Japanese GDP boost helps markets off to a strong start and Vodafone pleases with half-year results

“The markets get the new trading week off to a solid start, which is encouraging given all the excitement generated in the last seven days by news of vaccine breakthroughs,” says AJ Bell Investment Director Russ Mould.

“Solid and steady gains are arguably just what investors need after a very volatile period. The catalyst for the latest move for equities is more positive noises on vaccines, the formation of a new trading bloc involving the likes of China, Japan, South Korea, Australia and New Zealand, and better-than-expected Japanese GDP figures.

“These factors helped Asian markets sprint ahead before passing the baton on to European markets with the FTSE 100 up 0.7% early on.

“Telecoms firm Vodafone and industrial conglomerate Smiths Group were among the top risers on positive updates – otherwise it was the coronavirus recovery names like British Airways owner International Consolidated Airlines and Rolls-Royce which were in demand.

“Oil prices continued their mini-renaissance, to solidify their position above $40 per barrel, while gold prices continue to hover just below $1,900 per ounce.

“On the currency markets, sterling was higher against the euro and the dollar despite news that Boris Johnson will have to self-isolate after coming into contact with a covid-infected MP. The timing could be better after the departure of key adviser Dominic Cummings and with Brexit negotiations going to the wire.

“It is crunch week for talks between the EU and the UK – and while several self-imposed deadlines have come and gone, the end of the transition period is just a month-and-a-half away, suggesting something will have to give soon.”

Vodafone

“While there are some encouraging signs in Vodafone's latest results, more work must be done to truly fix the business.

“The covid-19 disruption to international travel has put a dent in its earnings from a hit to roaming charges and handset sales which means its recovery plan has a few headwinds.

“It makes a telling comment in the results about how the telecoms sector has effectively messed up over the last decade, where the level of returns on money spent in the business are below the average cost of financing that investment. That’s not a good situation for shareholders, hence why Vodafone is very eager to improve its returns.

“Returns in the sector have been falling because of high spending requirements in network infrastructure, mobile spectrum licences, high levels of competition and a tough regulatory environment.

“Vodafone is two years into its recovery plan and insists it is seeing good results including increasing customer loyalty, growing its fixed broadband base, achieving cost savings, and delivering 5G efficiently through network sharing. Patience is required while it tries to steer the juggernaut in the right direction.

“There are good reasons why the share price has risen on the latest results, including management being more confident about the full-year target of achieving at least €5 billion free cash flow and adjusted EBITDA (earnings before interest, tax, depreciation and amortisation) of €14.4-€14.6 billion.

“Also helping its cause is a continuation of the dividend and a lower decline in organic service revenue in the second quarter versus the first quarter. Those messages are enough to keep the market happy for now.”

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