Thu 04 February 2010
The bears wanted a 10% correction – and they are not far from being granted their wish.
The FTSE100 had lost 2.5% for the week as at midday Friday, bringing the year to date performance to a negative 6.5%. In the US the Dow Jones had posted a 0.7% loss as at the close of play on Thursday.
It is not difficult to see why the FTSE underperformed again. Its three largest sectors, namely mining, oils and banks lost 4%, 3.6% and 3.6% for the week respectively. The ongoing concerns around the tightening of Chinese monetary policy (and therefore potential demand for commodities) did it for the miners, whilst oils were not helped by some disappointing updates from BP and Shell. For the banks, the threat of regulation and further bad loans loom large, whilst the suspension of the Bank of England’s Quantitative Easing programme, as announced during the week, could also threaten liquidity.
The fear of contagion in the Eurozone stepped up a gear, despite promises from Greece that it would make the necessary painful adjustments to revive its economy. Exactly how its deficit will be controlled remains unclear, as is whether either the European Central Bank and/or International Monetary Fund will need to be involved.
On the UK corporate front, a positive glimmer was provided by a third quarter update from Vodafone. Elsewhere, whilst the BP numbers were generally acceptable, the market was in little mood for the update.
Despite high expectations, tough comparatives and a difficult market, BP continued to deliver.
There was little question that refining margins remained under pressure, but the company is in good shape. It continues to explore new opportunities, has costs relatively under control and, from an investment perspective, the dividend income is an additional bonus. At 5.7% the yield (variable and not guaranteed) is both supportive and attractive in the current interest rate environment whilst the company’s cash generating abilities remain strong. Meanwhile, the company is increasingly being seen as adept in dealing with the challenges which a volatile oil price presents.
The shares fell foul of high market expectations in early trade, and may have also been subject to some profit taking after a 14% rally in the last six months. Nonetheless, in the UK sector, BP remains the preferred play with the general market consensus being a strong buy.
For Vodafone, the benefits of geographical diversification became prominent as its news was announced.
Customer trends had either stabilised or continued to grow in many of the company’s major countries, with India remaining the only potential blot on the landscape due to aggressive competition. Alongside the strategy to increase the top line, Vodafone continued to make strong progress in terms of reducing its cost base. The increase in the cost cutting target as announced at the interims in November remained firmly on track.
In all, the company is making very steady progress, which has not been reflected in the share price of late – over the last three months the shares had added 1.6% versus a wider FTSE100 gain of 2.8%. With the continuing ability to generate large amounts of cash, and with a dividend yield which looks both supportive and attractive, the shares remain a buy in the eyes of the market.
Next week’s agenda remains brisk, with the current market nervousness set to be tested again.
For fuller details on these events, please refer to my colleague Keith Bowman’s "Week in advance".
Richard J Hunter
Head of UK Equities
