have rejected the proposal. They have opposed the EU/IMF's bailout and terms, fuelling speculation about Greece's exit from the Eurozone. Meanwhile, Eurozone ministers have dismissed talks of Greece's ouster, but stressed that Athens would have to abide by the terms of the bailout. 

Moody's downgrades 26 Italian banks 

Moody's announced the downgrade of 26 Italian banks, citing their exposure to loan defaults that trigger funding problems, making it more expensive for the banks to raise public funds. 

FDI in China continues to shrink 

FDI in China shrank 0.7% y-o-y to US$8.4bn after falling 6.1% in March, extending the contraction to the sixth consecutive month. 

Lonmin (LON:LMI)

Lonmin announced interim results for the six months ended 31st March 2012, yesterday. Revenue dropped 20% y-o-y to US$751m in H1 2012 from US$938m in H1 2011, and operating profit slid 90% to US$14m from US$144m. The company reported a loss of 11.8c per share in H1 2011 versus a profit of 44.5c in H1 2011. Revenue growth was hurt due to significant disruptions to production, poor sales volumes and lower PGM prices. PGM sales volume fell by 10% to 608,579 ounces in H1 2012 from 679,557 ounces in H1 2011. PGM prices faced downward pressure in H1 2012. PGM basket, including by-product revenue, fell 11% to US$1,231 per ounce in H1 2012 from US$1,382 in H1 2011. The price of platinum, palladium and rhodium weakened by 10% 11% and 36%, respectively, over the same period. In addition, higher unit costs amid weaker pricing also reduced profitability. CEO Ian Farmer said that the company 'performed well' despite high levels of safety stoppages, and labour and community unrest issues hampering production. Mr. Farmer did show concern over the inflationary increases in costs and depressed pricing environment, but maintained his stance to meet the full year guidance for costs and production. 

Our view: The world's third-largest platinum producer, Lonmin seems to be in a real tight spot. The company is facing a host of issues including production stoppages, imposed by South African authorities; lower sales volumes, poor pricing and rising costs. Considering the results announced yesterday, we downgrade the stock to a sell and choose Anglo American as our preferred company in this sector. 

Travis Perkins (LON:TPK)

Yesterday, Travis Perkins issued an interim management statement for the period from 1st January to 30th April 2012. Revenue for the four months grew 4.4% y-o-y. At 14.1% y-o-y, revenue growth at consumer division was the highest thanks to the Toolstation acquisition. Revenue at specialist merchanting, and general merchanting was higher by 6.3% and 6.1%; but, plumbing & heating division reported a revenue decline of 3.1%. Revenue on a Like-for-like (LFL) basis was strong at general merchanting and specialist merchanting, reporting LFL growth of 2.6% and 1.9%. The consumer division had a LFL revenue decline of 5.2%. The management reported that focus on gross margins had yielded good results and that gross margins, before synergy gains, were in line with the same period last year. They further said that despite disruption at building sites caused by heavy rain, the company would meet consensus expectations and realize synergy gains of £30m in 2012. 

Our view: We like the confidence depicted by Travis Perkins' management. Delivering growth in an economy which shrank 0.2% in Q1 2012 is a commendable job. However, given the recent spate of weak data on UK PMI and UK home prices, we feel that the economic conditions within the UK remain challenging making it difficult to estimate the direction of business for Travis Perkins in the near. We retain our hold rating on the stock. 

Dignity (LON:DTY) 

Yesterday, funeral service provider Dignity issued an interim management statement for the 13 weeks ended 30th March 2012. Revenue increased 3.4% y-o-y to £61.1m from £59.1m and underlying operating profit was higher by 3.5% to £23.4m from £22.6m. The management informed that despite a relative slow start, business has been noticeably higher in March with pre-arranged funeral plan sales continuing to enjoy robust growth. Since 1st Jan 2012, the company has acquired seven funeral locations and opened seven satellite locations. It also began operating one crematorium and three cemeteries on behalf of Haringey Council. Dignity remains on track to open its crematorium in Essex in Q2 2012. CEO Mike McCollum did not change the full year outlook. 

Diploma (LON:DPLM)

Diploma released interim results for the six months ended 31st March 2012, yesterday. Revenue increased 13% y-o-y to £127.1m in H1 2012 from 11.26m in H1 2011. Adjusted operating profit jumped 19% y-o-y to £26.4m resulting in an operating margin of 20.8%. Underlying revenue and operating profits were up 8% and 15%, respectively. Adjusted EPS during the first half of last year rose 22% to 16.1p. The management declared an increased interim dividend of 4.2p per share, up 20%. Diploma benefited from strong trading in the seals segment in North America, particularly in the aftermarket business, and from progress in the life sciences and controls sectors. The company benefited from acquisitions of J Royal in the US and Abbeychart Limited in the UK. CEO Bruce Thompson said that the company delivered good results, boosted by the strong activity in the seals business. He remained confident of the progress in the second half of the year. 

Eurozone Industrial production 

Industrial production in the Eurozone fell 0.3% m-o-m and 2.2% y-o-y in March 2012, as per the data released by Eurostat yesterday. The economists were expecting a monthly gain of 0.4% and a y-o-y decline of 1.4% for the region. In February, industrial production rose 0.8% m-o-m and fell 1.5% y-o-y. 

Our view: The y-o-y decline was expected, though the actual number came in higher than the consensus estimates. However, the m-o-m decline in industrial production is a cause for concern, especially after seeing that countries like Netherlands, Estonia, Ireland and Finland witnessed production declines of 9.0%, 3.4%, 2.7% and 2.3% in March. The situation looks worse given the ongoing problems in Greece and Spain. 

German wholesale prices

German wholesale price index rose 0.5% m-o-m and 2.4% y-o-y in April 2012 versus 0.9% and 2.2% in March 2012, Destatis reported yesterday. The slowing down of wholesale prices from 0.9% to 0.5% was a result of cheaper food and tobacco, partially offset by more expensive energy and overall consumer wholesale goods. 

Our view: : Germany could continue to report slower wholesale price inflation for May, due to a decline in energy prices amidst a Chinese slowdown and rising Eurozone problems. 

The Markets

Market opening: Markets could open lower today. The FTSE futures were trading 44.5 points lower at 7:00 am. 

New York: The S&P 500 declined 0.3% on Friday. The news of JP Morgan's US$2bn loss raised fears and offset positive consumer sentiment data. 

Asia: Markets moved up and down amid Europe's continuing debt woes and news of China's monetary policy easing. The Nikkei closed 0.2% up and Hang Seng was trading 0.1% higher at 7:00 am. 

Continental Europe: A late rally helped markets. On Friday, the German DAX rose 1.0%. The French CAC 40 closed flat for the day. 

Today's news

China slashes bank reserve ratios 

The Peoples Bank of China cut the reserve requirement ratio, freeing an estimated ¥400bn (US$63.5bn) into the system. The move to loosen monetary policy was prompted by slower economic growth of 8.1% in Q1 2012. Recent inflation data gave policymakers the confidence to take the step. 

Angela Merkel faces defeat as voters oppose austerity plan 

Exit polls indicated Chancellor Angela Merkel's party, the Christian Democrats, had suffered a defeat in elections in Germany's most populous state, North Rhine-Westphalia. The Christian Democrats won just 26.3% of the votes, while Social Democrats secured 39.1%. 

Greece struggles to form a government 

The first round of talks between the Greek President and top three political party leaders on the formation of a coalition government ended with no results. The failure to reach a solution would result in Greece's holding another election shortly, with its Euro membership at stake. 

Logica (LON:LOG)

Logica issued an interim management statement for the three months ended 31st March 2012, on Friday. The company reported revenue of £971m in Q1 2012 versus £974m in Q1 2011. In the outsourcing division, growth in infrastructure management and business process outsourcing was offset by lower sales in applications management. Revenue through consulting and professional services remained unchanged for the period. Orders for the quarter totalled £1.1bn compared to £1.4bn in Q1 2011. Despite the difficult market conditions, the management did not change the full year outlook. 

Our view: Logica delivered flat numbers for the quarter. The orders in Q1 2012 shrunk by about 40% y-o-y, which is concerning. The management clearly acknowledged that the business environment is proving to be difficult. However, we find hope in the restructuring efforts, which the management indicates, are likely to bear fruit soon. The management alleges that the restructuring program could result in cost savings of £25m-£35m in the second half of the year. They further inform that the Benelux business would be returning to profit in 2012 and the Swedish business will deliver improved margins. Despite positive indications from the management that Logica would be on a growth track soon, we would like to see some proof that the trend has turned before changing our rating. 

International Consolidated Airlines (LON:IAG)

International Consolidated Airlines released results for the three months ended 31st March 2012, on Friday. Revenue for the quarter was up 7.8% y-o-y to €3.9bn versus €3.6bn in 1Q 2011. Passenger revenue was up 9% on capacity growth (as measured in available seat kilometres) of 0.6% and improved unit passenger revenues of 8.5%. Fuel costs and non-fuel costs were higher by 24.9% and 5.7%, respectively. Higher costs resulted in an operating loss of €249m for the company in Q1 2012. The airline had posted an operating loss of €102m in Q1 2011. Loss before tax for the quarter was €263m versus a loss of €47m in the same quarter last year. 

Our view: International Consolidated Airlines is facing multiple issues. While weakness of the Spanish domestic market is affecting performance of Iberia, rising fuel costs is hurting profitability for British Airways. Government actions of hiking the air passenger duty in the UK and increase departure taxes from Spain add to the problem. Yet, on a positive note, with the purchase of bmi, the British Airways arm would now be able to manage its wider Heathrow slot portfolio more effectively. New flight launches from Heathrow could add significantly to the business. However, taking into account expectations of further deterioration of the Spanish economy in the short term, stubbornly high fuel prices, introduction of carbon credits on all flights in, to or from Europe, we have a hold rating on the stock. 

Petrofac (LON:PFC)

Petrofac published interim management statement for the period 1st January to 11th May 2012, last Friday. The backlog at the end of April 2012 stood at US$9.6bn compared to US$10.8bn at the end of FY 2010. Over the same period, net cash balances fell to US$1.0bn from US$1.5bn. Business developments since the beginning of the year include the US$330m project win from Gazprom, receipt of a capital project to undertake modification and upgrade works at a mobile operating production unit in offshore Peninsular Malaysia, and acquisition of KW Limited (a high-end subsea pipeline consulting and engineering services business). Commenting on the progress, CEO Ayman Asfari said that he was confident of delivering net profit growth of at least 15%in 2012 and of doubling recurring 2010 Group earnings by 2015. 

Our view: Petrofac is enjoying good growth in Abu Dhabi, Algeria and Turkmenistan. CEO Ayman Asfari said he sees a strong pipeline of bidding projects for the company in the Middle East, North Africa and the Commonwealth of Independent States. With a solid track record and high levels of backlog, the revenue visibility for Petrofac remains good. 

Centrica (LON:CNA)

Centrica issued an interim management statement, on Friday. Higher wholesale gas and power prices benefited the upstream operations and helped offset the impact of mild weather on the downstream business. The acquisitions in both UK and North America began to contribute and cost reduction initiatives have led to efficiency savings across the group. In the residential category, the number of energy customer accounts stands unchanged from the start of the year. Gas consumption was up 1% y-o-y over Jan to April while electricity consumption fell 3%. In the business category, average consumption was lower for both gas and electricity, at 1% and 4% respectively. Centrica warned that despite a 5% drop in electricity tariffs in January, by British Gas, the trend for retail energy costs remains upwards as wholesale gas prices are 15% higher for next winter. The management said that the company is trading in line with expectations. The residential category should deliver double digit profit growth, and the acquisitions in upstream gas and oil business would add 11mmboe of production in 2012, Centrica reported. 

Our view: We favour Centrica's strategy of developing upstream assets as it would shield the company from fluctuations in the price of imported gas and declining production from existing fields. In addition, the £500m cost reduction programme should improve operating margins. We have a buy rating for the company with a target price of 325p. (Please refer to our research note "A dozen for twelve" published 17th January 2012 for more details). 

The Markets

Market opening: Markets are set to open lower today. The FTSE futures were trading 39.5 points down at 7:00 am. 

New York: The S&P 500 rose 0.3% yesterday, after registering a continuous decline for two days. News of the €5.2bn aid to Greece and the US Treasury's budget surplus aided markets. 

Asia: Markets fell amid JP Morgan's US$2bn trading loss. The Nikkei closed 0.5% lower, while the Hang Seng was trading 1.3% down at 7:00 am. 

Continental Europe: Optimism over the near-resolve of the Greek political deadlock helped European markets. The German DAX and French CAC 40 closed 0.7% and 0.4% higher, respectively, yesterday. 

UK small caps: The FTSE AIM All-Share index closed 1.9% higher yesterday.

Today's news

JP Morgan loses US$2bn on flawed trade strategy 

JP Morgan incurred a loss of US$2bn in derivatives trading during the last six weeks. The company could possibly report another US$1bn in trading losses. CEO Jamie Dimon said the losses were due to flawed and poorly executed and monitored synthetic hedge. The revelation came after the market close. 

Moody's warns global banks 

Moody's is concerned about the tendency of global banks to leverage their balance sheets by taking on additional deBT and avoiding new capital requirement rules. The rating agency cited this as detrimental to the wider banking system. 

Chinese inflation eases in April 

China's CPI moderated to 3.4% in April from 3.6% in March. Rising food prices, a major concern, seems to be easing. Food inflation stood at 7.0% in April vis-a-vis 7.5% in March. With a slowdown in inflation, policymakers in China may consider relaxing the monetary policy to help propel growth. 

Company News

BT Group (LON:BTA)

BT Group announced results for the fourth quarter and the full year to 31st March 2012, yesterday. Underlying revenue, excluding transit, declined 2.0% y-o-y to £2.4bn for the quarter and 1.9% to £19.3bn for the full year. However, cost-cutting measures and rising popularity of BT Global Services, its broadband internet service, resulted in a rising profits. Adjusted profit before tax increased 13% y-o-y to £2.4bn for the quarter and 16% to £2.4bn for the full year. EBITDA was higher by 4% y-o-y to £1.6bn for the quarter and 16% to £6.0bn for the full year. CEO Ian Livingston commented that the company is doing well. It is investing in the business, has made a £2bn payment into the pension fund and received large orders at BT Global Services. Despite the economic and regulatory headwinds, BT is likely to deliver normalised free cash flow of above £2.4bn in 2014, he added. The management proposed a final dividend of 5.7p per share, taking the total dividend for the year to 8.3p, up 12%. 

Our view: BT continues to make significant strides. It achieved the EBITDA target (above £6bn) a year earlier than proposed. The cost cutting measures implemented to get the business into a leaner shape coupled with a focus on the fibre broadband network is helping BT earn higher profits and win new orders. In March, the company's deal with its pension trustees reflected strongly on its financial strength. Going forward, we believe focus will now shift to the healthy underlying business of BT and its fibre network, and we remain buyers of the stock. 

Dixons Retail (LON:DXNS)

Yesterday, Dixons issued a trading update for the 52 weeks ended 28th April 2012. Underlying sales on a like-for-like basis (LFL) contracted 3% for the year but was up 5% in the final quarter. The company enjoyed strong growth for its products in Northern Europe, throughout the year, while sales in UK & Ireland picked up pace only in the final quarter. Other areas, such as Southern Europe and PIXmania did not prove fertile, as they were impacted by continued difficult economic environment and supply issues following natural disasters. Gross margins dropped 0.3% for the full year and profit before tax is expected to be between £65m and £70m. 

Our view: Despite the headwinds in the Eurozone and increasing online competition, Dixons, which owns more than 1,200 consumer electronics outlets across Europe, is not doing badly. The company reported a strong end to the year, particularly helped by higher sales in the UK and Nordics. But, the company's Southern Europe business is facing trouble, having been impacted by the weak consumer sentiment. We fail to find the catalyst for a solid recovery in consumer demand across Europe, and the southern parts in particular, in the near future and are therefore very selective about investing in the retail sector. 

Experian (LON:EXPN) 

Credit data firm Experian reported earnings for the year ended 31st March 2012, yesterday. Total revenue increased 15% y-o-y to US$4.5bn from US$3.9bn in 2011. The top line growth was strong due to 33% y-o-y growth in Latin America and 18% growth in EMEA/Asia Pacific. EBIT margin expanded 50 basis points to 26.2% due to better margins in Latin America and North America. The company reported a 22.6% y-o-y increase in pre-tax profit to US$1,128m. Basic EPS for the year stood at US$0.67 versus US$0.49 in 2011. The management proposed a second interim dividend of US$0.22 per share, taking the full year dividend to US$0.32. CEO Don Robert said, the company would continue to deliver mid-high single-digit organic revenue growth, and maintain or improve margin in the future. Separately, Experian announced having signed an agreement to sell PriceGrabber, Classes USA and LowerMyBills to Ybrant Digital Limited, an Indian company for US$175m. 

Our view: Experian delivered a good set of results for 2012. We are particularly encouraged about the growth registered in Latin America, where Experian invested in new sources of data, broadened the product range and penetrated new customer segments. Further, with the acquisition of Computec in November, the company has been able to extend its credit bureau footprint to Colombia, Peru and Venezuela. Business in EMEA/Asia Pacific has also been healthy due to strong growth registered in digital marketing platforms. Experian's strategy of focusing on extending its global lead in the segments it operates seems to be working well. 

Wood Group (LON:WG.)

Wood Group released an interim management statement yesterday. The management informed that the company registered growth across all divisions and said it was confident in achieving full year performance in line with expectations. The engineering unit is enjoying high activity levels, particularly in upstream and is working on projects with Chevron, Anadarko, Williams Partners and Samsung. The PSN unit is witnessing robust activity in the UK and in the US due to provision of production support services to operators in the US shale regions. Even the GTS unit is expected to see good growth in EBITA, the company reported. 

Our view: Wood Group works across the globe, winning contracts in the US, Canada, Australia, UK, Russia, Malaysia and others. The current scenario of high energy prices is working as a boon for the company since it boosts the E&P capital expenditure and results in higher business for providers of high quality services in upstream, downstream and subsea & pipelines like Wood Group. The company is also benefiting from the recent surge in liquids focused US shale activity. 

Barratt Development (LON:BDEV)

Yesterday, Barratt Development issued an interim statement for the 18 weeks from 1st January to 6th May 2012. Average weekly number of private reservations rose by 25.3% y-o-y in the period to 248 and the average selling price increased by 5% y-o-y to £202,000. While the increase in reservations was driven by higher sales rates per site and increased site numbers, the improvement in price came from greater robustness in London and the South Eastern markets. The cancellation rate for the period was 15.4%, lower than the 16.1% seen in 2011. Forward sales, representing the value of booked sites that are yet to be completed, increased 16.1% on the prior year to £827.9m. CEO Mark Clare said that strongest spring selling season in five years and stable pricing environment should enable the company to improve profitability and cut deBT. Further, investment in new land would enable the company to shift away from older, lower margin land and drive profitability higher, Mr Clare claimed. 

Beazley (LON:BEZ)

Beazley issued an interim management statement for the three months ended 31st March 2012, yesterday. CEO Andrew Horton said business has been good. Gross written premiums increased 9% y-o-y to US$465m and premium rates on renewal business increased 2%. The increase in gross written premiums was a result of growth in life, accident and health, political risks and contingency and specialty lines. The positive change in premium rates came largely from property and reinsurance. Investment income for the three months ended 31st March 2012 was US$19.3m, a return of 0.5%. The company further reported that during the quarter, it launched three new products - Beazley Breach Response, Beazley Global Breach Solutions, and Beazley Bridge - and further augmented its product portfolio. 

Economic News

UK BoE interest rate announcement 

The Bank of England (BoE) held its base interest rate unchanged at 0.5% on Thursday and did not extend the quantitative easing programme (QE). 

Our view: With stubbornly high inflation the BoE was not left many other options but to keep rates were they are, and further QE would most likely just fuel inflation even more. To be able to meet its core purpose of monetary stability and with inflation around 3.5% the BoE could argue for raised rates. However, that would be a hard sell politically and the BoE is unlikely to pursue this path anytime soon. On the contrary, if the economic data continues to show weak performance, the BoE is likely to resort to additional QE in the near future and push inflation higher again. 

UK industrial & manufacturing production

The Office for National Statistics (ONS) released the UK industrial & manufacturing production, yesterday. Industrial production was down 0.3% in March after rising 0.4% in February, in line with the forecasts for a fall of 0.3%. The decline in industrial production was a result of lower oil and gas extraction and electricity output. On the other hand, manufacturing production rose 0.9% in March after contracting 1.1% in February, versus forecasts for a rise of 0 .5%. The rise in manufacturing was driven by chemicals and chemical products, transport equipment and computer, electronic and optical products. 

Our view: The decline in industrial production and a rise in manufacturing provide mixed signals. Though a deepening of the Eurozone crisis does concern us, more importantly, adding the recent spate of weak data on UK PMI and UK home prices, we feel that the UK economy could again be in trouble. 

US trade balance

The US trade deficit widened to US$51.8bn in March from US$45.4bn in February, as per data from the Department of Commerce. The trade deficit for February was revised downwards from the previous estimate of US$46bn. Economists were expecting a deficit of US$50bn for March, but a surge in imports played spoilsport. In March, US imports climbed 5.2% m-o-m to US$238.6bn and exports increased 2.9% to US$186.8bn. 

Our view: Widening of the US trade deficit was mainly due to higher imports of petroleum products and shipments from China. While the price of oil per barrel was higher by 4.2% m-o-m in March, petroleum imports rose 5.3% during the month. US' trade deficit with China also expanded to US$31.5bn in March from US$28.1bn in February. Though both factors are a cause for concern, rising exports of industrial supplies and materials, capital goods and automotive vehicles from the US are considered positives. 

UK NIESR GDP estimate

The UK economy grew by 0.1% in the three months ending April, according to the National Institute of Economic and Social Research estimate. The economy had fallen into a recession in the first quarter, but is likely to be 'flat' for the next six months due to a modest increase in economic activity as visible in the recent data like the UK manufacturing output, the institute said. 

US import price index

US import prices contracted 0.5% m-o-m in April as against an increase of 1.3% in March, as per the Labour Department's data. Economists were expecting import prices to fall 0.2% in April. Over the last 12 months, prices gained 0.5% vis-a-vis economists' expectation of a 0.8% rise. 

US monthly budget statement

The US Treasury posted a budget surplus of US$59.1bn in April compared to a deficit of US$40.4bn in March. The reported figures surpassed economists' estimates of a surplus of US$30bn for April by a wide margin. An increase in tax receipts coupled with a decline in government spending helped the US Treasury report its first budget surplus since September 2008. 

The Markets

Market opening: Markets could open mixed today. The FTSE futures were trading 2.5 points up at 7:00 am. 

New York: The S&P 500 continued its downward trend for the second day, closing 0.7% lower yesterday, amid the political deadlock in Greece and concerns over the rest of the Eurozone. 

Asia: Asian markets opened lower on Greek concerns. However, Japan's Nikkei 225 later rebounded and closed 0.4% lower, while the Hang Seng was trading 0.9% down at 7:00 am. 

Continental Europe: Rising concerns about Spanish banks and Greek political issues weighed on investor sentiment. The German DAX closed 0.5% higher on last minute buying yesterday, while the French CAC 40 declined 0.2%. 

UK small caps: The FTSE AIM All-Share index closed 2.1% lower yesterday. 

Today's news

Spanish government takes over Bankia 

The government has taken a 45% stake in Bankia, the country's third biggest bank in terms of assets. With this, the government is not just trying to shore up the trodden financial sector, but is also dispelling concerns the country would require a bailout. 

Greece to receive €5.2bn in aid 

The European Financial Stability Facility, the €700bn bailout fund, agreed to authorise a payment of €5.2bn to Greece as emergency assistance for near-term bond redemptions and other obligations. 

Slowing exports from China 

China reported a trade surplus of US$18.4bn in April vis-a-vis US$5.4bn in March. Exports increased 4.9% y-o-y in April compared to the 8.9% rise in March. Import growth was a mere 0.3% relative to 5.3% in March. 

Company News

Balfour Beatty (LON:BBY) 

Balfour Beatty issued a trading update for Q1 2012 yesterday. The company's order book stood above £15bn, as higher orders were received for professional services and support services. The construction services order book was slightly lower than in December 2012, due to weakness in the US and UK construction markets. The infrastructure investments are performing in line with expectations. The management was positive about achieving the targeted annual cost savings of £30m by 2013 and an additional £50m a year by 2015. However, the benefits of restructuring are expected to be visible only in 2013. The management acknowledged that the UK construction market remains challenging while the US market is showing signs of recovery. The company remains on track to make progress in FY2012, they added. 

Our view: Despite being faced with a challenging construction market in the UK, Balfour Beatty has been able to maintain its order book above £15bn through wins in the Middle East and expansions of offerings. Also, the company expects to benefit from the firming recovery in the US. The exposure to Australia and Canada and the planned entry into Indian and Brazilian markets are expected to drive growth in the future. Further, the management's focus on costs should ensure top-line growth is translated into profitability. 

InterContinental Hotels (LON:IHG)

InterContinental Hotels declared results for Q1 2012 ended 31st March 2012 yesterday. Operating profit grew 5.3% to US$118.0m on revenue of US$409m, 3.3% higher y-o-y and in-line with consensus. Underlying EPS jumped 8% to US$0.26. The management said global revenue per available room (RevPAR) increased 7% in Q1 2012 driven by improved performance in China and the US. The RevPAR in China and the US jumped 11.9% and 7.6%, respectively. Occupancy grew 2.1%. The total system size, a measure of available rooms, increased 1% y-o-y. During the quarter, the company introduced two new brands - Even, in the US and Hualuxe, in China. Capital expenditure in Q1 2012 amounted to US$21m compared to guidance of US$150m in maintenance capex and US$100m-200m in growth capex. The trend of Q1 2012 performance continued into April, when RevPAR was up 6.1%. The management expects the London Olympics to have a 'neutral' impact on the hotel's performance. 

Our view: The recovery in the US markets (60% of revenue) and the aggressive expansion plans in China (13% of revenue) are expected to support future growth and InterContinental plans to double its operations in China, India and the Middle East, to cater to travellers from the region's burgeoning middle classes. The company mostly relies on the franchise model, where it partners with hotel owners, saving the company the heavy capital expenditure and making the business model highly cash generative. The strong balance sheet ensures availability of adequate resources to fund expansion plans and we believe the company is poised to profit from the recovering US consumer and growing Chinese middle class. 

J Sainsbury (LON:SBRY)

J Sainsbury released preliminary results for the 52 weeks ended 17th March 2012 yesterday. Revenue (including VAT) grew 6.8% to £24.5bn and like-for-like sales (including VAT, excluding fuel) increased 2.1%. Underlying pre-tax profit rose 7.1% to £712m, with underlying basic EPS rising 6% y-o-y to 28.1p. The return on capital employed stabilised at 11.1%. The management highlighted delivering more than £100m in operational cost savings. Floor expansion will slow down to 5% in 2013 from 7% in 2012, cutting capital expenditure to £1bn from £1.2bn. The management said they are shifting focus towards smaller stores and refurbishing existing stores. It proposed a dividend of 16.1p, up 6.6% from the previous year. 

Our view: Sainsbury's FY2012 revenue exceeded market expectations. Its 'Brand Match' price scheme and the 'Live Well For Less' advertisement campaigns have been successful in attracting and retaining customers. The reduction in capital expenditure is expected to help the company fine-tune availability of space in accordance to shoppers needs. The lack of expansion beyond the UK seems to have helped the retailer maintain a sharper focus on consumer needs enabling it to outperform its peers. Also, we expect Sainsbury to capitalise on the problems at rival Tesco and are buyers of the stock. 

Sage Group (LON:SGE)

Sage published results for H1 2012 ended 31st March 2012 yesterday. Reported revenue was flat at £673.1m but underlying revenue increased 2% to £661.2m. Subscription revenue expanded 5%, compensating for the 4% contraction in revenue from software and software related services. Underlying EBITDA grew 1% to £180.9m while the EDITBA margin remained flat at 27%. Pre-tax profit was £167.1m, up 3% y-o-y. EPS increased 3% to 9.06p. The company was able to add 129,000 new customers vis-a-vis 131,000 customers added in H1 2011. The renewal rate remained stable at 81%. The economic headwinds in the Eurozone raise the risk associated with recessions in the UK and France, the management said and continued to propose a 30% increase in the interim dividend to 3.48p per share. 

Our view: Sage's customers, small and medium business owners in the Eurozone, are particularly vulnerable to economic situation in the region. Sage earns around 60% of revenue from Europe and the company's top-line faces risks due to concentration on the European markets. The number of clients signing up with Sage also declined compared to the previous year. The shift in focus to subscription-based sales offers greater revenue visibility and is a step towards building a more resilient business model, but we miss a convincing cloud strategy. And the changed revenue model has resulted in slower revenue growth. Despite recent takeover rumours, with the diminishing pace of growth and the economic turmoil in Europe we prefer to remain on the sidelines. 

Weir Group (LON:WEIR)

Weir released an interim statement for the period covering 31st December 2011 to 8th May 2012, yesterday. The management said the strong performance during the period put the company on track to achieve full year guidance. Orders increased 5% on a like-for-like (LFL) basis. Orders for original equipment grew 1% on LFL basis and 9% for aftermarket sales. Mining and power orders increased 18% and 27% respectively. However, orders at the oil and gas division, a third of group revenue and almost half of earnings, declined 26%. The management envisages the minerals, power and industrials division will compensate for the structural shift in the pressure pump market of the oil and gas division. 

Our view: Weir's oil and gas division faced order cancellations as oil and gas companies chose to pump liquids out of shale reserves after gas price plunged as a result of oversupply. Extraction of liquids takes less intense fracking of sand and chemicals. The management called this phase 'transitional'. However, orders at the minerals and power division remained strong, enabling the management to maintain full year guidance. Nonetheless, the management's cautious tone regarding the rapidly changing pressure pump market and the current economic scenario puts us on guard. 

Economic News

German trade balance 

Trade balance in Germany was stable at €13.7bn in March, following an upward revision to the figure for February to €13.7bn from €13.6bn, as reported earlier. Exports expanded 0.9% m-o-m to €91.8bn and imports rose 1.2% m-o-m to €78.1bn. 

Our view: Economists expecting exports to shrink 0.5% in March were surprised by the increase. Growing demand from the US and Asia buoyed German exports. However, exports to the EU shrank 3.6% y-o-y. The slump in exports to Germany's largest trading block raises doubts about the sustainability of the momentum in exports. However, domestic demand remains strong, as evident from the increase in imports. 

US wholesale inventories

Inventories at US wholesalers rose 0.3% in March vis-a-vis market expectations of 0.6%. As per data released by the Commerce Department, inventories grew 0.9% in February. Sales registered by wholesalers were higher by 0.5% compared to the 1.1% increase in February. Inventories of durable goods surged 1%, while sales declined 0.6%. Inventories and sales of non-durable goods fell 0.6% each. 

Our view: Weaker inventory build-up was due to the 5.9% decline in petroleum stocks, the biggest fall since May 2010. We believe this was due to lower crude oil prices. It also indicates companies have been reluctant and/or deferring purchases after having engaged in a large amount of stock purchases at the far end of last year. An increase in the purchase of durable goods by wholesalers was considered a positive. 

German current account

German current account recorded a surplus of €19.8bn in March, building on the €11.7bn surplus registered in February. Economists expected the current account surplus to stand at €18.0bn. 

US MBA mortgage applications

As per the Mortgage Bankers Association, the index of mortgage applications, which includes demand for refinancing and home purchase loans, expanded 1.7% for the week ended 4th May, after a slight rise of 0.1% the previous week. The index of refinancing applications and loan requests for home purchases increased 1.3% and 3.4%, respectively. The current reading implies an improving US housing market. 

The Markets

Market opening: Markets could open higher as investors overlook the concerning headlines from Greece and scout for buying opportunities after yesterday's fall. The FTSE futures were trading 22.5 points up at 7:00 am. 

New York: Though Wall Street recovered from the lows, S&P 500 closed 0.4% lower yesterday as the sentiment was impacted by the political disarray in Greece. 

Asia: Emergence of the Leftist candidate seeking to nullify Greece's bailout deal, leading to the country's possible exit from the EU, weighed on markets. The Nikkei closed 1.5% lower, while the Hang Seng was trading 0.9% down at 7:00 am. 

Continental Europe: The political turmoil in Greece raising doubts about its commitment to the bailout deal with the EU and IMF kept investors on the edge. Yesterday, the German DAX and French CAC 40 plunged 1.9% and 2.8%, respectively.. 

UK small caps: The FTSE AIM All-Share index closed 2.2% lower yesterday.

Today's news

Leftist Greek PM aspirant seeks to nullify EU/IMF bailout deal 

Greece's leftist leader, Alexis Tsipras, is expected to meet mainstream parties today to garner support for the formation of a coalition government. His primary condition is nullifying the bailout deal with the EU/IMF. However, Tsipras' chances of succeeding are slim as his pre-condition was rejected by Greece's New Democracy party leader, Antonis Samaras, who stressed the nullification could force Greece to exit the Eurozone. His disagreement further increases the probability of the country facing another election in the next 3-4 weeks, raising questions about the next bailout tranche. 

Aviva CEO quits as shareholder activism increases 

Aviva's CEO, Andrew Moss, resigned as 59% shareholders voted against his pay package rise. Moss is the third CEO to quit, after those at Astra Zeneca and Trinity Mirror, as shareholders expressed concerns over the growing gap between corporate performance and pay. 

Company News

Hiscox (LON:HSX) 

In an interim statement for Q1 2012, Hiscox said gross written premiums (GWP) declined slightly to £450.7m vis-a-vis £453.5m in Q1 2011. GWP for the UK markets grew 3.4% to £89.1m as strong growth and higher retention offset the cancellation of the contract with Bluefin at the end the last year. In the quarter, the company's investment result was 1.3%. The investment portfolio totalled £2.9bn and the asset allocation remained largely unchanged. The management said they kept some re-insurance capacity unutilised in anticipation of better rates in the near future. The renewal rate in April was above expectations, they added. 

Our view: The cancellation of the underperforming contract with Bluefin has had a limited impact on the company's operations in the UK. However, with both the US Federal Reserve and the Bank of England sticking to low interest rates for the near-term, the returns on the company's investments in sovereign bonds is expected to be subdued. Also, the corporate bond market is exposed to the current volatility in the financial markets. Nonetheless, reinsurance rates continue to improve and the management is reserving some re-insurance capacity in anticipation of even better rates in the near-term. We believe the management's optimistic view balances the muted returns on the company's portfolio, prompting us to maintain a hold rating on the stock. 

HSBC Holdings (LON:HSBA)

HSBC released results for Q1 2012 yesterday. Operating revenue was flat at US$20.4bn. Pre-tax profit climbed 25% y-o-y to US$6.8bn. The underlying cost-efficiency ratio improved to 55.5% from 58.7% in Q1 2011. A US$2.6bn accounting charge related to the bank's debt caused net profit to shrink to US$2.6bn from US$4.2bn in Q1 2011. Impairment charges were broadly flat at US$2.4bn. The return on equity, excluding the accounting charge, was 11%. Return on equity, including the write-down on debt was 6.4%. The core tier 1 ratio stood at 10.4% at the end of March more than the 9.0% level prescribed by the European Banking Authority. The bank set aside another US$468m as provision to compensate for payment protection insurance miss-selling. Revenue at the investment banking arm increased 7.6% to US$5.6bn and pre-tax profit climbed 5% to US$3.1bn. The management said the performance in April was satisfactory. 

Our view: Like its peers, profits at HSBC were affected by the write-down of debt. Despite flat revenue, the bank's focus on reducing costs has helped improve the underlying cost- income ratio and improve profitability. CEO Stuart Gulliver is targeting savings of around US$2bn in expenses by FY2012 end. HSBC enjoys a stronger balance sheet than most peers and the US operations are stabilising, as visible from the reduction in the provision for bad loans. This is expected to lift the pressure off earnings. In addition, the restructuring of the business in favour of emerging markets is expected to renew opportunities for growth. 

Telecity (LON:TCY)

Telecity released a trading update for Q1 2012 yesterday. The company reported a good start to FY2012 with growth in revenue and profitability despite the weakness in the Euro and the Swedish Krona. New capacity addition of 7MW increased total consumer power availability by 10% to 75MW. The total secured growth capacity across Europe is 124MW. Telecity said that it recently opened the first phase of its site expansions at London Powergate and Gutleutstrasse in Frankfurt. The management kept their positive outlook for 2012 unchanged and re-iterated that the company's maiden dividend will be paid out with H1 2012 results. 

Our view: The growing consumer demand for data centres is expected to fuel growth at Telecity. Telecity's planned capacity additions are expected to increase its consumer power availability by about two-thirds, helping it to cater to the growing demand for data centres in Europe. With ample room available for growth, we remain buyers of the stock. 

TUI travel (LON:TT.)

