FTSE Forecast; Brexit Supports, World Economy Undermines

It is that time of the month when we ritually kick ourselves for making what turned out to be a stupid forecast six months ago – and then, without learning from our mistakes – we go on to make a crazy forecast for where FTSE will be in another half year.

Will go up, will go down, but not necessarily in that order

BUT this time, we weren’t so far wrong. Back on 15 April, we had failed to leave the EU on the second deadline, and a new exit-date of 31 October had been decreed. Wisely, or perhaps by luck, we guessed that on 15 October, Brexit might not be established, or the future might be rather worrying. Quote “So we will work on the basis that Brexit is still on-going by October.

Our forecast for 15 October was 7600, quite a reduction from the 8150 we had been predicting for September. Thus, we got the direction right, and a close of 7212 is pretty accurate by our standards.

The Next Six Months

Now for the next six months. British politics are somewhat unpredictable. We think that Boris might just pull it off and squeeze Brexit through tomorrow. The country (or at least 52%) will rejoice….. so there is no way the opposition will allow an election if Brexit goes ahead. Thus our central forecast is that Brexit happens, but then the minority government struggles on for several months until the demand for an election is overwhelming. This could easily be around our forecast date of 15 April 2020. However, a Brexit Deal will create an optimism and gentle release of pent up demand to support the UK economy over the next six months.  Lack of Government interference with new laws will also help!

However, no country is an island. Okay, well some countries are islands. Malta comes to mind. But economically, the future of UK based businesses, with our new, outward looking trade policy, cannot be but affected by the world economy. We foresaw the potential of a recession by year end, and the data published since then has done nothing to change that view. The global economy, from US to China to EU (in that order) is definitely looking soft.

Where does that leave us?

The UK domestic economy should have a surge, this will be countered by weak global growth.

Re-rating

The UK stockmarket, is at rather low multiples of income, given the interest rate environment. This morning, www.dividenddata.co.uk quotes the FTSE100 yield at 4.53%. If / When Brexit is settled, we see scope for yield compression – and hence price rises – justified by the reduced uncertainty and risk.

In summary, we think UK growth will be supportive, global economics will undermine, but an extra boost will be given by removal of the Brexit factor. From a close yesterday of 7182, we see FTSE100 at 7600 on 15 April. This is an increase from the 7200 we expected for Jan – Mar next year.

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Vodafone plc: Still Not Time to Dial In

Back in the days of the Brexit doldrums – 6 March – we reviewed Vodafone plc (ticker VOD) and concluded that the forecast cashflow didn’t look strong enough to cover the dividend. Which was 9% at the time, and hence a clear signal that the market thought it had to be cut. We also thought that there seemed little upside in future growth plans

VOD 1 year chart, with date of our last sell recommendation shown

As the chart above shows, initially our avoid recommendation looked a bit sad (the price went up slightly!). However, we were vindicated on 14 May with the annual results including a 40% cut to the dividend provoking a fall of 11% in the share price over the next week. That shows up on the chart.

VOD over 5 years still looks sad

Viewed over a more reasonable investment horizon of 5 years, the share price still looks sad, currently at just 50% of its peak back in 2015.

In our last report, we commented that this is often our kind of buying opportunity. But not here. What goes down doesn’t necessarily go back up.

The future strategy continues to include investment in 5G spectrum and trying to share the network building. Other cost savings are promised, but the reality is a commodity market, fewer handset upgrades and brutal price competition. Users will be happy to have 5G, but only a few early adopters will be prepared to pay extra for it. Who actually needs to download all of Game of Thrones in 5 seconds? It can’t be watched at that speed.

The dividend was cut to 9 euro-cents per share – but even the adjusted (adjusted up, just to be clear) EPS fell from 11.59 to 5.26 cents. Thus, the new, reduced-fat dividend still isn’t covered. The market’s faith in this pay-out is demonstrated by the shares being down-rated to give a yield of over 6%.

The market doesn’t see any growth in the shareprice – and we don’t either. Revenue is stagnant, investment will be never-ending and we can’t see VOD growing rich from reducing costs. So profits might hold steady, at best.  Really, there is only downside for the earnings.  Right now, VOD is looking like a utility share, but without the pricing power that would entail normally.

One day, VOD shareprice/PE/growth will be attractive, but that time is not now.  Let’s see what the first quarter results look like next Friday.

For now, for buying, there is NO SIGNAL!  AVOID.

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FTSE to Rise and Fall over Summer and Autumn 2019

Yes yes, we know about the old forecast that FTSE will go up and down, but not necessarily in that order!

Prices going up!

Only this time, we think it will be like that.

