FTSE holds ground, just, under earnings barrage

<p>The UK’s main stock indices struggled to keep hold of slim gains on Thursday, as one of the busiest sessions for earnings and updates brought a mixed bag from closely watched names.</p>

The UK’s main stock indices struggled to keep hold of slim gains on Thursday, as one of the busiest sessions for earnings and updates brought a mixed bag from closely watched names.

The FTSE 100 fared better. Despite a strike at the world’s biggest copper mine, at Escondida in Chile, hitting Antofagasta, Glencore and Fresnillo, and Smith & Nephew‘s earnings miss, the benchmark dragged itself off the flat line early on.

Investors though, read FTSE 250 travel firm Thomas Cook‘s ultra-cautious first-quarter update as a potential negative for its bigger rival on the top market, TUI, sending the latter’s stock down 2%, and keeping the FTSE under pressure.

The mid-cap FTSE 250 index fared worse overall though. A surge on the back of surprisingly robust half-year figures from fund manager Ashmore wasn’t enough to offset poorly-received comments and numbers from key shares like Thomas Cook and Tate & Lyle.

A host of anxieties including Brexit, sterling and Donald Trump continue to test the softer defences of second-tier shares.


For Thomas Cook, most importantly, Q1 showed its refocus on the southern Med and Portugal is paying off, with a third of summer bookings already done by the New Year, suggesting promising momentum to date. The exposure to Europe’s airline seat bonanza madness (via Condor) is a worry, though the group is signalling that increasing volumes of determined British travellers, together with those from elsewhere in Europe, are offsetting the impact of declining seat prices. Thomas Cook’s typically loss-making first half thus looks set to improve year-on-year, on an underlying basis. A £10m rise in underlying net debt is neutral with net debt still below 10% of enterprise value, and in view of TCG’s underappreciated cash position. Overall, a good start to the year and the group’s best chance for some years to advance the operating margin, which has been skimming between flat and slightly negative on a trailing 12-month basis.

Med-Tech group Smith & Nephew continues to ail, failing to meet negligible FY profit growth investors were expecting of around 1%. China and the Gulf states continue to drag, contributing to a 7% trading profit decline. “Stronger revenue growth expected in 2017” says S&N, referring to reported revenue, which is seen coming in 1.2%-2.2% better in 2017. Unfortunately, that is the latest in a string of marginal downgrades relative to the market. Gross revenue expectations are running around 3.4% higher, pointing to c. £4.83bn. The key provable takeaway here is S&N’s trading profit margin. Cost self-help has kept the hit from FX, investment and softer sales in-line with forecasts, making the upper end of a  projected 20-70 basis point improvement look do-able. That, however,  won’t shut down questions over whether S&N has chosen the right growth markets.

Ashmore, the mid-size fund manager rival to Aberdeen Asset Management, keeps confounding the ‘reflation’ script. Instead of a slowdown from declining flows to emerging markets, the momentum of returning flows to emerging markets and the group’s dextrous reading of China have enabled a much stronger than forecast bump in first-half profits. Operating efficiency has filtered through 16% more underlying earnings than expected too. Whilst a new cycle of volatility in global flows isn’t over yet (all-too-familiar drivers suggest it’s just beginning) first-half figures show Ashmore has bagged a head start on what’s inevitably going to be a turbulent year. That will help the stock when investors begin to discount the speculation that partly accounts for its re-rating since late November.

FTSE 250 heavyweight Tate & Lyle is a fair FTSE 100 tracker. That’s due to it having one of the most favourable currency translation effects on the wider market, from a 78% revenue base in the states. This year, the group foresees a £40m mark-up on the bottom line from FX. Even at constant currencies though, it’s now calling for a performance that’s “modestly ahead of our expectations” at the time of half-year figures in November. That, in our view should help neutralise concerns over NAFTA changes, which the group expects to be “manageable”. Actually, Mexico issues have ebbed and flowed since at least 2006 including trade disputes, and more recently sugar price softening. The point is that Tate’s focus had long been drifting away from the relatively low-contribution region before the advent of Donald Trump.



Build your confidence risk free
Join our live webinars for the latest analysis and trading ideas. Register now

StoneX Financial Ltd (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.

No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

For further details see our full non-independent research disclaimer and quarterly summary.