TUI travel issued interim results for the six months ended 31st March 2012, yesterday. The company reported revenues of £5.4bn for H1 2012, higher by 5% y-o-y. The revenue growth largely came from higher volumes and average selling prices. Yet, the operating loss for the company increased to £317m in H1 2012 from £307m in H1 2011. Taking into consideration, amortisation of business combination intangibles, acquisition related expenses, predecessor accounting for Magic Life, the operating loss widened to £407m in H1 2012. Factors responsible for losses were lower bookings for North African destinations and Thailand, and poor performance by the French business, where the operating loss jumped to £61m from £39m. However, the above were partially offset by good performance in the UK & Ireland businesses. CEO Peter Long said overall trading for summer 2012 was good with booking volumes well ahead of last year across all markets like Poland, Germany, Netherlands, the UK and Nordic region, but France. The Board proposed an interim dividend of 3.4p per share. 

Our view: The European travel industry continues to be subdued by poor economic and political climate at both source and destination markets. The double whammy of fragile economic environment in Europe and the unstable political climate in travel destinations like North Africa is delaying travellers and places negative pressure on travel business. Though, TUI travel seems to be better placed than rivals like Thomas Cook, we are very cautious with investing in the sector and maintain our hold rating. 

Vitec (LON:VTC)

Yesterday, the Vitec Group issued a trading update for the period 1st January 2012 to 7th May 2012. The management reported that business during the first four months of the year was in line with expectations. The Videocom division is doing well thanks to strong performance of the broadcast business. The Imaging & Staging division is giving a mixed performance. While the "Manfrotto Powerbrand" products is continuing to increase market share in the US and Europe; business at Staging division remains weak. The Services division made a good start to the year and is likely to benefit from the London 2012 Olympics. Vitec also announced that it recently acquired UK-based Camera Corps Ltd, a provider of specialty remote camera systems used by broadcasters, for approximately £8.0m. The management maintained its full year guidance. 

Economic News

UK RICS home prices 

The Royal Institution of Chartered Surveyors' (RICS) house price index slumped to -19 in April from -11 in March marking the sharpest fall in the past six months. 

Our view: Economists expected the RICS house price index to stabilise at -11 in April. However, the decline in the index puts its findings in line with the Halifax and Nationwide surveys released last week. All three indices indicated that house prices fell in the UK as the expiration of the stamp duty in March caused buyers to advance house purchases and the resulting drop in demand in April kept a lid on prices. With the outlook for the drivers of the housing market (such as consumer income and credit availability) still muted, the market seems some way from bottoming out. 

German industrial production

Industrial production in Germany expanded 2.8% m-o-m in March rebounding from a 0.3% decline in February. The surge in industrial activity was largely due to the 30.7% increase in construction activity, reversing the 16.9% drop in February caused by an unusually harsh winter. The manufacturing output grew 1.5%. However, energy production contracted 1.8% in March. 

Our view: The pick-up in industrial activity was more than the 0.8% rise expected by economists. The expansion in industrial production suggests that the German economy is recovering from the winter-related slowdown seen at the beginning of the year. The expansion also raises hopes that the economy may have missed a technical recession in Q1 2011. However, manufacturing PMI falling to a 33-month low in April indicates an uneven recovery in industrial output. The fall in orders from recession-hit Eurozone may not be adequately compensated by the increase in orders from rest of the world. 

US NFIB small business optimism

The National Federation of Independent Business' (NFIB) optimism index expanded to 94.5 in April from 92.5 in March. The index measures optimism among small businesses. The rise was driven by stronger q-o-q sales trends and profits. The sub-indices presented a mixed picture, with the outlook for real sales decreasing 2% to 6%, while the index of expected earnings climbed 11% to -12%. The outlook for the next six months remains positive as its sub-index rose 3% to -5%, whilst the outlook for job creation increased to 5% from 0% in March. 

Our view: The rise in small-business optimism was larger than the 93.0 expected by economists. However, the index remains at the level witnessed in February 2011, signifying no gains over the past year. A larger number of small businesses reporting higher sales and profits, and a stronger inclination toward hiring bode well for the US economy. 

US IBD/TIPP economic optimism

The economic optimism index shrank 0.8 points to 48.5 in May from 49.3 in April, the Investor's Business Daily (IBD) and TIPP, a unit of TechnoMetrica Market Intelligence, said yesterday. The gauge of consumer outlook for the next six months declined to 50.4 from 52.1 the previous month. However, Americans have an upbeat outlook about their personal finances as indicated by the 1.5 points rise in the personal-financial index to 56.3 in May. Economists expected the headline index to pull back to 48.0 in May. 

The Markets

Market opening: The FTSE futures, trading 1p up at 7:00 am, point towards a flat opening for the markets as investors cautiously monitor the political imbroglio in Greece. 

New York: Wall Street opened negatively as weak labour data from the US and Europe weighed on investor sentiment. Strong buying in the banking sector helped the S&P 500 recover earlier losses to close unchanged. 

Asia: The Spanish government rallying behind the nation's banks helped markets rebound after Monday's lows. However, concerns about Greece continued. The Nikkei rose 0.7%, while the Hang Seng was trading 0.1% up at 7:00 am. 

Continental Europe: Markets expressed uncertainty on the failure to form a new government in Greece. The victory of Francois Hollande as France s President offered some respite as he quickly set out to build relations with Germany s Angela Merkel. The German DAX closed 0.1% up and the French CAC 40 expanded 1.7% yesterday.

UK small caps: The London Stock Exchange was closed yesterday. 

Today's news

Spain to bailout troubled banks 

Spain plans to inject €7bn - €10bn into Bankia, its third biggest bank in terms of assets. An IMF report on 25th April singled out Bankia Group as the largest risk to stability in the Spanish banking sector. Prime Minister Mariano Rajoy said the government, if required, would inject public funds to reactivate credit and save the financial system. 

Greece to hold re-elections in June 

Greece is preparing for a repeat general election after it failed to form a new government. Failure of the two main parties, New Democracy and Pasok, to win a majority is a cause for concern amid deteriorating economic situation and voters favouring anti-austerity drives. The repeat election is scheduled for 17th June. 

Company News

easyJet (LON:EZJ) 

easyJet said it flew 5.1m passengers in April, 8.6% higher y-o-y. In the past twelve months, the number of passengers flying easyJet increased 7.1% to 56.2m. The load factor improved 280 basis points to 89.3% in April. It was higher by 100 basis points to 88.2% for the twelve months to April. 

Our view: Cash-strapped passengers are attracted to easyJet's low cost proposition, which has helped the company consistently increase passenger numbers and improve seat utilisation. We believe easyJet's business model will thrive under the current pressing economic conditions and have a buy rating for the stock. 

Royal Bank of Scotland (LON:RBS)

Royal Bank of Scotland released results for Q1 2012 ended 31st March 2012 on Friday. Revenue declined 12.1% to £7.1bn. Operating profit increased to £1.2bn reversing the £144m loss in Q4 2012, and slightly ahead of the £1.1bn operating profit in Q1 2011. The £271m restructuring plan at the investment banking divisions is yielding results as the division recorded operating profits of £824m compared to a loss of £109m in Q4 2011. Operating profit at the retail banking division was up 4% q-o-q to £477m. However, net losses amounted to £1.52bn compared to a loss of £528m in Q1 2011 as a result of an accounting charge of £2.46bn related to the bank's debt. RBS reported reducing its balance sheet as non-core funded assets declined £11bn to £83bn and short-term wholesale funding was reduced to £80bn from £103bn. The funded balance sheet is now £27bn lighter at £950bn. CEO Stephen Hester said the bank will complete the repayment of the £164bn emergency loans granted by the UK and US government by mid-May. The bank re-instated dividend payment to some of its preference shareholders. 

Our view: RBS is on-track to turnaround after the 2008 crisis left the bank part nationalised. Soon, the bank will have repaid taxpayers' bailout funds. However, with the share price languishing at about 50% of the acquisition cost to the government, the sovereign shareholding is not expected to decline anytime soon blocking the bank's way back to private hands. Also, though the bank has taken steps to restart dividend, payout to common shareholders will take at least a year more as regulators tighten capital requirements. 

Rolls-Royce (LON:RR.)

On Friday, Rolls-Royce said trading in Q1 2012 was in line with expectations. The company expected underlying growth in revenue and profitability during the year. Cash flow is expected to be near break-even as investment in technology and facilities rise. The strong balance sheet prompted the S&P to upgrade RR's bond rating to A/A-1 with a stable outlook. During Q1 2012, the company's Trent XWB engine completed its first test flight attached to an Airbus A380. The Trent XWB is believed to be one of the most efficient civil aircraft engine in the world. During the quarter, Rolls-Royce also opened a new manufacturing and training facility in Singapore. 

Our view: The yearend order book stood strong at £62.2bn, with about half of the orders coming from the emerging markets. The boom in the civilian aviation sector in emerging markets along with soaring fuel costs has nurtured the demand for RR's fuel efficient engines. The division accounts for about 45% of total revenue and is expected to be the growth driver going forward. The ratings upgrade by S&P vouches for the strength of the company's balance sheet. Considering these factors, RR remains one of our picks for 2012 (see our 17 January 2012 note for full details). 

Rentokil Initial (LON:RTO)

Rentokil Initial released Q1 2012 results on Friday. Revenue increased 2.4% to £624.4m due to strong performance from recent acquisitions. Adjusted operating profit declined 10.5% to £33.3m as the losses at the City Link division increased 18.7% to £12.7m. Pre-tax profit stood at £13.4m compared to £5.4m in Q1 2011, when it recorded a one-off £4.8m charge related to suspension of operations in Libya. The management expects City Link to suffer further during the London Olympics as re-routing/traffic restrictions affect deliveries at the parcel division. But they expect the business to be close to break-even in H2 2012. The company is also holding talks with the Libyan authorities for the resumption of the contract to exterminate rats. It has restarted its commercial operations there. 

Our view: Rentokil's City Link division continues to be a drag on profits and the management expects further losses due to the London Olympics. Their best estimate is for the division to be near break even by H2 2012. With City Link expected to erode Rentokil's profits for some time, we have a sell rating for the stock. 

Lancashire Holdings (LON:LRE)

Lancashire Holdings announced results for Q1 2012 ended 31st March 2012 on Friday. Gross premiums written grew 36.1% to US$234.0m. Pre-tax profit jumped to US$46.5m from US$8.4m in the previous year. The combined ratio decreased to 74.0% in Q1 2012 from 97.4% the year ago, but increased compared to 73.1% in Q4 2012. CEO Richard Brindle said the US$34.1m claims costs due to the Costa Concordia accident impacted the combined ratio. The fully converted book value per share grew to US$7.78 from US$7.50 at 31st March 2011. The return on equity increased to 3.4% from 0.4% in Q1 2011. Q1 2012 dividend was maintained at US$0.1 per share. 

Economic News

UK Halifax house prices 

Halifax said house prices fell 2.4% to £159,883 in April, eroding the 2.2% gain registered in March. House prices declined 0.5% y-o-y in April. In the three months to April, house prices retreated by the same degree. 

Our view: The Halifax survey concurred with the Nationwide survey released on Thursday, with both surveys indicating that buyers advanced house purchases to take advantage of the stamp duty exemption which expired during March. With stringent lending norms leading to a fall in mortgage approvals and a subdued outlook for rise in consumer incomes, the housing market is expected to be muted in the near term. 

Eurozone retail sales

Retail sales in the Eurozone grew 0.3% m-o-m in March supported by stronger than expected demand in France and Germany, where retail sales climbed 0.9% and 0.8% respectively, the Eurostat reported on Friday. Retail sales, however, were down 0.2% y-o-y. 

Our view: Retail sales surprised economists expecting no change m-o-m and a 1.1% decline y-o-y. However, the monthly increase was mainly due to a pick up in stronger economies of Germany and France. Retail sales continued to contract in most other members of the Eurozone. The shrinking labour market and the respective government's austerity plans are eating into consumer incomes and eroding consumer confidence making it unlikely for the monthly increase in retail sales to gain momentum. 

US non-farm payrolls

Non-farm payrolls in the US increased by 115,000 in April after adding a revised 154,000 (120,000 reported earlier) jobs in March, the US Department of Labor said on Friday. A combined 53,000 more jobs were created in February and March vis-a-vis the initial estimates. The private sector added 130,000 jobs, while that in the public sector declined by 15,000. Manufacturers' payrolls increased by 16,000, the smallest in five months. Retailers added 29,300 jobs, but the construction sector continued to cut payrolls for the third consecutive month. 

Our view: The expansion in non-farm payrolls was lower than the 160,000 expected by economists. However, an upward revision to the data for February and March is a bright spot. Nonetheless, average jobs added per month in March and April stood at 134,500, well below the average monthly addition of 252,000 in January and February. The unusually warm weather during the first two months of the year aided hiring. Consequently, the diminishing pace of hiring in March and April seems more like a consolidation of the labour market than an outright loss on momentum. 

US unemployment

The unemployment rate in the US slipped to a three-year low of 8.1% in April from 8.2% in March, the US Department of Labor said on Friday. The underemployment rate remained unchanged at 14.5%. Average hourly income was unchanged m-o-m, but up 1.8% y-o-y at US$23.38. The average workweek also remained steady at 34.5 hours. 

Our view: Economists were expecting the unemployment rate to stabilise at 8.2% in April. The moderate increase in payrolls suggests the unemployment rate retreated as more people stopped looking for a job rather than any significant underlying improvement in the labour market. The US Fed estimates the unemployment rate to decline to 7.8 8.0% during 2012. 

Eurozone and German PMI

The final reading of the composite purchasing managers' index (PMI) for the Eurozone stood at 46.9 points, weaker than the preliminary reading of 47.4 and 1 point lower than March reading, Markit reported on Friday. The agency said, German services PMI edged up to 52.2 in April from 52.1 in March, but was lower than the preliminary reading of 52.6. 

The Markets

Market opening: Markets could open lower as investors appear cautious ahead of US jobs data to be released today. FTSE futures were trading 22.5 points down at 7:00am. 

New York: Weak services raised concerns about a slowdown in the US economy. The S&P 500 shed 0.8% yesterday as investors turned cautious. 

Asia: Decelerating expansion in the US services sector fanned fears of a faltering economic recovery. ECB's upbeat economic outlook for the Eurozone dashed hopes of further monetary stimulus, dampening the sentiment. The Hang Seng was trading 0.7% down at 7:00am. Tokyo was closed for the day. 

Continental Europe: Markets gave up initial gains after the ECB decided to hold fire and kept interest rates unchanged. Weak data from the US added to the gloom. The German DAX fell 0.2% and the French CAC 40 closed 0.1% lower yesterday. 

UK small caps: The FTSE AIM All-Share index ended 0.2% lower yesterday. 

Today's news

RBS to announce repayment of government loans - Reuters 

The Royal Bank of Scotland, of which the British government holds 82%, is likely to announce the completion of the repayment of £164bn it received in emergency loans from the UK and US governments together with its Q1 2012 results today, Reuters quoted sources familiar with the matter. This includes the repayment of £36.6bn to the BoE and US$84.5bn to the US Fed. 

Shareholders reject Aviva's pay report 

Shareholders voted down the insurance company Aviva's compensation report, making it the fourth FTSE 100 company ever to suffer such ire from shareholders. Nearly 54% of all shareholders who voted, cast ballots against Aviva's 2011 pay report. 

Company News

Antofagasta (LON:ANTO) 

In a production report for Q1 2012 released yesterday, Antofagasta said copper production rose 25.5% y-o-y but declined 12.9% q-o-q to 162,900 tonnes. The q-o-q decline was due to maintenance work and lower grades at the Los Pelambres mine, Chile. In February and March, damage to the conveyor belt at the Esperanza mine lowered throughput. Gold production increased to 63,500 ounces from 22,100 ounces in Q1 2011. The management expects production of copper from the Esperanza mine to be at the lower end of the 160,000 to 175,000 tonnes range specified earlier. Gold production is also expected to come in at the lower end of the forecasted 240,000 to 260,000 ounces range. Group cash cost at US$0.981 per pound were 9.0% lower y-o-y, but in line with the US$0.973 in Q4 2011. The management further informed that the Antucoya mine is expected to commence production in H2 2014 and the development costs are expected to escalate to US$1.7bn from the US$1.3bn budgeted initially. 

Our view: Antofagasta is still to find a full time CEO and is being run by majority shareholder and Chairman Jean-Paul Luksic, creating a possible leadership vacuum. Like the rest of the mining industry, the company is facing escalating labour and power costs that has caused the construction costs at the Antucoya mine to shoot up by around a third. This is expected the strain cash flows and delay break-even. Additionally, production declined during Q1 2012 due to disruption at the Esperanza mine, which is just one year old, which is concerning. Though the management maintained the guidance, production is expected to be at the lower end of the range. These factors coupled with a weak production report warrants downward revisions to estimates. 

Diageo (LON:DGE)

Diageo released an interim statement for Q3 2012 yesterday. In the quarter, reported sales grew 11%, of which organic sales growth was 6%, with organic volume growth of 3%. For the nine months to 31st March 2012, sales increased 9%, with organic sales and volume increasing 7% and 3% respectively. Organic sales in Latin America and the Caribbean improved 18% and in the Asia Pacific region sales expanded 10%. Growth in Africa and America was 12% and 5%, respectively, whilst European sales contracted 1%. The management said the weakness in the US dollar could adversely impact FY2012 profit by around £25m. 

Our view: Diageo's presence in emerging markets (about 40% of sales) and the recovering American markets is driving growth, offsetting shrinking European sales. The performance in Q3 2012 puts the company in a comfortable position to achieve the targeted 6% organic revenue growth. Considering the robust organic and acquisitions-driven growth, we see scope for upward revisions to forecasts. (Please refer to our research note published on 22nd March 2012 for more.). 

Legal & General (LON:LGEN)

Legal & General released a trading update for Q1 2012 yesterday. Sales on an annual premium equivalent basis were flat at £434m. Assets under management at the investment management division increased 3% to £383bn as net inflows swelled to £2.6bn. Sales of savings products in the UK declined 6% to £300m. The management blamed the weak economic environment for the underperformance of the product. Sales at the international division increased 37% to £56m, driven by term assurance products. The company continued to witness strong institutional flows in April. However, the retail investment environment remained challenging. Nevertheless, the management remained confident about growth for the rest of the year. 

Our view: Despite the weak performance in the UK, the management outlook is confident. Regulatory changes, such as auto enrolment into pension schemes, to be effective from October this year, is expected to benefit the business as both enrolled population and number of schemes offered grows. With one of the stronger balance sheets in the industry, L&G shares are priced attractively (trading at 2012 P/E of 7.7x), with a well-covered dividend yield (6.1%) attached. 

Smith & Nephew (LON:SN.)

Smith & Nephew announced results for Q1 2012 ended 31st March 2012 yesterday. Total revenue grew 3% to US$1.1bn as revenue from surgical devices increased 3% to US$839m and that from the wound management division rose 5% to US$240m. Knee replacement sales increased 6%, in a market that expanded 3%, indicating higher market share for the company. Meanwhile, hip replacement revenue declined by 2%. Trading profit climbed 5% to US$252m. Trading profit margin improved 50 basis points to 23.3%. EPS rose to US$0.18 from US$0.175 in the previous year. The management said the restructuring plans are moving forward and undertook three bolt-on acquisitions during the quarter. The management hinted at 'more than one deal' in the emerging markets, without disclosing specifics. They said the margin improvement in Q1 2012 was a result of the phasing of costs and expect the effect to reverse in Q2 2012, but kept the guidance for the year unchanged. 

Our view: The orthopaedic reconstruction market has been in doldrums for the past two years as cash strapped patients postponed expensive surgery or chose alternative treatments. This has opened up a strong case for consolidation within the industry. Last year, S&N was on the radar of larger firms, including J&J, and remains an attractive proposition considering its high quality products. Competitor Stryker earlier reported that the market for reconstructive surgery had stabilised, but S&N's CEO Olivier Bohuon stressed that talks of recovery are still premature. Nonetheless, the company maintained its positive guidance for 2012. This also lends credibility to S&N's restructuring plan. Barring hip replacement, S&N's strong portfolio of products are expected to outperform the market. 

Randgold Resources (LON:RRS)

Yesterday, Randgold Resources released a trading update for Q1 2012 ended 31st March 2012. Production of gold grew 19% y-o-y to 165,443 ounces and profit shot up 126% to US$104m. However, sequential quarterly production was down 13% and profit was 28% lower than that in Q4 2011. Cash cost of production stood at US$667 per ounce and remained in line with the previous year. Attributable reserves declined to 16.28m ounces of gold compared to 16.39m at Q1 2011 as production increased 58% during the year. The company termed its performance 'robust' saying it saw minimal impact to production from the political unrest in Mali. 

Rexam (LON:REX)

In a trading update for Q1 2012, Rexam said trading at the beverage cans and the healthcare division have been in line with the management's expectations. The beverage cans operations saw growth in Western Europe and some recovery in North American market. The speciality cans sub-division performed well in North America, but registered slower growth in Russia due to strong comparables from the previous year. South American operations registered slight y-o-y volume growth. A weak flu season and a product losing patent protection caused the healthcare division growth to decline compared to the previous period. The management also informed that the divesture of the personal care business in on track. 

Economic News

UK Nationwide house prices 

Nationwide's index showed house prices declined 0.2% m-o-m and 0.9% y-o-y to £164,134 in April after declining 1.0% m-o-m and 0.9% y-o-y in March. The three-month average price slid 0.7% compared to a decline of 0.5% in Q1 2011. 

Our view: Economists expected house prices to rise 0.5% m-o-m and decline 0.3% y-o-y. Nationwide said the drop in house prices was largely due to the expirations of stamp duty exemption in March which tempted buyers to bring forward purchases. It expects initiatives such as the NewBuy scheme to help the housing market but acknowledged that consumers remained in a tight spot. The lack of demand for houses, as Britons grapple with stubbornly high inflation and unyielding unemployment, has pressured house prices. Strict lending criteria are worsening credit availability and dampening the demand further. 

UK services PMI

The services purchasing managers index declined to 53.3 in April from 55.3 in March, market research firm Markit said yesterday. The increase in new orders supported the headline number, while the survey said margins were reduced due to rising input costs. 

Our view: The index shrank more than the decline to 54.1 expected by economists. Nonetheless, the weak expansion in the dominant services sector, together with similar expansion in the manufacturing and construction sector indicate that the economy probably grew in April. However, despite upbeat Q1 2012 PMI surveys, the official data showed the economy contracted in Q1 2012, toppling the country into a recession. The BoE is likely to consider the PMI surveys, which suggest an underlying strength in the economy, in its meeting next week and withhold further extension to the asset purchase program. 

Eurozone ECB interest rate decision

As widely expected, the ECB kept key interest rates unchanged at 1%. At the monthly press conference, ECB President Mario Draghi said he expects the economy to recover gradually over the year and termed the Bank's policy 'accommodative'. The fiscal compact and the growth compact are not contradictory, he added. He did not offer any hints of future easing in rates or indicate any other non-conventional methods to stimulate the economy. 

Our view: With inflation (2.6% in April) above the ECB's preferred 'below but near 2%' level the ECB was not expected to lower interest rates. Mr. Draghi re-iterated his earlier stance that ECB will stick to its mandate of price stability and pushed the onus of stimulating the Eurozone economy onto to member-governments. 

US ISM non-manufacturing

The non-manufacturing purchasing managers' index declined to 53.5 in April from 56.0 in March, the Institute of Supply Management said yesterday. The production index slid to 54.6 from 58.9 the previous month. The index for new orders slumped 5.3 points to 53.5. Both indices touched their respective six-month lows. The gauge of employment dropped to 54.2 from 56.7 in March. 

Our view: Although the services sector remains in expansion mode, the pace of growth slowed more than economists expected. Economists expected the index to retreat to 55.3 in April. The services PMI data concurs with other data that indicate slowing momentum in the US economy. However, ISM's manufacturing PMI unexpectedly rose to a 10-month high, presenting a mixed picture of the US recovery. The official employment data to be released today could offer more pointers about the health of the economy. 

US jobless claims

Claims filed to avail jobless benefits dropped 27,000 to 365,000 in the week ended 28th April, the US Department of Labour said yesterday. Claims for the previous week were revised upwards to 392,000 from 388,000 reported initially. The four-week moving average, which smoothes out weekly spikes, declined by 750 to 383,500. 

US Bloomberg consumer comfort

In the week ended 29th April, the Bloomberg consumer comfort index declined to -37.6 from -35.8 the previous week. 

The Markets

Market opening: The FTSE futures (trading 18.5 points up) indicate markets could open higher. Release of the service PMI data, expected at 54.1, and the ECB’s meeting may influence trading activity during the day.

New York: Investors hesitated to take on more risk as weaker than expected private payroll data ahead of the official non-farm payrolls due on Friday raised concerns about the recovery in the labour market. The S&P 500 gave up 0.3% yesterday.

Asia: Weak economic data from the US and Europe triggered doubts about the global economic recovery. The Hang Seng was trading 0.4% down at 7:00 am. Tokyo was closed today.

Continental Europe: High unemployment and poor manufacturing PMI data hurt investor sentiment. The German DAX fell 0.8%, but the French CAC 40 rose 0.4% yesterday.

UK small caps: The FTSE AIM All-Share index ended 0.1% up yesterday.

Today’s news

UK to face a rough and drawn out recovery – CBI

The Confederation of British Industry (CBI) revised its 2012 growth estimate for the UK to 0.6% from 0.9% in February amid rising oil prices and the turmoil in the Eurozone. It expects the economy to stall in Q2 2012 before rebounding 0.7% in Q3 2012. CBI maintains that the underlying conditions are buoyant, and expects the economy to grow in 2013.

BoE should have issued stronger warning – King

BoE Governor Mervyn King said Britain’s economic recovery is slower than expected and inflation is high. He acknowledged that the bank failed to understand and issue a stronger warning about risks to banks in the run-up to the 2008 crisis.

Company News

BSkyB (LON:BSY)

BSkyB released results for Q3 2012 ended 31st March 2012 yesterday. Revenue rose 5% to £5.1bn as the company added 78,000 new customers during the quarter taking total customer count to 10.5m. The average revenue per user increased by £9 to £546 whilst the churn rate declined to 10.1% from 10.4% in Q3 2011. Operating profit surged 25% to £939m. EPS grew 31% to 39.7p. ‘Triple play’ customers-customers subscribing to each of the TV, broadband and telephony services-increased 24% y-o-y to 3.2m. Regarding the OFCOM investigation launched last month after its news channel Sky News admitted to hacking into emails of suspected criminals, the company said it believed it was ‘fit and proper’ to hold a broadcasting license. CEO Jeremy Darroch underplayed the impact of the ongoing investigation of News Corp, the company’s largest shareholder, saying they were two separate entities. The company has completed £387m of the £750m share buy back program.

Our view: BSkyB had a stellar quarter with revenue increasing despite a price freeze, as customer penetration deepened. Its ability to cross sell products has helped improve margins. As unemployment and low rising income forces Britons to stay in, BSkyB should see further growth. However, with the ongoing OFCOM investigation and the UK parliamentary committee earlier this week declaring Rupert Murdoch “not fit” to lead an international company, the risk has increased in BSkyB. The investigation makes it very unlikely that News Corp would or could present a new bid for BSkyB. In addition, OFCOM could insist that James Murdoch should leave his position as chairman at BSkyB, potentially prompting News Corp to sell some or all of its 39% stake in BSkyB and put pressure on the share price. Nevertheless, currently we see these risks being offset by the underlying growth momentum for BSkyB.

Carillion (LON:CLLN)

Carillion held its annual general meeting, yesterday. The management said Q1 2012 trading was in line with expectations supported by a strong order book and large pipeline of bid contracts. They added that despite challenging market conditions, Carillion witnessed an increase in complex and higher value outsourcing contracts from local authorities. In April, the company won a 10-year £700m property and facilities maintenance contract from Oxfordshire County Council. The company’s portfolio of public private partnership is performing well. In the UK construction business, the strategy to be selective about contracts has helped maintain operating margins in a shrinking market. The re-scaling of the UK construction division is expected to be complete by FY2012. Revenue from the Middle East construction services is expected to be realised in H2 2012, due to the time of project completion. Operating margin at this segment continued to decline towards 6%. The management is focused on growing the support services business and doubling the revenue from Canada and the Middle East to £1bn each by 2015.

Our view: The re-scaling of the UK construction business in response to the shrinking of the construction market has helped to maintain profitability. Additionally, Carillion’s services business is expected to grow as local government authorities increase outsourcing to cut spending. We like the stock for its counter cyclical qualities and the recent de-rating has improved the valuation argument.

Next (LON:NXT)

In an interim statement for the 13 weeks to 28th April 2012, Next said its total brand sales grew 1.4% as sales from new space increased 2.9%. However, retail store sales declined 3.9%. The management said Q1 2012 faced tough comparables from a year earlier when the Royal Wedding and mild weather boosted sales. There was no change in costs and margin as it entered Q2 2012, they added. The guidance for H1 2012, of sales growth between 1% and 4%, was unaltered. For FY2013, the management anticipate sales increasing 1%-4% and expect profit in the range of £560m-£610m.

Our view: The growth in sales was at the lower end of management expectations. With a persistently weak economy and a report that provided little scope to trigger further meaningful upward revision of earnings estimates the stock looks fair value to us.

Standard Chartered (LON:STAN)

Yesterday, Standard Chartered released a trading update for Q1 2012 ended 31st March 2012. The bank had a strong start to the year as y-o-y income grew in high single digits. However, income growth was impacted by continued strengthening of the US dollar against Asian currencies. Nonetheless, growth in income outpaced the increase in costs. Consequently, operating profit grew by low double digits. The double digit income growth in Hong Kong Malaysia, Indonesia, China and the Americas, UK and Europe offset the decline in India, where increased political risk eroded business sentiment. Both the consumer banking and the wholesale division recorded single digit growth in Q1 2012.

Our view: Focus on fast growing markets in Asia, particularly its aggressive expansion plan in China, is expected to drive growth for Standard Chartered. The bank’s plan to add 2,000 jobs in 2012, at a time when peers are cutting staff, indicates management’s confidence in the bank’s growth prospects. The statement showed that the momentum of last year was carried forward to the first quarter. Attracted by its strong and liquid balance sheet and regional growth dynamics we rate the stock a buy.

Home Retail (LON:HOME)

Home Retail released FY2012 results yesterday. In the 53-week period to 3rd March 2012, total sales declined 6% to £5.5bn and sales at Agros dropped 8% to £3.9bn. Gross margin dipped 7% to £2.0bn. Pre-tax profit declined to £104.1m from £265.2m in the 52-weeks to 26th February. Net profit plunged to £72.8 from £190.9m in the previous year. Consequently, the management refrained from declaring final dividend. However, they did not favour a mass closure of Agros retail stores, and instead planned to close just ten stores while relocating several others. In the future, the management seeks to focus on multi-channel retail to improve the group’s performance.

Spirent Communications (LON:SPT)

Spirent Communications issued an interim statement for Q1 2012. Revenue increased 5% to US$129.4m as revenue at the performance analysis division surged 16% to US$107.3m. However, sales at the service assurance and the systems divisions decreased 35% and 17% to US$10.1m and US$12.0m respectively. Operating profit improved 15% to US$27.2m. Basic EPS rose 23% to US$0.0293. The company completed the US$40.0m acquisition of Mu Dynamics on 23rd April. The management said, the acquisition is expected to help the performance analysis division, its largest division, to expand into new addressable markets.

Economic News

UK construction PMI

The UK construction purchasing managers’ index (PMI) declined to 55.8 in April from 56.7 in March. However, the reading above 50 indicates that construction activity still expanded in April.

Our view: Economists expected the index to slide to 54.0. The lesser than expected dip suggests a recovery taking hold in the construction sector. However, a 3% drop in construction activity in Q1 2012 was partly responsible for pushing the economy into recession despite upbeat survey numbers. Economists are worried about the discrepancy seen between the survey numbers and actual data.

German manufacturing PMI

The German manufacturing PMI declined to a 33-month low of 46.2 in April from 48.4 in March, marking the second consecutive month of contraction in output, survey compiler Markit said yesterday. Production contracted for the first time since December 2011. Anecdotal evidence suggested manufacturers cut production as new orders declined, Markit added. Meanwhile order backlogs shrank for the eighth consecutive month, compelling manufacturers to slice jobs for the first time since March 2010.

Our view: Weak order inflow led to lower production at German factories. A slowdown in the US and mixed data from China raised concerns about global growth and could have delayed investment decisions, affecting new orders. With indications of a deepening recession in the Eurozone, Germany’s major trading partner, the country no longer seems immune to its neighbours’ problems.

German unemployment

The number of unemployed people in Germany increased by 19,000 to 2.9m in April, Destatis reported yesterday. The unemployment rate increased to 6.8% from 6.7% in March, which was revised from 6.8% reported earlier.

Our view: The increase in the unemployed confounded economists’ expectations of addition of 10,000 jobs. The decline in jobs points towards the stabilisation of the labour market in Germany. Economists believe the slowdown in the economy takes about six months to reach the labour market, which is a lagging indicator. So far, emerging markets’ demand for German high quality exports and improving employment has been essential drivers of the Germany’s growth story.

US factory orders

Factory orders in the US plunged 1.5% in March, while the orders for February were revised downwards to 1.1% from 1.3% reported earlier, the US Department of Commerce reported yesterday. Orders for durable goods declined 4.0% after increasing 1.9% in the previous month. Orders for consumer durable goods rose 0.9%. Non-durable goods orders increased 0.5%. Orders for non-defence capital goods (excluding aircraft), a measure of business investment, declined 0.1% compared to a decline of 0.8% estimated earlier. In February, orders for non-defence capital goods (excluding aircraft) jumped 2.7%.

Our view: The drop in factory orders was lower than the 1.7% decline expected by economists. The decrease is driven by the 48% fall in volatile orders for commercial aircraft. Excluding transportation, factory orders were unchanged for the month. Nonetheless, demand for consumer goods increased, indicating consumers are willing to spend. Consumer spending could help offset the decline in business investment, which helps maintain the momentum in the manufacturing sector.

Eurozone PMI

Markit’s final manufacturing PMI for the Eurozone declined to 45.9 in April from 47.7 in March indicating an accelerated contraction in manufacturing output. Economists were expecting the preliminary reading to be unchanged at 46.0.

US ADP employment change

Jobs in the private sector increased by 119,000 in April, missing the consuensus estimate of a 170,000 increase, ADP reported yesterday. The number for March was revised downwards to 201,000 from 209,000 reported initially. The services sector added 123,000 jobs in April compared to 158,000 in March. Jobs declined by 5,000 in each of the two sectors, manufacturing and construction.

The Markets

Market opening: Markets could open lower amid thin trading despite positive US factory data. The FTSE futures were trading 7.5 points down at 7:00 am.

New York: Wall Street rose as the surprise rise in factory output alleviated concerns about the recent slowdown in the economy, but gave up the gains in the last hour of trading. Nonetheless, the S&P 500 closed 0.6% higher yesterday.

Asia: Markets rose as stronger than expected US manufacturing data allayed fears about the sustainability of economic recovery in the US. The Nikkei rose 0.3%, while the Hang Seng was trading 1.2% higher at 7:00 am.

Continental Europe: Markets were closed yesterday.

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UK small caps: The FTSE AIM All-Share index ended 0.3% lower yesterday.

Today’s news

Chinese factory activity contracted – HSBC PMI

HSBC’s purchasing managers’ index edged up to 49.3 in April from 48.3 in March, but continued to contract for the sixth consecutive month. However, this reading is better than the flash reading of 49.1. The survey, which focuses on smaller private firms, highlighted the differences between the conditions of these companies and large state-owned corporations, which are considered while compiling the official PMI index. The official index released yesterday showed manufacturing rose to a 13-month high in April.

Xstrata shareholders show dissent over Glencore deal

Some 13.2% Xstrata shareholders cast votes against the re-election of Glencore’s CEO Ivan Glasenberg to the board while 2.9% votes were withheld. This suggest shareholders opposing the US$90bn proposed merger with Glencore, are ready to put up a fight. Only 16% of total votes would suffice to derail the Glencore Xstrata merger.

Company News

Man Group (LON:EMG)

Man Group issued an interim statement for Q1 2012 ended 31st March 2012 yesterday. Funds under management increased to US$59.0bn from US$58.4bn on 31st December 2011. The value of investments increased by US$2.0bn as strong performance at the GLG strategies offset the decline in the performance of the AHL computer driven system. During Q1 2012, the fund manager saw sales of US$3.1bn and redemptions of US$4.1bn resulting in net outflows of US$1.0bn. The management said the volatility in the markets in March helped the GLG strategies perform. Though redemptions have started to calm down somewhat, investor sentiment remains fragile, they added. CEO Peter Clarke said the company was on track to achieve the US$75m savings promised in January.

Our view: Redemptions slowed down from US$5.6bn in Q4 2011 to US$4.1bn in Q1 2012. And whilst performance at GLG improved, with two funds achieving returns above 10%, AHL, accounting for a third of assets, continues to drag performance at Man Group. It looks like the model is broken and a quick fix is unlikely. However, we believe the stock has probably fallen far enough and could become attractive to suitors and re-iterate our hold rating.

