As measured by the FTSE 100 index, the market has traded strongly over the past month post Brexit showing near 5% gains. The FTSE 250 (more UK centric index) is also now back to pre-Brexit levels. Much noise and concern had been voiced regarding the weakness of this particular area of the market. We have seen significant rallies in globally exposed blue chip stocks particularly in the pharmaceuticals and until recently, the oil majors space. Tobacco and Mining stocks have also traded well. Dollar earning capabilities as a result of the now much weakened pound can probably now give rise to definitive increases in earnings for many such companies; at least that is the theory – it is not clear for exactly how long the current FX rates will last.
In the pharma area, ongoing M&A rumour and reality has provided a further shot in the arm. It has been interesting to hear the AstraZeneca CEO saying their improving pipeline could make them an attractive takeover target! Sector valuations here look high to me (20 times forecasted earnings) and we have been prudently reducing for clients, taking some strong profits.
One notable observation over the past four weeks has been the swift 20% slide in the price of oil. This has naturally led to falls in the prices of oil companies; I had actually thought the sector looked too high recently when oil was steady around $50 per barrel even with the strong dollar. This disconnect has been belatedly recognised with the sector coming under some renewed pressure. Oil is currently at $43 per barrel and I have previously suggested that $50 looked like a resistance. I continue to believe the black stuff will remain in the $40’s for the second half of the year; nonetheless I am starting to look for opportunistically re-entry points in both BP and Shell. These shares are down over 10% from recent highs.
We have essentially been gifted the option to take profits in specific sectors over the past few weeks. While other areas have traded (and remain) lower, most have rallied from their immediate post Brexit nadir levels. Here I refer to property companies, retail stocks and to an extent banks. Airlines though continue to wane impacted by a toxic mix of unmanageable and unpredictable risks.
The net result of these cross sector performances is that there has been a marked improvement in the level of market indices not just in London. The S&P 500 in the US for example is at an all-time high. This has made it difficult to be overly bullish from current levels, that the market will simply continue to rise. Thus I am in general cautious, having to be very selective if I am buying anything from recently raised cash balances on portfolios.
August could yet become an interesting month and I suspect we will see some slippage especially after today’s bounce fuelled by the first BOE interest rate cut in 7 years. Certainly historically it has often been a bad month for markets. The August 2007 credit crisis, the August 2011 Eurozone
debt crisis and just last year, the Shanghai (Chinese) market fell significantly as retail investors became spooked, again in August. The US presidential election nears. The prospect of Trump winning with his protectionist orientation and strategic isolationism is likely not favourable for global growth. The troubles in Eurozone banks are worrying: Italian banks may be bust and the prospect of a German bank getting into difficulty is real: Deutsche Bank is at a multi-year share price low for example.
The ambiguity of US Central Bank policy is unsettling also in the context of some very mixed analyst views relating to the real health of the US economy. Will interest rates now rise further and if so, will the risk of a recession increase? Is there a growth risk now and are the equity markets simply too high either way?
Turning to the UK, will investors simply begin to de-risk in the face of the still potential negative impact of Brexit? Or will they just see more clearly (or differently) the reasons for record low rates and further stimulus and take action?
In simple terms, markets are relatively high and it is holiday season which will bring a natural decrease in trading volume. I will be monitoring with interest.
Stock specific comment
I have been revisiting Laird (314p), the global technology mid cap further to some weakness in its price. Its specialism is in electromagnetic interference minimisation and it is no surprise the smartphone sector is a big market (Apple is a customer). Interim results on the 29th July were “disappointing” in the CEO’s words but they anticipate margin improvement in the second half. The dividend yield is a well covered and growing 4.5%, the valuation a reasonable 12 times forward earnings and the company has stated broadly unchanged expectations for the full year. Debts are under control and directors have also been buying. The possibility of a takeover cannot be ruled out either in my view. Laird has world class technological capabilities across markets and customers and having seen ARM Holdings (in the FTSE 100) receive a bid recently, it has heightened for me some speculative appeal in the sector in general. My target level is 350p.
Sainsbury (224p) is an interesting consideration now further to a 22% decline in its price since May. Tangible (property) assets are significant, the income yield is a reliable 4.5%, they have bought Argos which should bring earnings enhancement, the Qataris remain a 25% shareholder and possible bidder and directors have been buying. At near 10 year lows, despite being more vulnerable now to discretionary consumer spend post Brexit, I suspect value has appeared in the price. One to pop in the shopping trolley perhaps.