The markets
Europe
The FTSE-100 finished yesterday's session 0.56% higher at 6,319.91, whilst the FTSE AIM All-Share index closed 0.02% lower at 729.08. On the continental equities edged higher as investors braced themselves for the outcome of the Fed interest rate meeting. In the interim, a slew of earnings releases from key companies also took centre stage. France's CAC 40 and Germany's DAX advanced 0.6% and 0.4%, respectively.
Wall Street
Wall Street ended in the green even as disappointing Apple Inc earnings depressed the information technology sector. Meanwhile, the focus remains on the Fed's policy meeting where it upheld the present interest rates. The S&P 500 closed 0.2% higher, led by the telecom sector.
Asia
Markets are trading mixed, eyeing the Fed's policy rate decision. The Nikkei shed 3.6% as no change in the Bank of Japan's economic policies left traders disappointed. The Hang Seng was trading 0.3% up at 7:00 am.
Oil
Yesterday, Brent and WTI crude oil prices rose 3.2% and 2.9%, respectively. The spread between the two varieties stood at US$1.8 per barrel.
Headlines
UK GDP growth for Q1 2016 weakens amid 'Brexit' concerns
According to preliminary estimates from the Office for National Statistics, the UK's GDP growth in Q1 2016 slowed to 0.4% q-o-q compared with 0.6% in Q4 2015. The primary reason for the slowdown was ascribed to the increasing risk of Britain's exit from the Eurozone. The economy expanded 2.1% y-o-y.
UK retail sales decline sharply in April: CBI
According to the Confederation of British Industry, retail sales in the country fell the sharpest in more than four years in April, as the cold weather turned away shoppers from spring and summer ranges. The survey's reading dropped to -13 in April from +7 in March. Meanwhile, the expected sales balance for May stood at +9, compared with +17 retailers expected for April.
Company news
Antofagasta (LON:ANTO, 478.8p) – Hold
Antofagasta yesterday published its Q1 2016 production report, maintaining FY16 guidance of 710-740,000 tonnes of copper production and cash costs of $1.35/lb net of credits. Of its various mining operations, Los Pelambres produced 82,200 tonnes , up 4.3% YoY but only due to a weak Q1 2015 comparable. Versus Q4 2015, Los Pelambres production was down 15.8%. Centinela produced 49,800 tonnes, down 17.5% due to expected lower grades. The newly built ($1.9bn capex) Antucoya mine started commercial production at the beginning of April and will ramp-up to 85,000 tonnes per annum over the next few months. During the period the copper price was $2.12/lb, 19.7% lower than Q1 last year although Anto's managed to realise $2.22/lb. The molybdenum price was down 38% YoY to $5.3/lb.
Our view:Although these numbers are in line with Anto's full year guidance, a number of less positive things are worth noting. Weak numbers at Centinela and Los Pelambres reflect the perpetual challenges of grade variability and mining in general. Like most miners, Anto's has to replace reserves and build new mines as its historical assets age, a very expensive process. FY16 guided cash costs of $1.35/lb is nearly the best in sector but 30% above 3 years ago while the copper price has halved and the outlook is uncertain. As Anto's new CEO stated yesterday, "movements in the copper price over the quarter may suggest the market is beginning to stabilise. However, with price growth likely to remain subdued in the near term our focus continues to be on operating safely, efficiently and profitably." This matches Rio's new CEO's words last month "macro- economic environment is tough, and is likely to remain so for the foreseeable future, from whichever way you look at it." Due to this uncertain outlook we recommend a Hold for Antofagasta but for cautious investors reduce your position in large cap mining stocks.
CRH (LON:CRH, 2,042.0p) - Hold
CRH, the international building materials company, yesterday announced its trading update for the 3 months ended 31 March 2016 (Q1 2016). During the period, Group sales advanced +9% year-on-year ('y-o-y') compared to Q1 2015. This was largely driven by continued positive momentum in the Americas with sales gown +22% y-o-y, where the economic and business environment remains favourable. The sales in Europe were remain flat but Asia rose +12% y-o-y due to the strong demand for cement in Philippines. On the operational front, CRH completed a number of divestments and asset disposals with total proceeds of €78m during the period. While cost of acquisitions and investments amounted to €85m, most of which relates to bolt-on transactions in the Americas Materials Division. The Group expect EBITDA for the first half of the year to be c.€1bn. CRH will report its Interim Results for the six months ending 30 June 2016 on Thursday 25 August 2016.