Imperial Tobacco (LON:IMT)

Imperial Tobacco released results for H1 2012 ended 31st March 2012 yesterday. Revenue rose 1.9% to £13.9bn aided by an increase in prices and demand in emerging markets. Operating profit grew to £1.3bn, up 4.4% y-o-y. However, EPS dipped 9.6% to 82.5p as net profit shrank 11% to £826m. Tobacco net revenue increased 3.3% to £3.4bn despite a 4.1% decline in stick equivalent volume (of both cigarettes and fine cut tobacco). The management said it expects the momentum gained in Q2 2012 to continue. It increased the interim dividend 12.8% to 31.7p per share.

Our view: Imperial Tobacco’s performance in Q2 2012 improved on Q1, when cigarette volumes plunged 7% and tobacco revenue dropped 1%. Like other tobacco companies, IMT intends to tap the opportunity in emerging markets created by their growing disposable middle class income levels. This should help the company compensate for the structural decline in volumes in developed markets. We like the defensive nature of the tobacco industry and IMT, its strong cash flow, relatively secure dividend and emerging markets growth exposure.

BP (LON:BP.)

BP declared results for Q1 2012 ended 31st March 2012 yesterday. Replacement cost profit plunged 12.2% y-o-y and 35.2% q-o-q to US$4.9m. Production declined 6% to 3.5m boe per day as the company disposed off assets to pay for 2010 oil spill in the Gulf of Mexico. EPS declined to 30.74p from 38.1p despite a rise in revenue to US$96.7bn from US$88.4bn in Q1 2011. The management expects production to fall in Q2 2012 due to seasonally maintenance activities. During the quarter, the company gained access to new deepwater and US shale gas exploration projects.

Our view: BP is in a transitional phase where it is disposing assets to pay for the Gulf of Mexico oil spill and is in the midst of realigning its portfolio with new opportunities such as shale gas reserves in the US. However, positives from new reserves are not reflected in the share price, which is still in an overhang resulted from the Macondo well blow-up. In March, the company paid US$7.8bn to the victims of the oil spill, but is yet to reach a settlement with the US Department of Justice over the liability for the disaster. We expect the currently undervalued share price to move closer to fair value if the deal progresses and have a buy rating for BP.

Lloyds Banking Group (LON:LLOY)

In an interim statement for Q1 2012, Lloyds Banking Group said it made additional provisions of £375m (totalling £3.6bn) to be paid as payment protection insurance (PPI) compensation after the volume of complaints increased. Nonetheless, the bank registered a pre-tax profit of £288m, lesser than the £316m reported in Q4 2011 but a marked improvement on the £3.5bn loss in Q1 2011. Total income, net of insurance claims, declined 7% to £4.5bn. The tier 1 capital ratio increased 20 basis points to 11.0% well ahead of the 9.0% recommended by the European Banking Authority. During Q1 2011, the bank cut its non-core assets by £12.4bn to £128.3bn. Net interest margin, the difference between the interest received and paid out, declined to 1.95% from 1.97% in Q4 2011 and 2.16% in Q1 2011. The management expects the economy to be flat throughout 2012, but kept the guidance for 2012 unchanged.

Our view: The sale of Lloyds’ 632 branches, as ordered by the European Union continues to drag on. NBNK is the new suitor for the branches after regulatory authorities raised objections of whether Co-operative Group was the best buyer. The management said, the third option of an IPO is still open, if the bank is to meet the November 2013 deadline. Though the shrinking balance sheet points towards lower future profitability, the de-risking could help offset some of the loss of scale by lower borrowing costs. The downturn in the economy, with subdued demand for consumer credit, increased regulatory pressure, questions about asset quality, lower volumes and structurally reduced margins along with the large government share overhang is likely to keep a cap on the share price. With little change in these conditions expected in the near future, we prefer to look elsewhere in the sector.

Reckitt Benckiser (LON:RB.)

Reckitt Benckiser issued a trading update for Q1 2012 yesterday. Revenue increased 4% to £2.4bn. Like-for-like (LFL) sales increased 4%. Revenue from Europe and North America (ENA), which forms 55% of core revenue, slipped 2% to £1.2% and LFL sales declined 1%. Revenue grew 13% in Latin America, Asia and Australia and New Zealand to £580m. Revenue from RB pharmaceuticals was up 7% to £167m. The management re-iterated its full year guidance of revenue growth 200 basis points above expected market growth rate of 1%-2%. They also expect to maintain full year operating margins.

Our view: In Q1 2012, Reckitt Benckiser met analysts’ revenue expectations. The management termed the performance in the ENA market as ‘satisfactory’ considering the economic conditions. However, the real engine of growth for the company is expected to be the increasing purchasing power of consumers in the emerging and fast growing markets. By 2016, the company aims to increase the revenue share from the emerging markets to about 50% from the current 27%. In addition, the change in strategy to focus on fast and successful brands such as Dettol and Lysol disinfectants and away from the pharmaceutical and food segments should help spur growth. We see increased growth opportunities from the exposure to emerging markets and rate the stock a buy.

CSR (LON:CSR)

CSR released results for Q1 2012 ended 30th March 2012 yesterday. Revenue grew 38.5% y-o-y to US$227.0m. Gross profit increased 42.8% to US$114.8m and gross margin improved to 50.6% from 49.1%. Platform revenue now constitutes 57% of total revenue compared to 38% in Q1 2011 as the company won fifteen new licensees for its aptX platform taking total customers to 75. During Q1 2012, the company returned US$9.5m to shareholder having bought back 2.45m shares. The management expects Q2 2012 revenue to be in the range of US$245m and US$265m and are confident of meeting full year market expectations. The company is on track to meet annualised cost savings of US$130m by end of Q2 2012.

Chemring Group (LON:CHG)

Chemring Group issued a trading update yesterday. The company said it received two new orders from the US Army and the UK Ministry of Defence. Non Intrusive Inspection Technology Inc, its US subsidiary, received an initial order of US$161m (expandable to a maximum of US$579m) for the Ground Penetrating Radar Husky Mounted Detection System from the US Army. Chemring Countermeasures Ltd, its UK subsidiary, received a five year contract worth £21m (expandable to £38m), for the supply of different infrared and radar frequency types of airborne expendable decoy flares for the UK MoD. The share price surged 20% to end the day at 391.9p.

Economic News

UK PM

The UK manufacturing PMI declined to 50.5 in April from 51.9 in March, market research firm Markit said yesterday. Despite the above 50 reading indicating expansion, Markit said the rate of increase was the weakest this year. The reduction in the index was driven by a drop in new export orders. Furthermore, the increase in output was due to completion of backlogs.

Our view:The PMI reading was worse than the decline to 51.5 expected by economists. The strengthening of the sterling pound could have contributed to a decline in the export orders. Considering the weak consumer confidence across the Eurozone, a drop in orders was more or less expected. However, orders from the US and East Asia, which have spurred manufacturing activity in the recent months, dropped too. This increases the risk to future growth.

US ISM manufacturing & price index

The Institute of Supply Management said its index of manufacturing output rose to 54.8 in April, the highest level since June 2011, from 53.4 in March. The index of employment advanced to 57.3 from 56.1, while that for new orders climbed to 58.2 from 54.5. The production index rose to 61.0 from 58.3 the previous month partly due to the completion of backlog orders (indicated by the decline in the related index to 49.5 from 52.5). Prices were stable with the index remaining at the previous month’s level of 61.0.

Our view: The rise in the index surprised economists who expected it to drop to 53.0. The ISM manufacturing index contradicted most regional surveys, which pointed to a slowdown in economic activity in April, and highlights the bumpy recovery. The jump in the forward-looking new orders index suggests manufacturing could pick up in the near future and soothes concerns about the sustainability of recovery.

US construction spending

Construction spending in the US increased 0.1% in March after declining 1.4% (1.1% reported earlier) in February, the US Department of Commerce said yesterday. Spending on private non-residential construction rose 0.7%. Due to increased construction of single-family homes, private residential activity grew 0.7%. Government construction declined 1.1%.

US vehicle sales

The number of vehicles sold in the US rose 2.3% y-o-y to 1.2m, maintaining an annual rate of 14.4m units in April. Fewer selling days due to the Easter holidays and bad weather were identified as the reasons for the weak sales, which grew 13.3% in Q1 2011.

The Markets

Market opening: Markets could open lower today as investors assess signs of recovery in the Chinese manufacturing sector indicated by purchasing managers’ index (PMI) amidst weak manufacturing data from the US. The FTSE futures were trading 8 points down at 7:00 am.

New York: Investors turned cautious as regional manufacturing data revealed factory activity lost momentum in April. Industrial and tech stocks dragged the S&P 500 0.4% lower yesterday, taking the monthly loss to 0.8%.

Asia: The Reserve Bank of Australia unexpectedly reduced the key interest by 50 basis points to 3.75% today as data showed manufacturing activity slumped to seven-month lows. The ASX/S&P 200 index was trading 0.8% up at 7.00 am. However, the Nikkei fell 1.8% as a strong yen hurt Europe- and US-dependent exporters such as Honda and Toyota.

Continental Europe: Disappointing Chicago PMI and data showing Spain entered a recession weighed on investor sentiment. The German DAX fell 0.6% and the French CAC 40 1.6% yesterday.

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UK small caps: The FTSE AIM All-Share index ended flat yesterday.

Today’s news

China manufacturing picks up in April

China’s official PMI rose to a 13-month high of 53.3 in April from 51.3 in March, the National Bureau of Statistics reported today. Though the increase is lower than the expected 53.6, the upturn in industrial activity suggests the economy could be recovering after posting 8.1% growth, the slowest pace in three years, in Q1 2012. The index for production rose to 57.2 in April from 55.2 the previous month, while the new export orders index moved up to 52.2 from 51.9. However, the overall new orders index declined to 54.5 from 55.1, indicating continued weakness in domestic demand.

Company News

Aberdeen Asset Management (LON:ADN)

Aberdeen Asset Management released an interim statement for H1 2012 ended 31st March 2012 yesterday. Revenue rose 7.0% y-o-y to £413.1m as recurring fee income increased 7.8% to £395.7m. Pre-tax profit increased 14% to £124.3m. EPS was 8.48p, 15.5% higher y-o-y. Assets under management (AUM) expanded to £184.7bn from £173.9bn at 31st December 2011 as demand for riskier equities increased. Equity AUM increased to £92.9bn from £81.1bn at the end of 2011. Net fund outflow narrowed to £0.4bn compared to £0.7bn at 31st March 2011. Though the management was mindful of the volatility plaguing the financial markets, the outlook for the year remained positive. The company declared a dividend of 4.4p per share, up 16% y-o-y. CEO Martin Gilbert confirmed that the company expressed interest in taking over the £2.1bn funds of Alliance Trust. Alliance Trust was earlier accused of underperformance and is being forced to outsource its fund management operations.

Our view: Aberdeen’s AUM increased as the upbeat stock markets and better investment performance offset the impact of net fund outflows. For the past few quarters, the fund manager has seen renewed interest for its equity offering, especially those focused on emerging market. Fund flows to these higher margin products should be positive for profitability. With the US economy in recovery and the Eurozone showing some signs of stability, we expect a gradual increase in investor’s risk appetite. And Aberdeen, with its global equities and emerging market focused strategy, should attract more investors.

Aquarius Platinum (LON:AQP)

In a production update for Q3 2012 ended 31st March released yesterday, Aquarius Platinum reported a 7.4% q-o-q and 17.7% y-o-y drop and in production to 97,802 ounces leading to a loss of US$9.4m. The management counted seasonal absenteeism, safety stoppages and labour ‘slow-go’ among the reasons for the drop in production. Production at South African mines was hampered by poor ground conditions. Revenue declined 31% to US$124.8m weighed by production shortfall and a 17.6% drop in average price for platinum group metals basket to US$1251 per ounce. The cash cost increased 5% to US$114.7m during the quarter. The management said operational and regulatory headwinds coupled with the weakness in the platinum markets and volatility in the financial markets is affecting the sustainability of the platinum mining industry. The stock closed down 10.3%.

Economic News

Eurozone inflation

Inflation in the Eurozone eased to 2.6% y-o-y in April after recording 2.7% in March, the flash estimate by the Eurostat showed yesterday.

Our view: Economists were expecting an accelerated slow down in inflation to 2.5%. Though inflation is moderating the probability of the European Central Bank (ECB) lowering interest rates, when it meets later this week, are slim. Earlier, ECB President Mario Draghi urged policymakers to stimulate the Eurozone economy by implementing pro-growth policies and not just focus on deficit control and debt reduction.

German retail sales

German retail sales rose 0.8% in March following a revised 0.9% decline in February (fall of 1.1% reported previously), Destatis said yesterday. In March, inflation-adjusted retail sales were 2.3% higher y-o-y. For Q1 2012, retail sales were 1% lower than that in Q4 2011.

Our view: Retail sales recovered after declining in January and February, but failed to match economists’ expectations of a 1% increase. Despite unemployment dropping to historic lows and rising real wages, consumer spending has disappointed. Q1 2012 GDP is expected to be negatively affected by the contraction in consumer spending.

US Chicago purchasing manager index

The Chicago purchasing managers’ index (PMI) fell to 56.2 in April from 62.2 in March. The sub-index for production declined to 57.1 from 68.6. The gauge of new orders fell for the second consecutive month, sliding to 57.4 in April from 63.3 the previous month.

Our view:Economists expected the Chicago PMI to touch 60.5. Though the reading above 50 indicates manufacturing activity expanded, the pace of expansion has slowed considerably, reinforcing the belief that the manufacturing sector lost steam as it entered Q2 2012. The Chicago PMI follows the New York, Philadelphia and Dallas manufacturing surveys that showed manufacturing activity slowed. The national ISM manufacturing data for April, due on Wednesday, is expected to confirm the belief that manufacturing has lost some of its Q1 momentum in April.

US personal income

Personal income in the US increased 0.4% in March after gaining 0.3% (revised upwards from the 0.2% reported initially) in February, the US Department of Commerce said yesterday. Real disposable income rose 0.2%. Consumption expenditure grew 0.3% in March, decelerating from an upwardly revised 0.9% in February. Personal consumption expenditure for January was revised upwards to 0.5%. Real expenditure (i.e., expenditure adjusted for inflation) rose 0.1% in March. The savings rate increased to 3.8% from 3.7% in February as the rise in income outpaced that in expenditure.

Our view: Economists expected income to rise 0.3% and consumer spending to increase 0.4% in March. Consumer spending was the major contributor to economic growth in Q1 2012. Observers believe that warm weather could have enticed consumers to spend in advance, causing an upturn in consumer spending in January and February. However, with the recovery in the labour market shaky and a large pool of unemployed restricting a significant rise in wages, consumer expenditure could start faltering.

Eurozone M3

M3, a measure of money supply in the economy, rose by 3.2% in March after increasing 2.8% in February. Economists were expecting money supply to stabilise at 2.8% in March. The three-month average scaled up to 2.8% compared to 2.3% in the three months to February. Growth in loans to the private sector dipped to 0.6% y-o-y in March following a 0.8% increase in February while to households halved to 0.6% from 1.2% in February.

US Dallas Fed manufacturing activity

The Dallas Fed’s index of general business activity plunged to -3.4 in April from 10.8 in March. The gauge of manufacturing production dropped to 5.6 from 11.1 the previous month.

The Markets

Market opening: Markets could open higher today as investors hope the US Fed would move in favour of QE3 after Q1 2012 GDP growth missed forecasts. FTSE futures were trading 10 points up at 7:00 am.

New York: Strong corporate earnings from Amazon and Expedia cheered markets despite Q1 2012 GDP failing to meet expectation. The S&P 500 index closed 0.2% up on Friday, taking weekly gains to 7.2%.

Asia: Markets were trading higher as weaker than expected US economic data upped the chances of the US Fed pursuing QE3. Australia’s S&P ASX 200 index closed 0.8% higher. The Japanese and Chinese markets were closed for today.

Continental Europe: Upbeat corporate earnings led by Sandvik lifted the sentiment, allaying the hurt caused by S&P’s downgrade of Spain. The German DAX gained 0.9% and the French CAC 40 ended 1.1% higher on Friday.

UK small caps: The FTSE AIM All-Share index ended 0.5% up on Friday. 

Today’s news

Spain discussing a bad bank scheme

A scheme to segregate the problematic property loans of all Spanish banks under one roof is believed to be under discussion. The “bad bank” scheme, which is being set up to avoid an international rescue programme similar to the ones required by Greece, Ireland and Portugal, would help Spain retain credibility in international markets.

NAB announces jobs cuts in the UK

National Australia Bank, owner of Clydesdale Bank and Yorkshire Bank, announced the closure of certain branches in the south of England due to difficult economic conditions. The move to close the commercial real estate portfolio and concentrate on retail banking operations could result in nearly 1,400 job losses.

Company News

Aegis Group (LON:AGS)

Aegis released a trading update for Q1 2012 ended 31st March 2012 on Friday. Revenue grew 17% y-o-y and 16.3% on a constant currency basis. The group’s organic revenue increased 8.1% supported by growth at Aegis media and Aztec. Geographically, Aegis media organic revenue expanded 20.3% in the Americas, 12.5% in Asia Pacific and 1.7% in the EMEA. During Q1 2012, the division signed on new business worth US$2.9bn compared to US$1.6bn in Q1 2011. The US$2.5bn contract with General Motors was noteworthy. Other wins include Philips TV in France, Bulgari in Italy, Lenovo and Pfizer in Russia, Woolworths in South Africa, Kraft in East Africa and Beiersdorf in China. The management is considering acquisitions particularly in North America and other fast growing markets. During Q1 2012, the digital business was fortified through bolt on acquisitions including Roundarch in North America, Upper Storey in Singapore, eLink in China. The company also acquired an out-of-home agency, PPI, in Hungary. The management remained confident about growth in FY2012 as clients’ marketing and adverting budgets continue to grow.

Our view: Aegis reported its first quarterly results as a pure-play media company. The stellar performance in Q1 2012 and the expansion into recovering markets of North America and growing markets in Asia quell doubts about growth. After signing on a big contract like that of General Motors, the ensuing boost to goodwill could help the company gain a larger pie of the marketing and advertising market. This justifies an upward revision to forecasts and creates room for share price improvement. Despite a rich valuation, that undoubtedly includes some takeout premium; we upgrade Aegis to a buy.

AZ Electronic Materials (LON:AZEM)

In an interim statement released on Friday, AZ Electronic said the difficult trading conditions seen towards the end of FY2011 are continuing and affecting performance. In Q1 2012, revenue declined 4% y-o-y to US$184.0m. Revenue at the integrated circuits (IC) division, constituting 70% of total revenue, shrank 4% to US$127.9m. The Optronics division witnessed a revenue drop of 1% to US$51.7m. Customers transitioning to new printing technology caused revenue at the printing and other division to decline 36% to US$4.4m. Nonetheless, group EBITDA was in line with the management’s expectations. Further, the management said trading conditions have looked up since the beginning of Q2 2012. Customers have reported increasing wafer capacity and utilisation. This is expected to spur growth at the IC division from Q2 2012 onwards. Increasing applications of the flat panel display revenues at the Optronics division. The management reiterated its FY2012 forecast and anticipates sequential growth throughout the year.

Our view: The decline in Q1 2012 revenue was expected as the semiconductor cycle causes revenue and profits to be loaded towards H2 in 2012. Furthermore, the EBITDA margin has been in line with management’s expectations. As industry defining customers such as TSMC announces increased capital expenditure and the industry prepares for near-term events such as Intel’s new processor family, a new iPhone launch and Windows 8, we believe this will drive demand for AZ’s products and enable it to meet its targets. With industry beating margins, market leading position and barriers to entry in a structural growth market, AZ’s valuation discount is unjustified. And with the private equity overhang gone, the company could be on the target list for one of the chemical majors. (Please refer to our research note on AZ Electronic Materials published 20th April for more.

Pearson (LON:PSON)

Unilever reported Q1 2012 results yesterday. Sales rose 11.9% to €12.1bn as volume increased 3.5% and prices went up 4.7%. Underlying sales grew 8.4%. Growth in the emerging markets, which constitute around 56% of total sales, was 11.9%. Developed markets witnessed growth of 4.2%. The management expects input cost headwinds to persist, but was confident of delivering a modest improvement in full year core operating margin. Management proposed to hike dividend by 8% to €0.243 per share

Our view: We are impressed by Unilever’s ability to pass on higher input prices to consumers, which helped drive growth in Q1 2012. The decline in volume seems to have reversed after Q4 2011, when consumers moved away from pricier Unilever products to cheaper alternatives. The increased penetration of emerging markets should propel further growth. Considering these positives and the recent share price performance, the stock appears to be fairly priced, which warrants an upgrade to hold.

WPP (LON:WPP)

WPP issued an interim management statement for Q1 2012 ended 31st March 2012 on Friday. Revenue increased 7.6% to £2.4bn. Like-for-like (LFL) revenue rose 4.0% and acquisitions contributed 3.4% to growth. Gross margin improved 4% y-o-y. Q1 2012 operating profit and operating profit margin were not only ahead of last year but also better than the management’s budget. Geographically, revenue from emerging markets covering Asia Pacific, Latin America, Africa & Middle East and Central & Eastern Europe grew 11.1% and 9.5% on a LFL basis. Revenue from Western Europe and the UK increased 5.8% (LFL: 2.5%) and 5.0% (LFL: 2.5%) respectively. The North American revenue increased 6.9% and 1.4% on a LFL basis. The media operations, 40% of group revenue, grew 8.3% and 6.2% on a LFL basis. Encouraged by the upbeat growth in Q1 2012, the management revised the operating margin target upwards by 50 basis points to 14.8%. The management re-affirmed long term growth targets, which include powering acquisitions driven growth, increasing cost efficiency through active management and expanding operating margin by 0.5% or more.

Our view: WPP reported a strong start to the year that has advertising-spend inducing events such as the London Olympics and the US presidential elections. We like the almost even split between acquisition fuelled and organic growth, which indicates the strength of the core business. WPP’s exposure to the fast growing emerging markets is expected to offset any slowdown in Europe. The upward revision of guidance opens up further scope for price outperformance. We re-iterate our buy rating.

Colt (LON:COLT)

Colt released a trading update for Q1 2012 ended 31st March 2012 on Friday. Revenue rose to €397.3m, up 5.2% y-o-y. EBITDA grew 4.7% to €80.6m implying a stable EBITDA margin of 20.3%. Separately, Colt announced identifying a site in the Netherlands to set up a 32MVA power data centre with an initial modular data centre space of 2,000m2, expandable up to 10,000m2. The data centre is expected to be operational in early 2013.

Ultra Electronics (LON:ULE)

In a trading update issued on Friday, Ultra Electronics said Q1 2012 performance was in line with management expectations and profits will be weighed towards H2 2012. For FY2012, the management expects the US and the UK to trim their defense spending, but believes that the company’s advanced electronic solutions lie in areas where spends will be least affected. It announced the grant of major contracts from the US Air Force and the US Navy. In addition, the company said nuclear power projects in the US, China and Sweden have agreed to procure Ultra’s specialist nuclear sensors from Areva and Westinghouse. The company’s security and civil sector continues to operate in niche markets with significant potential growth.

Economic News

US GDP

The US economy expanded 2.2% in Q1 2012 after reporting 3.0% growth in Q4 2011, the advance estimate from the US Department of Commerce showed on Friday. The deceleration was ascribed to the 2.1% decline in non-residential fixed investment (increased 5.2% in Q4 2011). Consumer expenditure, which grew 2.9% (up 2.1% in Q4 2011), helped offset the decline in non-residential fixed investment.

Our view: Economists were expecting the GDP to grow 2.5% in Q1 2012. Despite the slower growth in Q1 2012, this expansion points at the underlying strength in the economy. Unlike in Q4 2012, when building up of inventory contributed to the increase in output, the expansion in Q1 2012 was based on the pick-up in consumer spending and construction of homes. Nevertheless, the report was still a bit disappointing and could move the Fed, with its dual mandate, closer to QE3.

US Michigan consumer confidence

The final reading of Thomson Reuters/University of Michigan’s consumer confidence index rose to 76.4 in April from 76.2 in March. The gauge of current economic situation was revised upwards to 82.9 from 80.6 in the preliminary reading, but is below the 86.0 reading for March. The revised expectations index edged lower to 72.3 from the initial reading of 72.5, but was higher than March’s 69.8. Expectations of inflation dropped to 3.2% in April from 3.9% in March.

Our view: The rise in consumer confidence above economists’ expectation of 75.7 shows Americans are more upbeat about the economy. Gasoline prices have shown signs of retreating, which has taken some pressure off consumer budgets. Recent labour market data indicating a slowdown in job creation could have affected consumers’ views about their current personal finances. However, they remain positive about the uptrend in the economy as seen by the m-o-m jump in the expectations index and the general belief that inflation could ease in the near future.

UK GfK consumer confidence

Consumer confidence in the UK remained unchanged at -31.0 in April, GfK reported on Friday. The index measuring consumers’ view of their personal finances over the past 12 months increased to -23 from -25 the previous month. However, the gauge of their finances over the next 12 months deteriorated 3 points to -13. Nonetheless, the index of whether this was a good time to make big ticket purchases edged up 1 point to -30. Consumer’s view on the economy rose 2 points to -57 and their barometer of their outlook for the economy declined to -33 from -30.

Our view: The latest reading confounded economists’ expectations of the index improving slightly to -30 in April. The forecast for stronger consumer confidence came after recent retail data showed consumers’ willingness to spend. However, the retail sales series is notoriously volatile. All other consumer confidence surveys released last week pointed to a slump in consumer sentiment. Downtrodden consumer morale, a precursor to consumer spending, could be detrimental to the economic recovery.

German GfK consumer confidence

GfK’s expects its consumer confidence index to drop to 5.6 in May from 5.8 in April. GfK estimates the value for consumer sentiment in the succeeding by considering the readings for the preceding month. The index of economic expectations rose 1.3 points to 8.5 in April. The gauge of income expectations declined 1.3 points to 33 and the willingness to buy index plunged 11 points to 27.6 as rising petrol prices force consumers to reallocate their budgets

US employment cost

In Q1 2012, employment cost in the US increased 0.4%, the US Department of Labor said on Friday. This is below the consensus estimate of a 0.5% rise. With unemployment still high, businesses are able to hire without significant increases in wage payments.

US personal consumption

Personal consumption in the US rose 2.1% in Q1 2012, below economists’ expectation of a 2.3% increase. In Q1 2011, personal consumption grew 1.3%.

The Markets

Market opening: Markets could open lower following S&P’s rating cut for Spain. Early data showing consumer confidence in the UK did not improve in April could dampen the mood too. FTSE futures were trading 15 points down at 7:00 am.

New York: Wall Street inched higher despite thin trading volumes and lukewarm corporate earnings. Strong gains in the telecom and consumer discretionary sectors helped the S&P 500 index gain 0.6% yesterday.

Asia: Gains fuelled by BoJ’s decision to ease the monetary policy and upbeat results (including Samsung’s earnings which exceeded expectations) were capped after S&P cut Spain’s rating. The Nikkei closed 0.4% lower, while the Hang Seng was trading 0.3% up at 7:00 am.

Continental Europe: Data showing weakening confidence in the Eurozone weighed on the markets. The French CAC 40 ended 0.1% lower. However, the German DAX gained 0.5% after VW and Bayer reported better than forecasted earnings.

UK small caps: The FTSE AIM All-Share index closed 0.2% lower yesterday.

Today’s news

BoJ expands asset purchase program to ¥70tr

In a widely expected move, Bank of Japan (BoJ) today stretched its limit on government bond purchases by ¥10tr, but reduced funds set aside for fixed-rate market operations by ¥5tr, effectively increasing its version of quantitative easing by ¥5tr to ¥70tr. This will also help the Bank achieve its inflation target of 1%. BoJ voted unanimously to keep interest rates unchanged at 0.1%.

S&P downgrades Spain second time this year

Yesterday, Standard & Poor’s (S&P) lowered Spain’s credit rating by two notches from A to BBB+ with a negative outlook as it anticipates government finances to deteriorate more than previously expected. The dire state of the country’s banking sector also influenced the decision.

Company News

Barclays (LON:BARC)

Barclays released results for Q1 2012 ended 31st March 2012 yesterday. Adjusted pre-tax profit increased 22% to £2.4bn supported by growth at both the retail and business banking and corporate and investment banking divisions. Pre-tax profit at the retail and business banking grew 22% to £817m and that at the corporate and investment banking grew 10% to £1.5bn. Income, excluding own credit, rose 5% to £8.1bn as revenue at investment banking division, the largest contributor to profits, returned to growth. The investment banking division earned £3.5bn in Q1 2012, 3% higher y-o-y and 91% ahead of that in Q4 2011. Strong growth in Asia helped revenue from the fixed income, currency and commodities (FICC) division to increase 9% to £2.4bn. Adjusted return on equity improved to 12.2% from 10.2% in Q1 2011. Core tier 1 ratio edged lower to 10.9% from 11.0% in the previous period. EPS increased to 13.6p from 10.7p in Q1 2011. Dividend for Q1 2012 was maintained at 1.0p per share. However, the management said activity in April had weakened.

Our view: The debt crisis in Europe is showing signs of subsiding and exposure to Asia has enabled Barclay’s key FICC division to return to growth. This helped the bank beat analyst forecasts. Although the management said they saw growth slow down in April, the bank’s well capitalised and liquid balance sheet should shield it from most unexpected shocks. It should also provide a good position to capitalise on industry consolidation. Hence, we believe the valuation discount to peers (P/E of 8.4x compared to HSBC’s 9.4x and Stan Chart’s 11.9x) is unwarranted and that the stock has the potential to outperform.

British American Tobacco (LON:BATS)

British American Tobacco released an interim statement that showed that revenue grew 6% in Q1 2012 ended 31st March 2012. Volume, including sales from Protabaco, which was acquired in October 2011, increased 1.3% to 166bn cigarettes. Organic volume growth was 0.7%. The emerging markets of Brazil, Gulf countries, Bangladesh and Vietnam drove the growth in volume while cigarette sales declined in Italy and South Korea. Volume of the four global drive brands improved 6%. Volume of Kent increased 7%. Lucky Strike was up 26% and Pall Mall grew 4%. Performance at Dunhill was in line with last year. The management said the group performed well in Q1 2012, when volume increased despite the industry declining. In Q1 2012, the company returned £150m to shareholders through the buyback of 5m shares

Our view: British American Tobacco is tapping into emerging markets to drive growth and has been quite successful with volume growth despite a decline industry-wide. Consumers in the developing markets see BAT’s brands as aspirational, which facilitates premium pricing. This has helped offset the impact of losing cash-strapped consumers in western economies to cheaper brands. Furthermore, with strong and reliable cash flow, the stock provides diversification benefits in most portfolios.

Unilever (LON:ULVR)

Unilever reported Q1 2012 results yesterday. Sales rose 11.9% to €12.1bn as volume increased 3.5% and prices went up 4.7%. Underlying sales grew 8.4%. Growth in the emerging markets, which constitute around 56% of total sales, was 11.9%. Developed markets witnessed growth of 4.2%. The management expects input cost headwinds to persist, but was confident of delivering a modest improvement in full year core operating margin. Management proposed to hike dividend by 8% to €0.243 per share

Our view: We are impressed by Unilever’s ability to pass on higher input prices to consumers, which helped drive growth in Q1 2012. The decline in volume seems to have reversed after Q4 2011, when consumers moved away from pricier Unilever products to cheaper alternatives. The increased penetration of emerging markets should propel further growth. Considering these positives and the recent share price performance, the stock appears to be fairly priced, which warrants an upgrade to hold.

Royal Dutch Shell (LON:RDSA)

Royal Dutch Shell announced its Q1 2012 results yesterday. Total revenue for the quarter increased 9.1% y-o-y to US$123.8bn from US$114.8bn in Q1 2011. Over the same period, earnings, on a current cost of supplies basis, grew 10.6% to US$7.7bn from US$6.9bn. Basic EPS, excluding identified items, stood at US$1.17 in Q1 2012 compared to US$1.02 in Q1 2011. Revenues were particularly strong in the upstream segment, growing 24.2% compared the 7.6% growth registered by the downstream segment, its biggest revenue generator. Portfolio developments in the upstream segment include the commissioning of the 4.3mtpa Pluto LNG project in Australia and start of production at the Caesar/Tonga deepwater project in the US. The company also informed that it recently made a US$1.8bn all-cash offer to buy London-listed Cove Energy, which owns stakes in various offshore and onshore oil blocks in Mozambique and Kenya. CEO Peter Voser, said that the company is developing a portfolio of 26 projects to help achieve its target of generating around US$175bn-US$200bn in cash flow for 2012-15. Shell announced an interim dividend of US$0.43 per ordinary share (both ‘A’ and ‘B’).

Our view: Shell delivered stellar numbers largely due to increased upstream volumes and strong oil prices. Therefore, we have revised our rating from sell to hold. Our rating takes into consideration the near-term volatility in energy prices due to fragile economic and political conditions and continued challenges in the North American natural gas market. With this background the stock looks fairly valued.

AstraZeneca (LON:AZN)

Yesterday, AstraZeneca released results for Q1 2012 ended 31st March 2012. Revenue for the first quarter was down 11% y-o-y at constant exchange rates to US$7.3bn due to loss of exclusivity on several key brands such as Seroquel IR, Nexium and Arimidex. Revenues from the US and Western Europe fell 12% and 19%, respectively, while revenue from emerging markets were particularly encouraging. Gross profit fell 13% to US$5.9bn as margins contracted 250 basis points to 82% during the quarter. Core EPS at constant exchange rates declined 19% to US$1.81 and reported EPS dropped 39% to US$1.28. Earnings for 1Q 2012 were affected by the US$702m costs relating to third phase of the restructuring programme being undertaken by the company. Furthermore, in 1Q 2012, the company repurchased 22.6m shares for a total of US$1.1bn. AstraZeneca also announced that David Brennan, the CEO, would be stepping down 1st June 2012

Our view: AstraZeneca is clearly facing the heat. With patents on most of its top selling drugs expiring in the next four years and no promising replacements in the pipeline, there is little visibility for earnings growth. Though the exit of David Brennan, amidst rising investor discontent at the company’s performance, possibly makes way for a new CEO with a fresh R&D strategy to reinvigorate growth, we retain our sell rating for now.

Shire (LON:SHP)

In an interim statement released yesterday, Shire reported a 24% jump in product sales to US$1.1bn as its attention deficit hyperactivity disorder (ADHD) drugs, Vyvanse and Intuniv, penetrated the widening US market. Operating profit grew 18% y-o-y to US$362m. Diluted earnings per ADS increased 20% to US$1.48. The management said Firazyr, which was launched late last year, is being received well in the US. The performance of drugs for the treatment of rare diseases was ‘strong’. The management is confident of robust earnings growth in FY2012, with product sales growing in mid-teens. However, revenue growth could decelerate to low teens as royalties and other revenue may decline 15–25%. Shire also announced the acquisition of FerroKin Biosciences, including its Phase II drug for treatment of iron overload in patients after numerous blood transfusions. It acquired Vascugel from Pervasis Therapeutics to complement its regenerative medicine business. Shire also acquired the US rights to prucalopride for the symptomatic treatment of chronic constipation. Separately, the company announced positive results from a Phase II study of Vyvanse for the indication of binge eating disorder in adults.

Our view: With the approval of Vyvanse for treatment of ADHD in adolescents and adults, the market for the drug has increased manifold. Shire expects sales of Vyvanse to cross the US$1bn mark this year. Additionally, Shire boasts of a deep portfolio of products at different points in a drug’s lifecycle. Its offering for rare diseases has performed well too. Shire has perfected the recent trend in the biopharma sector where companies focus on rare diseases with niche markets, thereby commanding premium pricing. The growing addressable market, Shire’s drugs pipeline and focussed strategy should enable it to outperform.

Kazakhmys (LON:KAZ)

Kazakhmys issued production report and interim management statement for Q1 2012 ended 31st March 2012 yesterday. Copper ore extraction was up 8% y-o-y, benefiting from increased output from the Central and East regions. Yet, copper cathode equivalent production dropped 12.9% to 65kt in Q1 2012 from 74kt in Q1 2011 due to lower volumes of copper in concentrate output and planned repairs at the Balkhash smelter, which produces around two-thirds of the group’s finished copper cathode. Total copper products sales volumes higher by 5% to 61.3kt in Q1 2012 versus 58.4 in Q1 2011. However, average realised prices declined 12.5% y-o-y to US$8,599 per tonne in Q1 2012. Production of by products increased during the quarter. Gold output jumped 40%, zinc in concentrate production was higher by 22% and silver output increased by 20%. Sales of gold and silver increased strongly and Kazakhmys benefited from better prices of these precious metals. Further, the company informed that it completed buybacks of 10.6 m shares at a cost of US$150m since September 2011. Kazakhmys management gave guidance of being able to deliver annual target of between 285 to 295kt of copper cathode copper cathode this year

Our view: Kazakhmy’s first quarter production was hit by severe weather and transportation issues. The lower production in 1Q 2012 could result in higher cash costs further eating into the company’s profit margins. We also find the management’s stance of being able to deliver annual guidance on the optimistic side. Amidst fears of slowing economic growth in China, a major buyer of copper, we prefer to retain our hold rating for the stock.

