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Market Outlook: Is the reopening trade already over, RSA, Halfords & more

Markets are flat in London at the open as the vaccine rush wears off
November 18, 2020

Lockdown may be the word of the year, but rotation is the name of the game in November. The main debate taking place among traders is whether it’s got legs. Bank of America’s global fund manager survey paints a worrying picture. Things won’t be different this time, the report seems to indicate. The net percentage of respondents expecting a steeper yield curve is at levels similar to the most elevated extremes of recent years – eg in Oct 2008 (Lehmans), the 2013 ‘taper tantrum’ and the Nov 16 Trump election win. After each of those, whilst the yield curve did continue to steeper for a short time, it was a false alarm and the curve went on to flatten.

Investor positioning has already moved dramatically with the biggest flows into small caps, emerging markets, value sectors, banks and energy – all those seen to benefit most from the vaccine back-to-normal trade. Indeed, the percentage of respondents who think small caps will beat large caps is at the highest levels on record. The rotation trade has the makings of a very painful one if tech bounces. Investor positioning is clearly becoming a little crowded and there are reasons to be doubtful about the duration of the rotation trade. Note yesterday saw a clawback in the opposite direction after Monday’s value bump from the Moderna news.

• Vaccines might not be what they are cracked up to be, or uptake is not what’s required, leaving a persisting drag on the economy and the GOAT (get out and travel) type stocks that form the basis of the back-to-normal trade.  

• Vaccines are slow to be delivered, resulting in a longer set of lockdowns, restrictions on travel, dining out etc. 

• Even with a vaccine the macro setup is one of lower productivity, higher unemployment and depressed consumer confidence on Covid fears. Stimulus continues to be administered by CBs and governments, keeping rates low. 

• The bridge is not strong enough: whilst vaccines are coming, how many smaller businesses go out of business in the meantime, allowing large cap rivals with strong balance sheets to prosper (eg, Walmart/Amazon over small caps). The prospect of US fiscal stimulus has dimmed since the election and Europe is going through its own problems in ratifying its budget. 

• Value had plenty of problems before the pandemic hit – structural problems remain and if anything have been made worse by Covid. 

• As per the FMS, it’s all just a little too one way right now. 

But there are reasons to be hopeful 

• Whilst there have been some large swings from momentum/growth to value, the latter remains relatively cheap to the former and there is room for the trade to continue for at least a couple more quarters before it’s done. 

• Normalising of activity under a vaccine regime should support a strong macro environment in 2021, even if the first quarter is slow to materialize, encouraging yields to move to the upside in the near term and support the reflation trade 

• The glut of savings will be deployed next year to support consumer cyclicals and consumer discretionary sectors, albeit these are not universally in the value camp. 

• Central bank and fiscal stimulus will remain supportive and ensure liquidity remains strong and needs a home – relatively unloved sectors should benefit given valuations and the improving macro environment 

• If you are UK-based investor, a global value rotation is positive for UK over US (note Citi call on US 10-year yields hitting 1.25%)

• Traders should note that a rotation like this won’t be a straight line, but a pullback is not the same as a trend.  Directional trades require lots of small pullbacks, so this should be expected. The FTSE 100 is still up c14% this month despite handing back some gains in the last day or two.

Small caps have a lot of catching up to do (Russell 200 futs in blue vs Nasdaq 100 futs in purple and FTSE 100 futs in green in 2020)

Results from AP Moller-Maersk are encouraging for the global economy recovery. Although Q3 revenues fell 1 per cent, earnings before nasties rose 39 per cent year-on-year to $2.3bn. It also raised its guidance for the third time since the pandemic struck, and the second time in as many months, hiking its full-year outlook to $8bn-$8.5bn. The company also announced a $1.6bn share buyback programme to last 15 months. The company is benefitting from the increased demand for physical goods over experiences. 

European markets were generally a little softer again early on Wednesday as investors looked to consolidate some of the recent gains. I would anticipate this to be more of a pause than a pullback. 

UK Company Announcements

RSA (RSA)

The board has now formally recommended the 685p-a-share, £7.2bn offer from international peers Intact and Tryg, though the complicated nature of the deal means it is unlikely to complete until at least the second quarter of 2020.

Halfords (HFD)

Halfords secured half-year pre-tax profits of £56m in line with upgraded guidance issued last month. The retailer withheld forecasts for 2021 and added that recent lockdown measures have impacted its motoring products sales, citing government data that showed last week's car traffic to be 30 per cent behind pre-Covid levels.

