After a positive start to the day, the market’s euphoria in the wake of the Conservative election victory last week wore off slightly.
Despite a cut in Chinese interest rates giving a lift to the mining sector, and the Bank of England leaving UK borrowing costs unchanged, the FTSE 100 finished 16.97 points lower at 7029.85, having earlier climbed as high as 7083.
Reports that Greece had paid the €750m owned to the International Monetary Fund had little impact, given all the other payments due in the coming weeks and the need for the country to reach a deal with its creditors to unlock further bailout funds. As expected there was little sign of a breakthrough at the day’s Eurogroup meeting, although there were hopes of some progress being made.
An opening dip on Wall Street added to the cautious mood.
But analysts at Credit Suisse turned more positive on UK equities following the election, raising their recommendation from benchmark to overweight and lifting their year end FTSE 100 target from 7300 to 7450. But they warned:
There is likely to be ongoing UK uncertainty:a majority of 3 or 4 MPs is small given that there tend to be five by-elections a year; the Scottish National Party’s near clean sweep of Scotland requires a resolution to the West Lothian issue (i.e. Scottish MPs voting on English issues, without English MPs having the corresponding right), as well as raising the possibility of a second independence referendum on a 5 to 10 year view. Finally, without the need for a Lib Dem coalition partner, the terms of the EU referendum are not likely to be watered down.
Among the risers, Royal Mail added 18.7p to 497.6p as rival Whistl - formerly TNT - gave up on a door-to-door letter delivery service. Analyst Martin Brown at Shore Capital said:
While trying to compete with the universal coverage services of Royal Mail may seem like a great market opportunity, without significant scale or market share in our opinion it is very difficult to get the appropriate level of return. The requirement for scale should also be considered in the context of Whistl’s letter service having an apparent market share of around 24% in the areas in which it operated.
In our opinion, the only way a new entrant can hope to compete successfully and profitably is if a large part of its infrastructure and delivery costs are more than covered by the distribution of other items, say newspapers & magazine. The same is true of parcel home delivery, where despite the continued growth of internet fulfilment, very few companies make an acceptable return. This is neatly illustrated by the fact that Yodel has 18% of the UK home delivery market yet still doesn’t make a profit.
The Chinese rate cut helped lift Anglo American by 12.5p to £11.28, while Rio Tinto rose 31.5p to £30.30 and BHP Billiton was 11.5p better at 315.72.
But platinum miner Lonmin lost 1.5p to 140.5p as it reported a $118m first half loss and warned of at least another two years of depressed metal prices. It had already announced plans to axe 3,500 jobs to reduce costs, and will also cut capital expenditure.
Meanwhile Glencore received approval to distribute its 23.9% stake in Lonmin to its shareholders. Liberum analysts said:
Inevitably there will be selling pressure as Glencore shareholders do not own Lonmin for its shares, but equally if there were any buyers of Lonmin they would have waited for this buying opportunity.
Supermarkets were in demand, partly because the chances of a rise in the minimum wage have receded following the election, and partly on reports that Dutch retailer Ahold and Belgium’s Delhaize were in merger talks.
Tesco closed 3.65p higher at 232.50p, additionally buoyed by hopes of an auction for its Dunnhumby data business, while Morrisons added 1.9p to 182.9p.
Software group Sage rose 12.5p to 556p as Goldman Sachs raised its target price from 540p to 565p.
Among the mid-caps Diploma dropped 55p to 792p despite a 10% rise in half year revenues as it warned of “headwinds to organic growth” in certain key markets, although it said the acquisition pipeline remained encouraging. The company, which supplies products and services to the life sciences, seals and controls industries, also suffered some profit taking after recent rises. Analysts at Numis said:
Diploma has delivered first half results marginally ahead of our expectations. However, we are lowering our forecasts fractionally (1%-2%), to bring us in line with consensus, owing to a slightly more cautious outlook for organic growth in the second half of 2015. Acquisitions have been a key driver of performance in the first half, and further accretive bolt-on deals are possible in the second. Given recent strong share price performance, and having gone through our 843p price target, we downgrade to hold [from add] and would look for a better entry point into the shares.
Spirax-Sarco lost 213p to 333.29 despiste the industrial group saying sales increased by 4% in the four months to April. It added that growth conditions were less favourable than expected, especially in Asia and the Americas, but said it hoped for further progress in 2015. Investec analyst Michael Blogg said:
In an environment where industrial companies are struggling to find much growth, 4% organic in the first four months is very respectable (and much as we expected for the first half and full year). On unchanged estimates, our target price rises by around 4% to 3,350p (including the 120p special dividend) due to peer group re-rating, but the shares have performed very strongly since the results in March. We consider that consensus estimates, which are higher than ours, are vulnerable along with the share price. We move from hold to sell.