Admiral Group (LON:ADM)

In an interim statement for Q1 2012 ended 31st March 2012, yesterday, Admiral Group said it had a strong start to the year. Revenue for the quarter increased 9% y-o-y to £586m from £539m in Q1 2011. The group’s vehicle insurance count increased 17% y-o-y to 3.4m at the end of March 2012. Additionally UK car insurance vehicle count witnessed 5% annualized growth in Q1 2012 at 3m. International car insurance vehicle count increased 83% y-o-y to 0.4m. Furthermore, the company reported that there was no change in the insurance claim trend since Q4 2011. The management reiterated its positive outlook for the business for FY 2012

Cobham (LON:COB)

Yesterday, Cobham issued an interim statement reporting modestly positive organic revenue growth for the first three months of 2012. At the end of Q1 2012, the order book increased marginally to £2.5bn at constant exchange rates. The company also remained on track to deliver the planned £8m of annualised y-o-y efficiency savings in 2012. The management said the proposed acquisition of Thrane & Thrane is likely to improve Cobham’s technology advantage and scale in maritime, land and airborne SATCOM systems. Cobham purchased 25.6% of the shares of Thrane & Thrane while the offer for the remaining shares expires on 21st May 2012. The company also informed that CFO Warren Tucker has resigned from his post.

Taylor Wimpey (LON:TW.)

In an interim announcement yesterday, Taylor Wimpey said it has had a strong start to 2012. The order book has increased 16% y-o-y to £1bn, driven by growing private reservations. The average private net reservation rate has increased to 0.62 sales per outlet per week in 2012 year to date, compared to 0.57 in 2011. Cancellation rates of 14.0% are below the long term average. Margins were at the upper end of management’s expectation as new sales outlets provided enhanced returns by better leveraging the existing land portfolio. The management believes the UK housing market conditions remain stable even though mortgage availability is a concern.

Whitbread (LON:WTB)

Whitbread announced preliminary results for FY2011 ended 1st March 2011 yesterday. Revenue rose 11.2% y-o-y to £1.8bn, driven by substantial new openings as well as a 2.6% growth in like-for-like (LFL) units. The underlying profit before tax increased 11.3% to £320.1m as gross margins improved to 85.2% versus 83.8% in the previous year. Revenue from the Costa segment increased 27.5% to £541.9m due to opening of 332 net new stores across the globe. Revenue from the hotels and restaurants segment grew 5.3% to £1.2bn. The company proposed final dividend of 33.75p, taking the total dividend for the year to 51.25p, an increase of 15.2%. CEO Andy Harrison said that he expects continued expansions across segments to drive business growth. Mr. Harrison added that the company is on track to achieve its five year growth milestones of having 65,000 rooms and 3,500 Costa stores worldwide by 2015-16.

Economic News

Eurozone consumer confidence

Consumer confidence in the Eurozone declined to -19.9 in April from -19.1 in March, the European Commission said yesterday. The measure of economic sentiment dropped to 92.8 in April from 94.5 in March. The index of industry confidence declined to -9 from -7.1 in March. The gauge of confidence among retailers decreased to -2.4 from 0.3 the previous month, while construction confidence index dipped to -27.4 from -26.77.

Our view: Spending cuts by governments across the Eurozone are prolonging recession in the single currency region. While this has helped rein in debt, it has also had a severe impact on labour markets and has caused unemployment to touch all time highs. Consumers facing the double whammy of joblessness and rising energy costs have cut back on spending, affecting demand and the overall industry morale.

UK Nationwide consumer confidence

Nationwide said its measure of consumer confidence surged from 44 in February to 53 in March, the highest reading since June 2011. The current economic situation index increased to 24 from 19 the previous month, while the gauge of consumer expectations from the economy rose 13 points to 73. The index measuring shoppers willingness to make big ticket purchases climbed to 86 from 78 in February.

German inflation

Consumer prices rose 2.0% y-o-y in April after rising 2.1% y-o-y in March. On monthly basis, consumer prices grew 0.1% m-o-m after increasing 0.3% the previous month. Inflation, as per the harmonized index of consumer prices, rose 0.2% m-o-m and 2.2% y-o-y in April, after rising 0.4% m-o-m and 2.3% y-o-y in March.

US Bloomberg consumer comfort

The index of consumer comfort compiled by Bloomberg slipped to -35.8 in the week ended 22nd April compared to -31.4 the previous week. This is the largest weekly decline since March 2011. At current levels, the index is long way off from its long-term average of 15.3.

US pending home sales

The measure of pending home purchases rose 4.1% to 101.4 in March, the National Association of Realtors (NAR) said yesterday. NAR reversed the previously reported drop of 0.5% in February to a gain of 0.4%. The increase in March beat economists’ expectations of a 1.0% rise.

The Markets

Market opening: Markets may open higher today after the US Fed left its monetary policy unaltered, in line with expectations. FTSE futures were trading 6 points higher at 7:30 am.

New York: The S&P 500 index ended 1.4% higher yesterday as the US Fed reiterated its preparedness to spur economic growth and Apple’s earnings beat expectations. Apple shot-up almost 9% yesterday.

Asia: The US Fed’s reassurance that it would act in case the US economy faltered brought additional joy to investors cheering upbeat corporate earnings. The Nikkei closed flat, while the Hang Seng was trading 0.4% higher at 7:00 am today.

Continental Europe: Financial stocks helped markets build on Tuesday’s tentative recovery. Positive earnings soothed investors’ fears over corporate performance. The German DAX closed 1.7% higher, while the French CAC 40 ended 2.0% up.

UK small caps: The FTSE AIM All-Share index closed 0.3% up yesterday. 

Today’s news

ECB’s Draghi puts onus for Eurozone growth on governments

European Central Bank (ECB) President, Mario Draghi, said the €1tr ultra cheap funds offered by the Bank have created room for governments to reinforce their balance sheets and pursue structural reforms that would boost growth in the Eurozone. He said the ECB’s primary responsibility was to promote price stability in the region, while the responsibility to spur growth lay with governments.

Company News

Sports Direct International (LON:SPD)

Sports Direct International issued a pre-close trading update for FY2012 ending 29th April 2012. During the nine weeks ended 25th March, revenue grew 13.2% to £267.6m and gross profit increased 13.5% to £99.8m. Retail sales jumped 16.1% to £232.6m and retail gross profit improved 15.1% to £85.4m. The management reiterated it will achieve full year EBITDA target of £215m and the ‘super-stretch’ scheme target of £225m. After achieving the underlying EBITDA targets for FY2012, the management has set new targets of £270m in FY2013; £290m in FY2014 and £340m in FY2015. Analyst: Donald Linderyd

Our view: Encouraged by the success of the previous employee bonus share scheme, where employee bonus is directly linked to measurable financial metrics, the company has announced similar ambitious targets for the next three years. However, given that the challenging economic conditions are likely to prevail for some time, the new targets look risky. On 15th December 2011, the company announced it expected to achieve the ‘super-stretch’ EBITDA targets for FY2012. Since then the share price has increased around 50%, bringing the share price close to fair value. Analyst: Donald Linderyd

UBM (LON:UBM)

UBM released an interim statement for Q1 2012 yesterday. Revenue rose 11.1% to £264.3m backed by strong growth at the events division benefiting from the acquisition of Ecobuild. Adjusted operating profit increased 25.8% to £56.1 as operating margins improved to 21.1% compared to 18.8% in the previous year. Revenue at the events division grew 46.4% to £123.1m with underlying revenue growth of 19.3%. At the PR Newswire division, subdued demand in the US market partially offset the increase in international operations resulting revenue picking up 4.5% to £49.0m. Revenue at the data services division and the marketing services arm fell 9.0% to £50.6m and 18.7% to £41.5m, respectively. The management expect underlying growth at the events business to be 10%-12%, slightly ahead of previous guidance. However, they anticipate PR Newswire and the marketing services operations to grow at the lower end of guidance of 3%-5% and 2%-4%, respectively. Guidance for gross margins remains unchanged. UBM completed the acquisition of Malaysian International Furniture Fair, Dentech China, Airport Cities Exhibitions & Conferences and US-based 4G World during the period. Analyst: Donald Linderyd

Our view: UBM’s improved guidance for its largest operations, the events business, is expected to more than compensate for the muted growth at the print and marketing services division. Furthermore, the company is actively focussing on acquisition driven expansion in the emerging markets of China, Malaysia and India. The integration of the recently acquired business broadens the scope of growth. We remain buyers of the stock. Analyst: Donald Linderyd

GlaxoSmithKline (LON:GSK)

GlaxoSmithKline reported Wednesday a 1% increase in Q1 2012 revenue to £6.6bn and a 3% growth in core operating profit to £2.0bn. Core operating margins expanded 20 basis points to 31.2% versus 31.0% in Q1 2011. Revenue growth in the US (9%), emerging markets/Asia-Pacific (5%) and Japan (4%) offset the 5% decline witnessed in Europe. However, net profit slumped 13% y-o-y to £1.3bn, as Q1 2011 net profit included a one-time gain on sale of its stake in Quest Diagnostics. Consequently, EPS decreased 11% to 26.7p. The Board raised Q1 2012 dividend by 6% to 17p per share. Further, they plan to use the proceeds from the sale of GSK’s OTC brands to Belgium’s Omega Pharma to boost the share buyback programme by £450m to £2.0bn-£2.5bn. GlaxoSmithKline is bidding for US-based Human Genome Sciences. The management’s guidance for sales growth and core margin expansion remained unchanged. During Q1 2012, further progress was made in the R&D pipeline. Two drugs received positive data and an application was filed for one vaccine, with four more drugs with sufficient data to be filed for approval in 2012. Another four products are expected to complete Phase III registration studies in the 2012. The management’s outlook for FY2012 remains unchanged. Analyst: Donald Linderyd

Our view: Raising the share repurchase target projects a management confident of delivering growth. The company also boosts of a progressing R&D pipeline. The exposure to diverse geographies is mitigating the risks of declining sales in Europe. The restructuring has yielded results as the company returned to revenue growth after a 4% y-o-y slump in FY2011 and showed slow improvement in core operating margins. However, the increase in revenue was below the £6.8bn expected by analysts. EPS also undershot the 29p estimate. This leaves little prospect of upward revision to estimates and prompts us to maintain a hold rating for GSK. Analyst: Donald Linderyd

Bodycote (LON:BOY)

Yesterday, Bodycote issued an interim statement for Q1 2012 ended 31st March 2012. Revenue for the quarter rose 6.9% y-o-y. It was up 8.3% on a constant currency basis. Revenue from the aerospace & defence and energy division increased 13.5% y-o-y on account of strong growth from commercial aerospace sector and oil & gas customers. The other division, automotive & general industrial division, witnessed a 4.8% revenue increase due to improvement in the North American markets and weaker continental European markets, as anticipated. The company paid US$52m to acquire the heat treatment operations from Curtiss-Wright. The management said performance was in line with expectations. Analyst: Donald Linderyd

DS Smith (LON:SMDS)

In a pre-close announcement yesterday, DS Smith said it remains on target to grow like-for-like volumes at the corrugated packaging operations at GDP + 1%, supported by its FMCG customer base and strong contribution from continental Europe. The popularity of ‘bag-in-box’ for transporting liquids drove growth at the plastic packaging division. The management said the improvement in the corrugated packaging operations helped offset the risks due to volatile paper prices. The acquisition of Sweden’s SCA Packaging announced in January is progressing well and is expected to close by June. Miles Roberts, CEO, expects the SCA acquisition to add around £2.1bn – £2.2bn to revenue, effectively doubling the existing top-line of £2.5bn. Analyst: Donald Linderyd

Polymetal International (LON:POLY)

Polymetal announced results for FY2011 ended 31st December 2011 yesterday. Revenue rose 43% over the previous year to US$1.3bn, due to a 26% rise in average realised gold price per ounce and a 13% increase in gold equivalent production. Gold production was stable at 443,000 ounces and silver production expanded 15% to 19.9m ounces. Copper output increased to 6.9k tonnes from 4.0k tonnes. Adjusted EBITDA was 47% higher at US$624m and EBITDA margin improved 110 basis points to 47%. The company’s net profit shot up 21% to US$290m during the year. EPS increased 12% to US$0.74 per share. Polymetal announced its maiden dividend of US$0.20 per share. Analyst: Donald Linderyd

Standard Life (LON:SL.)

In an interim statement for Q1 2012 ended 31st March 2012, Standard Life said gross assets under administration increased to £206.8bn from £198.4bn on 31st December 2011 and £194.5bn on 31st March 2011. However, net inflows were down in the first quarter of the year. Long term new business sales were £5.0bn, down 13.7% from the £5.8bn in Q1 2011. New business sale in the UK market fell 9% to £3.6bn. Sales in Canada shrank one-third to £697m. The management expects the pension reforms in the UK to help increase business in the medium to long term. In Canada, the shift from defined benefit to defined contribution pension provision is expected to drive business. At the international operations, joint ventures in India and China are expected to contribute towards growth, while the business in Germany and Ireland is expected to be impacted by the ongoing economic uncertainty in Europe. Analyst: Donald Linderyd

Adriatic Oil (PLUS:ADOP)

Adriatic Oil announced yesterday a raising of £200k by way of a placing at an issue price of 0.8p per share to fund commercial activities whilst it awaits the results of four PSA applications for oil exploration in Albania. The directors intend to apply the proceeds of the placing towards further progressing the company’s activities in the Adriatic. Following the recently completed acquisition of Pelagian the board expects to secure rights to drill highly prospective “wildcat” areas offshore Albania. The acquisition of Pelagian, will allow Adriatic the rights to prospective off-shore and onshore license areas in Albania. We have seen a number of listed and larger players begin exploration and development work in the region, which is considered a relatively under-explored basin. Analyst: Ravi Lockyer

Our view: The National Agency for Natural Resources of Albania (AKBN) has estimated potential “unrisked” oil in place as a potential 6 trillion cubic feet of gas and 542 million barrels of oil. We are looking to invest at an early stage with a market cap below £4m as Adriatic Oil looks good value if the license option is exercised and the PSC signed. Read the full report. Analyst: Ravi Lockyer

Economic News

UK GDP

The UK economy shrank 0.2% in Q1 2012 following the contraction of 0.3% in Q4 2011, according to the Office of National Statistics’ preliminary estimate. The economy returned to recession as the 0.1% expansion in the dominant services sector could not compensate for the 3.0% contraction in the construction sector and the 0.4% decline in industrial production. Analyst: Donald Linderyd

Our view: The economy dipping back to recession astounded economists’ predicting a growth of 0.1%. Recent purchasing managers’ surveys have pointed to strengthening underlying economic conditions while the official data released yesterday paints an exceedingly bleak picture. Even the Bank of England’s (BoE) MPC (monetary policy committee) minutes left the impression of stronger underlying GDP growth by leaving its asset purchase program unchanged. Unfortunately for future generations, the economy entering an official recession could now sway the BoE towards expanding its asset purchase program, to try to push the economy towards the 0.8% 2012 growth previously forecasted by both, the International Monetary Fund and the Office for Budget Responsibility. Analyst: Donald Linderyd

US FOMC meeting

The Federal Open Market Committee (FOMC), in a meeting held yesterday, kept key interest rates in the US economy between 0% and 0.25%, and stuck to its pledge to hold the rate steady at least until 2014 to support economic growth. The committee did not hint at extending the quantitative easing (QE) program in the near term. In fact, Fed chairman Ben Bernanke said further QE would be ‘reckless’, unless the recovery falters. The Fed expects the US economy to grow moderately in the near term and anticipates a gradual recovery in the labour market. It boosted the forecast for growth in 2012 to between 2.4% and 2.9%. US Federal Reserve Chairman, Ben Bernanke, said the US economy was ‘expanding moderately’ but risks remain. He added that the US labour market was improving, but acknowledged that unemployment continues to be high. Consumer spending and business investment saw an uptick. Housing continues to be a drag on the economy and rising energy prices have fuelled the threat of inflation. Analyst: Donald Linderyd

Our view: The Fed’s view on the economy was more subdued than in the previous month. This was largely expected after recent indicators, including a slower than expected pick-up in job creation, showed the US recovery hit a soft patch as it entered Q2 2012. Though the Fed did not signal another round of QE, it has not taken the option off the table yet. Analyst: Donald Linderyd

US durable goods

New orders for durable goods decreased 4.2% m-o-m in March following a revised 1.9% m-o-m increase (2.4% reported earlier), the US Department of Commerce reported yesterday. The fall, the largest since January 2009, was ascribed to a 47.6% drop in highly volatile orders for civilian aircraft. Excluding transportation, orders for durable goods declined 1.1% after increasing 1.9% in February. Analyst: Donald Linderyd

Our view: The drop in orders for durable goods and data released last week showing industrial production stagnated for the second consecutive month in March indicate that the manufacturing sector lost steam as it entered Q2 2012. Analyst: Donald Linderyd

US MBA mortgage applications

Applications for mortgages decreased 3.8% w-o-w in the week ended 20th April 2012 despite a decline in average mortgage rates, the Mortgage Bankers Association (MBA) said yesterday. Applications for refinancing dropped 5.6%, while applications for home purchases increased 2.7%. Refinancing applications constituted 73.4% of total applications, down from 75.2% the previous week. The average rate for a 30-year fixed rate mortgage declined slightly to 4.04% from 4.05%. Analyst: Donald Linderyd

US capital goods orders

Orders for non-defence capital goods, excluding aircraft, fell 0.8% after an upwardly revised 2.8% in February, the US Department of Commerce said yesterday. However, the shipment of such goods climbed 2.6%, building on the 1.4% increase the previous month. Capital goods orders are generally viewed as a proxy for business investment. Analyst: Donald Linderyd

The Markets

Market opening: Markets could open higher today, taking cues from the US and Asia, where most indices closed with gains. FTSE futures, trading 5.5 points up at 7:00am, concur. GDP data to be released later today could guide markets further.

New York: Wall Street continues to trend higher due to strong results this earnings season. Better than expected earnings from Apple and other manufacturers like 3M helped the S&P 500 index to close 0.4% higher yesterday.

Asia: Markets were trading higher on solid US corporate results and expectations that Bank of Japan would ease the monetary policy later this week. After four days of consecutive losses, the Nikkei closed 1.0% higher today. Meanwhile, the Hang Seng was trading 0.1% down at 7:00 am today.

Continental Europe: Relatively successful auctions of Dutch, Italian and Spanish bonds soothed anxious investors and helped markets reverse Monday’s losses. However, trading volumes remained thin, indicating the sentiment is subdued. The German DAX and the French CAC 40 gained 1.0% and 2.3%, respectively.

UK small caps: The FTSE AIM All-Share index closed flat yesterday.

Today’s news

US Fed’s FOMC meeting today; all eyes on QE3 clues

The US Federal Reserve will hold its monthly policy meeting today. The Fed’s stance on the economy is expected to be slightly more optimistic, but any revision in interest rates seems unlikely. However, the Federal Open Market Committee (FOMC) meeting will be closely watched for indication on further QE in the near future.

UK to reveal Q1 2012 GDP figures today

The UK is set to reveal its GDP figures today. The country would discover if it has slipped into a technical recession (two consecutive quarters of contraction) after having contracted 0.3% in Q4 2011.

Company News

ARM Holdings (LON:ARM)

ARM Holdings announced Q1 2012 earnings yesterday. Revenue grew 14.2% to £132.5m as shipment of chips in consumer and embedded digital devices jumped 15% y-o-y. The company shipped 1.1bn chips to be used in mobile phones and tablets, similar to that in Q1 2011. Licensing revenue, which constitutes 37% of group revenue, increased 20.6% y-o-y to £48.5m. Underlying pre-tax profit rose 22% to £61.9m as operating margin improved to 44.5% from 42.5% in Q1 2011. Net profit rose 74% to £37.4m. EPS increased to 2.7p from 1.6p in Q1 2011. During the period, ARM signed 22 processor agreements. The management was confident about meeting full year expectations.

Our view: We believe the markets have overemphasised rival Intel’s mobile phone design wins and the lack of ARM chips in, yet to be released, Windows 8 PCs and tablets. The q-o-q drop in shipments of chips has clouded matters further. Nonetheless, the management expects the industry to improve in H2 2012 and see an increase in demand for ARM’s chips, which are smarter and more power efficient. The recent joint venture with Europe-based Gemalto and Giesecke & Devrient, to create devices with enhanced security for executing online transactions, is also likely to spur growth. This should help preserve ARM’s long-term growth prospects.

Associated British Foods (LON:ABF)

Associated British Foods released results for 24 weeks ended 3rd March 2012 yesterday. Pre-tax profit rose 3% to £329m following an 11% jump in revenue to £5.8bn. Revenue from sugar increased 17% to £1.2bn supported strong sugar sales in the UK and favourable regional pricing. Primark revenue increased 15% to £1.6bn spurred by new store openings; like-for-like sales grew 2%. Grocery revenue increased 4% to £1.8bn. Operating profit was up 6% to £378m. The 59% jump in operating profit from sugar to £172m helped offset the decline in grocery operating profit to £75m from £109m in H1 2011 (ascribed to the restructuring costs at Australia’s George Weston Foods and Allied Bakeries in the UK). Operating profit at Primark improved marginally to £154m from £151m in Q1 2011 as the company decided against passing on high cotton prices to customers. EPS increased 3.6% to 31.7p and interim dividend was up 8% y-o-y to 8.5p.

Our view: AB Foods impressive top-line growth masks the pressure on operating margin. High input prices at Primark and restructuring costs at the grocery division continue to impact overall profitability. Nonetheless, the management expects lower cotton price and space additions to accelerate growth at Primark in FY2012. The efforts to streamline the grocery operations should also pay off. However, at the current valuation we believe the market has priced in most or the positives and we see little potential for further price outperformance.

Reed Elsevier (LON:REL)

Reed Elsevier issued a trading statement for Q1 2012 yesterday. Underlying growth in Q1 2012 followed the trend set in FY2011. At the Elsevier division, subscription renewals progressed well. In FY2012, the management expects growth in research volumes and the growing demand for electronics to drive moderate underlying growth in revenue and profit. The performance of LexisNexis risk solutions is expected to be mixed, with the insurance and business services expected to grow while the outlook for screening services remains uncertain. In Q1 2012, LexisNexis Legal & Professional saw marginal improvement in underlying revenue. However, the management said, difficult market conditions have limited the scope for enhancement of margins and revenue. Reed Exhibitions completed the buyout of a joint venture in Brazil and made bolt on acquisition in China and in the alternative energy sector. The division reported good growth in annual events in Q1 2012 and expects this to continue through FY2012. H1 2012 will also see the positive impact of biennial cycling. Revenue at the Reed business information division was impacted by the disposal of Total Jobs. Further restructuring plans include the divestment of the Australian magazine and marketing operations and disposal of Variety, the US-based entertainment focused publication. The growth in data services is expected to offset the slump in print advertising. In FY2012, the management expects further underlying growth in revenue and profitability.

Our view: Contrary to the markets opinion of the stock having consumer-staples-like qualities, we see Reed Elsevier as a relatively defensive media stock with a highly diversified portfolio. We like the shift in the management strategy to increase exposure to digital media. The restructuring of the business information unit is expected to enhance underlying growth and profitability. Expansion into emerging markets of China and Brazil should drive growth. Maintaining our long-term view on the stock, we reiterate our buy rating.

BBA Aviation (LON:BBA)

Yesterday, BBA said Q1 2012 revenue grew 2% but declined 1% after adjusting for fuel prices. Revenue from the aftermarket services and systems division increased 15% while that at the flight support arm declined 8% (after adjusting for fuel prices). An unusually warm winter in North America limited growth in de-icing revenue against strong comparables in Q1 2011. The management expects the muted growth in North American and European air traffic seen in Q1 2012 to continue in Q2 2012. In FY2012, they anticipate growth at major markets to be low and volatile.

Carpetright (LON:CPR)

Carpetright issued a profit warning yesterday after total sales declined 4.2% in the 11 weeks ended 14th April 2012. Total sales in the UK decreased 3.2% but were up 1.4% on a like-for-like (LFL) basis. Performance in the UK was impacted by below forecast sale of the bed range launched in early 2012. In Europe, sales were down 4.7% and LFL sales declined 4.4%. After accounting for adverse currency movements, sales in Europe slumped 8.0%. The management said weak consumer confidence in the Netherlands and Belgium was affecting the floor coverings markets. Consequently, they expect underlying pre-tax profit to be in the range of £3m-£4m.

Filtrona (LON:FLTR)

In an interim statement issued yesterday, Filtrona said revenue rose 22% y-o-y on a constant currency basis. Like-for-like (LFL) revenue increased 8%. Revenue at the protection & finishing products division soared 63% y-o-y helped by last year’s acquisition of Reid Supply Company and Richco. Revenue at the division grew 14% on a LFL basis. The porous technologies, coated & security products and the filter products division grew 3%, 5% and 7%, respectively. The company completed the £6m acquisition of Securit World in February. The acquisition of the South Korea-based Jae Yong Co, for an undisclosed amount, was completed yesterday and is expected to be earnings accretive. The management said that the integration of all the acquired businesses was progressing well and the company remained on track to achieve the Vision 2015 target of mid-single digit LFL revenue growth and double digit adjusted EPS growth.

Economic News

US consumer confidence

Consumer confidence in the US slipped to 69.2 in April from 69.5 in March, the Conference Board reported yesterday. The present situation index increased to 51.4, the highest level since September 2008. However, the forward looking expectations index, which measures expectations for the next six months, dipped to 81.1 from 82.5 the previous month.

Our view: Consumer confidence shrank contrary to economists’ expectations that it would rise to 69.7. Consumer confidence is seen as the forward indicator of consumer spending, which is vital for the economy. Consumer confidence may have been hurt by last month’s employment report showing that job additions had slowed, and the fact that cost of fuel had risen without a corresponding increase in wages.

US new home sales

Sales of new homes declined 7.1% m-o-m to a seasonally-adjusted annual rate of 328,000 in March, following a sharp upwardly revised 7.3% m-o-m increase in February, the Commerce Department said yesterday. On an annual basis, new home sales advanced 7.5% y-o-y and Q1 2012 sales increased 16% after jumping 45% in Q4 2011. The inventory of unsold homes fell 144,000, the lowest since recordkeeping began in 1963. The median prices of new homes sold declined 1.0% m-o-m to US$234,500 in March.

Our view: Despite the drop in sales, new home sales were better than what economists had anticipated. Sales increased to 318,000 compared to the 313,000 reported previously in February. The availability of foreclosed houses (generally offered at deep discounts) resulted in oversupply, which pushes prices down and hampers recovery in the housing market. A weak housing market has so far dragged the US recovery and is also likely to influence the Fed’s FOMC meeting scheduled today.

US house price index and S&P/Case-Shiller house price index

The Federal Housing Finance Agency (FHFA)’s house price index gained 0.4% y-o-y in February, the first annual gain since July 2007. However, the S&P/Case-Shiller home-price index showed a sixth straight decline as house prices decreased in 16 of the 20 cities it monitors. Nonetheless, the index shed just 3.5% y-o-y, the smallest annual fall so far, indicating the drop in house prices has decelerated.

Our view: Rising foreclosures are deadweight on the US housing market. The abundant supply of cheap foreclosed property continues to pressure prices. However, the FHFA’s index, which registered the first annual increase in five years, and deceleration of the S&P/Case-Shiller index decline suggests the housing market could be stabilising.

US Richmond Fed manufacturing survey

The Richmond Fed manufacturing index doubled to 14 in April from 7 in March, beating economists’ estimate that the index would slip further to 6. The sub-index of shipments added 2 points over the previous month to settle at 18. The index for new orders jumped to 13 from 11 in March. The employment sub-index gained 4 points to 10 in April. The business outlook was more or less confident as the index of expected shipments increased to 28. However, the index for new order expectations declined to 29 from 32 the previous month.

Market opening: Markets are poised for a marginally higher opening as investors pause after yesterday’s fall. The FTSE futures were trading 19 points up at 7:00am.

New York: The political crisis in Europe coupled with the region’s worse than expected economic data pressured Wall Street. The S&P 500 closed 0.8% lower yesterday.

Asia: The Dutch government resignation increased uncertainty in the Eurozone, limiting Asian gains. The Nikkei closed 0.8% lower and the Hang Seng was flat at 7:00am.

Continental Europe: Weaker than expected economic data, the breakdown of the Dutch coalition and Hollande leading after the first round of the French election hit the sentiment causing a sharp sell-off in equities. The German DAX plunged 3.4% and the French CAC 40 shed 2.8%.

UK small caps: The FTSE AIM All-Share index ended 1.1% lower yesterday. 

Today’s news

Dutch coalition government falls over budget cuts

Dutch Prime Minister, Mark Rutte, offered the resignation of his 18-month old minority coalition government to Queen Beatrix after the populist Freedom Party withdrew support over differences about budget cuts. The political vacuum could push the state into elections as early as June. The resultant uncertainty poses a threat to the nation’s AAA rating unless parties in and outside the coalition reach a consensus on budget cuts. The political paralysis in the Netherlands, which has been Germany’s closest ally in enforcing fiscal discipline in the Eurozone, could also affect implementation of EU’s fiscal compact. German Chancellor Angela Merkel’s fiscal compact seems to be in jeopardy with support from the Netherlands faltering and French presidential election frontrunner, Francois Hollande, vowing to renegotiate the agreement.

Argentina put on negative watch by S&P

S&P revised the outlook on Argentina’s credit to negative from stable, citing government policies since the October 2011 presidential elections, including the government’s latest act of expropriating energy company, YPF, from Spain’s Repsol.

Company News

Greene King (LON:GNK)

Greene King issued a pre-close trading update yesterday. In the 50 weeks to 15th April 2012, retail like-for-like (LFL) sales rose 4.6%. LFL sales in the last 13 weeks were up 4.5%. Food LFL sales, a part of retail arm, increased 6.3% and 6.7% in the 50- and 13-week period respectively. Greene King acquired or developed 37 new sites for the retail expansion. The Hungry Horse retail brand now boasts of 180 outlets in the UK. At Pub Partners, the leased and tenanted pub operations, average EBITDA per pub in the past 48 weeks increased to 3.8% (from 3.0% in H1 2012) but LFL EBITDA was down 0.1%. Meanwhile, core estate LFL EBITDA increased to 0.5%. As a part of a strategic plan, the company disposed off 97 non-core pubs from this division. The brewing and brands division saw the re-launch of Greene King IPA, the cask ale brand, and introduction of two news beers – Greene King IPA Gold and Greene King IPA Reserve. A marketing budget of £4m was earmarked for the launch. In the 50-week period, core own-brewed volumes increased 0.8%. The company expects to benefit from the upcoming events in the summer such as the Diamond Jubilee, Euro 2012 and the Olympics, said Rooney Anand, the CEO.

Our view: Greene King witnessed a pick-up in LFL retail sales compared to 4.0% growth seen in H1 2012. Also, the disposals at Pub Partners seem to be improving profitability. However, at the current price, the share seems fairly valued. Seeing better opportunity elsewhere in the sector we reiterate our Hold rating.

Stagecoach (LON:SGC)

Stagecoach released a pre-close trading update for the 48 weeks to 1st April 2012 yesterday. The company said overall profitability remained good. Like-for-like (LFL) revenue grew 2.7% at the UK bus operations and 8.8% at the UK rail operations. The Virgin rail group recorded LFL revenue growth of 7.9%. In the eleven months to 31st March, the LFL sales at the North American operations soared 14.0%. The management expects to maintain stable levels of operating profit in the next fiscal year.

Our view: The performance at the North American operations improved as the US economy picked up momentum. However, the growth at the UK operations has slowed over the past two months. In the 40-weeks to 5th February, the UK bus and rail operations grew 3.0% and 9.5%, respectively. Though the cost-saving initiatives are expected to help maintain current profitability, we expect overall profitability to stagnate until 2013. With little opportunities of growth in the offing, we don’t expect to see consensus estimates to improve and have a hold rating on Stagecoach.

Cable & Wireless Worldwide (LON:CW)

Cable & Wireless Worldwide (CWW) announced the acceptance of the £1.0bn or 38p per share cash offer by Vodafone yesterday. This price represents a 107% premium on the average closing price of CWW share for the three months to 10th February 2012, when the news of the offer went public. However, the company’s top shareholder, Orbis Holdings, which holds 19% of the shares, said Vodafone’s offer does not appear to reflect Cable & Wireless inherent value. Vodafone needs 75% support from shareholders.

Our view: India’s Tata Communications had also expressed an interest in acquiring CWW, but withdrew their offer on Wednesday, as it could not reach an agreement on price. Cable & Wireless clearly does not have the strategy in place to capitalise on its assets, which leaves shareholders with few options. In the absence of a counterbid for a company which has issued three profit warnings since March 2010 and despite Orbis’ comments, we see limited upside. The current 5% discount to Vodafone’s offer represents the cost of carry until the deal closes and some uncertainty that Orbis may block the deal. However, Orbis blocking the deal would be another negative for CWW’s share price. Therefore, as Vodafone is dictating the terms, we advise investors to exit.

Economic News

Eurozone PMI

The Eurozone preliminary composite purchasing managers’ index (PMI) shrank to a five-month low of 47.4 in April from 49.1 in March, market research firm Markit said yesterday. The manufacturing PMI hit a 34-month low of 46.0 in April from 47.7 in the previous month. The services PMI declined to 47.9, the lowest in five months, from 49.2 in March.

Our view: The decline in the composite PMI defies economists expecting a rise to 49.3. They were expecting the manufacturing PMI to improve to 48.1 and the service PMI to come in marginally better at 49.3. The reversal of the PMI indicates that economic activity in the Eurozone contracted more than expected and suggests that the double dip recession could extend into Q3 2012.

Eurozone debt/GDP ratio

Governments in the Eurozone cut the budget deficit to 4.1% of 2011 GDP after running a 6.1% deficit in 2010, the Eurostat reported yesterday. However, debt as a % of GDP increased to 87.2% (or €8.2tr) from 85.3% in 2010 as economic growth slowed.

Our view: The members of the Eurozone are still a long way from achieving EU’s target of limiting budget deficit to 3.0% and maintaining a debt to GDP ratio of 60%. Though the austerity plans by the governments in the Eurozone have been successful in reducing the deficit, the slowdown in growth seems to be pushing the region into a deeper recession causing the debt to GDP ratio to rise. Also, though the 17-member Eurozone agreed to stricter budgetary discipline by ratifying the fiscal compact, recently Spain said it will not be able to meet fiscal targets. Italy followed suit saying the worsening recession would mean it will have to keep its balanced budget plans on hold.

German PMI

The German manufacturing PMI slipped to a 33-month low of 46.4 in April from 48.4 in March, Markit said yesterday. The services PMI improved 0.5 points to 52.6 from 52.1 in the previous month. Consequently, the composite PMI dropped to 50.9 in April from 51.6 in March.

Our view:Services PMI increased more than the 52.3 expected by economists but the manufacturing PMI disappointed by failing to meet expectations of an improvement to 49.0. This suggests that the increase in trade with Asia and the US has not been able to compensate for the decline in orders from the Eurozone. The contraction in output not only raises concerns about Germany’s ability to drive growth in the Eurozone but also casts some doubt over the upbeat business confidence surveys.

The Markets

Market opening: Markets could open lower as investors turn cautious and watch for signs of recovery in the region from Eurozone PMI data expected to be released today. FTSE futures were trading 19.5 points lower at 7:00am today.

New York: The S&P 500 ended a volatile week higher as better than expected corporate earnings at home outweighed the threat of the Eurozone crisis returning. The index closed 0.1% higher on Friday, taking weekly gains to 0.6%.

Asia: Markets were trading lower as weak corporate earnings disappointed investors and the HSBC Flash PMI for China indicated factory activity in the country was stabilising. The Nikkei closed 0.2% lower, while the Hang Seng was trading at 0.8% 7:00am.

Continental Europe: Markets ended a volatile week higher as banking and mining stocks recovered. The German DAX soared 1.2% led by a surprise surge in German business confidence, and was the best performer. The French CAC 40 rose 0.5%.

UK small caps: The FTSE AIM All-Share index ended 0.3% lower on Friday.

Today’s news

Factory activity in China stabilising – HSBC Flash PMI

The HSBC Flash manufacturing purchasing managers’ index (PMI) moved up to 49.1 in April from 48.3 in March. Though the reading below 50 still implies contraction in factory activity, the recovery in the new orders and new export orders helped the headline index recover. The uptick in manufacturing suggests that monetary easing at the beginning of this year has stimulated factory activity. This should ease concerns about a hard landing of the economy, especially as recovery in the US is showing signs of cooling.

