FTSE holds ground just under earnings barrage

The UK’s main stock indices struggled to keep hold of slim gains on Thursday, as one of the busiest sessions for earnings and updates brought a mixed bag from closely watched names.

The FTSE 100 fared better. Despite a strike at the world’s biggest copper mine, at Escondida in Chile, hitting Antofagasta, Glencore and Fresnillo, and Smith & Nephew‘s earnings miss, the benchmark dragged itself off the flat line early on.

Investors though, read FTSE 250 travel firm Thomas Cook‘s ultra-cautious first-quarter update as a potential negative for its bigger rival on the top market, TUI, sending the latter’s stock down 2%, and keeping the FTSE under pressure.

The mid-cap FTSE 250 index fared worse overall though. A surge on the back of surprisingly robust half-year figures from fund manager Ashmore wasn’t enough to offset poorly-received comments and numbers from key shares like Thomas Cook and Tate & Lyle.

A host of anxieties including Brexit, sterling and Donald Trump continue to test the softer defences of second-tier shares.

For Thomas Cook, most importantly, Q1 showed its refocus on the southern Med and Portugal is paying off, with a third of summer bookings already done by the New Year, suggesting promising momentum to date. The exposure to Europe’s airline seat bonanza madness (via Condor) is a worry, though the group is signalling that increasing volumes of determined British travellers, together with those from elsewhere in Europe, are offsetting the impact of declining seat prices. Thomas Cook’s typically loss-making first half thus looks set to improve year-on-year, on an underlying basis. A £10m rise in underlying net debt is neutral with net debt still below 10% of enterprise value, and in view of TCG’s underappreciated cash position. Overall, a good start to the year and the group’s best chance for some years to advance the operating margin, which has been skimming between flat and slightly negative on a trailing 12-month basis.

Med-Tech group Smith & Nephew continues to ail, failing to meet negligible FY profit growth investors were expecting of around 1%. China and the Gulf states continue to drag, contributing to a 7% trading profit decline. “Stronger revenue growth expected in 2017” says S&N, referring to reported revenue, which is seen coming in 1.2%-2.2% better in 2017. Unfortunately, that is the latest in a string of marginal downgrades relative to the market. Gross revenue expectations are running around 3.4% higher, pointing to c. £4.83bn. The key provable takeaway here is S&N’s trading profit margin. Cost self-help has kept the hit from FX, investment and softer sales in-line with forecasts, making the upper end of a  projected 20-70 basis point improvement look do-able. That, however,  won’t shut down questions over whether S&N has chosen the right growth markets.

Ashmore, the mid-size fund manager rival to Aberdeen Asset Management, keeps confounding the ‘reflation’ script. Instead of a slowdown from declining flows to emerging markets, the momentum of returning flows to emerging markets and the group’s dextrous reading of China have enabled a much stronger than forecast bump in first-half profits. Operating efficiency has filtered through 16% more underlying earnings than expected too. Whilst a new cycle of volatility in global flows isn’t over yet (all-too-familiar drivers suggest it’s just beginning) first-half figures show Ashmore has bagged a head start on what’s inevitably going to be a turbulent year. That will help the stock when investors begin to discount the speculation that partly accounts for its re-rating since late November.

FTSE 250 heavyweight Tate & Lyle is a fair FTSE 100 tracker. That’s due to it having one of the most favourable currency translation effects on the wider market, from a 78% revenue base in the states. This year, the group foresees a £40m mark-up on the bottom line from FX. Even at constant currencies though, it’s now calling for a performance that’s “modestly ahead of our expectations” at the time of half-year figures in November. That, in our view should help neutralise concerns over NAFTA changes, which the group expects to be “manageable”. Actually, Mexico issues have ebbed and flowed since at least 2006 including trade disputes, and more recently sugar price softening. The point is that Tate’s focus had long been drifting away from the relatively low-contribution region before the advent of Donald Trump.