Leading shares are recovering from their worst levels but are still at their lowest level since December, on growing fears about the Chinese economy and uncertainty over US interest rates.
With weak Chinese factory data the latest economic news to indicate a slowdown in the world’s second largest economy, investors continue to head for the exits. Concerns about China have accelerated since the central bank devaluated the yuan earlier this month, prompting falls in metal and oil prices and sending commodity company shares sharply lower.
The FTSE 100 is currently down 30.81 points at 6337.08, having earlier fallen as low as 6286. The recovery came as the Chinese stock market seemed to stabilise towards the close of trading amid talk of intervention by the authorities. Better than expected eurozone PMI figures also helped.
Later come US PMI, which could give further clues as to whether US interest rates will rise in September, following this week’s US Federal Reserve minutes which added to the uncertainty about when the central bank might sanction dearer borrowing costs.
Chip designer Arm is the biggest loser, down 25p or nearly 3% at 872p in the wake of China’s troubles and as analysts at Liberum cut their price target with a sell recommendation. The move came after smartphone sales in China fell for the first time in the second quarter, down 4% according to market research firm Gartner. Liberum said:
Growth in the smartphone market has been the key driver of Arm’s royalty revenue, in our view. We estimate that smartphones accounts for around 60% of Arm’s royalty revenue.
According to Gartner, smartphone shipments declined 2% quarter on quarter in the second quarter of 2015. Normal seasonality would imply a 5%-7% increase quarter on quarter in the second quarter. [This] is the second quarter in a row that has seen a quarter on quarter decline in smartphone shipments after many years of strong growth
We cut 2016/2017/2018 earnings per share estimates by 3%/5%/6%. We are now 24% below consensus in 2018. Arm is still a smartphone play (around 60% of revenue) and this market is slowing sharply. We cut our discounted cashflow based target price to 650p from 700p. This corresponds to 8 times 2016 enterprise value/sales, more than twice the multiple of most intellectual property companies.
Precious metal companies are among the risers, as investors search for havens. Fresnillo has added 9p to 693.5p and Randgold Resources risen 35p to £42.90.
Other miners have steadied after their recent plunges with BHP Billiton down just 3p at 1089.5p and Anglo American off 0.7p at 739.8p.
Supermarkets are also edging higher on their defensive qualities, with Morrisons up 1p at 170p and Sainsbury 1.2p better at 247p.