IMF coffers get US$430bn boost

The International Monetary Fund (IMF) received commitments for US$430bn from the world’s leading economies, effectively doubling its lending capacity. These funds will be used to shield the global economy from the Eurozone debt crisis, but it is still not clear how Eurozone countries would access the funds.

Company News

William Hill (LON:WMH)

The interim statement released Friday showed group revenue at William Hill rose 12% in Q1 2012 ended 27th March 2012. Retail revenue grew 5% due to a 2% expansion in amounts wagered. Gross machine win per week increased 3.7% to £918. Online revenue increased 33%. Operating profit was 19% higher y-o-y. Sportbook net revenue increased 58% y-o-y, with bets placed via mobiles accounting for 19% of total sportbook revenue. Amounts wagered at sportbook grew 31%. The management said its application for a gaming license with the Nevada Gaming Commission is progressing well. Considering the positive underlying trend set in Q1 2012, they remain confident of meeting full year expectations.

Our view: William Hill’s mobile app was well received and boosted online sales. The company said its licensing application with the Nevada Gaming Commission, which will enable it to expand its operations into the US through acquisition of three land-based sports betting businesses, is progressing per schedule. Also, its relationship with software partner Playtech seems to have thawed. Following the report we expect to see further upward revisions in earnings estimates and raise our rating to buy.

IMI (LON:IMI)

IMI issued an interim management statement for Q1 2012 on Friday. Revenue grew 8% y-o-y. Organic revenue increased 6%. Revenue from severe services rose 30% y-o-y (20% organically) as increased output from the Brno facility helped improve new valve shipments. The management expects this growth to normalize in Q2 2012, as the division faces tougher comparables from the previous year. Fluid power revenue was sIMIlar to that in Q1 2011 as growth in US and Asia offset weak sales in Europe. Though construction activity in Europe remained weak, energy efficiency legislation helped drive revenues at the indoor climate division. In Q1 2011, merchandising division saw organic revenue grow 14%. The management said the weakening of the Pound sterling against the US dollar while strengthening against the Euro, posed significant headwinds to the business. However, H1 2012 results are expected to be in line with management expectations.

Our view: In February, IMI announced that the acquisition of Remosa SpA (€82.4m) and Grupo InterAtiva (£22m) strengthened its position in South America. However, on Friday, the management said that growth is expected to moderate in 2012. They also expect to face “transactional headwinds” due to currency movements. Taking stock of these announcements, we see better opportunity elsewhere in the sector and maintain a hold rating for IMI.

Rotork (LON:ROR)

Rotork released an interim statement for Q1 2012 ended 30th March 2012. Revenue grew 26% y-o-y and organic revenue on a constant currency basis grew 14%. Q1 2012 order book increased 7.2% y-o-y to £169m. The controls division saw a slight slowdown in China, but the management considers that long term prospects have yet not changed. Increase in business in other geographies contributed to growth. The controls division is set to launch new products. However, new product introductions and inflationary pressures are driving up costs for the company. At the fluid systems division, order intake expanded 36% y-o-y, but the lag in conversion of sales will skew revenue realisation towards H2 2012. The margin target for the division remains 15%. The newly formed instruments division is looking at leveraging the Group’s global presence to expand in the other markets such as Singapore, China, India, Russia, Mexico and Brazil. The strength of the order book and strong order intake offered the management confidence about growth in 2012.

Our view: Rotork’s new instruments division should be able to utilise the company’s wide geographic footprint to quickly gain a toehold in the emerging markets, opening up further growth avenues for the company. Its strong order book and order intake in Q1 2012 offer enhanced revenue visibility. However, we believe the recent appreciation in the share price (14% over the past three months) factors in most of these positives and the stock looks fully valued.

Spectris (LON:SXS)

On Friday, Spectris released an interim statement for Q1 2012 ended 31st March 2012. Revenue rose 21% y-o-y due to higher contribution from acquisitions. Like-for-like revenue increased 5%. Geographically, Asia-Pacific and North America saw organic revenue growth of 7% each, while Europe increased 2%. The management said 2012 growth rates have moderated after recovering sharply in 2011. Nonetheless, they remained confident of performance for the remaining year as investment in new products and acquisitions spur growth.

Our view: Acquisitions of rivals Omega Engineering and Sixnet in 2011, coupled with the strong performance in the Asia Pacific region (33% of sales last year) continues to fuel growth for the company. With the enhanced focus on cost rationalisation by most companies in the current economic environment, the demand for the Spectris’ productivity enhancing equipment is expected to rise.

SuperGroup (LON:SGP)

SuperGroup issued an update for the financial year ending 29th April 2012, last Friday. The fashion retailer said profit before tax for the year is likely to be £43m versus the expectations of £50m, previously. The downward revision in profit was due to “arithmetic errors” worth £2.5m in the forecast of the wholesale business. The wholesale business is also likely to experience a shortfall of £2.0m due to the pull-down of stock over the year end period by both franchise and wholesale customers. Further, the retail sales, though in-line with expectations, could be reporting lower margins. Shares of SuperGroup lost 38% of their value on the profit warning

Economic News

UK Retail sales

Retail sales in the UK surged 1.8% m-o-m and 3.3% y-o-y in March following a m-o-m gain of 0.8% and an annual gain of 1.0% in February, the Office of National Statistics said Friday. Q1 2012 recorded a 0.8% growth in retail sales compared to 1.1% in Q4 2011.

Our view: The stronger growth in retail sales surprised economists who were expecting an increase of 0.4%. Warm weather and panic buying of automobile fuel following a strike threat issued by fuel–tanker drivers helped retail sales rise in the month. Nonetheless, the data suggests resilient consumer spending, in the face of high unemployment and inflation, probably saved the economy from slipping into a recession in Q1 2012.

Germany IFO Survey

Business confidence in Germany continued its upward trend after edging up to 109.9 in April from 109.8 in March, the IFO Institute said on Friday. The sub-index of current expectations rose to 117.5 from 117.4, while the future expectations index remained unchanged at 102.7.

Our view: Economists had forecast the headline index to fall to 109.5. However, the actual performance indicates that the economy continues to outpace its neighbours. The continuous uptrend also suggests that economists may have underestimated the underlying strength of the German economy. However, the imminent recession in Germany’s core trading partners in the Eurozone, tepid recovery in the US and a soft landing expected in China could affect export growth in Germany.

German producer prices

Producer prices in Germany rose 3.3% in March up from a 3.2% in February, the Destatis reported yesterday. Wholesale prices accelerated 0.6% m-o-m after rising 0.4% the previous month. Core prices, excluding food and energy, advanced 0.3% m-o-m and 1.6% y-o-y.

The Markets

Market opening: Markets could take cues from Asia and open lower today. FTSE futures were trading 5.5 points lower at 7:00am today.

New York: Lower than expected decline in jobless claims and disappointing housing market data overshadowed expectation- beating earnings from BofA and Morgan Stanley. S&P 500 closed 0.6% lower yesterday as investors turned cautious.

Asia: Lower closing on Wall Street overnight clouded the sentiment. Concerns about rising yields on Spain’s bonds, although the country successfully completed yesterday’s auction, also continued to dampen the risk appetite. The Nikkei closed 0.3% lower, while the Hang Seng was trading flat at 7:00 am.

Continental Europe: Downbeat corporate outlook and poor US data added to the existing concerns about an increase in Spanish yields. Rumours that additional risks due to the upcoming presidential election could lead to a downgrade of France’s rating further dampened the sentiment. The German DAX and French CAC 40 closed 0.9% and 2.1% lower, respectively.

UK small caps: The FTSE AIM All-Share index ended 0.2% lower yesterday.

Today’s news

Asia and LatAm to drive global economy in 2012 – Poll

The global economy is expected to grow 3.3% as Asia and Latin America remain the main drivers, as per a poll by Reuters. Easing of the monetary policy in Asia is likely to spur growth in the region. Recovery in the US, though one of the best among its western peers, has not been as good as expected. Yet, the economy is expected to grow 3.2% in 2012 and 4.3% in 2013. The Eurozone, with large variation in the pace of growth among northern (Germany and France) and southern economies (Italy, Spain and Greece), could experience a mild recession until Q3 2012, leading to a contraction of 0.4% in 2012.

Company News

WH Smith (LON:SMWH)

WH Smith announced interim results for the period ended 29th February 2012 yesterday. Revenue from travel increased 3% y-o-y to £217m, but failed to lift total group sales, which shrank 3% y-o-y to £665m due to a 5% y-o-y decline in high street total sales to £448m. Like-for-like (LFL) sales fell 5% with travel LFL sales down 3% and high street LFL sales down 6%. Excluding entertainment, high street LFL sales declined 4%. Nonetheless, gross margins improved 130 basis points. Trading profit from operations rose 3% to £74m. Operating profit from travel surged 8% to £27m and that from high street was stable at £47m. Pre-tax profit climbed to £66m from £64m in H1 2011. EPS jumped 14% to 40.0p. The management declared an interim dividend of 8.3p per share, up 15% y-o-y. They realised cost savings of £8m at high street and expect to save another £3m in H2 2012. The retailer has plans to open 20 new shops in India, Australia, Qatar, Gibraltar and Dubai taking the total number of international stores to 80. Commenting on the outlook, CEO Kate Swann mentioned trading conditions to be challenging in the near future.

Our view: Despite declining sales WH Smith has been able on expand profit and improve margins by shifting focus to higher margin products at more profitable outlets. The decision to move away from the entertainment business, due to escalating online competition and the successful implementation of the cost saving plan at its high street stores is expected to steer the division on the path to growth. Further, the retailer has decided to tap into international markets to compensate for stagnating growth in the UK. We appreciate the management’s hands-on approach toward value creation while negotiating the current economic situation and retain our buy rating for the stock.

African Barrick Gold (LON:ABG)

African Barrick Gold declared results for Q1 2012 ended 31st March 2012 yesterday. Production of gold declined 17% y-o-y to 144,643 ounces due to the waste stripping exercise at North Mara and planned reduction of head grade at the Buzwagi mine. Revenue rose slightly to US$267.5m from US$266.6m, largely benefiting from 22% rise in the average price realisation for gold. EBITDA declined 15% to US$90m as cash costs increased 41% on account of rising energy costs and lower production base. EPS fell 30% to US$0.086 per share. The exploration at Nyanzaga has revealed reserves in excess of 4.6m ounces. The management expects lower grade to affect production till the activity at the North Mara mine picks up in H2 2012. They kept the full year target of producing 675,000 to 725,000 ounces at cash costs of US$790 to US$860 per ounce unchanged.

Our view: The company’s Q1 2012 performance was against weaker comparables of Q1 2011 when output dropped due to power shortage in Tanzania. Though the management has maintained its full year production target, judging the Q1 2012 performance, we feel production could more likely be at the lower end of the range, hence disappoint once more. Furthermore, the drop in production is driving down economies of scale, raising the cash cost per ounce of gold mined, and eroding profitability. Though the exploration activity has yielded promising results, immediate opportunities for production growth appear limited, prompting us to downgrade the stock to hold.

Debenhams (LON:DEB)

Debenhams announced results for the 26 weeks to 3rd March 2012 yesterday. Revenue rose 1.3% to £1.2bn. However, operating profit declined 2.0% to £134.9m. Reported pre-tax profit increased 1.4% to £127.1m and EPS was up 4.2% to 7.4p. Group like-for-like (LFL) sales increased 1.4%, including VAT. LFL sales, excluding VAT, increased 0.3%. The management announced an initial share buy-back programme of £20m to be completed over the next six months, with a possible extension. They remained cautious about the outlook for H2 2012 as disruptions due to refurbishment at stores are expected to be higher than that in H1 2012. The management were uncertain about the impact on sales of the major events scheduled for the summer, but were ‘comfortable’ with full year market expectations.

Our view: Debenhams’ aggressive discounting and promotion activities have helped attract customers. Moreover, this has not had a major impact on margins. However, we expect Debenhams to face significant headwinds as the economy struggles with growth and consumers get more cautious of every penny they spend. We do not expect any major boost to sales from the summer’s big events as any uplift is likely to be offset by store revamping disruptions. Under these conditions and at the current valuation Debenhams may struggle to outperform.

International Power (LON:IPR)

In an interim statement released yesterday, International Power said, Q1 2012 revenue rose 5% to £4.3bn. Top line growth was powered by strong business from the emerging markets. Revenue from operations in Asia and Latin America increased 22% and 16%, respectively. Middle East, Turkey and Africa saw revenue growth of 8%. Trading conditions in the UK remained weak, with revenue remaining flat. Revenue from North America declined 2% as mild winter affected LNG and retail business. Revenue from Australia shrank 5%. The management remained optimistic about future growth as they see full year contribution from new plants that became operational last year and from new capacity additions planned for 2012.

Our view: The exposure to emerging markets is driving growth at International Power. Moreover, the share of revenue from these markets is increasing. On Monday, GDF Suez offered 418p per IPR share for the remaining 30% stake. The stock is currently trading very close to this offer price. Despite the positive earnings the share price will be driven by GDF’s offer going forward, leaving little room for further appreciation. Since our recommendation on 9th February, the stock has appreciated around 27%. We advice investors to book profits and downgrade the stock to sell.

Anglo American (LON:AAL)

Anglo American released an interim statement for Q1 2012 ended 31st March 2011 yesterday. A reduction in safety stoppages helped platinum production increase 5% to 593,200 ounces. However, production of refined platinum declined 24% to 402,800 ounces due to scheduled maintenance work at the plant. Production of copper, which contributes about a third of Anglo’s profits, was largely in line with Q4 2011 production and increased 21% y-o-y to 168,400 tonnes. Contributions from the Kolomela mine in South Africa and improvement at the Amapá mine in Brazil helped iron ore production rise 17% to 11.7m tonnes. The company reported having received all approvals for the acquisition of De Beers and expects to complete the transaction by H2 2012.

Ladbrokes (LON:LAD)

Ladbrokes announced interim results for the three months ended 31st March 2012. Group net revenue increased 8.9% during the quarter. Group operating profit came at £50.4m, about 3.9% higher reflecting growth in UK and European retail. A 21.7% jump in machine net revenue helped the UK retail performance. The average gross win per terminal week was £923 in Q1 2012 compared to £791 in Q1 2011. Ladbrokes opened 10 new shops during the quarter. Net revenue in Ireland grew 19.9% y-o-y and the business in Madrid benefits from growing amounts staked. The Belgium operations enjoyed a massive 50% jump in operating profit due to change in the tax regime introduced in 2011. Digital net revenue for the company grew 5.9% due to growth in sportsbook which clocked double digit growth of amounts staked. However, introduction of 20% machine games duty from 1st February 2013 for bookmakers and the wider gambling industry was shown as concerning. Richard Glynn, the CEO, said the investments in digital marketing should drive growth in the top line, going forward.

Persimmon (LON:PSN)

Persimmon issued its first interim management statement for 2012, yesterday. The management said the business witnessed a strong start to the current year. Visitor levels at sites over the first fifteen weeks have been 10% higher with low cancellation rates. The level of customer enquiries registered on the website have been encouraging and should rise further following the launch of the NewBuy 95% loan-to-value mortgage guarantee product by the government. The company’s order book grew 9% y-o-y to £1.24bn. Persimmon also plans to return £1.9bn to the shareholders over the next nine and a half years. Despite difficult business conditions in the housing market, the management indicates that it was confident to do well.

SABMiller (LON:SAB)

SABMiller yesterday issued a trading update for the 12 months ending 31st March 2012. Group revenue for the year grew 7% on an organic, constant currency basis. Lager and soft drinks volumes were up 3% and 7%, respectively, over the previous year. Group revenue per hectolitre was higher by 4% during the year and 5% during the final quarter. Latin America’s lager volumes were up 8% on an organic basis, with strong growth coming from Peru. Soft drinks volumes in Latin America were 10% higher, due to a pick-up in sales of non-alcoholic malt brands. Africa’s lager volumes for the year grew 13%. Countries like Zimbabwe, Uganda, Zambia and Tanzania contributed greatly to the growth. Lager volumes in the Asia Pacific region rose 4%, with China and India registering volume growth of 4% and 3%, respectively. Lager volumes for the year grew 2% in South Africa. However, in Europe, lager volumes fell 1%, driven by Romania and Poland, where competitor price reductions and promotional activity resulted in volume declines of 8% and 4% respectively.

Economic News

Eurozone consumer confidence

Consumer confidence in the Eurozone dipped to -19.8 in April from -19.1 recorded in March, the European Commission said yesterday. In the 27-member European Union, consumer confidence dropped to -20.1 from -19.3 in the previous month.

Our view: After increasing for the last three months, economists’ were expecting consumer confidence to edge up to -19.0. The European Central Bank’s ultra-cheap loans to the region’s banks helped to lift sentiment earlier in the year. However, the rise in Spanish yields again indicating the probable comeback of Eurozone crisis coupled with the continuing rise in unemployment eroded consumer confidence.

US existing home sales

Sales of previously owned homes in the US fell 2.6% to an annual rate of 4.5m in March, the National Association of Realtors said yesterday. Home sales aggregated 4.6m in February. Economists consider a sales pace of 6m homes healthy.

Our view: A milder winter could have encouraged people to conclude purchases in January and February, thereby pulling sales forward from March. The drop in mortgage rates and pick-up in employment are yet to instil enough confidence among consumers to buy houses.

US leading indicators

The index of leading indicators rose 0.3% in March, building on a 0.7% gain in February, the Conference Board said yesterday. The index is an aggregation of various other indices known to forecast a turn in the economy.

Our view: After data on jobs, housing and output disappointed last month-economists expected the indicator to edge up 0.2%. A marginally better reading of the leading indicators suggests the recovery may not have stalled, with a pick-up expected later in the year.

US jobless claims

Claims filed to collect jobless benefits dropped 2,000 to a seasonally adjusted 386,000, in the week ended 13th April, the US Department of Labor said yesterday. The claims filed for the previous week were revised upwards by 8,000 to 388,000. The four-week moving average, a less volatile indicator, gained 5,500 to 374,750. Economists were expecting claims to fall to 370,000.

US Philadelphia Federal manufacturing survey

The Philadelphia Fed index of business outlook dipped to 8.5 in April from 12.5 in March, well below the consensus estimate of 12.0. The index was weighed down by the decline in the index for new orders to 2.7 from 3.3 the previous month. The index for shipments contracted to 2.8 from 3.5. Manufacturers paid more for raw materials as reflected by a rise in the index for raw materials to 22.5 from 18.7 in March. However, the employment index recorded the best reading (17.9) in 11 months (6.8 in March.)

The Markets

Market opening: FTSE futures, trading 15.0 points up at 7:00am today, indicate a higher opening. The outcome of Spain’s debt auction at 9:30 am today will provide direction as the session progresses.

New York: Wall Street lost ground in the final minutes of trade as lacklustre earnings pushed markets into negative territory. The S&P 500 closed 0.4% lower yesterday.

Asia: Following yesterday’s rally, markets remained cautiously range-bound awaiting results of Spain’s longer termed bond auction due today. The Nikkei closed 0.8% lower, while the Hang Seng was trading 0.3% up at 7:00 am.

Continental Europe: Markets slumped on data showing that bad debts held by Spanish banks had surged to 8.2% of their assets. ECB policymaker Jens Weidmann’s statement that Spain should not ask the bank to help tackle its debt woes dampened sentiments further. The German DAX slipped 1.0% and the French CAC 40 closed 1.6% lower.

UK small caps: The FTSE AIM All-Share index gained 1.0% yesterday.

Today’s news

EU banks may see balance sheets shrinking – IMF

The balance sheets of 58 European banks, including BNP Paribas and Deutsche Bank, could shrink by about US$2.6tr, or 7%, in the next two years, if governments are not able to meet fiscal debt targets or if the Eurozone faces shocks that its firewall cannot contain, the International Monetary Fund (IMF) opined in its Global Financial Stability Report released yesterday. Though steps by the EU and the ECB have placated financial markets, global financial risks have not alleviated from six months ago, the IMF added.

Japanese exports rise on surging US demand

Exports from Japan increased 5.9% y-o-y in March, buoyed by car exports to the US, which helped Tokyo narrow its trade deficit to ¥82.6bn. Though comparisons are distorted by March 2011′s earthquake, the growth supports IMF’s projections that Japan’s economy would grow 2% this year.

Company News

GKN (LON:GKN)

In an interim statement for Q1 2012 issued yesterday GKN said, trading profit grew 19% y-o-y to £142m as revenue rose 17% to £1.7bn. Trading margin improved 20 basis points to 8.2% and pre-tax profit increased 17% to £125m. GKN’s driveline division, which provides automobile parts, saw a revenue jump of 26% to £847m due to strong performance at Getrag Driveline Products which was acquired last year. The other divisions, aerospace, land systems and power metallurgy witnessed revenue growth of 5%, 9% and 20%, respectively. The management said, despite the global economic uncertainty, they expect to make progress this year.

Our view: GKN is expected to reap the benefits from the increase in demand for light vehicles, especially in the emerging markets and the rebound in US market. GKN also counts both Boeing and Airbus among its customers and the expansion of production at these companies is expected to boost the aerospace division. The management said that the recent acquisitions have integrated well and are contributing to the overall growth of the company. With margin improvements registered across all of the four divisions and GKN’s clear growth potential, we reiterate our buy rating.

Tesco (LON:TSCO)

Tesco announced results for the 52 weeks ended 25th February 2012 yesterday. Revenue rose 7.4% to £72.0bn. Excluding petrol, the revenue increase was 5.9%. Underlying pre-tax profit was higher by 1.6% to £3.9bn, while reported pre-tax profit climbed 5.3% to £3.8bn. Operating profit from international operations increased 1.7% to £1.1bn and helped the group operating profit rise 1.3% to £3.8bn despite a 1.0% decline in operating profits to £2.5bn at the UK business. Group like-for-like (LFL) sales, including petrol, advanced 2.4% with LFL sales in the UK registering a 2.8% growth. However, excluding petrol, group LFL sales only improved 0.6% and UK LFL sales declined 0.9%. The management unveiled a plan to reinvigorate its UK operations. The plan includes boosting staff in key departments and revisiting the pricing and promotion strategy. A change in store formats is also on the cards, with management expecting floor space additions to be 38% lower than that in FY2012. Tesco plans to increase investment in its online portal by £150m and aims to extend its click and collect network to cover around 85% of the UK. The management announced a reduction in capital expenditure for FY2013 to £3.3bn after spending £3.8bn in FY2012. The management proposed a final dividend of 10.13p per share.

Our view: Tesco’s plan to boost the UK operations is necessary, as rivals are eating into its market share. However, Tesco still holds around double the market share than its closest rival. The plan to reduce selling space, expanding the click-and-collect format and improving the fresh food department seems to have been in line with analyst expectations. Though this plan could help the retailer re-boot UK operations, macroeconomic headwinds persist as cash-strapped customers are curbing expenses. Given today’s announcement, we do not think the plan is enough to turn Tesco around anytime soon to change our view on the stock.

BHP Billiton (LON:BLT)

BHP Billiton released a production update for Q3 2012 and nine months period to 31st March 2012 yesterday. The management warned that strikes and heavy rainfall at its Queensland mine continues to affect production. They added that depletion of stockpiles could have a severe impact on future performance. On the other hand, iron ore production increased a record 20% y-o-y to 118.6m tonnes during the nine months period, but declined 8% in Q3 2012 vis-à-vis Q2 2012. Production of metallurgical coal edged up 1% compared to the first nine months of FY2012 while q-o-q production declined 14%. Production of petroleum products increased 58% q-o-q to 56.5m barrels of oil equivalent (boe), but shrank 3% compared to the previous quarter. Copper production at Chile’s Escondida mine improved 9% q-o-q, helped by higher ore grades. Though the management expects production at Escondida to improve as mining activity progresses, they left the annual production target for copper unrevised. Annual target of iron ore production was also kept unchanged as scheduled maintenance activities are expected to slow down production in Q4 2012. Production at the petroleum division in on track to meet the annual target of 225m boe.

Our view: We appreciate BHP Billiton’s asset quality and the broad spectrum of its mining activities. However, these positives are already factored into the share price, which commands a premium over Rio. BHP’s shares trade at a P/E of 8.7x compared to Rio’s 7.6x. Also, the management warned that strike at its coal mine in Queensland, Australia is expected to affect full year production and has depleted reserve stockpiles. Coal is one of the major revenue earners for the company. Considering these factors, we prefer Rio Tinto.

Fresnillo (LON:FRES)

Fresnillo issued a production update for Q1 2012 ended 31st March 2012 yesterday. Gold production rose 26.3% to 121,792 ounces, while silver production decreased 2.9% to 9.8m ounces, in line with expectations. Production of lead and zinc increased 19.4% and 18.1% to 6,265 tonnes and 6,925 tonnes, respectively. The Noche Buena mine in Mexico commenced commercial production in March. Further, the management reported that construction of the $106.8m dynamic leaching plant at Herradura, and the exploration programme at San Julián, Orisyvo and Centauro Deep, are both on track.

Hochschild (LON:HOC)

The production results for Q1 2012 showed Hochschild produced 5.1m attributable silver equivalent ounces, which includes 3.4m ounces of silver and 28.3 thousand ounces of gold. This indicates that the company is on track to achieve FY 2012 targeted production of 20.0m attributable silver equivalent ounces. During the quarter, the average realisable price per ounce of silver inched up slightly to US$36.9 from $36.2 in Q1 2011. The average realisable price per ounce gold jumped to US$1,782.1 from US$1,391.4 in the previous year. Furthermore, the company earmarked US$90m, to carry forward its exploration strategy this year, which is an increase of 29% over the previous year.

Bunzl (LON:BNZL)

Bunzl released a trading update for Q1 2012 ended 31st March 2012 yesterday. Revenue grew 7% y-o-y on a constant currency basis. Underlying revenue was 4% higher y-o-y due to strong growth in North America and in Rest of the World. Growth in revenue from UK & Ireland was helped by acquisitions while revenue from Continental Europe was more or less stable. The company said acquisition in 2011 helped improve operating margins. It further informed that a pipeline of targets for acquisition has been set and will drive future growth.

Economic News

UK Bank of England minutes

The minutes of the Bank of England (BoE)’s Monetary Policy Committee meeting, released yesterday, showed members unanimously voted to hold the key interest rate stable at 0.5%. David Miles was the only member seeking an £25bn extension to the BoE’s asset purchase programme. The minutes also revealed that members thought the fall in inflation may be slower than earlier envisaged as rising oil prices pushes up overall prices.

Our view: The overwhelming majority voting against the expansion of BoE’s asset purchase programme dampens market expectations of the Bank pumping more fresh money into the economy. An increase of the £325bn programme would be unwarranted as economic indicators are slowly improving and inflation is stubbornly high.

UK unemployment

The unemployment rate in the UK fell to 8.3%, the Office of National Statistics said yesterday. The number of unemployed fell by 35,000 to 2.65m in the three months to February. Youth unemployment declined to 22.2% from 22.5% in the previous quarter. In March, the claimant count – a gauge of number of people claiming jobless benefits – rose at a slower pace of 3,600 from February to 1.61m. The claimant rate was unchanged at 4.9%.

Our view: The unemployment data confounded economists’ expectations of the unemployment rate holding steady while the claimant count was expected to increase by 6,000. This is the first indication that the labour market could be stabilising as the economy regains momentum. The data suggests that hiring in the private sector is compensating for the cut in public sector jobs. This is good news for the government that is facing increasing criticism for being too aggressive in cutting government spending and derailing the fragile recovery.

US MBA mortgage applications

The Mortgage Bankers Association reported a 6.9% w-o-w increase in total mortgage applications for the week ended 13th April 2012. Applications for refinancing rose 13.5%, while applications for new home purchases shrank 11.2%. The four-week moving average, which smoothes out seasonal spikes, increased 1.6% for the headline index. This average surged 2.4% for refinancing applications and retreated 0.5% for fresh purchase applications. The interest rate for a 30-year fixed rate mortgage decreased to 4.05%, giving up 5 basis points from 4.10% the previous week.

Our view: Mortgage applications shook off the downtrend seen through February and March as refinancing picked up following a drop in interest rates. Interest rates declined in the past week on renewed concerns about the Eurozone debt crisis. The 30-year fixed rate was at the lowest level since the survey in early February. The decline in new purchase applications continued for a second week, reflecting buyers’ apprehension about entering the housing market.

Eurozone current account

The Eurozone current account recorded a seasonally adjusted deficit of €1.3bn in February reversing the €3.7bn surplus in January, the European Central Bank said yesterday.

The Markets

Market opening: FTSE futures were trading one point higher, indicating markets could open flat with an upward bias as investors eye employment data scheduled for release today.

New York: Expectation-beating earnings from Coca-Cola and J&J were the highlights of overall positive earnings data yesterday. This helped the S&P 500 end 1.6% higher.

Asia: The well-received Spanish bond auction and healthy earnings in the US boosted markets. The Nikkei stemmed this week’s losses, closing 2.1% higher after BoJ’s Deputy Governor, Kiyohiko Nishimura, promised policy intervention to support the economy, if required. Meanwhile, the Hang Seng was trading 1.2% up at 7:00 am.

Continental Europe: Upbeat US earnings, unfaltering economic sentiment in Germany, and a better than expected Spanish bond auction lifted markets. The German DAX and the French CAC 40 both closed 2.7% higher.

UK small caps: The FTSE AIM All-Share index gained 0.2% yesterday. To read our latest small cap research, click here.

Today’s news

Spain wows to retaliate as Argentina seizes YPF control

Spain threatened economic sanctions against Argentina after the South American nation unveiled plans to expropriate Spanish company Repsol’s controlling stake in YPF. YPF is Argentina’s largest oil producer. Repsol, too, vowed to fight the takeover, terming it ‘unjustified’. Repsol valued YPF at US$18bn and said it would seek compensation accordingly. Argentina flatly refused to accept this price for YPF. On Monday, Argentina’s President, Cristina Fernandez, ordered the renationalisation of YPF in a populist move aimed at curbing the nation’s surging fuel import bill even as state finances worsen. Argentina is also at odds with Britain over oil exploration activities in the Falkland Islands, over which it claims sovereignty.

Burberry (LON:BRBY)

In a trading update for H2 2012 to 31st March 2012, Burberry said revenue soared by 18% on an underlying basis to £1.0bn as underlying retail revenue climbed 23% to £743m. Underlying wholesale revenue increased 7% to £230m and underlying licensing revenue increased 5% to £54m. Like-for-like (LFL) retail sales increased 13% in Q3 2012 and 11% in Q4 2012 taking H1 2012 LFL sales to 12%. In 2012-13, the company plans to increase average selling space by 12-14% and anticipates licensing revenue to hold steady y-o-y. H1 2012 wholesale revenue is expected to increase in mid single-digi.

Our view: We like Burberry’s structural drivers, geographical diversification, its product mix and strong branding. However, taking into consideration the share price rise of 22% in the past three months and the slow sales growth in H1 2012, we maintain our hold rating. In H1 2012, total revenue increased 29% y-o-y and comparable retail sales grew 16%.

Marks & Spencer (LON:MKS)

Marks & Spencer released a trading statement for the 13 weeks to 31st March 2011 yesterday. In Q4 2011, group sales rose 0.8% and sales in the UK increased 1.2%. Sales at M&S Direct advanced 22.8%. International sales declined 2% as the economic conditions in Greece and Ireland outweighed the strong growth in India, China and the Gulf. Like-for-like (LFL) sales in the UK shrank 0.7% while that at the food division increased 1%. LFL sales at the general merchandise, which includes clothing and homeware, decreased 2.8%. Clothing sales suffered as the retailer miscalculated demand for popular lines of women wear and ran out-of-stock. The management said implementation of new concepts, such as having delicatessens in-store, would cost about £500m, £100m lesser than previously estimated. They said the short-term trading outlook remains challenging but expects 2012-13 gross margins to improve 0-0.25%. Operating costs are expected to rise 3-5% as inflation, depreciation and expansion plans offset savings. Planned new footage additions would be 3% in the UK and around 20% in International markets and capital expenditure is expected to be around £825m.

Our view: M&S’s exposure to emerging markets of India and China, and its food business continue to drive growth and are expected to help the retailer perform despite the gloomy economic environment in the UK. The company’s expectation of the store revamping to cost £100m less than budgeted is an added sweetener, to a stock providing a yield close to 5%, self-help potential and comes at a substantial valuation discount to peers.

Rio Tinto (LON:RIO)

Rio Tinto released a production update for Q1 2012 yesterday. Iron ore production increased 10% y-o-y but declined 13% q-o-q to 59m tonnes. Iron ore shipment increased 2% y-o-y to 54m tonnes. Expansion at the Pilbara mine in Australia increased capacity by 5m tonnes to 230m tonnes while cyclonic activity in Australia hampered shipments. As anticipated, copper production declined 18% y-o-y and 13% q-o-q due to lower grades at Kennecott Utah Copper mine. Production of bauxite, alumina and coking coal increased 10% y-o-y, 13% y-o-y and 5% y-o-y respectively. The company extended its stake in Richards Bay Minerals to 74% after the acquisition of BHP Billiton’s 37% stake. The miner is also reviewing exit options for its diamond business. The shares re-purchase programme concluded on 26th March and the company paid a total consideration of US$7.0bn to buy back 116.9m shares at an average price of £37.47. The miner set the iron ore production target at 250m tonnes and mined and refined copper production target at 600,000 and 320,000 tonnes, respectively. The management described the quarter as ‘solid’ due largely from consistently high operating performance and lower impact from severe weather, but expected the volatility to continue.

Our view: The impact of weather, though not as severe as that in the previous year, hampered production and shipment of iron-ore from Australia. And most analysts’ expect the miner to recover the lost production as the year progresses. China, Rio’s largest market, reported a record 10% m-o-m increase in steel production (for which iron-ore is the main ingredient) in March. The growing demand for iron ore is expected to continue to drive Rio’s growth and support a relatively attractive valuation compared to peers.

Daily Mail (LON:DMGT)

Daily Mail issued a trading update for H1 2012 ended 31st March 2012 yesterday. Revenue fell 2% y-o-y, on a reported basis, but was up 2.0% on an underlying basis. Both operating profit and pre-tax profit is expected to be lower than that in H1 2011. Print advertising continued to weaken, however, the growth in the circulation and digital revenue compensated for this weakness. The company expects to incur an exceptional charge of around £40m in H2 2012 related to the relocation of its printing facilities to Thurrock. The management said the outlook for the year remains unchanged.

Euromoney Institutional Investor (LON:ERM)

Euromoney Institutional Investor said, in a trading statement for H1 2012, that revenue is expected to increase 13% to £189m and underlying revenue growth could be around 5%. Adjusted net profit is expected to be at least £47m (compared to £41.6m in H1 2012) with operating margin steady at 30%. The proportion of revenue from subscription increased to 53% from 49% in the previous year and revenue from the subscription segment increased 22%. The management said, though overall trading conditions were in line with expectations, advertising revenue (13% of total revenue) continues to be challenging. The outlook for the events business, for which the third quarter is crucial, is positive.

UK consumer price index

Consumer prices rose 3.5% y-o-y in March, after advancing 3.4% y-o-y in February, the Office of National Statistics said yesterday. On a monthly basis, the rise in prices decelerated to 0.3% m-o-m compared 0.6% in February. This takes Q1 2012 inflation to 3.5%, slightly above the 3.35% projected in the Bank of England’s February inflation report. Excluding food, energy and alcohol prices, core inflation edged up to 2.5% in March from 2.4% in the previous month.

Our view: Consumer prices rose as promotion activity at supermarkets declined y-o-y. Clothing and footwear prices increased 2.2% y-o-y compared to 1.1% in March 2011 and food and non-alcoholic beverage prices decreased 0.5% against a 1.4% fall in previous year. Inflation declining slower than that forecasted by the Bank of England will make it harder for the central bank to justify its loose monetary policy.

German ZEW survey

The economic sentiment in Germany edged up to 23.4 points in April compared to 22.3 in March, the ZEW Institute said yesterday. The index measuring the current situation rose to 40.7 points from 37.6 points the previous month.

Our view: The survey beat economists’ expectations of a fall in economic sentiment to 19.0, and the current situation to worsen to 35.0. However, the sideways movement of the main index of economic sentiments suggests investor confidence may begin to wane as economic conditions in Germany’s major trading partners worsen.

US industrial production and capacity utilisation

Industrial production, which measures output at factories, mines and utilities, remained unchanged in March compared to February, the US Federal Reserve said yesterday. Output at mines rose 0.2% and activity at utilities increased 1.5%. However, a 0.2% decline in manufacturing activity, which constitutes about 75% of industrial output, offset these increases, resulting in an unchanged reading of industrial production. For Q1 2012, industrial production is 5.4% ahead compared to the previous year, and manufacturing production has risen 10.4% y-o-y. The same report showed capacity utilisation declined to 78.6% in March after an upward revision to 78.7% in February. March’s reading is 1.7% below the long-term average.

