Article 50 to be the trigger for a GBP rally?
The FTSE opened higher this morning as concerns about the triggering of Article 50 took hold, meaning that the pound continued to slide.
We have been calling for a while that we think GBP has bottomed and that the triggering of Article 50 could actually be the start of a renewed push higher. It seems counter intuitive, but everyone is so bearish on the pound and when so many people are positioned one way, often large counter trend moves can catch people out.
This isn’t a case of trying to call a precise top in the markets, anyone that follows markets from a technical perspective understands that the forming of tops and bottoms are a process. They take time to build and often form similar patterns that have repeated time and time again.
We have noticed an increase in the number of these patterns building on various charts. The common theme across all of these is that it makes a case for GBP strengthening.
The chart below is the 4hour candle chart of the FTSE 100. Clearly this only represents a small period in time but what we can see as technicians is the potential formation of a head and shoulders top.
This morning the market opened higher only to fail at the 61.8% Fibonacci level before heading lower.
If the FTSE moves below the support at 7260 then this pattern will complete and we believe further downside towards 7080 could be seen quite quickly.
GBP versus USD appears to be forming an inverse head and shoulders bottom. This is a daily chart so this process has been ongoing since the lows that were reached in October. The key level to watch here is 1.2700, a break above here is likely to trap a number of traders/investors who have remained bearish on GBP. A move above this level will create a scramble to unwind short positions that should mean significant move higher.
We are targeting 1.3400 over the medium to long term if 1.2700 is overcome
Multinationals listed in London
Anglo American (AAL.L) has rallied almost 600% from the January 2016 lows to the peak seen in February 2017. There have been very few corrective moves to the down side in that period and as a result mining stocks have been the place to be. We believe however that some cracks are beginning to show in the rally and a top has arguably been building since the back end of 2016.
We believe a head and shoulders top is forming on the daily chart and Anglo is not alone. We have found similar setups on Rio Tinto (RIO.L), BP (BP.L) and HSBC (HSBA.L)
Head and Shoulders tops are considered a potent reversal signal and a break of the neckline tends to mark the end of a trend. If this does indeed play out then we can expect some fairly severe drops in the coming months.
Anglo American (AAL)
Anglo American is the furthest away from completing the top pattern. The neckline support comes in at around 1134p. This is the key level that must be broken in order to complete the pattern.
Should a break lower materialise then a corrective move towards 850p could potentially play out.
BP is very close to completing a top. The support at 441p is the key level to watch. A break below support here and further downside can be expected towards 362p.
HSBC recently pierced the support level at 644p before recovering higher. The threat of a top completing has not passed and we believe another attempt at breaking this level will be seen.
A break of 640p should set up a move lower towards the implied target of 575p.
Rio Tinto (RIO)
Rio appears to have already completed the top pattern with the break of support on the 27/03. We now believe the trade is to sell into strength. The shares have now closed the gap at 3246p, we expect a move lower over the medium term towards our target at 2635p
There is still some work to do on these patterns with some not yet complete.
Speculating on these moves at this stage is risky. A higher level of confidence will be in place once the key supports mentioned have been broken on a closing basis.
GBP/USD is the key factor in all of the above. Time will tell whether these predictions play out.
Remember capital is at risk when investing and losses can exceed deposits when using leveraged instruments.
This report is issued by Grow Research & Investments Limited. Trading in equities may not be suitable for all investors. The value of investments and any income from them can fall as well as rise, and you may get back less than you invested. An investment’s past performance is not a reliable indicator of future performance. Tax allowances depend on your personal circumstances and the benefits of tax-efficient accounts could change in the future. Before you begin to trade, you should obtain details of all commissions and other charges. You should make sure you can afford any potential losses before you begin to trade. Make sure you fully understand the risks involved and seek professional financial advice if necessary. You should only take a risk with money you can afford to lose. If you are in any doubt, please seek further independent advice. Any person placing reliance on the report to undertake trading does so entirely at their own risk and Grow does not accept any liability as a result. Information and research produced by Grow Research & Investments Limited, does not constitute a recommendation or offer to make a transaction in any derivatives or securities, and is intended to be general in nature. This report is prepared and distributed for information purposes only.
