Tuesday 12 November 2019

Revealed: the most bearish broker notes in the City

Eurasian Brown Bear, Kuhmo, Finland. Photo: Staffan Widstrand/wild-wonders.com
Eurasian Brown Bear, Kuhmo, Finland. Photo: Staffan Widstrand/wild-wonders.com

Tara Cunningham

China-led malaise has resulted in extreme swings in equities in recent months - and the FTSE 100 has felt the pain.

From highs of 7,104 in April, the blue chip index is now down by almost 11pc. Fears of a contraction in the world’s second largest economy saw global equities suffer their most painful quarterly performance in four years.

Now the final quarter of the year is upon us and it started on a positive note with equities the world over recording their biggest weekly gain since 2011.

But ongoing fears of a China-led global recession have prompted brokers and investment banks alike to flee to the sidelines and pile into the bearish camp, issuing cautious notes on UK equities.

Here are some of the most bearish we've seen:

HSBC on global equities: “Don’t throw in the towel”

Last week a bullish note from Citigroup urged investors to “be brave” as global equities were poised for a 20pc gain in the next 15 months. 

Just over a week later, HSBC forecast a mere 7pc gain across equities in the same time frame.

Unlike Citigroup, which claims the “global bull market” is not finished, it is simply “ageing”, HSBC reckon equities are likely to remain volatile until the uncertainty on global growth recedes.

Ben Laidler of HSBC said the bearish sentiment threatened the 30pc global equity rally of the last four years that has added $14 trillion to global equity market capitalisation.

While Citigroup believes the FTSE 100 will end the year on a high of 6,900, HSBC believes it will only touch the 6,500 mark by year end, and will only reach 6,700 in 15 months' time.

HSBC is cautious on the UK because its indices are weighted towards commodities companies; this, combined with a stronger pound, translates into weak earnings momentum.

Investec indulges in a game of total wipe-out

On September 28, Investec issued a note entitled “Bermuda Triangle – The shrinking slice of equity pie”, in which Hunter Hillcoat warned if commodity prices remained at current levels, nearly all the equity value of both Glencore and Anglo American could evaporate. 

It was the beleaguered Glencore that suffered the greatest pain, plummeting 30.6pc to its lowest ever level of 66.7p.

“Mining companies gorged themselves on cheap debt in a race to grow production following the Chinese stimulus,” Mr Hillcoat said.

“The consequences are only now coming home to roost, as mines take a long time to build.”

Investec added that commodity markets would remain “subdued for several years to come”, given excess supply has coincided with a slowdown in demand.

But Glencore's share price staged a recovery after boss Ivan Glasenberg bought 110m shares and allayed fears by advising the business was “operationally and financially robust”.

Its shares are currently trading at 123.6p after the Switzerland-based group announced plans to sell two of its copper mines in Australia and Chile earlier in the week.

Same 'old' story at Smiths Group

From underperform to neutral, Smiths Group felt the wrath of the rating downgrade once again, but this time from Exane BNP Paribas.

The engineering group has already been targeted by Investec, JPMorgan Cazenove and Nomura in recent times.

On Thursday, the investment bank warned it was simply a case of “new inheritance; old legacy” when it comes to the FTSE 100 company.

When Philip Bowman joined as chief executive in 2007, Exane BNP Paribas said he inherited “a jumble of assets and legacy liabilities”. The market hoped he could release some “hidden value” by resolving legacy issues - but they remain unsolved, and eight years later have become the responsibility of new boss Andrew Reynolds Smith.

Admittedly, progress has been made, analysts say, but legacy liabilities are still present. Now the group’s businesses occupy a series of “weakened market positions”.

Jonathan Mounsey, of Exane BNP Paribas, reckons the outlook for its two largest and most cash generative assets have worsened.

The medical business faces a threat of rising competition, while the John Crane business faces volume and price declines.

Only last month, Investec warned of “gloomy indications” in the group’s oil and gas division.

Warning: Avoid commodity-exposed industrial stocks

Analysts at Investec believe engineering group Weir could be hit by more revisions to its earnings forecasts than it experienced in previous downturns.

Rotork, Oxford Instruments and Smiths Group were also vulnerable, Investec said, as further negativity had not been fully reflected in their sentiment or forecasts.

The common theme among this selection of stocks? Exposure to oil and gas or mining equipment.

Fasten your seatbelts: Turbulence ahead

Credit Suisse downgraded the entire airline industry to “benchmark” as it was of the opinion the sector’s recent outperformance could be attributed to the weakness of the oil price.

The investment bank believes oil prices will now stabilise. Andrew Garthwaite, of Credit Suisse, said: “OPEC spare capacity is just 1.5m barrels per day and Saudi Arabia has, at the current price, achieved its objective of stabilising market share.

“If the oil price were to stage a modest recovery, one of the significant tailwinds airlines have enjoyed recently would fade away."

Lower fuel costs had also boosted consumer income, the bank said, with people opting to spend the money they saved on fuel on overseas holidays - in turn lifting the airlines.

On October 7, when Credit Suisse issued the note, airline stocks all suffered a bumpy landing at the bottom of the blue chip index.

Morgan Stanley 'like' the Sports Direct Story (but not enough)

Morgan Stanley revised the rating of Sports Direct International lower to equal rate as it believes investors are no longer underpricing the stock.

The investment bank's biggest concern is its lack of progress in expanding its international division, as well as indications that the retailer may be experiencing "teething pains" in Austria, which is currently its most important overseas market.

Six months ago when Morgan Stanley began covering the stock it argued that with sporting goods sales totalling €50bn (£37.2bn) across continental Europe, the company was still in its “infancy internationally”.

However, just last week, the bank had a change of heart, saying Sports Direct had made "no discernible progress" in the region, despite snapping up a majority stake in Irish department store Heatons in the same week.

This was the only deal struck by Sports Direct since it sealed agreements in Austria and the Baltics in May 2013 - too slow a progress for Morgan Stanley.

Sports Direct's shares fell 6.63pc on the day the note was released.

Standard Chartered and 'the sack race'

The Asian-focused bank has borne the brunt of the recent equities sell-off. However, only last week, it recorded a mammoth gain of 26pc across eight consecutive trading sessions.

On Monday, that winning streak was cut short after Investec targeted the stock in a note entitled "The Sack Race" - downgrading it to "hold".

Analysts said the surge in the share price could be attributed to “market enthusiasm”, driven by reports the bank was planning to cut around 1,000 top staff.

Ian Gordon, of Investec, cautioned: “Despite a raft of recent downgrades, consensus revenue/earnings forecasts remain far too high, in our view.”

On Wednesday, UBS cautioned the bank had a "long road still to travel", warning investors they would need "considerable" patience.


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