Our view: Flat industrial production failed to meet consensus expectations of a 0.3% rise, while capacity utilisation declined a little less than the 78.5 anticipated. Though manufacturing declined for the month, expansion during Q1 2012 suggests the economy is recovering gradually. Capacity utilisation, used to determine the scope for further growth in output without feeding inflation, is also well below its long term average, potentially leaving room for further stimulus, should it be needed.

Eurozone consumer price index

Consumer prices accelerated 1.3% m-o-m and 2.7% y-o-y in March, the Eurostat said yesterday, revising the annual preliminary estimate from the 2.6% y-o-y increase reported earlier. In February, consumer prices increased 0.5% m-o-m and 2.7% y-o-y. Economists expected inflation to be slightly lower at 1.2% m-o-m and 2.6% y-o-y.

US housing starts and building permits

Builders broke ground on fewer homes in March as housing starts slipped 5.8% m-o-m, but increased 10.3% y-o-y to 654,000, the US Department of Commerce said yesterday. Housing starts declined mainly due to a 16.9% drop in construction of multi-unit homes. The number for February was revised downwards to 694,000 from 698,000. Building permits rose 4.5% m-o-m and 30.1% y-o-y to 747,000 in March, the highest level since September 2008, the Commerce Department added.

The Markets

Market opening: Markets could open lower today as investors turn cautious ahead of Spain’s debt auction. FTSE futures were trading 19.5 points lower at 7:00 am. An inflation report due later in the day and M&S’ trading update could help decide market movement.

New York: Upbeat retail sales data spurred an early rally, but Wall Street gave up early gains due to data revealing erosion of confidence among homebuilders. The S&P 500 ended 0.1% lower yesterday.

Asia: Caution about resurfacing of debt worries in the Eurozone restricted an upward movement in markets. Nikkei, ended flat today, while the Hang Seng was trading 0.7% down at 7:00 am.

Continental Europe: Encouraging US retail sales data helped markets advance, while Spain’s debt auction ensured investors remained cautious. The German DAX and French CAC 40 rose 0.6% and 0.5%, respectively.

UK small caps: The FTSE AIM All-Share index ended 0.6% lower yesterday.

Today’s news

Spain to auction 12- and 18-month Treasury bills today

Spain’s borrowing costs on 10-year government bonds rose above 6% Monday as investors envisaged a new crisis brewing in the Eurozone. Madrid’s interest cost soared after Prime Minister Mariano Rajoy lowered the deficit target for 2012 amid fears of Spain entering a second recession since 2009 and effects of the ECB’s ultra-cheap funds begin to wane. Fear of the country’s banks needing recapitalisation with emergency EU funds, also fuelled the rise in yields. Spain aims to raise around €2-3bn at today’s auction. A more difficult sale of 2- and 10-year bonds, aimed at raising €1.5-2.5bn, has been scheduled for Thursday. Meanwhile, to placate investor fears, Madrid threatened to impose stricter control, as soon as May, over its 17 autonomous regions that breach spending limits.

Company News

AMEC (LON:AMEC)

Yesterday, AMEC released an interim statement for Q1 2012 ended 31st March 2012. The order book stood at £3.7bn at March-end compared to £3.1bn at March 2011. The company purchased £75m worth of shares under its £400m share buy-back programme. The management said trading performance in Q1 2012 has been in line with expectations. They estimate underlying revenue growth to be in double-digits in FY2012.

Our view: AMEC is registering solid top-line growth thanks to the acquisitions of 2011. The growing order book offers greater revenue visibility. A cash balance of £468m, despite the current share repurchase programme, points to a strong balance sheet. However, as indicated by the management, the resultant change in business mix could impact the margins. This change in management’s focus from profitability to improving revenues is a concern. The latest statement offers little clues about the success of this change in strategy. Together with the stock’s valuation and recent performance we believe there are better opportunities elsewhere.

Polymetal International (LON:POLY)

Polymetal International announced results for Q1 2012 yesterday. Gold production rose 24% y-o-y to 101,000 ounces and silver production increased 74% y-o-y to 5.7m ounces, while copper production declined 11% y-o-y to 1,555 tonnes. Revenue surged 64% to US$377m as sales of gold, silver and copper increased 13%, 99% and 75% to 105,000 ounces, 5.9m ounces and 1,884 tonnes, respectively.

Evraz (LON:EVR)

In a production update for Q1 2012, Evraz said crude steel production increased 4.6% q-o-q but declined 1.4% y-o-y to 4.3m tonnes as production in Russia and the US increased while that in Ukraine and Europe decreased. The proportion of finished goods in the steel product mix improved to 81% from 76% as production of railway and flat-rolled steel increased.

Economic News

UK Rightmove house price index

House prices climbed to a new high of £243,737 after increasing 2.9% m-o-m and 3.4% y-o-y, the Rightmove house price index showed yesterday. House prices are 0.5% higher than the pre-recession peak of £242,410 recorded in May 2008. However, real prices, after adjusting for inflation of 11.5% since May 2008, are down 9.9%. Rightmove said the number of properties listed for sale has declined 0.5% y-o-y. This number is down 30% compared to April 2007.

Our view:Economists were expecting house prices to rise 1.6% m-o-m and 2.2% y-o-y. However, the rise in nominal house prices does not indicate that the housing market in the UK is on the mend as the prices remain subdued in real terms. Also, the number of houses coming onto the market remains low, which was partly responsible for driving up prices. The data also highlights the regional disparity with house prices in London increasing 7.9% y-o-y, while prices in the north-west, Yorkshire and Humberside continue to fall.

Eurozone trade balance

Eurozone trade balance swung to a surplus of €2.8bn in February from a deficit of €7.9bn in January, reversing the €2.8bn trade deficit of February 2011, the Eurostat reported yesterday. On a seasonally adjusted basis, the trade surplus narrowed to €3.7bn from €5.3bn in the previous month. Growth in exports was 11% y-o-y, similar to that in January, while imports grew 7% compared to 4% in January. Exports increased 2.4% m-o-m and imports grew 3.5% m-o-m, during the month.

Our view: Though the trade balance failed to match economists’ expectations of €3.0bn surplus (€5.0bn on a seasonally adjusted basis), exports continuing to outpace imports raises hopes that increasing demand for goods from the Eurozone could spur growth in the economy in the near term.

US Empire state manufacturing survey

The Federal Bank of New York said its index of general economic sentiment slipped to 6.6 in April from 20.2 in March. The index of input prices slipped by five points to 45.8, while the gauge of future business conditions declined four points to 43.1.

Our view: The slump in manufacturing activity in New York State could be ascribed to shrinking demand in Europe and China. This slowdown in manufacturing activity together with the disappointing jobs data serves as a reminder of the fragility of the US recovery. And with the labour market bouncing back without a proportionate pick up in the economy, the Fed’s concern about the sustainability of the recovery could be materialising.

US retail sales

US retail sales increased 0.8% in March, building on the revised 1.0% gain (1.1% reported earlier) in February, the US Department of Commerce said yesterday. Core retail sales, which exclude volatile fuel and food prices, increased 0.5%, just like it did in February.

Our view: Retail sales beat the forecasted 0.3% increase. Sales seem to have been buoyed by the unusually mild weather. Retail sales rose despite a drop in consumer confidence. However, the indicator is notoriously volatile and subject to frequent and major revisions.

US TIC flows

The Treasury International Capital (TIC) report showed that net monthly inflows of capital into the US, including dollars held by banks, investments in short-term securities and other non-market flows, increased to US$107.7bn in February from US$3.1bn in January. Analysts consider this capital flow to be a vague indicator of investors’ willingness to lend to the US. Net purchases of US Treasuries notes stood at US$15.4bn compared to US$83.9bn in January. China continued to be the largest holder (with net holdings aggregating US$1.2tr) following net additions of US$12.7bn in February.

The Markets

Market opening: Markets could continue the downtrend witnessed on Friday as focus remains on the Eurozone debt crisis and Spanish bond yields. FTSE futures trading 3.0 points lower at 7:00 am point towards a flat to lower opening.

New York: Stocks ended the day at session lows with the S&P falling 1.3%. Mixed economic news in the US and concerns about the global economic recovery led to the year’s worst weekly decline in the US markets.

Asia: Stocks fell today as concerns about the Eurozone debt crisis were reiterated by rising yields on Spanish bonds. Stocks with exposure to Europe traded lower on the Nikkei, which ended 1.7% down. The Hang Seng was trading 0.6% lower at 7:00 am.

Continental Europe: Investor sentiment was weak amid fresh concerns related to Spain and Italy’s finances. The German DAX closed 2.4% lower and the French CAC 40 declined 2.5% yesterday.

UK small caps: The FTSE AIM All-Share index closed flat on Friday.

Today’s news

Spanish yields jumped Friday ahead of this week’s auction

The Spanish government’s bond yields and cost of insuring its debt rose to record highs Friday. This was likely fuelled by record borrowing by Spanish banks from the European Central Bank. Global markets would focus on the country’s success in auctioning 2- and 10-year bonds Thursday.

China doubling Yuan’s trading bands could raise confidence

Despite weaker economic momentum data the previous week, China doubled the size of its currency’s trading bands (versus the US$) over the weekend. This could be a sign that Chinese policy makers have greater confidence in the country’s economic growth path and are comfortable with the current rate of growth in exports.

Company News

Tesco (LON:TSCO)

Tesco is contemplating going slow on opening large-format stores and on store extensions in the UK, the Financial Times (FT) reported on Thursday. FT added that the company will focus on smaller stores instead. The change of strategy is expected to be revealed along with the announcement of FY2012 results scheduled for mid-next week.

Our view: Tesco had a disappointing holiday season and issued its first profit warning in 20 years. Analysts expect by moving away from opening ever larger stores the company will save between £200m-£400m in annual capital expenditure. They suggest that savings could be better allocated elsewhere, such as revamping of older stores, expanding the ‘click and collect’ service, and improving the fresh food offering. In fact, analysts’ estimate Tesco to comfortably cut store space by 15%-25% without affecting current sales. Nonetheless, the execution of this strategic change would take time to show results. In addition to this, there are little expectations of a revival in retailers’ growth drivers (declining consumer real income, rising unemployment) in the near term. We maintain our hold recommendation for the stock.

Glencore (LON:GLEN) and Xstrata (LON:XTA)

The merger of Glencore and Xstrata will take longer than expected, the companies said on Friday. However, they remain optimistic about receiving all the necessary approvals from regulators to formalise the US$90bn merger by Q3 2012. As per the press release, shareholders will now receive documents relating to the merger a month later than anticipated. The delay also grants more time to the companies’ to hold further talks with the European Commission (EC)’s competition regulators whose approval is mandatory for the merger.

Our view: Xstrata is an attractive target for Glencore, as the deal not only expands the latter’s portfolio, but also gives it access to Xstrata’s valuable cash flows and strong balance sheet. However, the companies expect around $500m of synergies per year, with the current value roughly equal to two times the premium Glencore offered for Xstrata. At three Glencore shares for every Xstrata share-as many analysts have asked for-compared to the offering of 2.8 shares, most, if not all, synergies would be paid to Xstrata shareholders, leaving few incentives for Glencore’s shareholders to approve the deal. This is prior to considering that synergies presented are usually too optimistic. This makes a raised bid for Xstrata is highly unlikely, in our opinion. Today’s announcement is also a bit surprising as it should have been very obvious for the management to anticipate the need for regulatory approval before any deal could be closed. It was one of the concerns we raised in early February, before the deal was presented. The fact that it only takes 16% of Xstrata’s shareholders to block the deal also raises the risk. After all, the premium offered by Glencore has already been fully priced into Xstrata’s share price, with little scope for the risks attached. Considering these factors, we believe the benefits of the merger are skewed towards Glencore.

Economic News

UK producer price index

Producer prices in the UK increased 3.6% y-o-y in March, slowing from the 4.1% rise in February, the Office of National Statistics (ONS) said on Friday. Wholesale prices increased 0.6% from February, the ONS added. The rise in core prices at the factory gates decelerated to 2.5% y-o-y from 3.0% in the previous month. The monthly increase in core prices slowed to 0.1% from 0.5% in February. The growth in input prices was subdued, at 5.8% y-o-y compared to the 7.8% (7.3% reported previously) in February. Input prices rose 1.9% m-o-m after gaining 2.5% m-o-m (2.1% reported previously) in the preceding month.

Our view: The rise in wholesale prices slowed lesser than the 0.5% m-o-m and 2.6% y-o-y expected by economists. As factory gate prices feed consumer prices, some policymakers are concerned that the pace of decline in consumer prices would be slower than that predicted by the Bank of England.

German inflation

Consumer prices in Germany decelerated to 2.1% y-o-y in March from 2.3% in February, Destatis said on Friday. Inflation increased 0.3% m-o-m after rising 0.7% m-o-m in the previous month. The harmonized index of consumer prices (HICP) rose 2.3% y-o-y, cooling from a 2.5% y-o-y increase in February. On a monthly basis, HICP increased 0.3% in March compared to the 0.9% rise in the previous month.

Our view: Cooling inflation in Germany gives some room to the European Central Bank (ECB) that has been caught between curbing inflation in Germany and recession in half of the region’s other member countries. Bundesbank Chief Jens Weidmann has been a leading voice, wanting the ECB to exit its crisis-fighting-mode amidst fears ECB’s ultra-cheap three-year money could stroke inflation.

US Consumer Price Index

Consumer prices in the US increased 0.3% m-o-m and 2.7% y-o-y in March as food and energy costs pushed up prices. Excluding food and energy costs, core consumer price inflation rose 0.2% m-o-m.

Our view: The inflation reading was in-line with expectations and showed an easing of the rise in gasoline prices. In February, gasoline prices rose more than threefold the 1.7% increase recorded in March. Core inflation rose primarily due to higher rents, medical costs and used car prices. Although inflation has slowed m-o-m, it remains high enough to keep the Fed from changing its stance about not introducing a third round of quantitative easing any time soon.

US University of Michigan Confidence

As per the Thomson Reuters/University of Michigan’s consumer sentiment preliminary report, the index declined to 75.7 in April from 76.2 in March. The reading was below expectations as analysts had expected the index to remain steady this month.

Our view: Lower consumer confidence follows a slowdown in jobs growth, which fell to its slowest rate since October. Additionally, weekly earnings dropped, while inflation remained steady. Household purchases are likely to be strained and could also contribute to the lower consumer sentiment.

The Markets

Market opening: Markets could surrender yesterday's speculation-fuelled gains as the day progresses as lower than expected Chinese GDP data has raised concerns about the outlook for demand. FTSE futures trading 1.5 points lower at 7:00 am points toward a flat to lower opening. 

New York: Wall Street rose amid speculation that China's GDP data would be better than expected. Disappointing jobs data raised hopes of another round of quantitative easing, bolstering the rally. The S&P 500 ended 1.4% higher. 

Asia: A better than expected Italian debt auction helped markets open higher. However, disappointing GDP data from China caused markets to surrender early gains. Nonetheless, the Nikkei closed 1.2% higher, while the Hang Seng was trading 1.8% up at 7:00 am. 

Continental Europe: Markets rose in anticipation that Chinese GDP data would beat the consensus estimate. The German DAX and French CAC 40 both closed 1.0% higher yesterday. 

UK small caps: The FTSE AIM All-Share index gained 1.0% yesterday. 

Today's news

China's growth slowed to 8.1% in Q1 2012 

China's economy grew at an annual pace of 8.1% in Q1 2012 compared to 8.9% in Q4 2011, marking the fifth consecutive quarter of slowing GDP growth, the National Bureau of Statistics reported. Economists were expecting 8.3% growth. Though China's Prime Minister Wen Jiabao has called for a monetary policy fine-tuning, a major swing is not expected, as the 8% rate of growth is not likely to be detrimental to job creation. Earlier, the government revised its growth target for 2012 to 7.5%. 

Company News

Aggreko (LON:AGK)

Aggreko released an interim statement for Q1 2012 yesterday. Underlying group revenue rose 21% during the quarter due to strong growth registered in local and international power projects. Revenue grew 18% on a reported basis and underlying trading margins improved slightly from last year. The order book for international power projects remained strong at 450MW secured YTD. The company received 150MW of new projects since the full year results announcement on 9th March. The two new contracts secured included a 100MW two-year contract worth US$80m for gas powered generation in the Dominican Republic. The acquisition of Poit Energia (a company with operations in Brazil, Chile, Argentina and Peru) announced on 26th March is expected to be completed sooner than anticipated. Trading conditions for the local business remain favourable helped by the London Olympics contract which is estimated to be worth around £50m. 

Our view: Aggreko reported strong growth in underlying revenue (revenue excluding one-time events such as last year's Asian Games and the upcoming London Olympics). Last month the company announced an increase in capital expenditure to help capture the power hungry markets in Africa and Japan. The recent acquisition of Poit Energia should also help the company penetrate the South American market. With avenues for growth opening up, we upgrade Aggreko's rating to Buy. 

Ashmore Group (LON:ASHM)

Yesterday, Ashmore issued an interim statement for Q3 2012 ended 31st March 2012. Assets under management (AUM) increased 9.1% q-o-q to US$65.9bn as the company saw net inflows of US$1.2bn and positive investment performance of US$4.3bn. External debt, equities and local currency themes made notable contributions to the growth in AUM. Performance is in line with expectations, the company added. 

Our view: We like the stock's exposure to emerging markets and disciplined and well-timed investment approach, as evidenced by its strong Q3 performance. This should drive upgrades to consensus estimates and further outperformance going forward. 

Hays (LON:HAS)

Hays released an interim statement for Q3 2012 ended 31st March 2012 yesterday. Net fees (the measure of gross profit for the company) increased 12% y-o-y on actual and 10% on like-for-like (LFL) basis. Net fees from continental Europe and rest of the world increased 27% (26% LFL basis). For Asia-pacific, the increase was 17% (9% LFL basis). However, fees from the UK and Ireland was a drag, and dropped 5% (actual and LFL). The temporary placements grew 16% (14% LFL) and permanent placements increased 8% (5% LFL). The management said full year net fees should be at the upper end of market expectations. 

Our view: Hays draws around 70% of its gross profit from its international business which has helped the company perform better than most peers. However, we believe the current share price reflects this positive. Moreover, the current uncertainty in the global economic environment is expected to be detrimental to growth in the recruitment sector. 

Centamin (LON:CEY)

In a production update for Q1 2012 ended 31st March issued yesterday, Centamin said gold production increased 9% y-o-y to 49,071 ounces, near the targeted level of 50,000 ounces despite strikes at its Sukari mine in Egypt. The management kept the annual production target of 250,000 ounces unchan. 

JD Sports Fashion (LON:JD.)

JD Sports announced results for the 52 weeks ended 28th January yesterday. Pre-tax profit shrank 14.2% to £67.4m despite a 19.9% rise in revenue to £1.1bn mainly due to the £2.2m loss at the Blacks Leisure, acquired in January. The acquisition of Blacks Leisure and others negatively affected the gross profit margin, which declined to 49.2% from 49.5%. Excluding acquisitions, like-for-like margins increased 0.2% to 49.7%. The management said offer-driven customers continue to pressure margins. Though major sporting events could boost consumer morale, the management maintained its cautious outlook. Total dividend declared increased 10% to 21.2p per share. 

Petropavlovsk (LON:POG)

Petropavlovsk said production of gold rose 60% y-o-y to 120,800 ounces due to extraction of higher grades at its Pioneer mine in Russia and capacity expansion at Malomir, Bulgaria. Production at the Pioneer mine and Malomir grew 79% and 58%, respectively. The interim statement for Q1 2012, released yesterday, showed that sales increased 5% to 129,900 ounces. The average realised price per ounce increased 22% to US$1,690 while total cash costs declined 7% to US$587 per ounce. The company said it remains on track to achieve the targeted annual production of 680,000 ounces. 

Economic News

UK trade balance 

The total trade deficit widened to £3.4bn from £2.5bn in January, the Office of National Statistics said yesterday. The UK's trade deficit in goods rose to £8.77bn in February from a revised £7.88bn in January as exports declined 3.4% and imports remained unchanged. The trade gap with EU nations narrowed to £3.76bn from £4.17bn in the previous month. The trade deficit with non-EU countries swelled to £5.02bn from £3.72bn in January as exports shrank 8.8%. 

Our view: Economists were expecting the trade deficit in goods to increase to £7.65bn from £7.53bn reported previously for January. Though the trade balance is a notoriously volatile series, analysts expect the widening gap between exports and imports to be a drag on Q1 2012 GDP. 

US trade balance 

US trade deficit narrowed 12.4% to US$46.0bn in February from US$52.5bn in January, the US Department of Commerce said yesterday. Exports rose 0.1% m-o-m, while imports shrank 2.7% during the month. The deficit with China declined 26% to US$19.4bn and that with the European Union decreased to US$5.9bn from US$8.5bn in January. 

Our view: The trade deficit was narrower than the US$51.8bn expected by economists. The shorter trade gap can be ascribed to lower imports, especially from China, where factory output declined due to the Lunar New Year holidays. The lower trade deficit is expected to bolster the GDP, and analysts may opt to revise their Q1 2012 GDP estimate upwards. However, this may be countered by a corresponding downward revision for the forthcoming quarters, leaving full year estimates more or less unchanged. Imports from China are expected to increase next quarter as post-Lunar year holiday manufacturing resumes. Weaker demand in Europe may also dent the outlook for US exports. 

US producer price index

Producer prices in the US remained unchanged in March after rising 0.4% in February, the US Department of Labor said yesterday. Core wholesale prices, excluding food and energy, increased 0.3%, after rising 0.2% in February. On an annual basis, producer prices increased 2.8%, while core prices increased 2.9%. Prices of fuel decreased 1.0% m-o-m in March after a 1.3% increase m-o-m in February. 

Our view: Economists expected producer prices to rise 0.3% and core producer prices to rise 0.2%. The decline in energy prices supports the US Federal Reserve's view that the spike in oil prices would be temporary, and with input prices declining, producers will not be compelled to pass on the rise in prices to consumers. This is likely to keep consumer prices in check. 

Eurozone industrial production 

Industrial production in the Eurozone rose 0.5% m-o-m, registering the first rise since August, the Eurostat reported yesterday. In the wider 27-state European Union, industrial output increased 0.2% m-o-m and 1.8% y-o-y. The Eurozone also saw a similar annual decline in industrial activity. Eurozone's industrial production numbers for January were downwardly revised to unchanged from an expansion of 0.2% reported previously. 

US jobless claims

Initial jobless claims filed by Americans increased by 13,000 to 380,000 in the week ended 7th April, the US Department of Labor said yesterday. Claims reached the highest level since 28th January, confounding economists' expectation of a fall to 355,000. Claims for the week ended 30th March were also revised upwards to 367,000 from 357,000. The four-week average, a more stable indicator, rose by 4,250 to 368,000. However, continuing claims declined by 98,000 to 3.25m in the week ended 30th March, beating consensus expectations of 3.33m. 

The Markets

Market opening: Markets could open flat to higher today as a positive start to the earnings season outweighs fears about sovereign debt. FTSE futures were trading 3.5 points higher at 7:00 am. 

New York: The earnings season started on a good note, with Alcoa beating estimates. This coupled with the Fed's optimistic Beige Book report restored investor confidence. The S&P 500 reversed a five-day slide to end 0.7% higher. 

Asia: Markets moved higher in a choppy trading session whilst keeping an eye on news about North Korea's planned long-range rocket launch. The Nikkei gained 0.7%, while Hang Seng was trading 0.6% higher at 7:00 am. 

Continental Europe: After the sharp slide on Tuesday, value hunting and positive earnings data helped European markets close higher yesterday. The German DAX closed 1.0% higher, while the French CAC 40 ended the day up 0.6%. 

UK small caps: The FTSE AIM All-Share index closed flat yesterday. 

Today's news

Pressure on Spain unjustified - ECB Executive Board member 

European Central Bank (ECB) Executive Board member, Benoit Coeure, said markets have piled undue pressure on Spain, pushing its borrowing costs higher, whilst ignoring its reform initiatives. He also said that the ECB's Securities Market programme should allow the purchase of debt of regional members, if needed. 

World Bank revises China's 2012 growth forecast downwards 

The World Bank estimated China will grow 8.2% in 2012 compared to the 8.4% previously estimated. However, it raised 2013's forecast to 8.6% from 8.3%. 

Global economic uncertainty high - BoJ Chief 

Bank of Japan Governor, Masaaki Shirakawa, said Europe's debt crisis, rising energy prices and higher inflation in emerging markets fuelled global economic uncertainty. He reiterated that Japan's economy was recovering after last year's devastating earthquake. 

Company News

WS Atkins (LON:ATK)

WS Atkins, in a trading update released yesterday, said it traded 'well' during Q4 2012. Consequently, FY2012 results are expected to be in line with market expectations. H2 2012 operating margins at the UK segment are expected to be ahead of that in H1 2012, despite a delay in the grant of the UK rail signalling contract. Previously, the company reported its North American business to have suffered a slow start as it entered H2 2012. The situation continued into Q4 2012. However, the company anticipates North American margins to improve y-o-y. Trading in the Middle East and at the Energy division was in line with management expectations. Full year results will be announced on 14th June 2012. 

Our view: WS Atkins enjoys wide geographic diversification with exposure to both the growing markets of Middle East and to North America. The company is also increasing its offerings to cater to a larger variety of markets from aerospace and security to water. Also, the expansion of product lines and geographical reach with the acquisition of PBSJ Corporation in 2011 has increased the scope for top line expansion. With expected improvements in margins to ensue, we remain buyers of the stock. 

Michael Page International (LON:MPI)

In an interim statement issued yesterday, Michael Page said Q1 2012 gross profit was higher by 6.9% y-o-y to £136.0m. Gross profit from the Europe, Middle East and Africa (EMEA) region, which contributed 44% of group gross profit in Q1 2012, increased 7.4% to £60.3m. Asia Pacific and the Americas (19% and 14% of gross profit respectively) registered a 23.0% and 4.6% rise in gross profits to £26.3m and £18.8m, respectively. However, in the UK (23% of gross profit), registered a 3.7% decline in gross profit to £30.6m. During Q1 2012, headcount increased 0.4% q-o-q and 9.4% y-o-y. Gross profit from the banking sector, which contributes about 8% to the group, contracted 12% y-o-y. The management said the weak hiring in this sector was curbing growth, especially in the UK, North America and Asia. 

Our view: Though performance in Q1 2012 was largely in line with expectations, Michael Page continues to suffer from the shaky growth in the recruitment market induced by the global economic uncertainty. With the majority of Michael Page's operations in regions with weak growth, we struggle to see how the stock will manage to outperform on its premium valuation and maintain our sell rating. 

Dunelm (LON:DNLM)

Dunelm issued an interim statement for the 13 weeks ended 31st March 2012 yesterday. Sales grew 10.7% in Q3 2012 and 9.4% in the nine months to March-end. Like-for-like (LFL) sales rose 0.6% in Q3 2012 as an upbeat performance in January offset the lower footfall in February and March. LFL sales for the nine months to March increased 1.0%. In Q3 2012, gross margin improved by 30 basis points y-o-y. The management expects full year gross margin to increase 0.2% y-o-y. 

Oxford Instruments (LON:OXIG)

Oxford Instruments pointed to full year adjusted profit before tax at the upper end of market expectations, when it issued a pre-close trading update, yesterday. It continues to make progress with its '14 cubed' initiative, the company added. The initiative focuses on increasing revenue and return on sales at a CAGR (compound annual growth rate) of 14% by 2014. 

Economic News

US Fed's beige book 

The US Fed's beige book indicated a modest recovery in the economy. Manufacturers were optimistic despite the rise in fuel prices. The beige book reported increased activity in the automotive and high-technology sectors. Consumer spending was "encouraging" and retail sales picked up, aided by the mild weather. Residential construction is showing signs of improvement in line with recent indicators that suggested the housing market is on the mend. Job creation remained steady. 

Our view: The US Fed's beige book is compiled on anecdotal evidence from across the country and paints a picture of an economy that has turned the corner. Also, the disappointing employment data released last week does not necessarily indicate that the economy has veered from the path of recovery. The US Fed, too, seems to have adopted a wait-and-watch approach. Thankfully, there is no indication that it may embark on another round of quantitative easing. 

US MBA mortgage applications 

The index measuring mortgage applications fell 2.4% w-o-w in the week ended 6th April, the Mortgage Bankers Association (MBA) reported yesterday. The index retreated as applications for refinancing declined 3.1% and applications for new house purchases slipped 0.5%. The four-week moving average, which smoothes out spikes in the data set, slid 2.1%. This average for refinancing applications decreased 3.5%, while that for new purchases applications increased 2.2%. The share of refinancing applications, as a percentage of total applications, continued to decline for the eighth consecutive week and touched 70.5%, the lowest since July. Interest rates for 30-year mortgages averaged 4.1%, 6 basis points lower than that in the previous week. 

Our view: Loan applications returned to its falling trend last week after rising in the week ended 30th March. After piling on debt in the pre-2008 crisis, consumers seem wary of refinancing. Rising employment and increasing personal income could also have dampened the demand for refinancing. However, loan requests for purchases continued rising in line with other housing indicators that point to a recovery in the housing market. 

German wholesale price index

In March, the rise in wholesale prices eased to 0.9% m-o-m following an increase of 1.0% in February, the Destatis reported yesterday. On an annual basis, wholesale prices moved up by 2.2% after rising 2.6% in the previous month. 

US import price index 

The import price index rose 1.3% in March, registering the largest gain since April 2011, the US Department of Labor said yesterday. The reading for February was revised to a drop of 0.1% from the 0.4% gain reported previously. Economists were expecting the index to increase 0.8% during the month. On an annual basis, import prices increased 3.4% in line with the consensus estimate, after gaining 5.5% in February. Export prices increased 0.8% in March after rising 0.4% in February. 

US monthly budget statement

The US budget deficit widened 5.3% y-o-y to US$198.2bn in March, the US Treasury Department said yesterday. This is higher than the US$196.0bn anticipated by economists. Budget deficit totalled US$188.2bn the previous year. However, the deficit for the H1 2012 shrank to US$779bn compared to US$829bn in H1 2011. For 2012, the Treasury estimates the budget shortfall at US$1.3tr-this would be the fourth consecutive year the deficit has exceeded US$1tr. 

The Markets

Market opening: Markets are likely to open lower as rising interest rates for highly indebted European nations leave investors jittery. FTSE futures were trading 33.5 points lower at 7:00 am. 

New York: Investors read signs of the European debt crisis staging a comeback as yields for Spanish and Italian bonds rose. Consequently, the S&P 500 ended its fifth consecutive session in the red, and lost 1.7% to 1,358.6 yesterday. 

Asia: Sony's greater than expected loss and concerns about re-emergence of the Eurozone's debt crisis drove markets lower for the third consecutive day. The Nikkei closed 0.8% down, while the Hang Seng was trading 1.2% lower at 7:00 am. 

Continental Europe: Investors returning from Easter holidays reacted to the weak US jobs data released Friday. The markets reached a 12-week low, wit the German DAX and French CAC 40 closing 2.5% and 3.1% lower, respectively. 

UK small caps: The FTSE AIM All-Share index dipped 1.1% yesterday. 

Today's news

France's economic growth stalled in Q1 2012 - Survey 

As per a survey by the Bank of France, the French economy stagnated in Q1 2012, with no indication of a recovery in activity in the near term. The economy grew 0.2% in Q4 2011. 

Banks need more capital - Spain's central bank 

Spain's central bank said banks could need additional capital if the economy deteriorates further, sparking fears of some banks not being able to survive the impending recession. However the Prime Minister, Mariano Rajoy, has ruled out a possibility of the government bailing out lenders. Spanish banks were significantly impacted after the property bubble burst in 2008. Separately, the government unveiled plans to cut another €10bn of public spending, with health and education budgets seeing cuts of €7bn and €3bn respectively. 

Company News

Randgold Resources (LON:RRS)

Randgold welcomed the agreement between Mali's military coup leaders and Economic Community of West Africa states (ECOWAS), its West African neighbours, putting an end to the political unrest in the country. The company said the military coup on 21st March did not have a material impact on production in the ensuing period. Consequently, the annual production target remains unchanged. However, chief executive Mark Bristow informed that the company is yet to assess the impact on costs due to the situation and would give the market a full update while reporting the first quarter results on 3rd May. 

Our view: The management's assurance about meeting annual production targets removes some of our concerns about the impact of the coup on the topline. However, the company's assets in Mali account for around two thirds of its production and a significantly raised political risk premium continues to reduce the stock's fair value. Despite the agreement, we see the political risk to be at the forefront of investors' minds for some time and maintain our hold recommendation. 

Ferrexpo (LON:FXPO)

Ferrexpo released a trading update for Q1 2012 ended 31st March 2012 yesterday. Overall production of pellets increased 0.5% y-o-y, but declined 9.4% q-o-q to 2.3m tonnes. Production of pellets from the company's raw material increased 6.3% y-o-y but declined 3.3% q-o-q to 2.2m while production from purchased raw material (which is dependent on availability in local markets) declined 68.2% y-o-y and 73.8% q-o-q to 0.06m tonnes. 

Our view: At the release of its FY2011 results, Ferrexpo reported that the share of fast growing markets of China, India, Japan and Germany (around 40% of sales) was increasing while its dependency on sales in Europe was shrinking. We believe the increasing demand for iron ore from these fast growing markets could spur further growth for the company. 

Vedanta (LON:VED)

Vedanta issued a production update yesterday for Q4 2012 and FY2012 ended 31st March 2012. In Q4 2012, iron ore production shrank 11% y-o-y to 4.9m tonnes while annual production declined 26.6% to 13.8m tonnes from 18.8m tonnes in the previous year. Iron ore production was affected by the mining ban in Karnataka, India and discontinuation of operations in Orissa, India. The mining ban, and transport and logistic problems at Goa, India, affected sales of iron ore which fell to 5.2m tonnes in Q4 2012 from 6.6m tonnes in Q4 2011. Annual sales for the company stood at 16.0m tonnes in FY2012 versus 18.1m tonnes in FY2011. Production of silver increased 77% y-o-y to 2.8m ounces in Q4 2012 and was 35% higher at 7.8m ounces for the full year. In Q4 2012, production of copper cathodes (80,000 tonnes) from India and Australia was largely flat compared to the previous year. For the full year, production of copper cathodes in India and Australia increased 7% to 326,000 tonnes. Copper mined from Zambia increased 5% to 32,000 tonnes in Q4 2012 but full year production decreased 2% to 142,000 tonnes. In Q4 2012, lead and alumina production increased 110% and 4% to 37,000 tonnes and 177,000 tonnes, respectively. Power sales increased to 1,938m units from 830m units in Q4 2011 and to 6,554m units from 1,879m units in FY2011. In Q4 2012, average oil production at Cairn India increased 12% to 180,293 boepd from 161,194 boepd. For the year, production increased 16% to 172,887 boepd. The production of zinc-lead was 7% higher q-o-q at 223,000 tonnes and the management expects production of FY2013 to be slightly ahead of that in FY2012. 

Our view: Though Vedanta witnessed a record quarterly increase in production in lead, silver, alumina and power, the impact from the ban on mining iron ore in Karnataka, India outweighs the positives. The mining ban is being heard by India's apex court. However, the issue does not seem anywhere near conclusion. We maintain our sell rating for the company. 

Flybe (LON:FLYB)

Flybe released a pre-close trading update for FY2012 ended 31st March 2012 yesterday. The management said performance was in line with expectations. Flybe UK signed an agreement with Brussels Airlines on 8th March to provide two Bombardier Q400 aircraft. Flybe Finland continued to expand services especially to Sweden and Denmark. The MRO business, part of the aviation support division, witnessed an increase in third party aircraft maintenance contracts from regional European airlines and the training academy benefitted from the second newly commissioned flight simulator. 

Economic News

German trade balance 

Yesterday, the federal statistical office said, exports from Germany increased 1.6% m-o-m in February, building on the revised 3.4% m-o-m gain in January. Imports increased 3.9% m-o-m, compared to a 2.4% m-o-m rise in January. Consequently, the trade surplus (seasonally adjusted) narrowed to €13.6bn in February from €15.1bn in March. Exports to non-Eurozone countries within European Union increased 9.4% y-o-y and that to non-EU nations grew 13.4% y-o-y. 

Our view: Economists expected exports to decline 1.2% m-o-m. However, stronger demand for German goods outside the Eurozone buoyed exports. Harsh weather during the month could have caused fuel imports to rise, inflating the imports bill. Last week, industrial production declined, sparking fears of Germany entering a technical recession. However, rising exports has raised hopes that the economy may still avoid a recession. 

US wholesale inventories 

Wholesale inventories rose 0.9% m-o-m and 9.3% y-o-y in February, the US Department of Commerce said yesterday. Dollar value of sales by wholesalers increased 1.2% m-o-m and 9.3% y-o-y. Wholesalers would take 1.2 months to clear the stockpile if the current sales pace continues. Inventories for January were revised to an increase of 0.6% (0.4% reported previously), while sales were flat. Stock of durable goods, i.e. goods lasting more than three years, increased 0.5% m-o-m, and sales of such goods rose 0.9% m-o-m. Inventory and sales of non-durable goods increased 1.4% each. 