5 Growth stocks to buy for your ISA
In our latest report we take a look at 5 UK listed stocks with great growth potential that we would buy for our 2017 ISA.
In the report we take a look at the fundamental and technical case for each stock
Bango PLC (Bango) offers the Bango mobile payment platform. The Company’s principal activity is the development, marketing and sale of technology to enable mobile phone users to make payments for digital content and media on smartphones and tablets. The Company’s segments include End user activity and Platform fees.
The End user activity segment includes the content access fees paid by end users for accessing chargeable content provided by digital merchants, adjusted to take account of whether Bango is agent or principal in the transactions.
The Platform fees segment includes the amounts paid to Bango by digital merchants and others for package fees and other services, including analytics and operator connections. Bango Grid is a resource for Bango application store partners to plan their payments strategy.
Bango Grid enables partners to find the statistics of every mobile operator globally, and a range of other payment methods.
The shares have formed a very neat inverse head and shoulders bottom pattern on the weekly chart. The share have now broken above resistance at 115p and look set to move higher over the medium term. The measured move of the bottom formation targets 195p, which is over 60% than its currently trading at.
Bango scores well in our model when ranked against the 100 largest companies listed on AIM. The shares score very well on growth and quality metrics.
Spending across Bango’s payment platform has increased in line with company expectations so far in 2017
The company is expecting to at least double what it what it calls its end user spend (EUS) rate by the end of this year.
The update on current trading came in a full-year results statement that largely confirmed the numbers for 2016 that were released back in January.
Total revenue doubled to £2.6mln from £1.3mln in 2015, while the annualised EUS at the end of 2016 was up 191% year-on-year at £195mln a year, due to growth from existing and newly acquired channels.
EUS revenue expressed as a percentage of EUS was 1.8%, the same as in 2015, but an improvement on the 1.67% seen in the first half of 2016.
The underlying loss (LBITDA) narrowed to £2.8mln from £3.1mln in 2015.
Cash at the end of 2016 had declined to £5.7mln from £12.1mln a year earlier following the acquisition in May of BilltoMobile Inc.
Bango said the activation pipeline for new routes is stronger than ever with 220 identified opportunities across various stores, including Google, Microsoft and Samsung.
Last year broker Peel Hunt said that Bango reminded them of and early Arm Holdings, which as we know went on to achieve spectacular things. They are now in a world leading position in mobile payment technology. The shares are a decent bet for any ISA or share portfolio.
Bango is listed on London’s AIM. Small cap stocks are considered a risky investment and the value of investment can go down as well as up. The shares have reached as high as 270p and as low as 25p, so clearly there is scope for movement in both directions.
IQE plc is a United Kingdom-based holding company. The Company is engaged in the research, development and provision of engineering consultancy services to the compound semiconductor industry. The Company’s segments include wireless, photonics, Infra Red and CMOS++.
The Company is the manufacturer and supplier of Compound Semiconductor wafers or epiwafers using a process called epitaxy. Its photonics business enables a range of end applications, from data communications and advanced optical-fibers, to sensors in consumer and industrial applications.
It operates through business units, including wireless, photonics, InfraRed, CPV (advanced solar), power switching, light emitting diodes (LEDs) and advanced electronics. It produces atomically engineered layers of crystalline materials containing a range of semiconductor materials, such as gallium, arsenic, aluminum, indium and phosphorous. The Company has operations in the United States, Asia and Europe.
IQE is trading in a fantastic uptrend with dips towards support continuing to attract buyers. The shares dipped aggresivly intraday yesterday following results, however once fully digested investors took advantage of the cheaper entry levels.
