“What a fantastic week for the FTSE 100. We’ve had new record highs, yet more takeover action, and everyone is talking about UK stocks in a positive way which hasn’t been seen for ages. There was no stopping the blue-chip index on Friday as NatWest’s results went down well and we saw gains across most of the market. The breadth of sectors moving higher suggests investor sentiment continues to improve,” says Russ Mould, investment director at AJ Bell.
“The outlier was medical specialist ConvaTec, down nearly 7% after negative broker comment. Peel Hunt downgraded its rating on the stock to ‘reduce’ amid signs of turmoil in the wound care market.
“The US market yesterday threw its toys out of the pram following clear signs of stagflation after GDP numbers came in weak and inflation came in strong. However, sharp losses didn’t last all the session as quite a bit of lost territory was regained by the end of the day. Pre-market indicative prices point to a much brighter session on Friday, helped by storming results from Microsoft and Alphabet last night.
“After recent fears about demand weakness for Apple and Tesla products and the negative reaction to Meta’s numbers earlier this week, investors were beginning to question if the Magnificent Seven had lost their mojo. While cracks are certainly visible, it seems some of the pack are still full of beans.”
Anglo America / BHP
“It’s no surprise that Anglo American has rejected BHP’s takeover bid. Anglo American has long seen itself as one of the big players in the market and it certainly won’t let a rival swoop on the business when its chips are down.
“Miners have a habit of going through bad patches as they are juggling so many different risks and selling prices are, on the whole, out of their control due to the nature of the commodities market. Anglo American has certainly had its fair share of operational setbacks and negative readjustments to output guidance in recent times, but it will fight tooth and nail to stop any takeover attempts while it tries to get back on top.
“The usual playbook for mega deals in the resources space is for the original suitor to respond to rejection by coming back with a better offer, or someone else throwing their hat into the ring. That contender could be Rio Tinto as it will certainly be watching activities with keen interest given it can see the same opportunity as BHP.
“Copper demand is expected to keep growing for years to come, thanks to the energy transition requiring large amounts of metal for things like wind turbines, solar panels and electric vehicles. Buying Anglo American is a lot easier than drilling thousands of holes in fields and mountains in far-flung places in search of the metal. Exploration is a laborious process but acquiring a ready-made package of assets is a much easier task.
“There is always a right price to buy a company – we just haven’t got there yet with Anglo American.”
Alphabet
“Alphabet joining the ranks of tech companies paying dividends is a sign of the times.
“Big tech firms have enjoyed stellar growth over the past decade and while most remain highly innovative, their cash flows have become so strong that there’s oodles of money left over post-reinvestment in the business to reward shareholders. It’s not that they’ve been tight on cash before, it’s just that previously share buybacks were seen as the preferred way to deploy surplus money.
“Joe Biden is keen for the US government to get a bigger slice of the buyback phenomenon by potentially increasing tax in this area. His administration already laid down a 1% tax on buybacks last year and there is an aspiration to lift that amount to 4%. That threat could have spooked companies into rethinking how they deploy surplus cash, hence bringing dividends into the equation.
“It could also be a retaliation against high interest rates which have encouraged people to move some of their money invested in equities into cash savings accounts which offer decent returns for no risk.
“The prospect of interest rate cuts either this year or next year means companies now have an opportunity to lure back some of these people as cash rates trend downwards. After all, stocks and shares offer the potential for capital growth and, in many cases, a growing stream of income. Alphabet and Meta, which also joined the dividend club fairly recently, could now appeal to a broader group of investors.
“The yields on offer from Alphabet and Meta are minuscule but the pace of dividend growth could be the key attraction for income hunters.”
Microsoft
“Microsoft got in on artificial intelligence early and it seems to be paying off in the form of strong momentum in its cloud business.
“Like Meta earlier this week, Microsoft announced plans for further capital spending to support its AI strategy. However, Microsoft’s greater credibility with investors meant this revelation received a radically different reception.
“It helps that the company is already showing the financial benefits of its investments in AI to this point – with demand running ahead of capacity according to the company. The company’s Copilot product which supports its 365 suite of apps like Word and Excel is being rapidly adopted and its Azure computing platform is also in heavy demand.
“This update feels like a gauntlet laid down to its big tech rivals on AI and it won’t be easy for them to catch up with the world’s most valuable company by market capitalisation.
“With its acquisition of Activision Blizzard and other investments in the so-called metaverse running alongside its leading position in generative AI – Microsoft is firmly plugged in to the future of work and entertainment.”
NatWest
“While NatWest is affected by the same headwinds as other banks – greater competition on mortgages and customers moving their money into accounts offering higher rates of interest – its first quarter numbers still came in ahead of expectations and there are signs these headwinds are starting to ease.
“This beat hasn’t been backed up by an increase in full-year guidance but a conservative approach provides scope for NatWest to deliver a positive surprise down the road.
“There was a trio of wins for the company in the first three months of the year: impairments were lower than expected, net interest margin ticked higher to also beat forecasts and the volume of customer loans and deposits grew. The latter suggests the bank is doing a decent job of defending and enhancing its market share. These are ticks in the box for Paul Thwaite whose role as interim boss was only recently made permanent.
“It looks like the timing and pace of rate cuts will be more favourable for the banks than appeared to be the case at the start of 2024 and this could be supportive as NatWest looks to take its final steps towards a return to full private ownership.”
These articles are for information purposes only and are not a personal recommendation or advice.
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