Market opening: Markets are expected to open higher today, joining the global rally, following the US Fed's more positive view on the US economy and upbeat US data. FTSE futures were trading 28.0 points up at 7:00 am UK time.
New York: Wall Street welcomed the US Fed's upgrade of its outlook on the US economy and positive retail sales data. The S&P 500 closed 1.8% higher yesterday.
Asia: Positive US economic data, US banks passing the crucial stress test and the Fed withholding further QE, helping the US$ gain versus the yen (thereby supporting exporters), caused the Nikkei to rise 1.5% today. The Hang Seng was trading 0.2% higher at 7:00 am UK time.
Continental Europe: Strong investor sentiment in Germany lifted markets. US markets opening on a positive note pushed indices higher in the afternoon. The German DAX and French CAC rose 1.4% and 1.7%, respectively.
UK small caps: The FTSE AIM All-Share index gained 0.8% yesterday.
Eurozone stabilising - Draghi
At a conference in Paris, the European Central Bank (ECB)'s President Mario Draghi said that the Eurozone economy was showing signs of stabilising. Ultra-cheap loans (€1tr) disbursed by the bank and fiscal reforms by governments in the region provided respite to markets, allaying fears of inflation. Earlier, German banks had expressed concern that loans given by the ECB could increase inflation in the region. Mr. Draghi, however, disagreed, and urged banks and governments to use the ECB's funds to implement pro-growth reforms.
Fitch assigns Greece B-rating, out of default territory
Fitch became the first rating agency to revise Greece's credit rating (above default but still in the non-investment grade category) to B- after the country completed the historic €100bn debt restructuring. The agency warned that the slow pace of reforms and economic growth coupled with political uncertainty could push the country into bankruptcy again.
FY2011 results released yesterday showed Antofagasta's revenue grew 32.7% to US$6.1bn as copper production increased 22.9% to 640,500 tonnes and average prices shot up 16.9%. A five-fold increase in gold production to 196,800 ounces also helped revenue grow. Earning before interest, taxes, depreciation and amortisation was up 32.1% to US$3.7bn and net profit increased 17.6% to US$1.2bn. The management set the 2012 copper production target at around 700,000 tonnes and expect to produce around 280,000 tonnes of gold, reflecting full year operations at the Esperanza mine following the completion of ramp-up activities. The management said that the short term outlook for copper remained volatile; however long-term fundamentals remained strong. Total ordinary dividend for the year increased 25% to US$0.20 per share however special dividend was reduced to US$0.24 per share from US$1.0 per share declared last year, bringing the dividend payout ratio to the historic levels of 35%. The special dividend in 2010 reflected the successful completion of two key growth projects. The company did not offer any explanation for last week's surprise departure of Marcelo Awad, its Chief Executive Officer since 2004.
Separately, the company said it would make a provision of US$140.5m against the carrying value of the Reko Diq project in Pakistan, in which Barrick Gold is a 50-50 partner, after the miner was not granted a mining license by the local government.
Our view: The reduction in dividend payout takes the sheen out of the Chilean miner's valuation. The management's expectations of short term volatility in copper prices and the CEO's unexpected exit without further clarification on the leadership makes us wary of making investment decisions at this point. We see better opportunity elsewhere in the sector.
Close Brothers (LON:CBG)
Close Brothers released results for H1 2012 ended 31st January 2012 yesterday. Adjusted operating profit slipped slightly to £63.2m from £63.4m in H1 2011 despite a strong performance at the banking business. Banking adjusted operating profit increased 27% to £61.8m. The securities business, where adjusted operating profits contracted 58% to £13m, weighed on overall business performance with Seydler (the securities operations in Germany) incurring a loss of £0.9m compared to a profit of £4.9m in H1 2011. The restructuring of the asset management business is in the final stages of completion and adjusted operating loss narrowed to £2.6m from a loss of £6.0m in the previous year. The management expects an improved performance in H2 2012 as the banking business continues to grow. The securities business is seeing some recovery in trading conditions in H2 2012. Interim dividend increased by 4% to 14p per share.
Our view: The management expects improved performance in H2 2012. The securities division, which pulled down profits in H1 2012, could see growth as financial markets stabilise. Though the asset management business is expected to record a loss in 2012, new products such as the online SIPP and direct access platform to be launched later in the year could help improve performance at the restructured business. The banking division is expected to continue the growth trend seen in H1 2012. Considering these positives we upgrade the stock to hold.
G4S reported a 16.7% drop in pre-tax profits to £279m as a £55m charge from the failed merger with Danish cleaning company ISS ate into profits. Revenue increased 4.7% to £7.5bn with 4.5% growth organic. Revenue from developing markets, which now contributes 30% of group revenue, increased to £2.2bn, with organic growth of 9%. The company plans to spend around £200m on acquisition in 2012 with a focus on developing markets as it aims to increase the share of revenue from developing market to 50% by 2019. Annual dividend increased 4% to 8.53p per share.
