Today's Markets: Mixed start for equities

Tech stocks recover but Twitter falls amid Musk controversy

May 16, 2022

Uncertain mood in equity markets as Chinese economic data slips
National Express continues to pursue Stagecoach
MADE.com, Greggs, Vodafone, Life Science, BPEA updates

Stress everywhere: European stock markets slipped in early trading on Monday morning with a sharp downturn in Chinese economic activity in April weighing on risk sentiment. The move lower is modest so far with the FTSE 100 and DAX down by around half of one percent in early trade before stocks in London managed to move above the flatline.

China’s retail sales fell by more than 11 percent last month and industrial production declined by almost three percent. The data underscores the impact of lockdowns and the ongoing Covid outbreak in the country. Shanghai hopes to return to ‘normality’ by June.

US stocks registered a sharp relief rally on Friday but still closed lower for the week. The Nasdaq Composite rallied more than 3.8 percent, its best daily gain since November 2020. Led by beaten-up tech and growth names, it’s got all the hallmarks of a bear market rally and the flow does not suggest all-out capitulation just yet. The Nasdaq 100 bounced clean off the 50 per cent retracement of Mar ’20 trough to all time high at 11,700.

Twitter (TWTR) stock fell 10 per cent as Musk did a very Musk thing and said the transaction was on hold... something to do with bots. This is not just a bit brazen, it’s totally against the law. The fact he then tweeted “Still committed to acquisition” two hours later is hardly important, TWTR stock was on the move. Twitter’s legal team says he violated an NDA... the SEC should be more worried about whether this tweet broke the 2018 settlement that demands Musk have any communications that might affect Tesla (TSLA) shares checked by a Tesla lawyer; TSLA stock rallied almost 6 per cent on the comment – the stock had fallen amid concerns Musk’s holding was collateralised for the Twitter deal and he would need to sell more to raise cash. The SEC is already looking into the murky disclosures of Musk’s initial ‘passive’ stake in Twitter, which was not only mislabelled but late. Quite whether this kind of behaviour is the sort of thing that a considerate CEO of a public company should be doing is kind of moot – Musk's chequered history and maverick behaviour are well known and anyone trading this deal or trying to arb it should be very aware who they are dealing with. It could be a ploy to renegotiate at a lower price, it could just be that he’s running into obstacles. Or it could be that he’s never really wanted to see the transaction through. I don’t know... shares are down 2 per cent in the pre-market today.

High conviction, high risk: Cathie Wood’s ARK Innovation ETF (ARKK) continued to load up on beaten-down tech stocks she thinks will be winners from major technological changes. And investors keep flocking to her... ARKK ended Friday up 11 per cent in a sharp rebound that almost wiped out all the losses of the last week.

Companies

The unmaking of MADE.com continues with profit warning

“Tougher trading conditions” in the online furniture market have led MADE.com (MADE) to slash sales and profit expectations for 2022. Shares plunged by 15 per cent, hitting a new record low as the retailer racked up a 60 per cent decline year-to-date. The tightening of consumers’ purse strings has hit big-ticket purchases such as furniture and electronics worse than other retail products, which have also been suffering from ongoing delays to imported goods due to Chinese lockdowns and supply chain issues.

The homewares retailer said that gross sales were down “only” 10 per cent in the first quarter of 2022, comparing this to a reported 30 to 40 per cent decline in the wider furniture market. The sector is expected to remain “highly challenging for the rest of 2022”, said MADE, adding that it now anticipates gross sales growth to be between zero and a 15 per cent decline for the full year - a far cry from the 15-25 per cent growth it forecast in March.

Adjusted EBITDA is also expected to post a loss of between £15mn and £35mn.

Liberum said that the near-term outlook for sales and profits “falls well below where we were expecting”, and slashed full-year sales forecasts to the bottom of MADE’s stated range. The company’s current valuation makes it “vulnerable to an approach”, which could support the share price, said the broker. MT

National Express keeps battling in all-share bid for Stagecoach

National Express (NEX) has carried on with its takeover attempt of fellow transport company Stagecoach (SGC) despite the company preferring a cash bid from a German asset manager. National Express said on Monday its offer was better than DWS’s, which “materially” undervalued Stagecoach, and that it was now “final”.

DWS is putting up 105p a share in cash, while National Express has offered an exchange ratio of 0.36 times, meaning Stagecoach shareholders would receive 0.36 shares in the new company for each share they hold in the smaller company.

The coach operator also put forward some highly speculative potential valuations for the combined company in order to make the undervaluation argument, including a 23p per Stagecoach share boost from “synergies” to the share price. It also waved the union flag at shareholders. “In a period that has seen a surge of private equity firms acquiring British companies, the [potential combination] represents a rare example of two UK listed companies combining to form a global leader in their industry,” National Express said.

Stagecoach shareholders have until Saturday 21 May to vote for the DWS deal. AH

Muted reaction to Greggs trading update

Greggs (GRG) said that full-year expectations remain unchanged despite sales struggling in bigger cities and increasing cost challenges.

In a trading update covering the first 19 weeks of its 2022 financial year the company announced like-for-like sales growth of 27.4 per cent against the pandemic-hit comparative. Total sales were up by 30 per cent to £495mn.

There were 49 new shops opened in the period, and 6 closures, taking the estate to 2,224 shops. The expansion of the shop estate is a key part of management’s growth strategy.