Our view: The increase in wholesalers' inventories was more than the 0.5% expected by economists. Since sales are keeping pace, the increase in inventories does not indicate unwanted stockpiling. Many businesses had de-stocked in Q3 2011, as uncertainty stoked fears of another recession. However, as indicators pointed towards growth, businesses rebuilt inventory during the fourth quarter. This replenishment of stockpiles contributed 1.8% to the GDP in Q4 2011. Economists do not expect the restocking to contribute as much to GDP growth in Q1 2012. 

UK RICS house price balance

The Royal Institution of Chartered Surveyors (RICS) reported its house price index improved to -10 in March from -13 in February, registering the strongest reading since June 2010. The new buyer enquiries index rose to 9 in March from 3 in the previous month. However, the measure of surveyors expecting prices to increase in the next three months declined to -2 from 0 in February. 

German current account 

German current account surplus grew to €11.1bn in February from €9.5bn in January, Destatis reported yesterday. 

US NFIB small business optimism

The index of small-business optimism declined to 92.5 in March from 94.3 in February, the National Federation of Independent Business (NFIB) reported yesterday. Rising energy prices and slowing sales have impacted confidence among small businesses, NFIB added. Small businesses contributed to job creation. The net change in employment per firm rose to 0.22. Economists were expecting the headline index to rise to 94.8. 

The Markets

Market opening: Markets could open lower due to concerns about global growth as trade data points to a soft landing in China. FTSE futures were trading 59 points lower at 7:00 am. 

New York: Trading volumes were light Monday as investors awaited Alcoa to start the earnings season after the US close today. Friday's disappointing employment data continued to dent the market sentiment. The S&P 500 shed 1.1% to end at 1,382.2. 

Asia: Trade data indicating China could head for a soft landing and weak jobs growth in the US dimmed prospects of global growth. The Nikkei closed 0.1% lower, while the Hang Seng was trading 1.2% down at 7:00 am. 

Continental Europe: European markets had a mixed day as the more than expected fall in US jobless claims helped markets pare early losses. The German DAX closed 0.1% lower, while the French CAC 40 ended 0.2% higher on Thursday. German and French markets were closed on Friday and Monday. 

UK small caps: The FTSE AIM All-Share index rose 0.1% on Thursday. 

Today's news

China records a surprise trade surplus in March 

China registered a trade surplus of US$5.4bn in March (market expected a trade deficit of US$1.3bn), reversing the trade deficit of US$31.5bn in February as exports grew 8.9% outpacing the 5.3% increase in imports. Exports and imports rose 18.4% and 39.6%, respectively, in February. This is the first indicator not distorted by February's Lunar New Year holiday and indicates the economy is headed for a soft landing. The economy is expected to slow down for the fifth consecutive quarter to 8.3% in Q1 2012. 

US Fed Chief calls for banks to hold more buffer capital 

The Fed Reserve Chairman said banks should maintain more capital as buffer to ensure stability in the financial system. His comments at the Atlanta Fed conference came on the same the day as the Institute of International Finance's appeal to policymakers to go slow on regulating the banking industry. 

Company News

Halfords (LON:HFD)

Halfords released a pre-close trading update for the 52 week period to 30th March 2011 on Thursday. Total revenue shrank 0.8% y-o-y despite a 0.3% increase in sales during Q4 2012. Like-for-like (LFL) sales for the year declined 2.7% and that for Q4 2012 were 2.3% lower than the previous year. Sales of premium cycles and children's bikes performed well (up 5.7% in Q4 2012) but online sales suffered as sales of Sat Nav systems and child safety products declined. The management said FY2012 was a challenging year and expected pre-tax profit of £90m-£93m on revenues of approximately £861m (with the retail division bringing in £751m, and Autocentres contributing £110m). Retail margins are expected to decline 130-150bps, in line with previous guidance. The management warned that retail operating costs are expected to increase around 4% in FY2013 mainly due to wage inflation and staff costs. They forecast Autocenters to grow by low double-digit during 2013. In Q4 2012, the company completed a buy back of 18.1m share at an average price of 345p per share, disbursing around £62.3m to shareholders. 

Our view: The management acknowledged that the squeeze on consumer spending is affecting revenue growth and expected this to continue in FY2013. They also anticipate a 4% increase in operating costs at the retail division in FY2013. These factors will affect margins and hit profitability. With a challenging economic outlook offering little help for the company's growth, we have a hold recommendation on the stock. 

EasyJet (LON:EZJ)

EasyJet released trading statistics for March yesterday. The airlines flew 4.4% more passengers compared to March 2011 and the load factor improved 1.9% to 88.8%. On a rolling twelve-month basis, passengers flown increased 8.9% and the load factor stood at 88.0%, 0.9% better than that in the twelve months to March 2011. 

Booker Group (LON:BOK)

Booker released its fourth quarter trading update on Thursday. The food wholesaler reported total sales for the 12 weeks to 23rd March 2012 to be higher 4.8% y-o-y, with total like-for-like (LFL) up by 4.8%. Non-tobacco LFL rose 4.1%, while LFL tobacco sales were 5.9% higher. Total sales for the 52 weeks to 23rd March 2012 was £3.9bn, up by 7.3%, with total LFL up by 6.1%. LFL non-tobacco sales rose 5.1%, while LFL tobacco sales increased by 7.8%. Charles Wilson, the CEO, said that the company is making good progress and profits for the 53 weeks to 30th March 2012 remain in line with expectations. Booker added 22,000 more customers this year. 

Victrex (LON:VCT)

Victrex announced trading update for the six months ended 31st March 2012. Group sales volume for the first half reflects a strong recovery in the Victrex Polymer Solutions business. Sales volume in the first half was 1,377 tonnes with a new record of 795 tonnes in the second quarter. The company defined order book for April and new business activity as encouraging. Revenue for the Invibio® Biomaterial Solutions business for the first half was £25.5m, up 5% y-o-y, despite uncertainties in the US healthcare market. 

Economic News

UK BoE announces interest rates 

The Bank of England (BoE)'s Monetary Policy Committee announced keeping interest rates unchanged at a historic low of 0.5%. The Bank also decided against expanding the asset purchase target, currently at £325bn. 

Our view: The BoE's move was widely expected. The purchasing managers surveys released last week indicated an unexpected pick-up in economic activity raising hopes that the economy could have avoided a double-dip in Q1 2012. Also, inflation is proving stickier than expected (mainly due to rising fuel prices) raising concerns that it will not fall below BoE's price stability target of 'below but near 2%.' The Bank seems to have shifted to a wait-and-see mode, and if the first GDP estimate to be released at the end of this month is in line with expectations of a 0.5% growth in Q1 2012, the Bank will have little incentive to expand the £325bn asset purchase programme further. February's £50bn addition to the programme is expected to be concluded in May. 

UK industrial & manufacturing production 

Industrial output in the UK rose 0.4% m-o-m but declined 2.3% y-o-y in February, the Office of National Statistics (ONS) reported on Thursday. Manufacturing output contracted 1.0% m-o-m and 1.4% y-o-y, the ONS added. Industrial production for January shrank a revised 0.6% m-o-m (-0.4% reported earlier). Factory output for January was also revised downwards to a fall of 0.3% m-o-m from a 0.1% rise reported previously. 

Our view: While the rise in industrial output is in line with consensus estimate, factory output failed to meet expectations of a 0.1% m-o-m increase. Analysts do not expect a quick recovery in manufacturing as the Eurozone, the UK major trading partner, stands on the brink of recession. However, the manufacturing purchasing managers' index (PMI) for March published last week indicated manufacturing activity strengthened in the month raising hopes of the economy picking up pace as we enter the second quarter. 

German industrial production

Industrial production in Germany shrank 1.3% m-o-m and 1.0% y-o-y in February, Destatis reported on Thursday. The drop was credited to a 17.1% fall in construction output, as February witnessed unusually cold weather. However, Destatis said the business sentiment remains positive, indicating output could improve in the near term. Industrial production for January was revised downwards to reflect a 1.2% m-o-m and 1.5% y-o-y increase, compared to an increase of 1.6% m-o-m and 1.8% y-o-y reported previously. 

Our view: The contraction in industrial output was worse than the 0.5% m-o-m drop expected by analysts. They were also expecting industrial output to rise 0.5% y-o-y. After a rebound in industrial production in January, the decline in February could be blamed on unusually chilly weather in February. Data released on Wednesday showed factory orders increased 0.2% m-o-m, compared to expectations of a 1.2% rise m-o-m. However, business and consumer confidence remains high, providing mixed signals about the economy. Economists expect the German economy to return to growth in Q1 2012 after shrinking 0.2% in Q4 2011. 

UK NIESR GDP estimate 

The UK economy grew 0.1% in Q1 2012, narrowly avoiding recession, the National Institute of Economic and Social Research (NIESR) said Thursday. The growth estimate for the three months to February was revised downwards to 0% from the 0.1% growth reported previously. The economy contracted 0.3% in Q4 2011. 

US jobless claims

Initial claims for jobless benefits fell 6,000 to 357,000 in the week ended 30th March, the US Department of Labor said on Thursday. Economists were expecting claims to decline to 355,000. Claims for the previous week were revised upwards to 363,000 from 359,000 reported earlier. The four-week moving average, which depicts a smoother trend, dipped 4,250 to 361,750. For the week ended 24th March, continuing claims declined to 3.34m, 16,000 lower than the previous week. 

US consumer comfort

US consumer confidence for the four weeks to 1st April, measured by the Bloomberg consumer comfort index, rose to -31.4 from -34.7 registered in the previous week. This is the highest reading since March 2008. 

Happy Easter from HB Markets!

Market opening: FTSE futures, traded 38 points higher at 7:00 am UK time, indicating markets may open higher as investors scout for opportunities after yesterday's fall. 

New York: Spain's rising borrowing cost fuelled worries about the return of the Eurozone crisis. Signs that the US Fed may not embark on QE3 continued to weigh on sentiments. The S&P closed 1.0% lower, registering its largest decline in a month. 

Asia: Investors followed New York's lead and exited equities. The Nikkei closed 0.5% lower, while the Hang Seng was trading 0.7% lower at 7:00 am. 

Continental Europe: Markets plunged after Spain's disappointing bond auction. ECB President Mario Draghi's warning about downside risks to the region's economic outlook also dented investor confidence. The German DAX and French CAC 40 ended 2.8% and 2.7% lower, respectively. 

UK small caps: The FTSE AIM All-Share index closed 1.7% lower yesterday. 

Today's news

Talks of ECB exiting crisis mode premature - Draghi 

European Central Bank President, Mario Draghi, said the current high unemployment and shrinking output warrants that ECB continues to operate in 'crisis mode'. "Downside risks to the economic outlook prevail," he added. Recently, Bundesbank President Jens Weidmann has led voices asking the ECB to start raking in the over EUR1tr it pumped into the Eurozone to soothe liquidity concerns and restore market confidence. Mr. Draghi appeared relaxed about Spain's rising borrowing cost, terming the rise in yields as a signal that markets were eager for economic reforms.

Company News

International Consolidated Airlines (LON:IAG)

International Consolidated Airlines (IAG) reported revenue passenger kilometres rose 6.2% y-o-y in March. Available seats kilometres, a measure of capacity increased 1.1% compared to March 2011. The airline's premium traffic increased 6.7% y-o-y and the growth in non-premium traffic was 6.2%. The management said that while the operations from their London Heathrow hub are improving, the Spanish operations continue to be impacted by threats of strikes by Iberia's pilots. Another 30 days of strikes have been announced by the striking pilots' labour union SEPLA. The management recognised that the economic conditions in Spain are likely to worsen in the short term. Nonetheless, Iberia's subsidiary, Iberia Express started flights to 17 destinations to cater to seasonal traffic in summer. The management also said it has received an approval for the acquisition of BMI from Lufthansa from the European Commission. 

Our view: The approval to acquire BMI is conditional upon IAG agreeing to give up fourteen slots at Heathrow and pledging to carry passengers flying on long-haul connecting flights with other players. Late last year, IAG offered to buy BMI for £172.5m. With BMI's acquisition, IAG will be able to extend its network by operating more long-haul routes. However, the problems at Iberia continue for IAG. Further deterioration of the Spanish economy in the short term is widely expected and IAG is unlikely to find much support from the UK economy to drive significant demand improvement. With what looks like a situation of oversupply of aircraft coming into Europe during 2012, pricing pressure is likely to follow. Adding stubbornly high fuel prices along with the introduction of carbon credits on all flights in, to or from Europe, rising costs are likely to eat into IAG's already thin margins. 

Shanks Group (LON:SKS)

Shanks Group released a pre-close trading update for FY2012 ended 31st March 2012 yesterday. Shanks, a provider of waste management solutions, closed a £750m, 25-year contract with Barnsley, Doncaster and Rotherham Councils, while a deal with Wakefield is nearing completion. The management said that the core net debt to EBITDA ratio should fall between 1.7x-1.8x while adding that trading during the year was in line with expectations. 

Economic News

UK, EU and German PMI 

Markit's services purchasing managers' index (PMI) for the UK progressed to 55.3 in March from 53.8 in February. The index for the Eurozone advanced to 49.2 (preliminary reading 48.7) from 48.8 in February. In Germany, the services PMI fell slightly to 52.1 in March from 52.8 the previous month. Markit also released data for the Eurozone's composite PMI, which stood at 49.1, bettering the preliminary reading of 48.7. However, this is lower than February's reading of 49.3. 

Our view: The strong pick-up in activity in the UK surprised economists, as consensus estimated the services index to shrink to 53.4. The increase was the strongest since Q2 2010 and should douse fears of the economy plunging into recession after contracting 0.3% in Q4 2011. The data for the Eurozone shows that the pace of contraction slowed - indicating stabilisation. However, the Eurozone may not be able to avoid a technical recession (output falling for two consecutive quarters). This slowdown seems to be affecting the core, with Germany experiencing a slowdown, but as recent data suggests may escape a recession. 

EU ECB interest rate announcement 

The key interest rate in the Eurozone was kept unchanged at 1.0% by the European Central Bank (ECB). After back-to-back rates cuts in November and December last year, the ECB has maintained the interest rates at 1% for the past four months. 

Our view: The ECB's decision was widely expected by investors and analysts. Last month, ECB President Mario Draghi, remarked that the Eurozone was showing signs of stabilising. ECB's €1tr in fresh money injection had helped restored some confidence in the markets. The fear of rising energy prices (which could ignite inflation) is also believed to have influenced the ECB to withhold the downward revision to interest rates. Inflation at 2.6% in March was above ECB's target of 'below but close to 2%'. 

US ISM non-manufacturing

The Institute for Supply Management's non-manufacturing purchasing managers' index (PMI) stood at 56.0 in March, declining from 57.3 in February. The headline index pulled back as the business activity index declined to 58.9 from 62.6 in February and the new orders index retreated to 58.8 from 61.2. However, the employment index climbed 1 point to 56.7 in March. Pricing pressure has eased (the prices index dropped to 63.9 from 68.4 in February), but remains elevated due to rising fuel prices. 

Our view: Though the index failed to meet economists' expectations of a rise to 56.8, the reading above 50 indicates that the services sector is still growing. Services industries account for about two-thirds of the economy, and continued expansion is expected to further improve the labour market, kick-starting the virtuous cycle of increasing income, higher consumption, and (the consequent) further growth in output. 

UK Halifax house price index 

Halifax house price index rose 2.2% m-o-m in March as average house prices climbed to £163,808, a level similar to that in June 2011. The index declined a modest 0.1% for the first three months of 2012 compared to the preceding three months. Compared to the first three months for 2011, the index was 0.6% lower. The lender said, house transactions in January and February increased 14% y-o-y, as first-time buyers raced to avail the exemption on stamp duty for houses priced between £125,000 and £250,000 that expired on 24th March. 

EU retail sales

Retail sales in the Eurozone declined 0.1% m-o-m in February following a revised 1.1% increase in January, the Eurostat said yesterday. The annual decline in sales continued for the tenth consecutive month, with retail sales falling 2.1% in February after a 1.1% drop in January. Economists expected sales to drop 0.2% m-o-m and 1.1% y-o-y. 

US MBA mortgage applications

The index of mortgage applications rose 4.8% w-o-w for the week ended 30th March, the Mortgage Bankers Association (MBA) reported yesterday. The first increase in the past seven weeks was ascribed to a 4.0% increase in the sub-index for refinancing applications and a 7.0% surge in the index for home purchases applications. The four-week moving average (a more stable reading) for all applications retreated 2.1%, and this average for refinancing applications declined 3.7%. The four-week moving average for purchasing improved 3.5%. Refinancing applications, as a percentage of total applications, declined to 71.2% from 71.9% the previous week. Interest rates on 30-year fixed mortgages dropped seven basis points to average 4.16% after rising sharply for two weeks. 

The Markets

Market opening: FTSE futures (trading 12.5 points lower at 7:00 am UK time) indicated that markets could open lower today. PMI services data to be released later today may determine the market's direction. 

New York: The US Fed's stance of not bringing in a third round of quantitative easing (QE) disappointed investors yesterday. The S&P closed 0.4% lower. 

Asia: Investors offloaded equities after being disheartened by the possibility that the US Fed may not pursue another round of QE. The Nikkei closed 2.3% lower. Markets in Hong Kong are closed today. 

Continental Europe: Markets closed lower on concerns about Spain's ability to repay debt and QE3 losing favour among US Fed policymakers. The German DAX and French CAC 40 ended 1.1% and 1.6% lower, respectively. 

UK small caps: The FTSE AIM All-Share index closed 0.6% lower yesterday. 

Today's news

Spain's debt set to breach 1990 levels 

Investors holding Spanish bonds were left jittery after the country's government highlighted high public debt levels during its budget announcement yesterday. Spain's debt-to-GDP ratio is expected to shoot up to 79.8% from 68.5% in 2011, the highest level in 22 years, despite the implementation of measures aimed at saving €27bn. 

Banking monopoly in China should go - China's PM 

China's Prime Minister Wen Jiabao said the banking monopoly in the country needs to be dismantled to help release much needed credit to cash-starved small businesses. Speaking at a round-table discussion with local businesses, he added that the monopoly of big banks allowed them to earn profits too easily. His comments followed reports that suggested the Chinese economy grew 8.4% y-o-y in Q1 2012, after racing at more than 10% for two years. As policymakers try to slowdown the economy to a more sustainable pace, credit disbursement is gaining attention. 

Company News

ARM Holdings (LON:ARM)

ARM Holdings announced forming a joint venture with Gemalto (Amsterdam-based software and services provider) and Giesecke & Devrient (Munich-based maker of security-related products) to address security needs of smart devices such as smartphones, tablets and smart-TVs and provide a 'trusted execution environment' based on ARM's existing TrustZone security technology. The joint venture will use solutions from the three companies to develop a new platform aimed at offering greater security to online transaction over smart devices. The three companies will contribute software, patents, manpower, cash and equipment to the new venture. ARM's share in the new entity will be 40%, while that of Gemalto and Giesecke & Devrient will be 30% each. 

Our view: The joint venture extends ARM's existing partnership with Gemalto and Giesecke & Devrient. The new company will focus on hardware as well as software and related services, moving a step closer to providing a common security standard to process transactions on smart devices. As consumers increasingly adopt smart-devices into daily life, providing a secure environment for the new generation of innovative services would be of paramount importance. Consequently, the need for a secure environment enabling such services is expected to increase rapidly. The new venture will cater to this nascent market, fuelling further growth for the companies. 

Economic News

UK PMI construction

The Markit/CIPS purchasing managers index for the construction sector rose to a 21-month high of 56.7 in March, from 54.3 in February. Commercial construction expanded the most, followed by construction at civil engineering projects. Residential construction grew slightly. New orders rose the most in four-and-a half years and caused a moderate pick up in employment.

Our view: Economists were expecting construction activity to shrink to 53.4 in March, but mild weather seems to have helped increase demand. PMI manufacturing data released on Monday offered a similar surprise. The upbeat reading of these indicators suggests that the UK may have escaped a recession. However, this also dims hopes of the Bank of England extending its asset purchase programme once the current £325bn concludes in May. 

US factory orders 

Factory orders in the US gained 1.3% in February reversing the revised 1.1% decline (from -1.0%) in January, the US Department of Commerce said yesterday. Orders for core capital goods, a rough estimate of business investment, expanded 1.7%. Demand for durable goods (i.e., goods meant to last more than three years) increased 2.4% during the month, higher than the 2.2% gain expected in a preliminary report released last week. Orders for transportation equipment increased 3.9% in February, as orders for cars and auto parts increased 0.2% and aircraft orders gained 6.0%. Orders (excluding transportation equipment) increased 0.9% after falling 0.5% in January. 

Our view: The increase in factory orders was lesser than the 1.5% expected by economists. The slump in January can be ascribed to the expiration of tax credits in December, which enticed businesses to advance investments. However, higher factory orders in February and expanding manufacturing activity in March (the ISM manufacturing index for March released on Tuesday rose to 53.4 from 52.4 in February) suggests that manufacturing activity is regaining momentum. 

Eurozone producer price index

The increase in producer prices cooled to 3.6% y-o-y in February after rising 3.8% in January, Eurostat reported yesterday. Producer prices advanced 0.6% m-o-m compared to a 0.8% increase in January. This increase was slightly ahead of consensus estimate of a 0.5% m-o-m and 3.5% y-o-y rise. 

US FOMC minutes 

Eight out of ten Federal Reserve policymakers do not see the need for further quantitative easing (QE), the minutes of the Federal Open Market Committee (FOMC) released yesterday showed. This is a surprising shift for the previous month, when a majority still thought that a third round of QE would be warranted to support the fragile economic recovery. Improvement in the labour market and indicators of firmer growth in the overall economy could have prompted this shift. However, the outlook for the economy remained cautious. 

US ISM New York

The gauge of current business conditions in New York rose to 67.4 in March (the highest in 13 months), from 63.1 in February, the Institute for Supply Management-New York reported yesterday. The measure of outlook for six months from now advanced to 79.5 from 77.3, and the purchasing-volume index increased to 51.1 from 45.5. The employment index, however, pulled back to 51.2 from 54.4 the previous month. The rise in the prices paid index from 53.0 in February to 59.3 in March reflects the mounting cost pressure on manufacturers. 

The Markets

Market opening: Optimism following increasing positive indicators about the economy could help markets to build on yesterday's gains and open higher. FTSE futures were trading 13.5 points higher at 7:00 am UK time. 

New York: Wall Street welcomed better than expected manufacturing data from the US and China, which indicated the pace of recovery in the respective economies was intact. The S&P rose 0.8% to 1,419, its highest level YTD. 

Asia: Markets rose following upbeat US factory data, which fuelled strong rallies in global equities overnight. However, the Nikkei closed 0.6% lower, while the Hang Seng was trading 0.8% higher at 7:00 am. 

Continental Europe: Faster than expected expansion in the US manufacturing sector helped markets end in the green. The German DAX gained 1.6% and French CAC 40 rose 1.1%. 

UK small caps: The FTSE AIM All-Share index gained 0.4% yesterday. 

Today's news

UK avoided recession - British Chambers of Commerce 

A quarterly survey by the British Chambers of Commerce showed that the UK economy avoided a recession, growing 0.3% supported by stronger exports. However, the economy is expected to expand around 0.6% during 2012, lower than the 0.8% growth estimated by the Office of Budgetary Responsibility. This shows that the path to normal growth is difficult. The survey also showed that employers exhibited the strongest desire to hire in nine months, raising hopes that unemployment (currently at 8.4%) would retreat.

IOBE expects 5% contraction of Greek economy 

Greek think-tank Foundation for Economic and Industrial Research (IOBE) estimated the economy would shrink around 5% in 2012 and unemployment could rise to 20% from 17.3% in 2011. These projections are worse than the 4.5%-4.7% contraction expected by the EU and the IMF. The IOBE criticized the sharp drop in government expenditure, slow pace of privatisation and inadequate labour market reforms.

Company News

Cookson (LON:CKSN)

Cookson is contemplating spinning off its electronics business, The Sunday Times reported. The company is said to have approached Rothschild to advice on separating the division which makes parts used in electronic gadgets. As of now, the electronics division accounts for about 30% of the £2.8bn total revenue of the company. Cookson also operates in the ceramics space, which produces consumables used in steel production and runs a precious metals processing unit. Over the past five months, activist hedge fund, Cevian (known for acquiring undervalued businesses that are later broken up to unlock greater value) has acquired an 18% stake in the company.

For FY2011, the company earned a pre-tax profit of £261.5m on revenue of £2.8bn. Operating profit increased 15% to £290.2m. 

Our view: In February, the company sold off its US precious metals business to Richline Group, a subsidiary of Berkshire Hathaway, and is said to be looking at disposing the division's European operations too. This would leave Cookson with the electronics and ceramics division. With the demerger of the electronics business, the two new companies would have a sharper focus driving growth and could lead to considerable value appreciation for the stock, which is currently trading at a discount to peers in the industrials sector. 

Economic News

UK PMI manufacturing

The purchasing managers' index for the manufacturing sector rose to a ten-month high of 52.1 in March from 51.5 (revised from 51.2) in February, the Markit/Chartered Institute of Purchasing & Supply survey released yesterday showed. Production expanded as order backlogs decreased and firms built up inventories. A surge in new orders also contributed to the increase. However, the employment sub-index was largely unchanged. The index of input prices increased to 60.4 in March from 55.3 in February. Rob Dobson, senior economist at Markit, said the PMI data indicates a growth in output of around 0.3% in Q1 2012. 

Our view: The surprise increase in the index was contrary to a drop to 50.7 expected by economists. Rising input costs, mainly due to rising energy prices, could worry policy makers if producers chose to pass these on to customers, thereby flaring inflation. Currently, producers are taking a hit on margins as high competition mounts pricing pressures. Also, the expansion in production raises hopes that the economy could avoid a double dip. However, PMI data for the dominant services sector to be released over the week should offer better indication. 

Eurozone and Germany PMI manufacturing

The manufacturing purchasing managers' index for the Eurozone retreated to a three-month low of 47.7 in March from 49.0 in February, market research firm Markit said yesterday. This marks the eighth consecutive month of a below 50 reading. 50 demarcates expansion from contraction. The index for Germany shrank to 48.4 from 50.2 in the previous month, indicating production contraction during the month. 

Our view: The slight acceleration in Eurozone's manufacturing activity seen in the first two months of the year was more or less reversed in March, validating economists' expectations that the Eurozone would contract for the second successive quarter in Q1 2012, implying a recession. Also, German manufacturing activity seems to have lost insulation, with the slowdown in the Eurozone's periphery weighing on growth of output. 

US ISM manufacturing

The Institute for Supply Management's measure of manufacturing activity rose to 53.4% in March from 52.4% in February. The sub-index for production surged 5% m-o-m to 58.3% (a three-month high) and compensated for the decline in the indices for new orders and exports (to 54.5% from 54.9% and 54.0% from 59.5%, respectively). The sub-index for employment advanced to 56.1% from 53.2% in February. 

Our view: The rebound in the manufacturing activity index in March after a slight decline in February surpassed economists' expectation of a rise to 53.0%. Growth in forward-looking new orders and exports, while continuing, decelerated, indicating the effect of the imminent recession in the Eurozone and mixed performance of the Chinese manufacturing sector. Nonetheless, the rise in the employment index and increase in production suggest that the economy is still in the recovery mode. 

EU unemployment

Unemployment in the Eurozone rose to a 14-year high of 10.8% in February compared to 10.7% in January, the Eurostat reported yesterday. This increase is in line with consensus expectations. In the broader 27-state European Union, unemployment rate increased to 10.2% from 10.1% in the previous month. 

UK BoE housing equity withdrawal

Housing equity withdrawals was £8.5bn in Q4 2011 similar to that in Q3 2011, the Bank of England said yesterday. Equity withdrawals as a proportion of net income remained steady at -3.2%. However, analysts believe this move to injections of housing equity is more likely to be caused by the decrease in number of housing transactions than by households actively accelerating the repayment of mortgages. Economists were expecting injections to fall to £8.2bn. 

US construction spending

Construction spending in the US fell 1.1% m-o-m to US$808.9bn in February, the lowest level since October, the US Department of Commerce said yesterday. Spending for January was revised downwards to show a 0.8% m-o-m fall, much greater than the 0.1% m-o-m reported previously. Economists expected construction spending to rise 0.7%. 

The Markets

Market opening: Markets are expected to open higher on positive Chinese PMI data. FTSE futures were trading 5.0 points higher at 7:00 am UK time. 

New York: The S&P closed almost flat (up 0.4%) Friday, ending its best quarter since 1998. The rally was fuelled by increasing confidence about the US recovery. 

Asia: Better than expected Chinese manufacturing data aided markets. The Nikkei closed 0.3% higher, while the Hang Seng was trading 0.5% lower at 7:00 am. 

Continental Europe: Markets rallied on Friday after a three-day losing run as investors welcomed an agreement to temporarily boost the Eurozone's rescue fund. The first quarter has also been good for European markets, which posted their best quarterly gain since 2006. The German DAX and French CAC 40 rose 1.0% and 1.3%, respectively. 

UK small caps: The FTSE AIM All-Share index gained 1.1% on Friday. 

Today's news

China's official PMI shows economic activity expanding 

The official Purchasing Managers' Index (PMI) that captures activity in large factories rose to an 11-month high of 53.1 in March, bettering February's 51.0. The PMI rebounded as domestic demand supported an increase in new orders (the related sub-index rose to 55.1 in March from 51 in February). The new export orders index, too, edged up to 51.9 from 51.1, although indicating subdued growth. On the contrary, the PMI compiled by HSBC, which focuses on activity in smaller factories, fell to 48.3 (flash reading 48.1) in March from 49.6 in February, indicating a marked slowdown in production.

Eurozone's firewall stretched to €700bn 

Eurozone finance ministers temporarily expanded the combined lending capacity of their rescue funds, EFSF and ESM, to €700bn from €500bn. Of this, €500bn will come from the ESM, while the remaining €200bn is what the funds have already committed to the bailout of Greece, Ireland and Portugal.

Company News

Electrocomponents (LON:ECM)

Electrocomponents issued a pre-close trading update for the year ending 31st March 2012. Top line growth in Q4 2012 shrank to 1% from 14% reported in Q1 2012. Sales at the international business grew 2%, while sales in the UK were flat. For the year ending 31st March, sales could rise around 7% to more than £1.2bn, supported by a 9% increase in international sales and 3% improvement in UK sales. The management expects FY2012 pre-tax profit to be in line with expectations.

Our view: The decline in global manufacturing due to the unstable economic environment affected sales growth in Q4 2012. Though the economic outlook for the US is improving, forecasts of global growth remain subdued. Given the current economic conditions, the company's heavy weighting in Europe and little scope for consensus upgrades, we believe the stock could struggle to outperform. 

LSE Group (LON:LSE)

On Friday, the London Stock Exchange Group released a pre-close trading update for the eleven months to 29th February 2012. The company said performance during the period was good and supports the expectations of a strong performance for the year. Average daily equity trading value in the UK shrank 2% while equity trading volumes on the Italian exchange increased 2%. New listings on the exchanges declined to 144 from 167 in the previous year and funds raised in the market dropped 7.5% to £34.6m. Net treasury income increased in Q4 2012 compared to the £33.5m in Q3 2012. 

Our view: LSE's deal to acquire up to a 60% share in the LCH.Clearnet, the London-based clearing house, faces a crucial shareholders vote Tuesday. The acquisition, if successful, could give LSE an edge over competition, by controlling the clearing house operations inherent to the functioning of the financial markets. The acquisition is also critical as LSE stands to benefit from the regulatory changes being considered in the US and Europe that could see trading of over-the-counter derivative shift to exchanges. However, winning regulatory approval for acquisitions in this sector is an uphill task. Recently, NYSE Euronext's merger with Germany's Deutsche B rse was blocked by the European Commission. We prefer adopting a wait and see approach until the uncertainty surrounding the acquisition ceases and trading volume starts to improve. 

Tate & Lyle (LON:TATE)

Tate & Lyle released a pre-close trading update for FY2011 ending 31st March 2012 on Friday. The management said performance is in line with expectations. The speciality food ingredients division registered sales and volumes growth. However, considering that activity has returned to more normal levels after an extraordinary H1 2012 and that costs associated with the restart of Splenda sucralose factory in McIntosh, Alabama, would be accounted for in the second half of 2012, profits for the period are likely to be affected. Margins at the bulk ingredients division in Europe could improve supported by a rise in sugar and starch prices. The management further said that in anticipation of tight supply of corn before the commencement of the harvest season, they've decided to stock on corn, leading to increased working capital demands. 

Our view: Tate & Lyle's refocused strategy and an opportune movement in corn prices has afforded the company an impressive year. The company also saw the introduction of new products and capacity expansion during the period. However, the share price has appreciated more than 20% recently, which we believe factors-in most of these positives. 

Qinetiq (LON:QQ.)

In a pre-close trading update delivered on Friday, Qinetiq confirmed performance for the year ending 31st March 2012 would be in line with expectations as the company reaps the benefits of the self-help programme, which increases productivity and competiveness. The company will receive a one-off payment of £65m in the next financial year from the UK Ministry of Defence (MOD) in settlement of liabilities that would otherwise be recovered through revenues over the next ten years. The MOD has also agreed to give up its right to veto the company's transactions and activities, subject to shareholder approval. This will be replaced by a compliance system similar to the ones applicable to peers operating in the aerospace and defence space. However, the management warned that revenue visibility remained low. 

Our view: The restructuring plan has helped boost the bottom-line despite pressures on the top-line as governments in the UK and US cut defence spending. The removal of MOD's veto rights could give the company more flexibility in choosing clients, increase competitiveness, open new avenues of growth and makes the company available for structural deals in the industry. We remain buyers of the stock. 

Economic News

German retail sales

Retail sales in Germany dropped 1.1% m-o-m, but advanced 1.7% y-o-y in February, the federal statistics office reported on Friday. The sales for January were revised up to -1.2% m-o-m and a gain of 1.7% y-o-y from the 1.6% m-o-m decline and 1.6 y-o-y rise reported previously. 

Our view: The drop in retail sales confounds economists' expectations of a 1.1% m-o-m rise and punctures hopes of a meaningful contribution from consumer spending to Q1 2012 GDP growth. The fall in retail sales (a highly volatile and frequently revised indicator) suggests the increasingly positive labour market is yet to induce a significant change in consumption among Germans. 

Eurozone inflation

Inflation in the Eurozone eased to 2.6% in March from 2.7% in February, Eurostat reported on Friday. 

Our view: Economists had expected inflation to slow to 2.5%, however higher fuel costs seem to mount upward pressure on general commodity prices. Earlier, the European Central Bank (ECB) raised its annual inflation forecast to 2.0%-2.4%. Also, though inflation has come down from last years' peak of 3%, it remains stubbornly above the ECB's long term price stability target of 'below but close to 2%' dousing hopes of an interest rate cut during the its monthly meeting next week. 

US personal income

The personal income of Americans increased 0.2% in February after rising by a similar amount in January, the US Department of Commerce said on Friday. Personal spending rose 0.8%. However, core personal consumption expenditure, which excludes food and energy, increased 0.1% m-o-m. Consequently, the personal savings rate declined to 3.7% in February from 4.3% in the previous month.

Our view: Economists expected personal income to increase 0.4%. Though the higher spending may seem to be a positive sign, it was largely because consumers spent more on fuels and dipped into savings to fund the increase. 

US University of Michigan consumer confidence

The final reading of the Thomson Reuters/University of Michigan s consumer confidence index came in at 76.2 in March compared to 75.3 in February. The sub-index of current economic conditions rose to 86.0 from 83.0 in February, beating the preliminary estimate of 84.2. The consumers  expectations index edged up to 69.8 in March from the preliminary reading of 68.0, but was below February s 70.3.

Our view: The final reading beat expectations of the index rising to 74.5. Richard Curtin, Director of the survey, said that the uptrend in income and jobs was helping offset the impact of higher energy prices. Upbeat confidence generally precedes an increase in consumer spending. As consumer spending constitutes about 70% of the GDP in the US, growing consumer confidence bodes well for the economy. 

UK GfK consumer confidence

GfK's measure of consumer confidence shrank to -31.0 in March from -29.0 in February, contradicting economists' expectations of the measure remaining unchanged. The gauge of expectations for the economy one year from now slipped to -30.0 from -29.0 in the previous month. The measure of consumers' assessment of whether now was a good time for big ticket purchases decreased sharply to -31.0 from -27.0 in February. The index measuring personal finances over the past twelve months slid to -25.0 from -21.0. However, consumers' opinion about the economy over this period edged up to -59.0 from -60.0 in the previous month. 

US Chicago PMI

The Chicago PMI fell to 62.2 in March from 64.0 in February, the Institute for Supply Management-Chicago said on Friday. The retreat suggests a deceleration in production. However, the reading is above 50, indicating activity is still expanding. The employment sub-index slid to 56.3 from 64.2, while the new orders index fell to 63.3 in March from 69.2 in February. Economists expected the headline index to stand at 63.0. 