The shares have travelled a long way over the past year, but with a solid history of growth and a being a favourite amongst growth investors, we expect to see higher prices.
IQE ranks above average in our fundamental model when ranked against the largest 100 stocks listed on AIM. The shares score particularly well on value and momentum metrics.
IQE recently announced a full year profit and revenue growth. The company reported a 16.4% increase in revenue for the year ending 31st December to £132.7m, compared with £114.0m the previous year.
Adjusted pre-tax profits increased 17.4% to £20.6m which was up from £17.6m in 2016.
The share price has tripled in the last year and looks set to continue higher. The photonics business which accounts for 17% of group revenue reported a 4% like for like increase following 2 years of volume declines.
IQE has established itself as a market leader in photonics and infra red and there is no reason to believe that revenues will not continue to grow moving forward. The company has a solid track record of achieving growth, making the shares a great candidate for long term investment in an ISA portfolio.
IQE is listed on London’s AIM. Small cap stocks are considered a risky investment and the value of investment can go down as well as up. The shares have reached as high as 60p and as low as 12p, so clearly there is scope for movement in both directions.
Polymetal International plc is a precious metals mining company. The Company has a portfolio of over seven operating gold and silver mines and a pipeline of projects in Russia, Kazakhstan and Armenia in Russia and Kazakhstan.
It operates through eight segments: Voro (CJSC Gold of Northern Urals), Okhotsk operations (LLC Okhotskaya Mining and Exploration Company, Svetloye LLC), Dukat (CJSC Magadan Silver), Omolon (Omolon Gold Mining Company LLC), Varvara (JSC Varvarinskoye), Amursk-Albazino (Albazino Resources Ltd, Amur Hydrometallurgical Plant LLC), Mayskoye (Mayskoye Gold Mining Company LLC) and Kyzyl (Bakyrchik Mining Venture LLP, JSC Inter Gold Capital).
Its exploration activities are focused on over five regions in Russia-Khabarovsk, Magadan, Chukotka, Karelia and Ekaterinburg, as well as on Kazakhstan. It has approximately 80 licenses for geological studies and gold, silver, copper and platinum group metals (PGM) mining, covering a total area of over 9,000 square kilometers.
Polymetal has pushed higher in recent days and as a result has cleared an important resistance level at around 1000p. We have now completed an inverse head and shoulders bottom pattern that suggest upward potential towards 1217p.
Momentum has been strong in recent weeks and we expect further upside. We recommend buying on pullbacks towards the 1000p level.
Polymetals scores poorly overall on our fundamental model, our recommendation is weighted heavily towards price action. The shares however do score well on quality and profitability metrics when compared against the largest 300 stocks listed in the UK.
Polymetal has boosted its revenues by 10% but have also ramped up spending at the same time.
Polymetal said capital expenditure has risen by 32 per cent to $271m (£220.54m) and revenues increased 10 per cent to $1.58bn.
Polymetal’s total gold equivalent production stood at of 1.3m oz, exceeding initial production guidance for the fifth year in a row.
The company said its adjusted earnings before income, tax, depreciation and amortisation (EBITDA) was $759m, up 15 per cent year-on-year.
Net debt of $1.33bn remained flat over the previous year’s $1.29bn and the firm declared a final dividend of 18 cents per share, which represents 30 per cent of the group’s underlying net earnings for the second half of 2016.
Panmure Gordon recently increased its price target on Polymetal to 1192p. This is roughly inline with our own 1217p target.
Polymetal is a Russian company and therefore political issues could impact the performance of the shares. The shares can have volatile phases that may result in trading losses.
EVRAZ plc is a steel, mining and vanadium business with operations in the Russian Federation, Ukraine, the United States, Canada, the Czech Republic, Italy, Kazakhstan and South Africa.
The Company’s principal activities include manufacturing steel and steel products; iron ore mining and enrichment; coal mining; manufacturing vanadium products, and trading operations and logistics. Its segments include Steel; Steel, North America; Coal, and Other Operations.