Our view: CRH delivered a good performance during the Q1 2016, driven by the strong sales in the Americas. Usually, the first half of the year is less significant as activity typically remain lower seasonally. However, favourable weather conditions improved its construction activity which, supported by continued positive economic trends, resulted in improved sales in the Americas. In the US, demand for aggregates and ready-mixed concrete was higher with positive pricing trends, whereas asphalt volumes were also strongly ahead although prices reduced due to a continuing low input cost environment. In Europe, markets stabilised while pricing remain competitive. In Asia, strong demand for cement, particularly in the Philippines was supported by increased Foreign Direct Investment in the business process outsourcing sector, overseas workers' remittances and increasing government infrastructure spend. Looking ahead to H2 2016, the management expect to "continue to make progress on a Group EBITDA basis", in the absence of any major financial or energy market dislocations. Beaufort retains its Hold rating on the stock.
Foxtons (LON:FOXT, 151.0p) - Hold
Yesterday, Foxtons issued a trading update for the quarter ended 31st March 2016. Foxtons reported a 16.2% y-o-y rise in revenue for the quarter to £38.4m, primarily driven by a 28.5% increase in property sales commissions. The company benefitted from a spike in transactions before the introduction of a 3% stamp duty surcharge on buy-to-let investments and second homes in April. Letting revenue remained flat on a y-o-y basis, as tenants continued to renew existing tenancies and entered into longer tenancy tenures. The company's newly established 'Institutional Private Rental Sector' business won its first contract. The business is expected to develop and invest in fresh initiatives to expand its letting business. Foxtons' mortgage broker, Alexander Hall, registered 57.6% revenue growth for the quarter. Foxtons' focus would remain London and outer territories in future. During the quarter, the company opened four new branches in Loughton, New Malden, Sutton and Fulham (Bishops Park), increasing its branch network to 62 whereas three more offices are scheduled to be opened in 2016.
Our view: Foxtons quarterly performance was strong; however, its half-yearly performance is expected to be subdued owing to increasing uncertainty over the UK's future in the Eurozone. As large number of completions were brought forward during the quarter before the introduction of the additional stamp duty surcharge on buy-to-let properties, sales pipeline for the second quarter is likely to be lower than that in the previous year. Although Foxtons' expansion strategy remains on track and there are significant opportunities to expand its network across London, we are concerned about the company's reduced sales pipeline entering into Q2 2016. We remain confident of the company's long-term prospects, given its strong balance sheet and low debt, the recent uncertainty in the property market is likely to depress its growth and profitability in the near-to-medium term. Thus, in view of the factors mentioned above, we maintain a Hold on the stock for now.
Ilika (LON:IKA, 73.00p) - Speculative Buy
Yesterday, Ilika announced the launch of Stereax™ M250, a new, miniaturised solid-state battery technology for IoT (Internet of Things) devices. The new battery family is expected to enable smaller, higher energy-dense batteries to accelerate IoT products to market. Stereax™ batteries use patented materials and processes, enabling superior energy density per battery footprint, up to 40% improvement in current solid-state solutions, and increased temperature range support to over 100°C (30°C higher than existing solid-state products). Further, Ilika's batteries do not contain any free lithium, which makes them more moisture-resistant. The company would demonstrate the capability of its first Stereax™ battery in its perpetual beacon for temperature sensing at IDTechEX in Berlin during 27–28th April 2016.
Our view: With the launch of Stereax™ M250, Ilika has taken the solid-state battery concept to the next level of evolution with its expertise in material development. The battery is expected to gain wide acceptance as its 'fit-and-forget' design enables IoT sensors to be fitted without further maintenance. In IoT batteries, self-sufficiency is a critical requirement, as they may be deployed at difficult-to-service places. Solid-state battery is a key component of IoT, as they can be used in conjunction with all current energy-harvesting technologies while matching the energy needs of IoT devices. At present, connected devices are a constant drain on batteries and therefore, they are required to be efficient and lightweight. Thus, with the launch of this new battery, the company is at an interesting juncture and may be able to establish a significant new revenue stream. In addition, the company has made good progress towards its other battery development endeavours. We believe the steps undertaken by Ilika would generate positive results and drive growth. Therefore, Beaufort maintains a Speculative Buy rating on the stock.
