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.