The Steel segment is engaged in the production of steel and related products at all mills except for those located in North America. The Steel, North America segment is engaged in the production of steel and related products in the United States and Canada.
The Coal segment includes coal mining and enrichment, which includes operations of Nakhodka Trade Sea Port as it is used for shipping of products to the Asian markets. Other Operations include energy-generating companies, shipping and railway transportation companies.
The long term chart on EVRAZ displays a very large double bottom pattern with prices ranging from 54p to 210p.
In November 2016 the share price smashed through the resistance at 210p before hitting a high of 280p. The shares have subsequently retreated to re-test the break out level of 210p and so far have held.
The buyers seem keen to jump back in following a successful re-test of support and this should now provide the base to further gains. The measured move to the upside of the double bottom pattern is a massive 366p, over 70% above the current share price.
When ranked against the largest 300 UK listed stocks, EVRAZ scores poorly in our fundamental model. The basis for the recommendation is heavily weighted towards price action. The shares do score reasonably well on momentum metrics.
Citi Group have recently upgraded the shares as its sees prices for Russian long steel and coking coal catching up with commodities elsewhere. There has been a jump in the price of China long steel on the closure of furnaces and stronger than expected construction demand.
EVRAZ is operating well under capacity and it is expected to enjoy a sizeable volume rise as global long product market tighten in reaction to China.
Coking coal price are still behind the recent of the world and a rebound in price could significantly boost earnings.
We expect to see first-quarter results reflect the coking coal rebound.
EVRAZ is a Russian company and therefore political issues could impact the performance of the shares. The shares can have volatile phases that may result in trading losses.
Halma plc is involved in the manufacture of a range of products that protect and improve the quality of life for people. The Company operates through four segments: Process Safety, Infrastructure Safety, Medical, and Environmental & Analysis.
The Process Safety includes products, which protect assets and people at work, including specialized interlocks, instruments, and explosion protection and corrosion monitoring products. The Infrastructure Safety includes products, which detect hazards to protect assets and people in public spaces, transportation and commercial buildings.
Its products include fire and smoke detectors and fire detection and suppression systems. The Medical includes products, which enhance the quality of life for patients and improve the quality of care delivered by providers.
The Environmental & Analysis includes products and technologies for analysis in safety, life sciences and environmental markets. It also includes products to monitor water networks.
Halma is trading in a very consistent long term uptrend. There has a been a large correction that took place at the end of last year which allowed investors the chance to get involved in the shares at a discount.
The reaction from the trend line has been excellent and following a solid set of results the shares look ready to push on and target the previous all time highs. We recommend buying these shares on pullbacks and tucking them away for the long term.
Halma ranks above average when compared to the 300 largest listed stocks in the UK. The shares score particularly well on quality and momentum metrics.
Halma announced that they expect full year pre-tax profits to be in line with expectations and are eyeing potential acquisitions.
Last month the company said it would buy US-based multi-spectral imaging provider FluxData for $12m and an earn0out of up to $15.5m for growth to March 2019.
The companies financial position remains strong as it increased its revolving credit facility last November to £550m from £360m for five years.
Barclays has reissued its ‘overweight’ rating in recent days, the consensus generally is bullish with price targets ranging from 825p to 1210p.
Shares can go down as well as up in value. Past performance of a stock is not necessarily a guide to future performance.
The value of investments and any income from them can fall as well as rise and you may lose more than you invested. An investment’s past performance is not a reliable indicator of future performance. Tax allowances depend on your personal circumstances and the benefits of tax-efficient accounts could change in the future. Read our full Risk Warning for further information.
Risk warning for Financial Promotion.
