Leading shares have lost early gains as the mining sector - spooked by worries about China’s economy - weigh on the UK market.
But building materials supplier Wolseley is bucking the trend, up 55p or 1.3% at £42.62 as Citigroup raised its recommendation from neutral to buy and lifted its target price from £41 to £47.25. The bank said Wolseley was well placed for the medium term given a positive outlook for the US economy despite the prospect of the Federal Reserve raising interest rates this year. It said:
We expect the group to deliver three year earnings per share compound annual growth rate 16% (2015-17). While worries around rising US interest rates and slower market growth in the US may weigh on sentiment in the near term, we believe Wolseley is well-positioned to deliver strong earnings growth and value over the medium term, assuming a sustained macro recovery and employment growth in the US despite rising rates.
Overall though the FTSE 100 is underperforming the rest of Europe, with concerns about China hitting metal and oil prices and undermining the commodity heavy UK index. The FTSE is currently down 13.62 points at 6537.12. with investors ignoring the more positive signs from Greece after eurozone finance ministers approved the latest bailout deal on Friday. A number of national parliaments still have to vote on the package, with the crucial decision due in Germany on Wednesday.
Last week’s turmoil as China devalued its currency to give its economy a lift reminded investors that the country was concerned about the outlook for growth. Michael Hewson, chief market analyst at CMC markets UK, said:
The events in China were a timely reminder to investors that all may not be well with the world’s second largest economy, as the authorities attempt to reinvigorate a flagging economy, at a time when economic data in some of its key export markets are also showing signs of flagging.
So with fears of falling demand for oil adding to concerns about oversupply, Brent crude has lost another 1.2% to $48.58 a barrel.
BHP Billiton is leading mining companies and the FTSE 100 lower. Its shares are down 16p at £11.34 while Glencore, which has struggled in recent weeks, has lost another 1.9p ahead of this week’s results.
Weir, the engineering group which supplies equipment to the oil sector, has dropped 17p to £14.45.
Elsewhere Morrisons has slipped 1.5p to 176.3p amid talk it was close to selling off its M-Local convenience stores. Shore Capital, which is broker to the supermarket, said:
Whether Morrison is doing as the weekend newspapers’ speculate, that is disposing of its convenience stores to Greybull Capital for a so far undisclosed sum or not, we deem it encouraging and important that David Potts, chief executive, and his newly constituted senior team concentrate on the big issues, the big challenges and yet the major opportunities for the group. We have felt and continue to see these ‘big matters’ as turning around the performance of the group’s 500 or so superstores and supermarkets.
Analysts at Stifel said a sale would be a positive move:
The business is sub-scale; and was poorly executed from the start, in terms of location selection in particular. Even if execution had been better, the track records of Tesco and Sainsbury’s in the early days of building out their convenience store businesses suggest that it takes a long time to get the model right, with a significant amount of store portfolio churn on the way. Hence we think the business could have dragged on group returns for some time to come. Tesco and Sainsbury’s had the advantage of better conditions in their core businesses to dilute/mask the early years’ losses and to take the focus away from expensive portfolio churn. Moreover, we think the convenience store market is becoming more difficult, with greater competition for fewer remaining good locations and pressure on site costs as a consequence.
The downside of an exit is that convenience is one of the faster growing parts of the grocery market, significantly faster than conventional supermarkets.