Sales in major cities and office locations “continue to lag the rest of the estate”. However, these sites only make up around 10 per cent of Greggs’ estate according to Panmure Gordon analysts. There was also “a marked increase in activity in recent weeks” in transport locations.

The company also flagged that cost pressures are worsening. Previous guidance was for 6-7 per cent cost inflation for this financial year, and Panmure now expects this to be around 8-9 per cent.

The shares fell by 0.5 per cent in early trading and are down by around 13 per cent over the last 12 months. CA

Vodafone gets a new big shareholder

Emirates Telecommunications Group (e&) has purchased around £3.3bn of Vodafone (VOD) shares, to give it a 9.8 per cent stake in the British telecoms company. e& has no current intention of making a bid for the company, Vodafone said, and doesn’t want a board seat.

Instead it seems e& is happy to sit back and let Vodafone get on with streamlining its business. In the announcement e& said “it is confident about the company's [Vodafone] ability to unlock value from its organic business activity and other potential strategic transactions”.

This move might be an endorsement of the role activist investor Cevian is taking in the business. Cevian is a Scandinavian investment company that took a stake in Vodafone at the end of January. It hasn’t publicly stated its intentions for Vodafone – but there have been reports in the Financial Times that Cevian is pushing the board to speed up the corporate restructuring process.

Vodafone has completed 19 deals since 2018 – including the IPO of Vantage Towers - and has been looking for a buyer for its less profitable Italian business. In February, it rejected a €11bn (£9bn) from Illiad but admitted that it was continuing to look for consolidation opportunities across Europe. For e&’s sake, let’s hope this happens sooner rather than later. AS

Life Science makes biggest property deal since IPO

Life Science (LABS) has made its biggest property deal since its initial public offering (IPO) at the end of last year.

The real estate investment trust (Reit) which specialises in buying properties linked to the life science sector, such as office and lab space let to pharmaceutical companies, has acquired the Oxford Technology Park in a £183mn deal.

The deal means the Reit has now invested all of the equity proceeds from its oversubscribed IPO in November 2021, having spent £383mn across seven deals.

Life Science bought the 20-acre Oxford Technology Park for £120mn, including park’s £34mn debt, but has also agreed to pay the developer and previous owner of the site a further £63mn to complete the build out.

The park currently comprises 11 units, one of which fully let to the Native Antigen Company, a business which develops antigens and antibodies for infectious diseases like Covid-19. Five further units are due to be completed during 2022 and the final four units during 2023. The acquisition also includes a completed hotel, let to Premier Inn until 2045. ML

BPEA pulls out of RWS takeover bid

Baring Private Equity Asia (BPEA) has said that it will not proceed with a takeover bid for RWS (RWS) – the language and patent services business. Last month, RWS’s board said it was in “preliminary stages of considering a possible offer” but since then BPEA has got cold feet.

RWS’s share price has dropped 19 per cent on the morning of the announcement. With the distraction of this offer now gone – RWS will need to get back to work of finding cost savings from the recent acquisition of SDL – one of the world’s largest language service providers. AS

Sentiment in crypto markets remains fragile with Bitcoin south of $30k... have already seen portfolio stress from crypto crash and can see more coming.

BofA: “Crash in crypto/speculative tech now rivals internet bubble crash (Nasdaq -73 per cent peak-to-trough) & GFC (banks -78 per cent); trading pattern of post-bubble assets always furious bear rallies amidst dead sideways trading range for couple of years.” Sam Bankman-Fried, the found of FTX, says Bitcoin has no future as a payments network. ICYMI, he’s the guy who basically admitted that crypto yield farming is a Ponzi scheme.

More stress in commodities with Indian banning wheat exports, which sent prices limit up +6 per cent this morning to the highest in two months. After the late-Feb and early-March volatility there has been some calm restored to global commodity markets over the last month or so, albeit prices have remained elevated. India’s export ban betrays the underlying stress that resides in the commodity space.

What about the real economy? The University of Michigan’s headline Consumer Sentiment Index dropped more than expected to 59.1 from 65.2. Inflation expectations were steady at 5.4 per cent for a year out and 3 per cent for five years out...some compression in the belly of the yield curve indicates fears of the recession and demand destruction – one way to control inflation and about all the Fed can do right now: break the economy and hit demand until it comes down.

Elsewhere, the euro was up a bit after bouncing off the 2017 lows around 1.0340, after France’s Villeroy said he expects a ‘decisive’ June meeting and ‘active’ summer. ECB is shaping up for a big pivot and this is more of the groundwork for that effort. A break here at the 2017 undoubtedly brings parity into focus. But a recovery above 1.0640 would be bullish. A brisk rally is coming for the euro for sure, it’s more a matter of how low do you go first.

Sterling also marking some progress after sinking last week to its weakest in two years. Governor Bailey faces scrutiny in Parliament this week – the BoE acted early but has been slow to follow up and the economic outlook for the UK remains bearish for the pound. UK inflation figures are also out this week so potentially an important few days for sterling.

I’ve been hoping that the max CB divergence thesis would spark a rally for the euro and pound but so far the dollar has been relentless. I would think that the ECB will not only be watching rampant inflation but the exchange rate as a negative feedback loop, which will force a strong reaction this summer. Gold retains a bearish bias after breaking its 200-day SMA last week and has the $1,800 support in view now.

Neil Wilson is the Chief Market Analyst at markets.com