Here’s why. A) Fundamentals

Long-term stockmarket moves are driven by fundamentals. Thus in the long-run, share prices are a function of corporate earnings and interest rates. Corporate earnings are what inspires share purchases, and so over time, the higher the earnings, the higher share prices will be. Interest rates have three effects. As an alternative to share purchases, bonds provide a benchmark against which dividends can be measured. There is a second, more subtle outcome from interest rate changes. Bond yields are used as the discount rate applied to future company earnings to give them a value today. Hence higher rates mean that future earnings appear less tempting today. It is also thought that companies are generally borrowers, and so higher rates will reduce profits. So by all three measures, higher interest rates lead to lower share prices.

Here’s why. B) Market Noise

Our Hero, Benjamin Graham

We are all familiar with what the fabulous Benjamin Graham called Mr Market. (If you are not familiar, minimise this article and google it straightaway, right now, without delay). Mr Market reacts to chitter-chatter, market data and political developments, becoming overly optimistic, or excessively pessimistic. Many of these inputs are essentially unpredictable – but not all of them!

Here’s why. C) Momentum

There is also the matter of market momentum. Once it starts moving in a positive or negative direction, the market gets the wind in its sails and tends to keep going. Hence the famed capacity for the market to overshoot.

Our chosen time frame for market prediction is 6 months. This was designed to be like a bridesmaid’s dress – long enough to cover the essentials but short enough to keep you interested. We feel that 6 months is long enough for Fundamentals to have an effect, for predictable Market Noise to be included and for Momentum to have not reversed.

On to the Predictions for 6 months time, Friday 13 December 2019!

We do actually see the markets going up, then down, as per our intro! The going up is down (see what I did there) to slightly softer fundamentals (world economic slowdown), initially being outdone by the excitement of a new PM with new policies over Brexit and other minor matters. However, we then see moves down, down to Brexit reality (and maybe No Deal).

Last time, in May, we advised Go away at the end of July, come back in mid-November”, forecasting a rise into July and then a fall back to 7200 by 15 November. The events of the last 4 weeks have done nothing to change that view. Today, FTSE is at 7351. By mid December, we see it stuck at 7200, having been up to 7500 in July, but brought down by soft fundamentals and Brexit uncertainty.

Good Luck!

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Babcock Bargain Basement Buy!

Babcock’s results on Wednesday were condemned by the market.

Babcock 12 month Price Chart looking sad

From a close of 507p on Tuesday evening, by the end of Wednesday the shares were at 460p. The slide continued yesterday, to finish another 9.4% down at 416.7p.

So what was wrong with the results?

Babcock 2019 Results Summary

Chief Executive Archie Bethel said: “We have delivered a robust performance this year, operating profit is in line with our expectations, we have sustained our strong margins and we have improved our cash generation.”

However, there were two issues which have frightened the market. The first is the future outlook, Underlying revenue is expected to fall to £4.9bln from £5.2bln, and underlying profit to fall to £515 – £535mio.

The second issue is that this year’s numbers are only held up by treating some costs as exceptional. The statutory profits are down by 47% and barely cover the dividend.

As shown in the chart above, over the last 12 months the share price has fallen from a high of 862p down to 445p as this article is written. This is the outcome when a company goes from steady reliable growth to figures that are flat at best.

Babcock short positions

We continue to believe in Babcock, despite the weaker share price and continued short positions out there. Profit numbers are derived by accountants’ opinions. So we always follow the cash, which is much harder to fake (unless your name is Pat Valerie!)

In the last 12 months, Babcock has paid out a decent dividend, and reduced net debt from £1,115m to £957m. In the context of slowing profits, this remains a credible performance. We continue to expect these businesses to throw off cash and pay a strong dividend. The present payment rate is 7.2%, according to www.dividenddata.co.uk. We expect cashflow to be there to support this rate going forward, and management has confirmed that there are no plans to cut.

In our previous review of Babcock International Group plc, on 27 February, we stated that the shares were attractive value at 544p.  We suggested we were not calling the bottom of the market, and so it proved!  But if we liked them at 544, surely we love them at 460p?  And indeed we do!

 

At these levels we rate Babcock International Group a strong buy.

 

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No U-Turn on Aston Martin (AML) – Yet!

At the time of the Geneva show, we recommended ASTON MARTIN – BUY THE CARS, AVOID THE SHARES. We didn’t buy the shares. Sadly, we weren’t able to buy the cars either. One day, it will be time to brake (break) our recommendation, reverse our view, steer in a new direction and accelerate purchases. Okay, now with the car-puns done, as before, let’s have some pictures before getting to the boring numbers.

Aston Martin Vantage – is it bonus time for me yet? (Ed; NO!)
AM-RB 003 – sold out already!

So to the financials.

