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MENAFN - ProactiveInvestors - Australia - 25/11/2012

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(MENAFN - ProactiveInvestors - Australia) A glance at the above chart of the FTSE 100 shows there has been a strong recovery for equities, on optimism that progress is being made towards averting the US fiscal cliff.

Initial talks between the Democrat and Republican leaders aimed at tackling the looming fiscal cliff appeared surprisingly constructive. Signs that both parties were prepared to make concessions in order to reach a deal enabled stocks on both sides of the Atlantic to make their best one-day gains for more than two months.

A series of encouraging US data releases helped boost investor's appetite for risk, with further optimism returning to the US housing market. Evidence this week revealed that sales of previously occupied homes rose solidly in October and that builders are more confident than they have been at any other time during the past six and a half years. New home sales and house price indices have also reached multi-year highs, supporting a recovery in the world's largest economy.

Elsewhere in the economy the number of Americans filing new claims for jobless benefits fell and leading indicators, which anticipate economic conditions three to six months out, rose 0.2% in October, slightly more than had been expected.

Evidence of further improvement in China lifted Asian equities after the preliminary HSBC China manufacturing Purchasing Managers Index, a gauge of nationwide manufacturing activity, rose to 50.4 in November compared with a final reading of 49.5 in October. The data marks the first time in 13 months that the index has been in expansion territory, confirming that the economic recovery continues to gain momentum towards the year end.

Meanwhile, Europe continues to weigh on sentiment after European officials failed to reach a deal on another bail-out for Greece and Moody's Investors Service stripped France of its triple A credit rating. The regions finance ministers failed to reach an agreement over the much needed funds to Greece, even after marathon talks unsuccessfully concluded how to reduce the country's debt to a sustainable level, putting further pressure on the single currency.

Technical analysis illustrates the severity of the recent sell-off, with a break of the medium-term support line at 5800 triggering a rapid move down to the historically significant 5600 level. The index has since recovered, with the oscillators rising out of acutely oversold territory and the MACD histogram stepping into positive territory, suggesting the uptrend may continue. 5600 is regarded as the major support level with targets seen at 5755, 5800 and 5920.

In conclusion, the vast bounce on such little news confirms both the oversold conditions equity markets had reached and the importance of the fiscal cliff. Improving trends in the macro-economic backdrop is encouraging, but the fiscal cliff is likely to be the near-term catalyst and could lead the FTSE to close-out the year up or down 5-10% from current levels depending on the outcome. I favour further upside, but with a conclusion to the fiscal cliff unlikely to be without its challenges and low trading volumes likely due to thanksgiving in the US and the festive season ahead, I will buy on weakness.

The mobile telecommunications sector has underperformed the wider market over the past three months, losing 13.5% compared to the FTSE 100 falling less than 1%, largely due to heavyweight Vodafone (LON:VOD) coming under pressure.

The above chart of Vodafone highlights the recent weakness, with the shares falling almost 20% in the past three months. It is, however, worth noting the shares have started to consolidate around major historical support at 158p, which combined with the oscillators rising out of deeply oversold territory, implies it could be a good time to buy the shares.

Interim results on 13th November confirmed investors' fears over the company's exposure to Southern Europe and failed to clarify the size and reliability of future dividend payments. Revenues in Spain fell 22% to 1.97 billion, while Italy shrank 16% to 2.43 billion, as customers tightened their belts. This resulted in Vodafone taking a 5.9 billion impairment charge in the first half numbers, which pushed the group into a pre-tax loss of 492 million, compared to a pre-tax profit of 8 billion in the same period last year.

It is, however, important to note that these figures do not include the positive impact from Verizon Wireless, Vodafone's US joint venture, of which it owns 45%. Cash profits attributable to Vodafone from US operator Verizon Wireless rose 14% in the period to 4.49 billion, which helped adjusted operating profits rise by 8.5% to 6.2 billion, meaning it came in at the upper end of guidance and highlighted the importance of Vodafone's geographic diversification.

Vodafone's stake in the joint venture has always been controversial, as the company is the minority partner with New York based Verizon owning the other 55% and controlling the business. For many years Verizon has denied Vodafone a dividend as a way to squeeze the British company into selling its stake in the wireless carrier to Verizon. Without dividends from Verizon Wireless, Verizon itself started to run out of cash and last year initiated a 10 billion dividend payment to both major shareholders.

Vodafone returned the windfall cash to its shareholders, sending the blue chips yield from 5.25% to circa 8%. Of recent, however, analysts have grown fearful the payment from Verizon Wireless may not continue, leading to much of the recent share price weakness.

Results confirmed Vodafone will receive a 2.4 billion dividend from Verizon Wireless before the end of the year, but instead of returning it all to shareholders, 1.5 billion will be used in an earnings enhancing share buy-back. Strong performance at Verizon suggests the dividend will become more regular, with 14 of 21 analysts on Bloomberg forecasting an annual dividend above 14p or 8.75% for at least the next two years.

European operations are likely to remain problematic, but its geographical diversification, evident from Verizon Wireless's strong contribution, should continue to drive growth. Meanwhile, Vodafone has a great track record for returning cash to shareholders and the near 9% prospective yield is a huge attraction, which combined with the bullish technical outlook, suggests it could be worth acquiring for both income and capital growth.

At the time of writing the share price is 158.3p with near term targets seen at 164.6p, 170.2p and 181p. I shall set a stop-loss marginally below the two year low at 155.5p.



This report was written by Mark Allen " Head of Derivatives at Simple Investments Stockbrokers. The writer does not hold a position in Vodafone, but client accounts may. The material in this report has come from Simply Charts and Vodafone's corporate website.

 






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