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FTSE recovers in cautious trading with Tesco leading the way

Discussion in 'Market News' started by Lily, Jan 8, 2016.

  1. Lily

    Lily Forum Member

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    Markets calmer after recent volatility but mood still uncertain ahead of US jobs

    After a traumatic first few days of the new year, there is a calmer feeling around stock markets, with a recovery after China’s latest actions, albeit a tentative one.

    Tesco is the biggest riser of the day so far in the FTSE 100, climbing 8.25p or nearly 6% to 147.45p after a positive note from analysts at Barclays which raised its recommendation, albeit lowering its target price. Analyst James Anstead said:

    We think recent share price underperformance has left Tesco’s valuation at attractive levels, although we remain conscious of the numerous headwinds facing the UK food retail market. In particular, it now offers a reasonably visible double- digit free cash flow yield and is trading in-line with Sainsbury on an enterprise value/sales basis for the first time in many years. We also think that there are a number of likely helpful catalysts in the coming months – with additional information at the full year results and in the Annual Report helping earnings visibility and with the potential resolution of several long-running distractions.

    Additionally, we tend to think that the upcoming trading statement (14 January) may be less worrisome than the market’s worst fears. Consequently we upgrade our stock rating to overweight (from equal weight), and our price target (reduced to £1.90 from £2.25, based on an average of discounted cash flow and sum of the parts valuations) still gives a 34% upside potential.

    What should have been a perky start to 2016, with New Year optimism underpinned by portfolio positioning as investors buy stocks, has been eclipsed by ongoing concerns on global growth, the oil price and negative geopolitical developments. The general souring of sentiment had been exacerbated by the Chinese circuit breakers, along with Fed minutes which questioned the strength of belief in the December hike and sellers apparently pushing against an open door.

    Today’s non-farm payrolls and the imminent fourth quarter reporting season on both sides of the pond could provide some solace, although investors will be scrutinising the latter for real revenue growth as opposed to cost-efficiency driven gains which epitomised much of last year. In the meantime, investors of a more cautious disposition remain on the sidelines.

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