(MENAFN- ProactiveInvestors)
Equities paused for breath as strong US economic data was offset by further worrying reports on the health of the Chinese and Eurozone manufacturing sectors.
US factory activity remained resilient with the Institute for Supply Management’s manufacturing index edging down to 58.7 in November from 59.0 a smaller drop than analysts expected. The ISM index is at levels historically consistent with GDP growth in excess of 4% with the finer details of the report recording an improvement in both new orders and exports.
The Federal Reserve’s Beige Book report compiled using data from the 12 Federal Reserve districts also offered a positive assessment of the world’s largest economy. Economic activity continued to expand with employment manufacturing and construction expanding.
Fresh evidence of the fragile state of the Eurozone economy came from the final reading of the Manufacturing PMI which was revised down to 50.1 from the initial estimate of 50.4 fractionally above the 50-level that separates contraction from expansion and down from 50.6 in October. Manufacturing activity contracted in Germany France and Italy despite the help coming from a weak Euro and lower oil prices.
Meanwhile China’s official manufacturing PMI fell to 50.3 in November from 50.8 the previous month its lowest reading in eight months. The data followed a private survey from showing that growth in Chinese factories stalled as output shrank for the first time in six months with rising costs and falling demand being blamed for the downturn in activity.
The Chinese economy however showed signs of resilience outside the factory sector as two gauges of non-manufacturing activity improved. The PMI for the service sector improved last month after the People’s Bank of China’s recent rate cut and other measures to support the flagging housing sector helped stabilise demand.
Oil prices remained in the spotlight as the fallout from Opec’s failure to cut production continued to reverberate. After falling to $67.3 last week Brent crude initially improved to $73 before renewed weakness forced it back below $70 a barrel. The bleak outlook sent the rouble and other oil-dependent currencies to all-time lows against the US dollar. Russia’s economy ministry warned that sliding oil prices combined with the impact of sanctions on Moscow would cause the country’s GDP to contract by 0.8% next year down from growth of 1.2 % it had previously forecast.
The reaction of equities appears to have shifted from previous optimism that lower oil prices will be good for growth to a more cautious outlook. Economists fear the deflationary impact on the UK China and Eurozone while others fear the debts of many oil dependent countries could become questionable as their balance sheets deteriorate.
On a domestic front Britain’s economy continues to grow at a healthy pace according to PMI reports on the manufacturing and services sector. Both reports exceeded expectations although the services sector which accounts for about four-fifths of the UK economy jumped to 58.6 from 56.2 in October with growth in new orders helping boost employment in the sector to a four-month high.
Technical analysis of the FTSE 100 illustrates a period of consolidation after a 700-point recovery from the sell-off in October. The bearish divergence evident from the fading oscillators however illustrates a slide in momentum with the negative MACD histogram indicating the possible start of a new downtrend. Support is seen at 6650 and 6535 while a break above 6775 could re-invigorate the bulls and inspire a retest of the 13-year highs at 6900.
In conclusion equities remain supported by robust US and UK data combined with the prospect of additional stimulus in Japan China and the Eurozone. Despite the positive implications to many corporations of the low oil price it is also a growing headwind for the global economy. Deflation is a threat to many economies while the sovereign debts of many oil producing nations are at risk of being downgraded which could send many nations back into recession.
() celebrated its IPO anniversary last month and after the early turbulence the company appears to be stabilising after undergoing a move from public to private hands. The shares which listed at 330p last October rocketed to 618p in January due to excess demand and over optimism before settling back around 400p.
has two main businesses; UK Parcel International and Letters (UKPIL) which generates 82% of revenue and General Logistics Systems (GLS) responsible for 18% of revenue. UKPIL is offsetting a structural decline in the letter industry with Parcelforce its fast-growing branded parcel delivery company and marketing mail operations.
Parcelforce has a market leading position with 53% of deliveries fuelled by an increase in internet shopping while revenue from marketing mail benefitted from an improving domestic economy. GLS operates a parcel delivery operation across Europe where tough competition caused profit margins to slip.
Privatisation of the 500-year old postal service has not been easy with cost cutting and improving profit margins proving harder than was expected at the time of the floatation. Its monopoly power and valuable assets however have shifted the group into a lower-growth utility type company which has taken investors time to get their heads around.
Interim results on 19th November revealed a rise in revenue during the first six months of the year resulting in a £279 million operating profit before extraordinary costs. The business generated £117 million in free cash flow and net debt was reduced to £590 million from £903 million last year.
Profits are likely to remain choppy during the turnaround although shareholders will receive a 5% dividend yield which is covered 1.5 times by earnings and more than twice by free cash flow with a circa 8% increase in the yield expected during the next two years. The shares currently trade on 12.3x forecast earnings a slight discount to its European peers and a wide markdown to the utility sector on circa 17x.
There is also hidden value in the London Development property portfolio which was recently shown by the disposal of the Paddington site for £111 million in cash. Analysts estimate has net property assets of between £600 million and £1 billion or 60p to 100p per share. The company had a net asset value of £2.7 billion or 270p per share at the end of September 2014.
The chart of illustrates the volatile journey during its first year although the shares appear to be building a base around 400p. The oscillators have also started to rise out of acutely oversold territory indicating an improvement in momentum.
Viewed more like a utility company rather than a fast-growth stock I believe offers attractive fundamentals while improved innovation with plans to offer a Sunday delivery service and automated parcel operations should facilitate growth.
Neil Woodford one of Britain's best-known fund managers has bought shares in for his new fund and with a stop-loss below the recent lows at 388p I believe it offers an attractive risk / reward bias. At the time of writing the share price is 405p with near-term targets seen at 425.25p 449.5p and 480p.
This report was written by Mark Allen – Head of Derivatives at Simple Investments Stockbrokers. The writer does not hold a position in but client accounts may. The material in this report has come from Simple Investments internal data sources Simply Charts and ’s corporate website.
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