Despite further concerns about China following the weekend’s weak factory output and investment figures, leading shares are heading higher.
Traders are already turning their attention to this week’s US Federal Reserve meeting, which had been widely expected to see a rise in interest rates until the recent volatility around China.
The day’s biggest FTSE 100 riser so far is chip designer Arm, up 20.5p at 954.5p. Traders pointed to a number of reasons, including a positive report in Barron’s on Apple, one of the company’s main customers. After weakness last week’s product launches, Barron’s said Apple shares could rally by as much as 50%. Mike van Dulken, head of research at Accendo Markets, said:
Arm is top of the FTSE tree this morning retracing some of the post-Apple weakness last week that took the wind from the sails of its recovery from 2015 lows. Some positive weekend reviews of Apple’s latest product launch/updates/initiatives is serving to offset the initial scepticism voiced by a highly critical investment community (losing its edge?) even if technology geeks and the Apple faithful were more than satisfied, as they tend to be.
There is also some digesting of the announcement earlier in the month of Arm’s partnership with chip-rival IBM to strengthen each other’s Internet of Things (IoT) businesses. This is an area focused on connecting devices such as phones and watches to everyday objects such as boilers and fridges, as well as to each other and the cloud. Research firm IDC estimates the market for IoT at $656bn last year with potential to more than double to $1.7bn by 2020 which could be a nice area of growth to be involved in should sales of phones and tablets (Apple and other brands) slow up more than expected.
Lastly, the stock could also be one to watch for any China/emerging market rebound, especially after such recent Fed-led market uncertainty. Stimulus hopes from poor China data could be a boost, as could the Fed holding off from a rate hike, putting markets at ease. However, with emerging central market bankers calling on the Fed to get on with it, maybe a hike could prove beneficial. Win-win for the chip architect?
Meanwhile ahead of an analyst day next week, Morgan Stanley issued a buy note on Arm:
This is the first analyst day for new chief financial officer Chris Kennedy, previously of easyJet, which under his term became active in capital returns with multiple special dividends and ordinary dividend payout increases. Arm has a strong balance sheet with £904m in cash and free cash flow yield of 3.5% in 2016 growing to 6.0% in 2020 versus a current dividend yield of 1.0% – hence we believe there is plenty of room for more returns at Arm, given the relative immunity to the semis cycle. It may be too early for the new CFO to announce a less cautious capital return plan, but we expect the subject to be raised in the Q&A.
We remain buyers of Arm in a context of rising royalty rates and with an estimated PE of 32 times in 2015 and 27 times in 2016.
Overall the FTSE 100 has climbed 27.03 points to 6144.79, with mining shares among the main risers. The companies shrugged off Chinese concerns, on the basis that further stimulus might be on the cards to boost the country’s flagging economy. BHP Billiton was 20.5p better at £10.78, helped by a buy recommendation from Jefferies. Rio Tinto has risen 42.5p to 2425.5p while Anglo American has added 10.8p to 729.2p.
But supermarket group Morrisons is down 3.8p to 161.4p after a downbeat note from HSBC following its profit fall announced last week. The bank issued a reduce recommendation, and slashed its forecasts for 2016 to 2018 by 20% to 30% a year. It said it was one of the UK businesses most exposed to cost inflation from the rise in the national living wage.
B&Q owner Kingfisher has slipped 2.1p to 363.2p ahead of figures on Tuesday.
