The Week Ahead

Tuesday, 21st August 2012 08:34 - by David Harbage

Taking a look at the week ahead..

Macro-economic events

Monday 20th

All eyes will be on Greece, as Euro3.8 billion is scheduled to be repaid today to the European Central Bank (ECB). Servicing such debt is likely to depend on ongoing receipts from the European Commission, the International Monetary Fund and the ECB. Despite recent supportive assurances given by the head of the ECB, consensus opinion suggests Greece will be unable to meet these obligations and an exit from the Euro is a case of a ‘when, rather than an if’

Wednesday 22nd

The United States’ central bank’s monetary policy and prime interest rate setting forum, the Federal Open Market Committee, will publish the latest minutes of its deliberations at approximately 7pm (UK time). Most recent economic data has improved, but a further stimulus in the form of a boost to money supply by repurchasing treasury bills (further Quantitative Easing) cannot be ruled out. Such action (of which inflation is a by-product) would be welcomed by the bond and equity markets, less so the foreign exchange market (the US dollar could weaken). Details of Existing Home Sales in the United States are due at 3pm.

Thursday 23rd

Indications of consumer confidence are due as we expect survey evidence from both the United States (via Bloomberg) and Europe. Perhaps more pertinently, harder data on the health of the United States economy will be delivered by the Initial and Continuing jobless claims and New Home Sales - due at 1.30 and 3pm respectively. Closer to home, the British Bankers Association (BBA) provide mortgage lending figures at 9.30am and the Confederation of British Industry (CBI) report findings of their Distributive Trades survey.

Friday 24th

Banks, the Bank of England and the Financial Services Authority – amongst others – are due to provide detailed evidence to the Parliamentary Commission on Banking Standards in respect of the LIBOR interest rate. Political and public demands for greater clarity in the business models of clearing banks could re-open the debate surrounding the provision of free banking. Attaching a visible fee to current accounts (or specific services, such as use of cash machines) would ease pressure on banks to cover the cost of doing business by selling insurance or applying exceptional overdraft charges. 

The Office for National Statistics is set to publish a further estimate of the UK’s economic growth in the second quarter of 2012. The initial decline in total output, suggesting Gross Domestic Product (GDP) fell by 0.7% - restrained by the additional bank holiday prompted by the Royal Jubilee celebrations- may have been overstated. But not to the point of avoiding a negative, recessionary outcome, with a number expected of -0.5%.

Company news

Monday 20th 

House builders Bovis, on Monday (and Persimmon on the Tuesday) are due to produce good trading results to underpin their respective share price rallies. By contrast with London-focused Berkeley Group and Telford Homes, highlighted in a previous edition of this blog, Bovis and Persimmon are national, lower priced, volume-based operators. Bovis has a tradition of earning higher operating margins than most of its peers and Persimmon has, to its credit, been a leader in its focus on returning cash to shareholders. Expect more of the same this week, but don’t expect much enthusiasm for higher prices in the wider UK housing market; these well managed businesses thrive on stability.

The Lloyds of London insurance group Amlin is expected to turn last year’s £192.3 million loss – which produced a 20% setback in the shares - into a profit north of £170 million as catastrophe events eased in the first half of 2012. The FTSE250 constituent has recovered its poise over this period and a positive update from management could maintain the stock’s positive momentum.

Also on Monday, another mid cap stock, Drax is set to provide a half yearly update. The owner of the coal-fuelled power station in North Yorkshire has encountered problems in its strategy to move towards biomass (wood-based) fuel, including a major fire near Tilbury, Essex and reduced HM Government subsidies for the fuel. Drax is a perennial bid favourite within a sector that has seen considerable corporate activity but, while it boasts an attractive dividend, less speculatively-minded investors may find the fundamentals less compelling.

Tuesday 21st

Commodities trader and miner Glencore International probably represent the most important corporate announcement this week. Rather than the interim trading results, attention is likely to focus on the company’s bid for Xstrata which became controversial for the planned retention bonuses offered to Xstrata’s leading management. Many investors continue to view the offer as being ungenerous and, as such, the US$90 billion merger may not get sufficient shareholder support.

From the multinational mega cap to a small UK listed business, half year trading results are also due from Johnston Press. The regional newspaper publisher has struggled as advertising revenue fell by 9% in the first six months of 2012 – impacted by the headwinds of a slowing domestic economy (reduced use of classified advertisements) and structural changes in the industry (towards online advertising). The market is keen to learn more following a major restructuring of the firm (which features 13 daily and 230 weekly local newspapers) has seen headcount reduce as it moves towards being a multimedia business.

Investors can also expect interim results from Afren, Severfield-Rowan and Wood (John) Group, amongst others.

Wednesday 22nd

After Glencore, we expect final results from another global natural resources group BHP Billiton who have already indicated that their energy business (one third of the group’s turnover, post the acquisition of Petrohawk) is likely to disappoint as US gas prices have been weak in the first half of 2012. Following last month’s production report, investors’ prime focus will be the group’s cash management strategy: returns to shareholders (immediate dividend, stock repurchases) relative to capital expenditure plans. 

Also anticipate interim results from Carillion, Hardy Oil & Gas, Soco International, Spirax-Sarco Engineering and TT Electronics, amongst others.

Thursday 23rd

International drinks business Diageo is expected to announce an 11% rise in pre-tax profits to just north of £2.9 billion in the first half of 2012. Best known for its portfolio of branded spirits (such as Baileys, Johnnie Walker and Smirnoff) and Guinness, the company expects demand from Asia and other emerging countries to offset slower growth in the likes of the United States and Europe. In the absence of good trading numbers, the premium-rated shares could be susceptible to profit taking. However, beyond trading, the City expects to hear more this week of plans to acquire Jose Cuervo tequila from the Mexican Beckmann family – the brand will cost circa £1.9 billion. 

FTSE250 constituent W H Smith should provide an encouraging trading update on Thursday, covering the six months to the end of August ahead of announcing its full year results in October. One of the oldest names on the High Street, this retailer has managed to reduce its dependence by positioning itself in travel locations (railway stations, airports, motorway service areas) and overseas (via joint ventures, franchises). The group is likely to increase profits by 16%, to circa £78 million, in the current year - aided by close attention to costs across the business – and this should justify investor confidence evident in the shares’ current five year high.

Expect interim results, too, from Aegis Group, IMI, Kazakhmys, Petropavlovsk, Premier Oil and Salamander Energy.

Friday 24th

Berendsen, formerly known as the Davis Service Group, are expected to announce pedestrian earnings growth of approximately 3% in the first half of 2012, but management are likely to indicate an improvement in prospects over the next twelve months. This FTSE250 company, which provides textile cleaning services in the UK (which have enjoyed higher occupancy levels) and Nordic countries (whose economic performance has been robust, compared to southern Europe), is seeking to move into higher margin areas.

Finally, we conclude by mentioning that other half year trading updates are due from Aga Rangemaster Group and Henry Boot.