AML Financials still look scary

The numbers still don’t look great, (Data from Sharecast.com) with strong growth in revenue required before a decent profit can be made. Turning the numbers around relies on the forthcoming SUV, the DBX, being introduced successfully and selling well. All the industry pointers confirm that this vehicle will sell at great speed and with good margins. However, it is being built in a new factory in Wales (not that the location is desperately relevant, I’m sure that the Welsh have produced outstanding engineering in the past, like, er…. didn’t the Sinclair C5 get built there?) Anyway, the fact is that a new factory producing a new type of car does hold some risks – just ask Elon Musk at Tesla.

AML Share Price since IPO

Here is the share price chart….. not looking like the trend has reversed yet is it? We’ve helpfully added the point where we advised not to buy last time! How modest of us!

Where Next For the Share Price?

Reasons for Up!

  1. Once sales of the DBX SUV fire up, revenues and profits should race away

  2. Autocar has reported that sales of the AM-RB 003 £1 mio hypercar are over-subscribed

 

Reasons for Down!

  1. The trend is firmly downwards – expect it be be oversold before it rebounds

  2. First quarter results confirmed our expectations that new-model investments will eat margins for the foreseeable future

  3. There remains huge delivery risk on the “saviour” SUV project

  4. Market cap remains twice revenue, whereas we would expect it to be closer to a 1:1 ratio

At some point in the future, these shares will be good value. That will be when revenues have grown, new products are selling well or at least have had good launches. Right now, we expect the selling to continue until perhaps 600p.

When we consider investing in AML shares, we find ourselves shaken, not stirred! Steer clear.

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FTSE100 Forecast. Don’t Come Back on St Leger Day

The economy seems to keep motoring along, both here and in the US (which drives so much of the world GDP). And yet….. and yet…… and yet, everyone is fearful because of the politicians.

Will May ever go? Will the Brexit uncertainty ever end? Will Trump’s trade war on China undo last year’s tax boost (which was fading anyway)? And didn’t we just call a peak in the latest tech bubble (as signalled by Uber being over-hyped)?

However, the underlying economics are okay, and we see corporate earnings remaining good. But the fear-factor in the UK market is there.

This forecast covers the period to 15 November, so yet again we find ourselves caught in the Brexit will it/won’t it uncertainty. Our expectation (see tomorrow) is that a hard Brexit on 31 October remains a possibility, and this will cause some turmoil in the stock market. In this case, the word ‘turmoil’ has the additional meaning of ‘buying opportunity’.

FTSE positive so far this year

Today FTSE100 is at 7247. We see slow growth upwards over the summer, but softness in September and October due to the politics. Thus, our forecast for FTSE100 on 15 November is 7200.

The old saw says to go away in May and come back on St Leger Day (14 September). We can’t see much joy in buying into the Brexit uncertainty, so we advise “Go away at the end of July, come back in mid-November”. Doesn’t scan as well does it?

Invest in fun not shares

This is more pessimistic than we have been in a while, (see our previous forecasts) but hey ho, sun’s out, surf’s up, life is good eh?

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UK Equities about to Soar

Well it is that time of the month to make a 6 month forecast for FTSE100.

Prices going up!

The table below summarises our forecasts so far this year.  We note that our target date 6 months hence is 16 September 2019.  Which, of course is the Monday after the St Leger’s Day meeting at Doncaster.  So we expect the market to be very well bid – by all the people who went away in May – and missed the huge summer rally.

William Hill St Leger Festival – St Leger Day

So what do we know will happen between now and St Leger’s Day?  Well the real economy does seem to be in a soft patch in the UK, and is also slowing in all the main world economic drivers.  The EU is flirting with recession (ha, does that mean it has its come-hither eyes and is flicking its hair?)  China appears to have softened but isn’t heading for a blow-up.  Even the US seems to be losing some of the sugar-rush from last year’s tax cuts.  So, looking on the bright-side, it feels like interest rate rises are off the agenda everywhere, which will keep the relatively high yields from shares looking attractive. FTSE100 is yielding 4.46 as of today – from dividenddata.co.uk.

 

So what else is there that could possibly affect UK share prices coming up this summer?  Anything in the world of politics?

 

Oh yes, well there is Brexit!  It may seem an odd thing to say, but slowly the muddy water in our crystal ball is settling like the flakes in a snow-shaker dome. I love to mangle a metaphor.

 

We’ll review the Brexit alternatives tomorrow, but to summarise, by September we’ll either have left, be in a transition period of Mrs May’s Deal, or be in a long postponement. So in all cases the immediate threat to UK equities will have disappeared.

 

Under all of those scenarios, hopefully the stock market can get back to doing what it does best – ignore the real world and live by rumour and counter-rumour.

So we continue to believe that the late spring will bring a relief rally to UK equities.  Anyone who leaves it until St Leger’s Day will have missed the boat.

We forecast that on 16 September, FTSE will close at 8150.

