Market resilient as BREXIN confidence mounts

Current Overview

I had suspected earlier in the month that the market might not fall far on
fear of a Brexit. Why? Because it is highly unlikely it will materialise and
investors are seemingly believing the same. That the market dipped
because of this anxiety, it has thus been logical to see it recover to an
extent. Further volatility may yet present in the 3 weeks before voters
hit the booths. In the meantime I have been busy adding companies
selectively in areas that have weakened due to the uncertainty and I am
now starting to see the (intended) recovery: St Modwen Properties
(330p), the mid cap brownfield regeneration play has just put out a solid
trading statement; ITV (232p adjusted for special dividend) and blue chip
airlines IAG (544p) and Easyjet (1535p) have all moved higher over the
past few weeks.

Oil has now reached the psychologically important $50 per barrel which
was a logical target level. Amazing that you could have now nearly
doubled your money here had you stepped in against the herd at $27
towards the end of January. And how many were calling it lower then!
Right now I still suspect “long oil” is somewhat of a crowded trade if
just for the short term. Next year it can probably go higher but I remain
of the view that it is at the top end of the near term range here.

Calls for a further interest rate rise from the US Fed next month are also
seeing the value of the dollar strengthen again. Dollar denominated
commodities struggle as the dollar rises; another potential headwind for
oil at the moment. Trying to call the daily oscillations in currencies in the
context of conflicting economic outlooks is close to impossible. One
minute the US economy is looking promising and the dollar rallies; then
the mood changes and the dollar dips. Similarly Brexit is on the cards
and the pound falls, then Brexit fears recede (as now) and the pound
rallies. And within these dynamics share prices jump around in
sympathy; one reason that short term attempts to trade mining
companies would be a risky pastime. The stock picker needs to look
beyond the short term noise in search of value and invest in a timely
manner. Current conditions are providing opportunities.

On the basis that Britain remains in the EU, a significant uncertainty will
be removed. Although the market is already showing signs (in my view)
of pricing in this outcome, I suspect shares will likely rise further
subsequently. Then the prospect of a UK interest rate rise may resurface
quicker than many might think; certainly if the US Fed raises rates for
the second time in June. Inflation is picking up and the growth outlook
will improve for the UK and beyond post referendum. An interesting
time will shortly be upon us and then we will have the US presidential
election to ponder!

Stock specific comment

Marks & Spencer (384p) has fallen to a 3 year low on lacklustre full year
results last week. Without going into the details, new CEO Steve Rowe
will be focusing on all matters non-food with urgency; in other words the
clothing performance. While the market may not get further strategic
clarity until the autumn, I suspect value has crept into the share price.
With tangible (property) assets per share at around 165p, a forward
dividend yield of over 5%, the valuation has appeal despite margin
pressures. Impairments in the international business were the main issue
with the headline results. Philip Green failed in 2004 to take over M & S
and some argue it has gone backwards ever since. Green had raised
over £11 billion to buy the group at that time and the current market
capitalisation of the company is around £6.2 billion. Sure M & S is not
now the animal it was then making £784 million pretax profits versus the
£689 million pre-items (just announced) but with the stock down from
600p this time last year, investors may wish to consider investing for the
future now. This may be a slow burn recovery play but historically the
stock has tended to bounce back from setbacks such as these.

Also in the retail space, Mothercare (137p) has recently caught my eye.
The £230 million company has returned to profit for the first time in 5
years, 2 years into a UK turnaround plan. Reported pretax profits of £9.7
million, despite ongoing challenges in the international business was
sufficient for directors to buy further shares in the company. The balance
sheet shows net cash at £13.5 million and the chart is recovering from 5
year support levels near 125p. A well respected brand adds intangible
asset support in my view and the company could be vulnerable.
Management is addressing the issues with the international business
(which is significant) from success at home. Speculative buy for further
momentum from current levels.

In closing, Serco (106p) has finally produced an upbeat trading statement
with underlying profits to be ahead of market views. Can long suffering
shareholders finally look forward to some recovery? Serco is now largely
Government contract skewed, focused on 5 market sectors across 4
geographies with a significantly de-leveraged balance sheet. It is still
firmly in transformation mode but is stabilised. This remains a long term
growth recovery play.