London Stock Exchange (LON:LSE, 2,765.00p) - Buy
The LSE yesterday released an Interim Management Statement covering the period to 26th April together with KPIs for the three months ended March 2016. Management detailed a strong performance - all main business divisions delivering growth on an organic and constant currency basis, Q1 total income from continuing operations up 9% to £387.6 million and sale of Russell Investment Management, for gross proceeds of US$1,150 million, is on track to complete in Q2 2016. The CEO, Xavier Rolet confirmed the Group had achieved underlying growth in each of its core business areas, with particularly strong performances in LCH's OTC clearing, at FTSE Russell and good results across Capital Markets. It also continued to make good progress integrating recent acquisitions, developing innovative new products and expanding services and partnerships in line with our successful open access strategy. He went onto detail his opinion that LSE's proposed merger with Deutsche Börse presents a compelling opportunity to expand the LSE's business in an industry-defining combination, creating a global markets infrastructure group. With substantial cost synergies and multiple opportunities to extend its product offerings, he stated his view that the transaction offers significant value and benefits to customers and shareholders.
Our view: Excellent results and confidence in the future - No surprise there. But the trouble is that M. Rolet appears to be surrendering this veritable UK crown jewel to the Germans on the cheap. In fact, much too cheap! Given the overwhelming belief that the endgame for the LSE is now approaching, the only questions investors are now actually being asking is 'When will the bidding war begin?' and 'Will the competition authorities be seen to block the creation of a clearly dominant European clearing and trading player?' Most probably, the answers to these are 'very shortly' and 'no'. Remember, this is the third time that the LSE and Deutsche Börse have attempted to combine - which is no surprise given their overwhelming cost and revenue synergies – so this time they undoubtedly did knock on their respective regulators' doors to establish what exactly would be required to get the deal done. Seemingly, the outline conditions, Brexit notwithstanding, were not insurmountable. Having agreed a basis to go ahead, the two Boards proposed a marriage of convenience. Noting it is proposed that Deutsche Börse will control the entity's majority while also appointing the CEO, however, both LSE shareholders and its global peers have smelt a rat. So far, only the Intercontinental Exchange has formally advised the market that it was considering making its own bid – on which basis it now has a 'put-up-or-shut-up' deadline of 8th May (or 53-days post formal merger announcement). The CME Group is also said to have run its own slide rule over the numbers, while less contentious operators like Hong Kong's HKeX might possibly also enter the fray. Given the rarity of jewels such as the LSE, it would be a genuine surprise if bidding war of some type does not get underway soon and the firepower available suggests that it is unlikely to stop anywhere short of the £33/share mark. At the very least, the other global peers will be intent on ensuring Deutsche Börse is forced to pays a more realistic price even if they do not genuinely expect to walk away with the prize itself. LSE shares should certainly be bought on this basis, although it may be best for investors to consider locking in profits before the battle enters into months of regulatory abeyance. The LSE remains on Beaufort's Buy list.
DS Smith (LON:SMDS, 382.80p) - Buy
Yesterday, DS Smith, a recycled packaging company, released its trading update for the year ended April 2016. The company traded in line with the guidance. This was due to strong volume growth across the business and robust returns on sales compared with those in the previous year. DS Smith's rapidly expanding e-commerce channel helped in growing the company's large pan-European customer base. Furthermore, the integration of the acquisitions made during the year progressed well. The company plans to publish annual results on 23rd June 2016.
Our view: The company's trading update was in line with the guidance and marked another year of progress. It largely benefitted from acquisitions totalling €600m made during the year and high activity in its fast-growing e-commerce channel. During the year, DS Smith grew organically and inorganically while improving its margins. The multichannel retail environment is evolving, and the importance of the packaging business has grown as it is a crucial part of the supply chain. DS Smith plans to develop high-quality packaging and further expand its footprint. We are encouraged by the company's progress and look forward to more such encouraging updates on its developments. Therefore, we maintain a Buy rating on the stock.
Economic news
Eurozone M3 money supply
Eurozone's M3 money supply expanded at an annual pace of 5.0% in March after growing a revised 4.9% in the previous month, the European Central Bank said yesterday. The growth came in line with the market forecast. Loans to the private sector and households increased 1.1% and 1.6%, respectively. On a three-month average from January to March, growth in money supply stood at 5.0% y-o-y.
US MBA mortgage applications
US mortgage applications declined 4.1% w-o-w% in the week ended 22nd April after increasing 1.3% in the prior week, the Mortgage Bankers' Association said yesterday. Refinance applications fell 5% for the week, while the gauge of loan requests for home purchases fell 2.0% over the week.
US FOMC rate decision
The US Federal Reserve Open Market Committee (FOMC) maintained the benchmark interest rate in the range of 0.25-0.50%. The rates were hiked for the first time in a decade in December last year. However, a stubbornly low inflation and a sluggish economy have kept the FOMC from raising interest rates since then.