This report is issued by Central Markets (London) Limited of America House, 2 America Square, London, EC3N 2LU, which is authorised and regulated by the Financial Conduct Authority, No. 473312. Trading in equities may not be suitable for all investors. The value of investments and any income from them can fall as well as rise, and you may get back less than you invested. An investment’s past performance is not a reliable indicator of future performance. Tax allowances depend on your personal circumstances and the benefits of tax-efficient accounts could change in the future. Before you begin to trade, you should obtain details of all commissions and other charges. You should make sure you can afford any potential losses before you begin to trade. Make sure you fully understand the risks involved and seek professional financial advice if necessary. You should only take a risk with money you can afford to lose. If you are in any doubt, please seek further independent advice. Any person placing reliance on the report to undertake trading does so entirely at their own risk and CML does not accept any liability as a result. Information and research produced by Central Markets (London) Limited, does not constitute a recommendation or offer to make a transaction in any derivatives or securities, and is intended to be general in nature. This report is prepared and distributed for information purposes only.
We have noticed that a number of stocks are beginning to form top patterns on the daily charts. This is particularly noticeable in the resource space after commodities in general have had a fantastic 18 months or so. The patterns are calling into question the strength of the underlying trends and we are now wondering if the wheels are beginning to fall off?
Rio Tinto is up almost 140% since the beginning of January 2016. The top that is forming is a concern for the bulls.
Oil has been under pressure in recent weeks. BP has failed to regain the form that saw the shares rose from 430p to 520p at the end of 2016
The reason behind the strength in resource stocks is down to weakness in the value of sterling versus the dollar. Commodities are priced in dollars therefore there has been a significant boost in the value of these companies.
We have highlighted the potential for an inverse head and shoulders bottom on GBP/USD. If this does indeed play out then we can expect the opposite to play out in resources.
These patterns haven’t completed and until that is the case then it is a little premature to make the call of a top. The probability of a top does appear to be increasing, but these things do not always play out the way we expect.
We are watching vigilantly and believe that this could be the end of the uptrend in resource stocks.
Article 50 – How will it affect your wealth?
Britain is edging closer to triggering Article 50 of the Lisbon Treaty, which is expected to happen at the end of March.
Once Britain has activated the never before used Article 50, the Government has 2 years to discuss separation talks. The negotiations are meant to be completed within a 2-year time frame, but many believe it will take much longer. European Union law professor Michael Dougan has been quoted as saying that the whole exit process could take around 10 years.
The moment Article 50 is activated the UK is immediately cut out of EU decision making at the highest level and there will be no way back, so the UK then has a 2-year period to reach a divorce settlement with the EU.
It is possible for talks to be extended if no agreement is reached in that time, this will involve the EU’s remaining members who must vote unanimously to extend the deadline.
What will the deal look like?
This is key question and one at this stage that is very difficult to answer. Until Article 50 is triggered no debate on the details of the deal is supposed to take place. In October, Prime Minister Theresa May told the BBC that she hoped some “preparatory work” would be done. However, the European Commission’s president responded to her comments and rebuked them by insisting “no negotiations without notification”.
Therefore, it is difficult to say what any deal will look like at this stage and we are all waiting for the negotiations to begin.
Now that the timeline is pretty much set, there is now the matter of negotiating a new relationship between Britain and the EU. The exit itself has been debated with both ‘hard’ and ‘soft’ versions being discussed.
The ‘Hard’ version means the UK will stop being a member of the European single market and get full control of its own law making and immigration.
The ‘Soft’ version advocates keeping the UK in a similar place to where it is now, but for its EU membership. Under a soft Brexit the UK would move out a layer and come to rest either alongside Norway (in the EEA but not the EU Customs Union) or Turkey (in the EU Customs Union but not the EEA).
The ‘Hard’ Brexit at this stage appears the most likely outcome but what implications will this have on your wealth?
What is next?
In early 2016, David Cameron called for a referendum on the UK’s membership of the EU. Since then the value of sterling has dropped quite dramatically but the stock market’s reaction has been quite muted.
