NGmorningcall: Late US rally leaves markets feeling more positive

Date: Tuesday 30 Nov 2010

UK
he share price of fund manager Aberdeen Asset Managerhit a 52-week high earlier this month though it has come off the top since. Tuesday’s full year results might provide further impetus, with the group expected to report good progress on debt reduction and margin improvement.

KBC Peel Hunt is forecasting profit before tax of £191m and earnings per share (EPS) of 12.0p, a little above consensus on profits but bang on the money with the EPS. The broker thinks the full year dividend will be hiked by 16% to 7.00p, putting it well ahead of the consensus figure of 6.64p.

The broker expects assets under management (AuM) to show “modest growth” to £171.4bn from the £168.8m reported at the end of August.

“For the 11 months to 31 August, the group had recorded £1.0bn of net inflows. The financial impact of this is more significant, however, as the broad trend has been a switch from lower-margin fixed-income products into higher-margin equity mandates. Fixed-income outflows amounted to £10.6bn for the 11-month period, indicating that performance issues have yet been fully worked through, although we believe that the outlook for 2011 is better (as the poor performance numbers drop out by August or September),” the broker said.

“Even within asset classes, Aberdeen has been successful at winning new business at higher margin than existing business (partly a business mix issue, with more Global Equities Management and Global mandates, in addition to a greater proportion of pooled funds),” Peel Hunt added.

Singer Capital Markets is also expecting an upbeat statement from Aberdeen. "Investment performance has continued to improve and we expect strong equity flows to have continued since year-end leading to a strong outlook statement and potential for consensus upgrades,” the broker predicted.

Britain’s biggest tile and wood flooring specialist, Topps Tiles said at the end of September that full year adjusted pre-tax profit is expected to be within analysts' estimates after an uptick in demand in the fourth quarter.

That would suggest Tuesday’s preliminary full-year figures will reveal a profit before tax of somewhere between £14.5m and £17.1m. The median forecast is for pre-tax profit of £16.1m on sales of £180.7m. Consensus for earnings per share is 6p, down from 6.62p last year.

Broker KBC Peel Hunt thinks “ongoing sales will show continued stability, providing the basis for further growth in 2011.” The broker rates the shares as a “buy”.

“Given the strength of fourth quarter like for like sales, expected to be up c4% year on year, we have seen consensus profit before tax (PBT) expectations upgraded towards our £16.6m forecast and we expect full-year PBT to be in the range £16m-16.5m,” the broker predicted.

Diagnostics testing kit firm Immunodiagnostic Systems issues interim results for the six months to the end of September. Panmure Gordon is forecasting revenues of £22.6m, up 34% year on year, and earnings per share of 17.6p (+36%). Profit before tax is tipped to be 56% higher than last year at £7.1m.

“The company already announced in its trading update on 5 October 2010 that significant progress has been made on placing 140 iSYS machines since it was launched in February 2009, almost doubling the number of machines placed by 31 March 2010, which was 74 iSYS. We look forward to an update there,” the broker said.

US

Wall Street rallied late in the day as positive US retail spending news eased some of the European debt worries.

The S&P 500 ended the day 1 at 1,187. Dow Jones fell 39 at 11,052 while dropped 9 at 2,525. Earlier the Dow had been over 100 points lower.

After the bail-out of Ireland there were worries about whether another eurozone country is likely to need a helping hand from the European Union and the International Monetary Fund.

Both Spain and Portugal have been nominated as likely candidates for assistance, despite the protestations of politicians from both countries.

Online seller Amazon and drug-store chain Walgreen picked up after reports of a big week-end for shopping.

The National Retail Federation (NRF) said that sales on “Black Friday” – the day after the Thanksgiving Day holiday and so called because it is the day when many retailers move into the black for the year – were comfortably up on last year.

The NRF said 212m shoppers spent $45bn in shops and online over the holiday week-end, up from 195m shoppers the year before. The average amount spent on Black Friday rose to $365.34 from $343.31 last year.

In company news, Hewlett Packard, the world’s biggest computer-maker has been sued by shareholders who wanted know why the company ousted its former chief executive Mark Hurd.

A Dutch court has also ordered the consumer goods and pharmaceutical group Johnson & Johnson to pay a $130m fine to pharma company Basilea for breaching a licencing agreement.

Kraft Foods, meanwhile, is locking horns with Starbucks over an existing deal to distribute packaged Starbucks coffee to grocery stores.

Surf fashion group Quiksilver has lifted its revenue forecasts for the fourth quarter to $492m from a previous estimate of $497m.

FX
If the intention of the weekend bailout package agreed at the weekend was intended to send a signal to the market that European ministers were up to the challenges presented by the unfolding crisis in Europe, then yesterday’s reaction seemed to suggest that they failed miserably.

There remains the major concern that given the precarious state the Irish government finds itself in politically, that the fiscal budget will not get passed on 7th December on the basis that at least €17.5bn of the bailout fund is coming from Irish pension funds and cash reserves. Fine Gael, Labour and Sinn Fein have all vowed to vote against the austerity budget in early December on this basis.

There is also a sense that the money being provided may not be enough and even if it is there is the possibility it may never get paid back given the high rate of interest being charged on some of it.

A lacklustre Italian bond auction yesterday added to the prevailing sense of uncertainty in bond markets as CDS spreads again increased to record levels for Portugal and Spanish bonds. There were also the first signs that a contagion backdraft has started to spill over to Belgian and Italian bonds with 10 year Italian yields pushing above 4.5%.

The pound had a slightly better day after the Office for Budget Responsibility upped its growth forecast for 2010 by 0.6% to 1.8%, though it trimmed its forecasts for 2011 and 2012 by 0.2%. However the release of Gfk UK Consumer confidence for November came in slightly worse than expected at -21 against an expectation of -19 and this has pushed sterling back from its highs.

The US dollar has continued to push higher against its currency peers on the back of the debt concerns in Europe as well as fears that China may act to further tighten fiscal policy in the coming weeks.

Other factors buoying the dollar include positive retail sales figures from Black Friday, as well as encouraging sales figures from Cyber Monday which suggested that the US economy could get a pre Christmas e-commerce sales boost.

Today’s US Consumer confidence figures for November will be closely scrutinised for further confirmation of a gradual turn around in sentiment with expectations of a rise to 52.6 from last months 50.2.
Chicago PMI which is released 15 minutes earlier, is expected to decline slightly to 60 from last months 60.6.

Commodities

Crude oil futures climbed 2.4% on Monday, despite the stronger dollar and ongoing concern about sovereign debt in Europe.

Crude for January delivery settled up $1.97 at $85.73 a barrel on the New York Mercantile Exchange a two week high.

Demand for oil was triggered early on by optimism over Europe’s rescue package for Ireland and gains remained intact despite concern that other nations such as Portugal may need a financial bail-out.

Meanwhile US stocks staged a late comeback on Monday after the National Retail Federation said that sales on “Black Friday” – the day after the Thanksgiving Day holiday, were comfortably ahead of last year, an encouraging indication that US retail spending is on the right track.

Otherwise contagion worries bumped up gold prices on Monday as investors took a shine to its safe haven qualities.

Gold for February delivery advanced $3.20 to settle at $1,367.50 an ounce on the Comex division of the New York Mercantile Exchange.

While gold is off its all time high of over $1,400, prices are still very high and are expected to remain so amid persistent jitters about European sovereign debt, in particular the underlying financial health of Spain and Portugal.

Silver for March jumped 1.6%.

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