 

Now this is really more foolhardiness that most economists show, but here are our forecasts so far this year;

Date of Forecast               FTSE Then           Date for Forecast             FTSE Forecast

15 January 2019                6855                       15 July 2019                        8050

12 February 2019              7129                       15 August 2019                  8050

18 March 2019                   7228                       16 September 2019         8150

 

We’ve even added the links to our earlier articles.  How brave/foolish is that???

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London Will Not Lose Its Financial Dominance after Brexit

We do not believe that Brexit will dethrone London from being Europe’s pre-eminent financial centre.

London at Night

Back in 2017, Xavier Rolet forecast that leaving the EU could cost 200,000 jobs in London. By January this year, Nomura had the number down to 10,000. Our expectation is that approximately 5,000 people will actually be re-located from London to a different EU city. According to the statista.com website, the total number of financial services workers in London is in the region of 350,000. Thus the change represents about 1.5%, which is substantially less than the normal annual fluctuation. And we believe that these jobs/people will likely trickle back over the next few years.

The reason is agglomeration economics. The EU would love to grab hold of such a high-earning industry – and to be able to closely control capital flows and investments. Their challenge in making it happen – which they will not meet – is partly that they want to control the industry, which frightens it away. The major hurdle though, is that their financial services are too dispersed – and national-competition is unlikely to let them pick one centre to develop.

London by Day

Of those people leaving London, many have gone to Dublin, but others have gone to Frankfurt, Luxembourg, or Milan. Following President Macron’s temptations, a few have even gone to Paris, despite the tax rates.

The aforementioned agglomeration economies result from having a high-concentration of an industry in one place. Lots of good employees are drawn there by the multitude of opportunities, giving a great pool of talent from which banks can choose. A wide array of support industries appear: everything from specialist lawyers and accountants, to top restaurants, schools and transport systems. Informal and formal communication methods encourage the spread of information and best practice. This productivity-by-concentration applies to London, but not to any other single city in Europe.

In time, we expect a passporting agreement will be struck with the EU – but from a position of strength. European banks, companies and individuals will need access to London’s financial markets just as much as London wants frictionless financial customers across Europe. EU intransigence could mean this takes many months or even years to happen – but happen it will. London will thrive and grow inside or outside of the EU.

Politicians like to think they are in charge – but in the long term, they can’t beat economics!

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WPP – Will Patience Pay-off?

Way back in January, when the news was all about Brexit, and there were great fears about that a deal might not be secured before the crunch time in March, we looked at the sorry share price of WPP. We concluded that business goes on all around the world – and even in the UK surely things would brighten up as it couldn’t be long until Mrs May came back from Brussels triumphantly holding aloft a piece of paper in a Chamberlain-esque manner. Oh how our optimism has been beaten up by events – or the lack of them. But what about WPP?

Back then we pointed out that perhaps the pessimism could be overdone. The share price when we wrote that was 874p. Since then, the downbeat mood has remained, with prices dipping as low as 800p.

Mark Read, CEO of WPP

However, the Preliminary Results this morning came in slightly stronger than forecast back in December, and the 60p dividend has been maintained. Mark Read, CEO commented Our results for 2018 are at the upper end of the guidance we provided in October….” The market seems to have liked the report, with the shares up 7.6% at 888.6p as we write.

The outlook for advertising continues to be somewhat murky, but we retain our confidence that there is a profitable role for WPP. The company has now taken the first steps of what it is billing as a 3 year transformation programme. We continue to feel that the 6.8% yield is suitable recompense for holding on and awaiting a positive outcome.

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Short Selling of Babcock – Update

A fortnight ago we investigated the world of short selling equities as it applied to Babcock International Group PLC.Yesterday, the company released its February Trading Update. Given that there is only one month to go until their financial year end, any bad news could not have been excluded from such an interim report.

And yet there was no profit warning, no giving notice that the business has suffered unexpectedly. In contrast, it was stated that previous guidance for the year end outcome still applies. And this is with only one month of trading remaining. Chief Executive Archie Bethel stated “The Group’s underlying earnings and cash generation outlook for the current year is unchanged.”

This is a company with turnover more than £5bln, and a confirmed order book of £18bln. On top of the £18bln, there is a further £14bln in the pipeline. Thus the overall pipeline is more than 6 years worth of income – and it is mainly due to the UK and other Governments.

Short Positions in Babcock

Meanwhile, the short selling situation, as monitored by shorttracker.co.uk, remains at a little under 7% . It has not increased, and still looks more likely than not that they’ll have to buy them back and push up the price.

Babcock Share Price Over 1 Month

When the February Trading Update was announced yesterday, the share price took a bit of a tumble, which has continued today – as shown by the chart from Bloomberg.  Again, we are not calling the bottom here. But this level seems an attractive entry point for a long-term holding, with secure income and decent yield.

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