The Markets

Market opening: FTSE futures (trading 40.5 points higher at 7:00 am UK time) indicate markets will open higher after yesterday's sell-off. Spain's budget announcement will be closely followed by markets today. 

New York: Weaker-than-expected jobs data failed to excite investors. The S&P 500 index pared early losses to close 0.2% lower yesterday. 

Asia: Markets were range bound today, awaiting a decision by Eurozone ministers on the expansion of the region's firewall. The Nikkei fell 0.3% on profit taking. Nevertheless, this was the best first quarter performances in 24 years. Meanwhile, the Hang Seng was trading 0.7% lower at 7:00 am. 

Continental Europe: European markets ended the day at three-week lows. The German DAX and French CAC 40 closed 1.8% and 1.4% lower, respectively. 

UK small caps: The FTSE AIM All-Share index ended 1.3% lower yesterday.

Today's news

G7 economic recovery fragile, patchy - OECD 

The Organisation for Economic Cooperation and Development (OECD) anticipates two-speed growth in the G7 nations, with the Eurozone lagging behind North America. It estimates G7 economies will grow at an annualised rate of 1.9% in Q1 and Q2 2012, and advised central banks to continue with policy easing to support the fragile recovery. The OECD forecasts that the US will record 2.9% and 2.8% annualised growth in Q1 and Q2 2012, respectively. This contrasts growth expectations in Europe. During Q1 2012, Germany is expected to grow 0.1%, while Italy and Britain could contract 1.6% and 0.4%, respectively. Britain could return to growth in Q2 2012, expanding 0.5%, while the Italian economy is expected to continue in recession, contracting 0.1%. The organisation estimates surging oil prices could reduce growth by 0.1-0.2% in 2012.

Company News

FirstGroup (LON:FGP)

FirstGroup released a pre-close trading update for the year ending 31st March 2012. Life-for-like (LFL) revenue at the First Student division is expected to shrink by 1.4%; though operating margin in H2 2012 is expected to be ahead of that in the previous year. LFL revenue at First Transit and Greyhound businesses could improve 1.5% and 4.2%, respectively. The UK rail LFL passenger revenue could grow 8.3%. The UK bus division is also expected to see LFL passenger revenue increase by 1.5%, but could possibly report lower operating margins of about 8% in 2012-13 due to the weakening economic situation, especially in Scotland and north of England. The management said the pullback of government subsidies and rising fuel costs are reducing margins for the UK bus division. However, they re-iterated their guidance of generating about £100m-£115m in cash and maintaining a net debt to EBITDA ratio of 2.5x.

Our view: FirstGroup's most profitable business - the UK bus division - could report lower operating margins of 8% in 2012-13 versus 13.1% last year. Though the performance at the North American business is expected to improve, offsetting the loss of earnings from the UK bus division could prove difficult, as it constitutes about a third of the group's operating profits. Also, about 60% passenger revenue is earned in north of England, one of the regions worst-hit with unemployment. Under these circumstances, the stock could struggle to offer growth and we currently advice withholding investment decisions. 

Homeserve (LON:HSV)

Homeserve released a pre-close trading update for the period ending 31st March 2012 yesterday. The company said its marketing campaign in the UK generated a lukewarm response. As a result, customer numbers could shrink by 9% compared to 8% estimated previously. The policy retention rate is also expected to decrease to 80% from 82.7% in FY2011. After the suspension of telesales and marketing activities last October, due to a mis-selling scandal, the company's new telephony pilot is near completion and is expected to be launched in the near future. The businesses in the US, France and Spain are expected to fare better with customer numbers increasing 15% , 5% and 50% respectively. The management said pre-tax profits should be in line with market expectations. 

Our view: Homeserve is still reeling under the effects of suspension of outbound telesales campaigns in October. This is the third revision to the drop in customer numbers from 5% and 8% estimated earlier. The loss of reputation is the likely cause of the slow response to the company's recent mail marketing campaign. We remain sellers of the stock. 

Imperial Tobacco (LON:IMT)

Yesterday, Imperial Tobacco issued a pre-close trading update for H1 2012 ending 31st March 2012. Revenue for the period is expected to rise 3% despite a 4% decline in volumes. Trading performance for the full year is expected to be in line with management's expectations. 

Our view: The decline in volumes is not affecting revenue due to Imperial Tobacco's improved sales mix. The stickiness of demand for its product offers the company a high revenue visibility. We like the stock for its highly predictive cash flows and attractive dividend and are buyers. 

3i Group (LON:III)

3i Group issued a trading update before the close of FY2012 (ending 31st March 2012). The company invested £623m in the 11 months to 29th February 2012, compared to £581m in the previous period. Separately, Michael Queen announced his intention to step down from the role of Chief Executive as soon as the Board found a suitable replacement. Michael Queen was instrumental in deleveraging the company's balance sheet and broadening the asset management model. However, he has been under attack from shareholders, wanting him to pursue a more aggressive strategy by taking on more debt and return capital to shareholders through buy-backs. 

Bwin.Party Digital Entertainment (LON:BPTY)

Bwin.Party Digital Entertainment released results for FY2011 ended 31st December 2011 yesterday. Revenue, after the merger of Bwin and PartyGaming on 31st March 2011, rose 93% to €691.1m. Pro-forma revenue grew to €816.0m from €814.0m in FY2010 despite the closure of French casino and strong revenue growth registered during the 2010 World Cup. Pro-forma EBITDA from continuing operations increased 3% to €199.3m. The integration delivered synergies of €23.3m in 2011, ahead of target. The company expects to recognise synergies of €40m in 2012 and €5m in 2013. In the conference call, the CEO Norbert Teufelberger said that positive developments relating to online gambling market in the US would present a significant opportunity for the company. The company declared an annual dividend of 3.12p per share. 

TUI Travel (LON:TT.)

TUI travel released a trading update prior to the conclusion of H1 2012 to 31st March 2012 yesterday. The company said it is outperforming the market as strong demand boosted late winter trading and summer booking volumes are showing improvement. Load factor and yields are also inching up. Around 48% of the UK summer programme has been booked and the average selling price has increased 8%. The differentiated product offering forms 63% of UK bookings. Trading conditions in France continue to be challenging due to the upcoming presidential elections and the slow recovery in North Africa. Despite the challenging economic conditions, the management remains confident about the company's performance given the improvement in summer bookings in the UK, Nordics and Germany. 

Economic News

US GDP

The economy grew 3.0% y-o-y in Q4 2011, unchanged from the previous estimate, the US Department of Commerce said in its final estimate yesterday. The downward revision to exports (to 2.7% from 4.3%) offset the upward revision to business spending to 5.2%. Government spending, which plummeted 6.9% after rising 2.1% in Q3 2011, failed to contribute to economic expansion. Defence expenditures plunged 12.1%. However, consumer spending rose 2.1% (unrevised), building on the 1.7% growth recorded in Q3 2011. Boosted by the improved labour market, personal income and household disposable income increased to US$3.3bn and US$10.6bn, higher than previously reported. The economy expanded 1.8% in Q3 2011. The GDP grew 1.7% in 2011, after accelerating 3.0% in 2010.

Our view: The Fed expects the economy to grow 2.2%-2.7% in 2012. The increase in disposable income and business spending reflects the underlying strength in the economy. However, Fed Chairman Ben Bernanke indicated that the monetary policy still has a major role to play to ensure that the recovery is sustainable, while adding that it is 'too early to declare victory.' 

Eurozone consumer confidence

The index of economic sentiment edged down to 94.4 in March from 94.5 in February, the European Commission reported yesterday. Industrial confidence shrank to -7.2 from -5.7 in February and the gauge of confidence in the services sector slipped to -26.5 from -24.6 in the previous month. However, the measure of consumer confidence rose to -19.1 from -20.3 in February. The index of services confidence increased to -0.3 from -0.9 in February and confidence among retailers improved to -12.2 from -14.0 in the last month. 

The headline number declined as economic confidence in Germany (-2.4 points), the Netherlands (-1.3 points) and Spain (-1.1 points) offset a rise in Italy (3.5 points) and France (2.0 points). 

Our view: The downturn in the confidence indicators dents hopes of the Eurozone returning to growth in Q1 2012. Economic confidence at the Eurozone's core seems eroded, with Germany and the Netherlands posting highest declines. Money supply figures released on Wednesday showed the European Central Bank (ECB) fresh money injection has not yet trickled down to households and businesses. Consequently, the central bank is unlikely to lower interest rates further in the near term. 

UK Nationwide house prices

House prices in the UK dipped 1.0% m-o-m and 0.9% y-o-y in March to £163,327, Nationwide Building Society said yesterday. The monthly fall in March is the steepest since February 2009. The expiration of 1% stamp duty exemption was expected to affect sales, the building society added. 

UK mortgage approvals

Mortgage approvals dropped to an eight month low of 48,986 loans in February following a negatively revised 57,899 in January, the Bank of England said yesterday. Economists were expecting approvals to dip to 57,200 from the 58,728 reported previously. 

German unemployment

The unemployment rate in Germany eased to a new low of 6.7% in March from 6.8% in February, Destatis reported yesterday. The number of people unemployed fell to 2.8m declining by 18,000 from the previous month. The consensus estimate pegged the drop in unemployment of 10,000 and expected the unemployment rate to hold steady at 6.8%. 

US jobless claims

Initial jobless claims dropped to the lowest level since April 2008, after decreasing 5,000 to 359,000 in the week ended 24th March 2012, the US Department of Labor said yesterday. Economists were expecting jobless claims to decline to 350,000. The four-week moving average, a more stable measure, declined to 365,000. 

The Markets

Market opening: Markets could open lower, taking cue from Asian counterparts that lost ground after fretting about growth in the US and China. FTSE futures were trading 21.5 points lower at 7:00 am UK time. 

New York: Tepid growth of future business investment, as indicated by the lesser-than-expected increase in durable goods orders, weighed on the sentiment. Material and energy stocks pushed the S&P 500 index 0.5% lower yesterday. 

Asia: Investors preferred de-risking as concerns about growth in the US and China resurfaced. Markets followed Wall Street lower for the second day as an insipid rise in durable goods hit the sentiment. The Nikkei fell 0.7%, while the Hang Seng was trading 1.4% lower at 7:00 am. 

Continental Europe: Markets closed at three-week lows, reacting strongly to lower-than-expected US durable goods data. The German DAX and French CAC 40 both closed 1.1% lower yesterday. 

UK small caps: The FTSE AIM All-Share index ended 0.8% lower yesterday. 

Today's news

Eurozone firewall of little long-term use - ECB's Weidmann 

European Central Bank policymaker and head of Germany's Bundesbank, Jens Weidmann, said increasing Eurozone's firewall does little other than buy time, and is likely to face political and financial limitations. Instead, leaders should focus on structural reforms to address the monetary union's core problems. Weidmann remarks directly contradict OECD chief Angel Gurria's call to build the 'mother of all' firewalls in the Eurozone. Eurozone finance ministers meet tomorrow to discuss combining their two rescue funds to increase the region's crisis-fighting capacity to around €700bn.

Company News

Petropavlovsk (LON:POG)

Petropavlovsk announced results for the year ended 31st December 2011 yesterday. Revenue doubled to US$1.3bn in FY2011 from US$612.0m in FY2010, as the company sold more gold at higher prices. Revenue contribution from subsidiary IRC (a producer and developer of industrial commodities) also benefited the company. In FY2011, the Russia-focused miner sold 676,000 ounces of gold, 52% more than the previous year. Production of gold was 24% higher at 630,100 ounces. Average price realised per ounce increased 29% to US$1,617, while cash cost of production increased 9% to US$662 per ounce. Pre-tax profit increased to US$361.3m from US$69.2m and net profit shot up ten-fold to US$240.5m from US$23.0m in 2010. In FY2012, the miner plans to increase gold production by about 8% to 680,000 ounces, however, this does not include the planned capacity additions at the Pioneer and Albyn mines. Net debt increased to US$787.3m as the company incurred capital expenditures of US$544m. In FY2012, capital expenditure is expected to be US$354m and Petropavlovsk plans to spend around US$60m on exploration activities. The board recommended a final dividend of £0.07p per share.

Our view: The production guidance for 2012 is largely in line with consensus expectations, leaving little room for upgrades. In addition, the company's capital expenditure plans seems to be on the high side, reducing cash flow and further worsening the broker upgrade outlook. From the macro perspective, improving global economic sentiment should stem gold's rally. Without major production increases, prices stagnant and production costs increasing, Petropavlovsk would struggle to trigger upgrades and outperform and warrants a downgrade to hold. 

Domino's Pizza (LON:DOM)

Domino's Pizza released a trading update for Q1 2012 yesterday. Total sales rose 9.0% to £144.2m. Like-for-like (LFL) sales growth slowed to 3.5% from 4.2% in Q1 2011, with LFL sales in the UK easing to 3.6% from 5.5%. Ireland, however, returned positive LFL sales growth of 1.7% versus -10.5% in the previous year. Total online sales increased 44.5% to £59.3m; with 16.4% these orders being placed through the company's mobile platform. Online sales in the UK now comprise about half of total UK sales up from 39.3% in the previous year. The company opened 6 new stores during the period. The target of opening 72 stores during the year was unrevised, including 12 stores to be opened in Germany. 

Our view: Domino's is seeing eager adoption of its online and mobile platforms. In the UK, online sales have equalled in-store sales. Performance in Ireland has improved. In a bid to boost growth, Domino's is testing new geographies by entering Germany. However, we believe the share price reflects these positives. 

Evraz (LON:EVR)

Yesterday, Evraz announced preliminary results for the year ended 31st December 2011. EBITDA increased 23.3% to US$2.9bn on revenue of US$16.4bn, which grew 22.4% y-o-y. Production of crude steel increased 3% to 16.8m tonnes and steel sales increased 21.4% to US$14.7bn. Pre-tax profit increased 37.9% to US$873m. However, net profit declined 3.6% to US$453m reflecting higher tax and one-off expenses relating to the incentive payment (conversion premium) paid to the holders of US$650m convertible bonds due in 2014. Excluding extraordinary expenses, net profit would have been US$633m. In 2011, capital expenditure amounted to US$1.3bn compared to US$832m in 2010. The management declared a final dividend of US$0.17 per share and said the market for steel is expected to be challenging in 2012, as steel consumption could see a 'modest' rise led by emerging nations. 

Economic News

UK GDP

The Office of National Statistics said the economy shrank 0.3% q-o-q in Q4 2011 compared to the initial estimate of a 0.2% contraction. The economy shrank as output from the dominant services sector fell 0.1% and manufacturing output dropped 0.7%. Consumer spending increased 0.4% following a decline of 0.3% in Q3 2011, despite a 0.2% drop in disposable income. Government spending increased 0.5% after a similar fall in the previous period. On an annual basis, GDP grew 0.5% in Q4 2011, compared to 0.7% in Q3 2011. For 2011, the economy expanded 0.7%. The q-o-q growth in Q3 2011 was revised upwards to 0.6% from 0.5% estimated previously. 

Our view: Though the downward GDP revision is disappointing, more recent indicators suggest that the economy could avoid a technical recession (two consecutive quarters of GDP contraction). The office of budget responsibility predicts the economy will grow 0.8% this year, up from 0.7% forecasted earlier. 

US durable goods

Orders for durable goods (goods lasting more than three years) increased 2.2% m-o-m in February, after a 3.6% decline in January, the US Department of Commerce said yesterday. Orders for vehicles grew 1.6%. Other orders, excluding transportation, rose by a similar degree. Orders for non-defence capital goods, excluding aircraft, expanded 1.2%, while shipments of non-defence goods (excluding aircraft) surged 1.4% during the month. 

Our view: The modest increase in durable orders was lower than economists' expectation of 3.0%. Economists expected an improvement in business investments. However, orders for non-defence capital goods (excluding aircraft), its close proxy, failed to meet the consensus estimate of a 1.5% increase. A rise in business investments is eagerly anticipated as it precedes hiring. However, easing of economic activity in China and the Eurozone could deter investments from growing at the pace recorded earlier. 

German inflation

Consumer price inflation eased to 2.1% in March from 2.3% in February, Destatis reported yesterday. The monthly rise in consumer prices slowed to 0.3% in March after gaining 0.7% in February. EU harmonized inflation decelerated to 2.3% from 2.5% in February. 

Our view: Economists were expecting consumer prices to rise 2.2%. Falling inflation creates more room in household budgets and spurs spending. This is expected to aide the economy reverse the 0.2% contraction experienced in Q4 2011 

UK current account

The UK's Q4 2011 current account deficit narrowed to £8.5bn (2.2% of GDP) following a revised deficit of £10.5bn (2.8% of GDP) in Q3 2011. The deficit stood at £14.1bn in Q4 2010. For 2011, the current account deficit declined about two-fifths to £29bn from £48.6bn in 2010. 

Eurozone M3

M3, the broader measure of money supply, increased 2.8% y-o-y in February, accelerating from 2.5% y-o-y in January. Economists were expecting the pace to slow to 2.4%. In the preceding three months, money supply increased 2.3% compared to an increase of 2.0% in the three months to January. However, credit flow to the private sector slowed to 0.7% following January's increase of 1.1%, suggesting money from ECB's cash injection is yet to filter through to households and businesses. 

US MBA mortgage applications

Applications for mortgages dropped 2.7% w-o-w in the week ended 23rd March 2012, recording the sixth consecutive fall on a weekly basis, the Mortgage Bankers Association (MBA) said yesterday. The refinance index contracted 4.6% to its lowest reading since December. However, applications for home purchases increased the purchase index advanced 3.3% from the previous week. The ratio of refinancing applications to total applications decreased to 71.9% from 73.4% the previous week. The relatively stable four-week moving average for all applications dipped 3.4% as the average for refinancing activity shrank 4.9%, while that for purchases increased 2.1%. Average mortgage rates rose. A 30-year fixed rate mortgage commanded an average contract interest rate of around 4.23%, the highest since November 2011. 

The Markets

Market opening: Markets could open lower following fresh worries about the pace of the US recovery and as global markets take a breather after Monday's strong rally. FTSE futures were trading 16.5 points lower at 7:00 am UK time. 

New York: The S&P 500 index ended 0.3% lower as markets fell in the last trading hour after having traded mostly flat throughout the session. 

Asia: Markets, taking cues from Wall Street's retreat overnight, were trading lower today. The Nikkei fell 0.7%, while the Hang Seng was trading 0.9% lower at 7:00 am. 

Continental Europe: Lacklustre US data and a decline in energy stocks were led by France's Total. The company expects to plug the gas leak at its North Sea platform over the next six months. The German DAX closed flat, while the French CAC 40 ended 0.9% lower. 

UK small caps: The FTSE AIM All-Share index ended 0.3% higher. 

Today's news

Europe needs to exceed market expectations - OECD's Gurria 

Angel Gurria, Secretary General, Organization for Economic Co-operation and Development (OECD), said Eurozone ministers need to 'overshoot market expectations' while deciding on their firewall. Mr. Gurria has repeatedly demanded €1tr be set aside to combat the region's crisis. However, finance ministers, who are meeting at the end of this week, are more likely to combine their two rescue funds (totalling about €700bn). They also aim to push the IMF into supporting the debt-ridden European economies.

Recovery in the UK still a long way off - BoE's King 

Bank of England (BoE)'s governor, Mervyn King, said it would take additional time for economic growth to reach the pre-crisis levels as banks are still under pressure to mend their balance sheets. 

Company News

Bellway (LON:BWY)

Bellway sold 2,455 homes during H1 2012, 5.3% more than that in H1 2011, results released yesterday showed. The average price of homes sold rose 8.5% to £182,753. Consequently, total revenue grew 12.4% to £458.6m. Operating profit increased 65% to £46.4m as a higher proportion of homes sold were built on high margin land acquired since the economic downturn. Operating margin stood at 10.1%, 320 basis points ahead of the previous period. Pre-tax profit rose to £40.6m from £24.0m in H1 2011. During the period, the homebuilder drew down £11.6m of the committed bank facilities of £300m despite spending about £105m buying 4,600 plots. Bellway reported a robust start to the spring sale season; average reservations increased to 120 per week since 1st February after averaging 89 per week in H1 2012. The management said despite the anaemic economic growth and increasing unemployment, the underlying demand for houses remained strong following the seasonal trend. The board increased dividend by 62% to 6.0p per share.

Our view: Bellway, like other UK-based homebuilders, is benefitting from increased margins by building more private homes on land bank bought cheap since the slow down in 2007. The company has been able to earn a higher average selling price from an improved sales mix. In addition, Bellway has room to increase its land bank further by utilising unused banking facilities to take advantage of a subdued property market, ensuring healthy long term profitability. 

Compass Group (LON:CPG)

Compass Group released a pre-close trading update for the H1 2012 ending 31st March 2012 yesterday. The positive performance in Q1 2012 continued in Q2 2012 enabling revenue growth of around 8.5% during H1 2012. Organic growth during the period was approximately 5%. Like-for-like sales growth, though positive, was below that reported in the previous year as economic conditions in the UK and Europe continued to impact performance. However, encouraging performance in North America, and fast and emerging markets helped drive revenue growth. The company expects organic revenue to increase 7% in North America, and 19% in fast and emerging markets. Organic revenue in these markets could grow 12% on a like-for-like basis. Operating profit held steady compared to H1 2011. The management has earmarked around £160m for acquisitions. During the period the company announced the acquisition of NKS (Japan), a provider of catering services to healthcare and senior living facilities, and completed the acquisition of Supercare (South Africa) and DORA Gastro (Czech Republic). 

Our view: Like-for-like sales growth is being hampered by the economic condition in the UK and Europe. However, good performance by the North American division, and presence in the fast and emerging markets should help offset this decline and drive future growth. We are particularly attracted by the strong cash position, and growth potential in the fast and emerging markets. 

Kazakhmys (LON:KAZ)

Kazakhmys released audited financial statement for the year ended 31st December 2011 yesterday. Revenue increased 10.1% to US$3.6bn. Copper sales increased 7.8% to US$2.6bn; as higher prices offset the volume decline. Other revenue increased 16% to US$993m due to improved sales of silver at favourable prices. Group EBITDA grew 3.2% to US$2.9bn. The cash cost of copper increased 28% to US$1.14/lb. Underlying profit for the year increased to US$1.5bn including a US$465m contribution from the miner's 26% stake in ENRC. Net profit, however, declined 35.9% to US$930m as the company incurred losses of US$472m on discontinued operations, mainly impairment charges related to the disposal of its petroleum business. Kazakhmys completed share buy-backs worth US$110m for an average price of US$9.04 per share. The management said cost pressure would remain an industry wide issue in 2012. Dividend for the full year was increased by 27% to US$0.28 per share. 

Our view: Earlier, the miner said forward contracts signed for the year were skewed in favour of China disrupting the more or less even split between Europe and China seen previously. The company could benefit from tapping into the Chinese market for further top-line growth. However, increasing cost pressure on miners is expected to erode margins in the near term which prompts us to retain our hold rating for the stock. 

Wolseley (LON:WOS)

Wolseley announced H1 2012 results yesterday. Revenue grew 3.2% to £6.8bn and like-for-like (LFL) sales rose 5% during the period ended 31st January 2012. Sales in the US, which contribute about 43% of total sales, grew 11% (9% LFL) while sales in the UK (15% of group sales) shrank 1% and 3% on a LFL basis. Underlying operating profit for continuing operation of £318m was 16% ahead of H1 2011. Adjusted operating margin of continuing business improved 0.4% to 5.0%. Pre-tax profit rose 28.2% to £250m. The company completed the sale of Encon, Build Center and the residual stake in Stock Building Supply. The sale of Brossette, its French distribution business, is expected to be completed shortly. Wolseley spent £41m on six bolt-on acquisitions (aggregate revenue around £100m) during the period. The management said the trend in LFL sales since the end of H1 2012 had weakened slightly, particularly in Europe, while the US market continued to gain strength. The company declared an interim dividend of 20p per share, a 33% increase on the previous year. 

Our view: The management seems committed to focus the business, with bolt-on acquisitions and disposals. However, the wider economic conditions in the company's geographies remain challenging. Increasing sales in the US helped boost performance in H1 2012. However, data released last week showed the US housing market is some way from gaining a firm footing to growth. Europe's housing market is also expected to remain depressed for some time. The management noted seeing slightly weaker trading conditions in H2 2012. Considering these factors, we maintain our hold rating. 

Afren (LON:AFR)

Afren's pre-tax profits increased almost three-fold to US$221m in FY2011 from US$79m in FY2010, results released yesterday showed. Revenue grew 87% to US$597m as average price realised per barrel of oil surged 37% to US$109.0 from US$ 79.7 in the previous year, while average price realised per mcf for gas jumped 54% to US$8.8 from US$5.7. Gross profit increased to US$302m from US$129m. The management said that it was on track to achieve 2012's targeted production of 42,000-46,000 boepd as the Barda Rash field in Kurdistan (Iraq) begins production in August. The field is expected to produce about 10,000-15,000 boepd by the end of 2012. 

Bumi (LON:BUMI)

Bumi reported an operating profit of US$280m when it released its maiden full year results yesterday. Sales during the period amounted to US$1.4bn. Underlying EBITDA was US$427m. However the company incurred pre-tax losses of US$115m. Changes to the board were also announced. Samin Tan would be replacing Indra Bakrie as Chairman of the company, who in turn would be the co-chairman, ousting Nat Rothschild (the current co-chairman). With these changes the Indonesia focused miner hopes to put an end to the disagreement between the company's dominant Indonesian shareholders and financier Nat Rothschild. Indonesian shareholders, the Bakrie family and Samin Tan, hold 29.9% voting rights in Bumi. The spat turned public after Mr. Rothschild's letter criticising corporate governance at Bumi Resources (listed in Indonesia) was leaked in November. 

Babcock (LON:BAB)

Babcock released a pre-closing trading update for the year ending 31st March 2012 yesterday. The company said trading was in-line with expectations. The order book increased to £12.5bn after remaining stable at £12bn for the past year and a half. Since 31st January, the bid pipeline has expanded by £2bn to £12bn. The management said the company shall continue to benefit from higher revenue visibility due to its long term contracts, deep order book and strong bid pipeline. 

Resolution Limited (LON:RSL)

Resolution Limited announced preliminary results for the year ended 31st December 2011, yesterday. Net revenue slumped to £4.1bn from £10.2bn in 2010 as investment returns plunged 79% to £1.8bn. The company swung to pre-tax losses from continuing operations of £268m from pre-tax profit of £956m last year. Pre-tax profit rose to £681m from £275m, after recording £404m of extraordinary gains. The management has proposed divesting the insurance business and listing the two resultant businesses by 2014. The company acquired three insurance units - Friends Provident, Bupa Health Assurance and UK based assets of AXA - spending some £4.7bn over 2009-10 and combined them into a company called 'Friends Life'. However, with limited potential to grow Friends Life further, the management has proposed to split Friends Life into two parts - OpenCo and HeritageCo. OpenCo will include Friends Life's corporate benefits, protection and retirement income businesses, the overseas businesses and Sesame Bankhall Group, while HeritageCo, will include the legacy in-force portfolios, Friends Life Investments, Friends Life's listed debt and its UK pension funds. 

Economic News

Germany GfK consumer confidence

The GfK Research Institute estimates consumer confidence would edge down to 5.9 in April compared to 6.0 in March. The institutes' forward looking index dipped for the first time after advancing for six consecutive months. The index for income expectations pulled back to 34.3 in March from 41.3 in February and the index measuring consumers' willingness to spend dipped to 38.6 from 39.2 in February. However, the gauge of economic optimism increased to 7.2 in March from 5.9 in the previous month. 

Our view: Economists expected consumer sentiment to hold steady. The research institute said rising fuel prices is impacting purchasing power thereby dampening consumer sentiments. Nonetheless, the Bundesbank believes that unemployment at historic lows should support household spending which could help the economy reverse the 0.2% contraction experienced in Q4 2011. 

US consumer confidence

The consumer confidence index compiled by the Conference Board stood at 70.2 in March compared to the revised reading of 71.6 in February, the highest in a year. The present situation index climbed to 51.0 (a three-year high) from 46.4, indicating that consumers do not feel the economy is losing momentum. However, the index of economic expectations, which measures consumers' outlook about the economy six months from now, dropped to 83.0 from 88.4 the previous month. Anticipation that inflation could flare up during the year increased; consumers estimated inflation at 6.3% for the year compared to 5.3% the previous year. 

Our view: Economists, expecting high gasoline prices to deflate consumer confidence, foresee the index sliding to 70.0 in March. An improving labour market and stock market gains are buffering households from rising fuel prices. However, expectations of rising inflation could dampen consumer expectations. Though the index dipped slightly, it remains significantly higher than its all-time low of 25.3 recorded in February 2009. Strength in consumer spending is critical to sustaining the nascent economic recovery. 

US S&P/Case-Shiller home price index

S&P/Case-Shiller home price index declined 0.8% m-o-m in January. Annually, the index retreated 3.8% after falling 4.1% in December. On a seasonally adjusted basis, m-o-m prices held steady after declining 0.5% in December. 

Our view: Home prices have fallen by about a third from their pre-bubble peak in 2006. Despite a pick-up in sales, the availability of foreclosed houses at deep discounts is pushing home prices down. Data released last week painted a mixed picture of the housing market. However, with other parts of the economy (manufacturing, labour market) recovering, it is hoped that the housing market would rebound this year. 

Germany import prices 

The growth in import prices decelerated for a fifth consecutive month to 3.5% y-o-y in February from 3.7% in January, Destatis reported yesterday. However, prices increased 1% m-o-m after gaining 1.3% in January. Economists expected import prices to rise 0.9% m-o-m; the annual rise in prices was in line with their expectations. 

US Richmond Fed manufacturing index

The Federal Reserve Bank of Richmond said its manufacturing index declined to 7 in March from 20 in February, indicating a deceleration in factory activity during the month. A reading above zero indicates expansion. The sub-indices for shipment and new orders decreased to 2 from 25 and 11 from 21, respectively. The employment index declined to 6 from 13 the previous month. The outlook for the future was also subdued. The index of shipment expectations retreated to 26 from 30, but expectations for new orders edged up to 32 from 31. 

The Markets

Market opening: Markets may open higher as Mr. Bernanke's remarks of the need to maintain an easy monetary policy in the US (see below) improved the general sentiment. FTSE futures were trading 23.0 points higher at 7:00 am UK time. 

New York: US Fed Chairman Ben Bernanke stressed that interest rates would be needed to be kept at historic lows to sustain the improvement in labour markets. Consequently, the S&P 500 index rose 1.4% yesterday to end at 1,416.5, a four-year high. 

Asia: Markets cheered Bernanke's dovish comments. The Nikkei closed 2.4% higher today. The Hang Seng was trading at +1.6% 7:00 am. 

Continental Europe: Stronger business confidence in Germany and Mr. Bernanke's remarks helped markets close higher. The German DAX and the French CAC 40 gained 1.2% and 0.7%, respectively. 

UK small caps:The FTSE AIM All-Share index ended 1.0% higher. 

Today's news

Faster recovery required to fight unemployment - Bernanke 

US Federal Reserve Chairman Ben Bernanke said that there was a need to speed up the US recovery to counter unemployment. Currently, unemployment stands at 8.3%. His comments suggested that the US Fed was ready to maintain an easy monetary policy to allow business and consumer confidence and demand to catch momentum.

Germany supports expansion of Eurozone's rescue resources 

Berlin signalled its approval for the expansion of Eurozone rescue funds to around €700bn. At a meeting of conservative Christian Democrats, Chancellor Angela Merkel said Germany would agree to let the ESM and the EFSF run simultaneously. Eurozone finance ministers are expected to discuss combining the temporary EFSF with the permanent ESM, which comes into force in July. They are meeting on 30th and 31st March. 

Company News

Aberdeen Asset Management (LON:ADN)

Aberdeen Asset Management reported a £10.5bn increase in assets under management to £184.4bn on 29th February compared to £173.9bn at 31st December. The fund manager released a pre-close trading update yesterday. Net outflows in the five months to February more than doubled to £1.4bn from £0.6bn in the previous period. However, in the two months to February, net inflows amounted to £1.4bn. These inflows are expected to generate annualised recurring fees of around £20m. Emerging market funds and funds focused on local Asian currency continued to attract investors, while outflows from fixed income securities slowed. The management said funds delivering higher margins continued to see inflows, while most outflows were witnessed at lower margin funds.

Our view: Flow of funds to higher margin products, such as emerging market and Asia equities, from lower margin funds should boost the fund manager's earnings. Also, the management noted that investor confidence and risk appetite is returning. The recent gains in global markets should attract more investors towards the fund manager's products. We rate the stock a buy. 

EasyJet (LON:EZJ)

EasyJet released a pre-close trading update for H1 2012 ending 31st March 2012 yesterday. The management said the performance for the period is expected to exceed the outlook outlined in the previous trading update. They anticipate a 10% increase in revenue per seat compared to 'upper single digits' expected earlier. The cost per seat excluding fuel is expected to decline to 1.5% from the 3.0% estimated previously while the growth in capacity remains unchanged at 3.0%. Milder weather meant lower disrupted flights; disruption and de-icing costs were around £18m lower than that in the prior year. However, rising fuel cost caused a £100m increase in the fuel bill for the period. Consequently, the management expects losses for the six months to narrow down to between £110m and £120m versus the earlier estimate of £140m-£160m. H1 2011 losses for the company amounted to £153m. 

Our view: EasyJet's business model is highly scalable and tends to benefit from shifting preferences of cash-strapped consumers towards cheaper alternatives. Also, the improved guidance for H1 2012 provides the stock good upside potential and prompts us to upgrade Easyjet to buy. 

Kentz Corp (LON:KENZ)

Kentz Corp announced results for the year ended 31st December 2011 yesterday. Revenue grew 29% to US$1.4bn from US$1.1bn in FY2010. Pre-tax profit rose 18% to US$79.4m however, pre-tax profit margin contracted to 5.8% from 6.4% recorded in the previous year. Kentz's order book surged 50% to US$2.4bn compared to US$1.6bn at the end of 2010. The management said that the current trading was in-line with the market expectations and proposed a final dividend of US$0.073 per share taking the total dividend to US$0.123 per share, a 23% increase over the previous year. 

Lamprell (LON:LAM)

Lamprell released results for FY2011 ended 31st December 2011 yesterday. Revenue grew to US$1.1bn from US$503.8m in FY2010. Adjusted operating profit increased 29.8% to US$90.8m and adjusted net profit rose 10.8% to US$73.8m. However, reported net profit declined 2.9% to US$63.3m resulting in lower net profit margins of 5.5% versus 12.9% due to dismal performance at three fixed price windfarm liftboat projects. Acquisition charges related to Maritime Industrial Services (purchased in June 2011) also pulled down the net profit. Consequently, annual dividends declined to US$0.08 per share from US$0.095 per share in FY2010. However, the management termed the acquisition as 'transformational' that helped the company re-affirm its market leading position. Rising oil prices have helped the company secure contracts worth US$1.1bn during the year. At 31st December 2011, the order book was unchanged at US$1.2bn. 

Economic News

Germany IFO survey

The business climate index compiled by the IFO institute increased to an eight month high of 109.8 in March. The reading for February was revised to 109.7 from 109.6 reported previously. The Munich-based institute's measure of current situation was unchanged at 117.5 and the index of future expectations, which gauges expectations from the economy six months from now, climbed to 102.7 from 102.4 in February. 

Our view: The business climate index was expected to stabilise at 109.6, according to consensus estimate. Data released earlier this month showed German export orders declined in January. A cut in spending by European governments and consumers impacted the economy, which contracted 0.2% in Q4 2011. However, the confidence index edging up for the fifth consecutive month suggests that the economy could return to growth in Q1 2012. 

US pending home sales

The pending home sales index, which tracks the number of Americans signing contracts to buy pre-owned homes, fell 0.5% m-o-m to 96.5 in February, the National Association of Realtors reported yesterday. The index had risen 2.0% to 97.0 in January, the highest reading since April 2010. The reading for February is still 9.2% higher compared to February 2011 (88.4). 

Our view: Despite the m-o-m fall, the index has held steady at its two-year high since January, indicating that the housing market is stabilising. But the unusually warm winters could have shifted home sales forward. A dip in the index suggests a lukewarm start to the spring sale season. As a leading indicator, the y-o-y improvement in pending sales adds weight to the belief that the housing market is on the mend. 

US Chicago Fed national activity index

The Federal Reserve Bank of Chicago said its gauge of manufacturing activity in the region slipped to -0.09 in February from 0.33 in January. However, the stable three-month moving average advanced to 0.30 from 0.22 in January. The dip in production in February may have been caused by a slowdown related to the Chinese Lunar New Year, the Bank noted. 

US Dallas Fed manufacturing activity index 

The general economic index compiled by the Federal Reserve Bank of Dallas dipped to 10.8 in March from 17.8 in February. The production sub-index held steady at 11.1, while the new orders index dropped to -0.3 from 5.8 in February. The employment index also weakened to 21.7 from 25.2 the previous month.