Our view: The management acknowledged the lack of opportunities to replace the revenue it will earn by providing security arrangements at the London Olympics. However, they said that the contract to provide back-office support to the Lincolnshire Police Authority could enhance the company's position to a preferred supplier helping it circumvent the bidding process. Also, the company's focus on developing markets offers it increased avenues for growth. Considering these positives, we revise the company's rating to hold from sell.
Inchcape reported a 1.7% drop in revenue to £5.8m as the March 2011 earthquake and tsunami in Japan imposed supply constraints. A 6.7% reduction in costs and improved operating margins in four out of six regions of operations helped overall operating margin improve by 40 basis points. Pre-tax profit, on a reported basis, increased 5.9% to £203.4m. The management said the company benefitted from robust sales of luxury and premium cars in Asia-Pacific and emerging markets in 2011. These markets form around two-thirds of the company's earnings and give the management confidence about growth in 2012, despite challenging trading conditions in the UK and Europe. The strength of the yen is expected to put pressure on gross margins in 2012, the management added. Total dividend for 2011 increased two-thirds to 11.0p per share.
Prudential reported results for the full year ended 31st December 2011 yesterday. Operating profit increased 7% to £2.1bn as profit from the Asia life insurance business surged 32% to £709m. Pre-tax profit grew 33% to £1.9bn and net income increased 4% to £1.5bn, despite a 23% fall in revenue to £36.5bn. Annual dividend increased 5.6% to 25.19p per share. The management warned that the Solvency II capital requirements for Europe-based insurers to be implemented in 2013 will make competing in the US impossible for Prudential; forcing it to consider relocation from its current base in London.
IG Group released a trading update for the period from 1st December 2011 to 12th March 2012 yesterday. In Q3 2012, revenue rose 1.5% y-o-y to £75.1m and the number of active clients increased by 4.6% partially offset by a 3.0% decline in revenue per client. Trading in the UK, which accounts for 48% of total revenue, was weak with revenue falling 1.4% to £39.4m. Lower volatility during the holiday season adversely affected client activity in the period. However, client activity perked up 10% in February as investors adapted to the less volatile conditions. The management remained confident of the group's prospects.
UK trade balance
UK's trade deficit grew at a slower-than-expected pace to £1.762bn in January as the deficit with non-EU countries narrowed to £3.678bn from £3.748bn in December. During January, exports to non-EU nations increased to £12.921bn from £12.381bn in the previous month. The trade deficit for December was revised upwards to £1.217bn.
Our view: Economists had pegged the deficit to grow to £1.9bn in January. The slower than expected growth in the deficit was supported by the increase in export to non-EU nations. With a slowing Eurozone economy curtailing demand for British goods from the region, the trade with rest of the world is helping the UK rebalance its economy.
US retail sales
US retail sales advanced 1.6% in February, the highest in five months, after gaining 0.6% in January. Retail sales grew led by a 1.8% spike in sale of clothes (the sharpest rise since November 2010) and 3.3% increase in sales at petrol pumps (the highest since March 2011). Retail sales, excluding autos, rose 0.9% in February, following an upwardly revised 1.1% increase in January.
Our view: The increase in retail sales adds to other indicators that point towards a firmer recovery in the US economy. Data released last week showed robust creation of jobs; this is expected to boost confidence and spur consumer spending. However, rising oil prices could deter a rise in sales in the future as fuel expenses eat into household budgets.
US FOMC meeting
The Federal Open Market Committee expressed a slightly more upbeat view on the US economy led by the improvement in the labour market and increased consumer and business spending, but cautioned that the economy still faces significant downside risks . Though the committee did not indicate any further expansion of the quantitative programme, it has kept options open. The committee maintained the interest rate at the historic low of 0.25%, continuing with its expectation to keep rates exceptionally low until at least 2014.
Our view: The Fed s slight optimism amid improving economic indicators suggests that it would shelve plans for further quantitative easing in the near term. However, its cautious tone is warranted as risks persist.
UK house prices
The Department for Communities and Local Government (DCLG)'s house price index rose 0.2% y-o-y in January following an increase of 0.1% in December. Average house price increased to £206,523 from £205,269 in December. However the index declined 0.7% m-o-m in January compared to a 0.4% increase during the previous month. Three-month average house prices, a more stable indicator, increased 0.2% in January after rising 0.6% in the three months to December. Meanwhile, the Royal Institute of Chartered Surveyors (RICS) said their index of UK house prices rose to -13 in February from -16 in January; the gauge of price expectations over the next three months leaped to 0 in February from -14 in January and the index of price expectations over the next year increased to 11 from -4 in January, recording the first positive reading in almost 2 years.
Germany ZEW survey
Germany's index of investor and analyst economic expectations index rose to a 21-month high of 22.3 points in March from 5.4 points in February, the ZEW Centre for European Economic Research said yesterday. However, the gauge of current expectations declined 2.7 points to 37.6 confounding consensus expectations of a rise to 41.5. The indices measure investor confidence in Germany.
EU ZEW survey
ZEW's index of economic sentiment for the European Union surged to 11.0 points in March following a reading of -8.0 points in February.