Kaz Minerals (KAZ)

Just a few weeks after the chairman and shareholder told shareholders they would not like the hugely expensive Baimskaya construction and began a privatisation bid, Kaz has added $2.5bn (£1.9bn) to the cost of the Russian mine. The added cost is from infrastructure the miner had previously said the Russian state would build for it. The mine’s feasibility study will now arrive next year.

Petra Diamonds (PDL)

Creditors and other stakeholders have backed the struggling diamond miner’s restructuring plans, which will leave shareholders with 9 per cent of the company. Petra said noteholders, another lender group and its Black Economic Empowerment shareholders had signed off on the plan.

Croda International (CRDA)

The chemicals company will buy out Spanish fragrance and flavours maker Iberchem for over £700m, and will raise £600m from shareholders to fund it. Croda was trading at an all-time high last month, but has since dropped off 10 per cent, to around 6,000p. Institutional shareholders have signed on for the placing, which will be launched immediately.

Breedon (BREE)

Revenue for the first 10 months of the year came in at £750m with like-for-like revenue in September and October ahead of a year earlier. As construction activity recovers, Breedon is guiding to full year underlying operating profit of at least £70m, which would exceed company-compiled analyst consensus of £67m. The group generated £117m of underlying operating profit in 2019.

Spirax-Sarco (SPX)

As global industrial production improves, the decline in organic revenue in the four months to 30 October was lower than for the first half of the year. Improved sales and cost cutting have helped bolster the operating profit margin. The group is sitting on £254m of net debt (excluding lease liabilities) which is more than a fifth lower than the June half-year position.

Carnival (CCL)

The cruise operator has launched an equity offering as it looks to raise capital to repay $499m in senior convertible notes. Carnival said that the fundraising effort would not materially affect its cash position.

Begbies Traynor (BEG)

The corporate restructuring group expects to match or surpass consensus adjusted pre-tax profits of £9.8m for the 12 months to April. Shares are up 4 per cent in early trading.

Micro Focus (MCRO)

The troubled software company expects revenues this year to come in 10 per cent below those in 2019. The licence division has suffered the most, where sales are projected to drop by almost a fifth year-on-year.

British Land (BLND)

The interim dividend has been reinstated at 8.4p, down from the prior year's level of 15.97p, after the commercial landlord was pushed further into an earnings loss by a £625m devaluation in the portfolio.

SSE (SSE)

Adjusted operating profit declined by 15 per cent year-on-year in the six months to 30 September, to £418m. This reflects a £115m blow from the Covid-19 pandemic. Statutory operating profit almost tripled to £985m thanks to one-off gains from asset disposals. The group has increased its interim dividend by 2 per cent to 24.4p a share and is guiding to a full year payout of 80p plus RPI inflation.

Safestore (SAFE)

An almost 10 per cent increase in the occupancy rate and marginal upift in the average store rate meant revenue was up just over 5 per cent for the self-storage specialist between August and October.

WTI crude oil (Dec) was steady around the $41.50 level after the OPEC+ technical committee broke up without offering a recommendation on extending production cuts. The Committee’s recommendations will be provided to the OPEC+ meeting on Dec 1st, after the core OPEC meeting on Nov 30th. Meanwhile the API report showed a build in crude oil inventories of more than 4.1m barrels vs expectations for under 2m. EIA data later today seen at +1.7m. Given this API number and last week’s big EIA print I think we are now seeing the real flip from draws to builds in inventories that will put near-term pressure on prices and force OPEC+ to extend cuts for 6 months if it is not to disappoint the market. 

 

Elsewhere, Bitcoin prices continue to shoot to the moon, now surging past $18,000 overnight. What’s remarkable this time is the lack of hype around Bitcoin. Why is there not the interest this time around? Too mainstream perhaps. Read our recent feature on Bitcoin here. 

 

Are sterling traders pricing for a Brexit deal? GBPUSD moved higher with indications pointing towards a deal being done in the coming days. GBPUSD advanced to 1.3280 with the more-than two-month high at 1.33130 potentially offering near-term resistance. UK inflation rose to 0.7 per cent, ahead of expectations for 0.5 per cent, which offered some additional support to the pound this morning.

 

Neil Wilson is chief markets analyst at Markets.com