Market Report: WPP in favour as blue chips snap losing streak
Friday 04 June 2010
The blue chips snapped a three day-long losing streak and touched a two-week high last night, with WPP rising as bargain-hunters moved in.
The advertising giant saw its shares strengthen by 22.5p to 669.5p as the markets, cheered by optimism ahead of today's US payrolls report, enjoyed a broad-based rally. The stock received an additional boost from UBS, whose analysts urged investors to make the most of WPP's weakness relative to its peers. WPP's rival Publicis has seen its shares pull ahead in the year to date, leaving WPP trading on an undemanding multiple of 10.5 times forward earnings – the cheapest in the sector. The pullback offers a way in ahead of what promises to be a period of strength as WPP reaps the benefits of its exposure to the recovery in the world economy.
UBS said in a note: "Despite European macro-economic risks, the EU ad agencies offer exposure to more robust drivers of global growth while being listed in relatively weak currencies." It pointed out that about 70 per cent of WPP's revenue comes from the US, Germany and the fast-growing emerging markets. Factoring in the impact of recent foreign exchange moves, UBS went on to raise its earnings forecast for the group by 2 per cent while raising its target price for the stock to 740p from 700p previously.
Overall, the FTSE 100 rose by 1.2 per cent, or 59.86 points, to 5,211, while the FTSE 250 rallied by 140.8 points to 9,801.18. Sentiment perked up after Barack Obama hinted that the US employment report for May, which is due out today, would show growth in payrolls. "We expect to see strong jobs growth in Friday's report," the President said on Wednesday. "This economy is getting stronger by the day."
The miners, although broadly stronger, were off the day's highs as commodity markets began to soften in the final hours of business. Earlier, copper prices had bounced off recent lows, lifting the mood around the likes of Eurasian Natural Resources Corporation, which closed more than 4 per cent, or 42.5p, higher at 1,031p, Kazakhmys, up 19p at 1,178p, and Antofagasta, which closed up 8.5p at 883p.
Randgold Resources, which has been outperforming the wider sector in recent weeks, was weak from early in the session, shedding 155p to 5,975p after Bank of America-Merrill Lynch issued a warning about the gold miner's valuation. The stock was one of only six blue chips to close in the red after BofA-Merrill said it was nearing "peak" multiples. "The valuation premium versus peers has widened to +40 per cent against an historic average of +20 per cent," the broker said, lowering its stance to "neutral".
The computer chip-maker ARM Holdings was in focus following news that it had teamed up with rivals including Texas Instruments to set up a joint venture called Linaro, which aims to boost investment in telephones and other devices running the free, open-source Linux platform. This could boost demand for technology from ARM and its peers. ARM's shares duly closed up 12.7p, or 5 per cent, at 267.9p,
The building materials specialist Wolseley was marked up by 33p to 1,672p after Wednesday's report about pending US home sales continued to support sentiment. The National Association of Realtors said the number of property transactions in the pipeline swung to a six-month high in April, offsetting the negative impact of news that demand for home loans had softened last week.
Among the mid-caps, housebuilders such as Barratt Developments, up 2.2p at 107.7p, and Redrow, up 3.3p at 135.2p, drew steam from the latest UK housing market report by the Nationwide building society, Although it said there was some moderation in the pace of growth last month, house prices had continued to advance. A pullback remains on the cards, however, because the end of bargain-hunting may prompt traders to focus more closely on signs of a slowdown.
Also on the upside, BP stood firm and just about shook off the impact of Fitch's and Moody's decision to lower its credit rating. Its shares rose by 2.5p to 432.25p as investors pinned their hopes on the company's latest attempt to control the oil spill in the Gulf of Mexico. The optimism was tempered by Evolution Securities, whose analysts warned that while BP could (and should) afford to pay a dividend, it was likely to "bow to political pressure in the US" and suspend payouts for the remainder of this year.
Earlier this week, the Nigeria-focused oil and gas exploration and production group Afren agreed to buy Black Marlin Energy of Canada in a deal that will see it expand in east Africa. Yesterday Afren's shares fell 1.45p, or 1.6 per cent, to 90.5p after Credit Suisse said the takeover was "a divergence" from the company's core strategy.
"We are not yet convinced of the logic behind the deal," the broker said, downgrading the stock from "outperform" to "neutral" and revising its target price from 131p to 100p.
"The deal activity that we had been looking forward to was the acquisition of satellite fields around the company's key Ebok development in Nigeria," the broker explained in a note to clients.
"As such, we feel that exposure to high-risk frontier exploration in east Africa is a divergence."
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