The result of the referendum impacted markets temporarily before rising sharply, we then saw a similar reaction to the surprise outcome from the US elections.
The resilience of the UK stock market can be attributed to investors’ appetite for international stocks with US dollar earnings.
Roughly 29% of the UK’s leading companies in the FTSE100 generate their revenues from the UK. The FTSE 100 is also home to many international companies operating in sectors that are typically described as ‘defensive’ such as pharmaceuticals and tobacco. These sectors have been in demand because of their overseas earnings and their relatively lower sensitivity to economic fluctuations.
The triggering of Article 50 itself promises to be a non-event for investors. It’s pretty much priced in and everyone knows that it is coming. One of the first things that will be negotiated is the exit payment the UK will need to make to settle existing liabilities.
The initial impact is likely to be limited, however periods of volatility may materialise along the negotiating process as investors respond to the evolving bargaining position.
At this stage the real estate sector is seen as being most affected by the exit process. The threat of certain operations relocating could have an impact and London will likely to see the biggest impact, with other UK cities less affected
The threat of big businesses leaving the UK because of Brexit is a major concern for the large Real Estate companies as the increasing possibility of an exodus from the City of London could mean increased office vacancy rates. With rental yields forming the basis of valuations, which in turn underpin share prices the companies remain increasingly wary. British Land and Land Securities are the two biggest UK REITs and both say that tenants could be more cautious in the months ahead.
With Brexit negotiations due to begin upon the triggering of Article 50, this uncertain period could mean REITs continue to suffer over the medium term.
Housing on the other hand remains an issue for the UK Government and there is still a shortage that needs to be addressed. New developments are springing up all over the country as the rush to create housing continues. The data suggests there has been a slowdown in recent months due to the condition of the overall economy, but stock levels on estate agents’ books remain close to the lowest on record.
We have run both sectors through our fundamental model and assessed them on a technical perspective to form a medium-term view.
The FTSE100 is home to four house builders: Barratt Developments, Berkeley Group, Persimmon and Taylor Wimpey. We have taken the average score of these stocks in our model to form a score for the sector.
We have done the same for the Real Estate Investment sector, which is comprised of British Land, Land Securities, Intu Properties and Hammerson. Again, we have taken the average score to form a score for the sector.
The radar chart below shows a well-rounded score for the Homebuilders, while the REIT sector scores poorly overall with particularly bad scores on value and growth metrics.
The REITs in general are trending lower since the beginning of 2015; we see no reason for this to change in the short to medium term. With new negotiations set to take place, we believe these uncertainties could drag the sector lower.
Line chart of all four REITS. LAND=Blue, BLND=Orange, INTU=Green, HMSO=Red
The homebuilders on the other hand have recovered well from the Brexit lows and we have seen a sequence of higher lows over the medium term across the board. We expect the trend to continue pushing higher from here.
Line chart of all four Homebuilders. BDEV=Blue, TW.=Orange, PSN=Green, BKG=Red
Over the coming months, we believe that the UK Homebuilders should outperform the UK REITs and believe constructing a market neutral basket could yield a decent return over the coming months.
We would suggest selling the four REITs mentioned and subsequently buying the four mentioned Homebuilders in equal size across all investments.
The net exposure should be flat overall so that we remove market risk over the coming months. We would allow for 5% drawdown on the position before triggering a stop loss and believe there is upside potential of between 10-15% before now and the Autumn.
Periods of uncertainty are likely to cause an increase in volatility, which despite the neutral setup of the trade can still have an adverse impact on the outcome. We would always suggest using a stop loss on trades to limit losses. You can lose more than the capital at risk.
We can expect periods of volatility over the next 2 years as the UK begins the exit process and without all the facts about how the negotiations will materialise, it’s difficult to make any long-term predictions at this point. Overall, the UK is home to many international companies that offer investors easy access to build globally diversified investment portfolios. By keeping portfolios diversified across a variety of sectors and geographies, investors can keep fairly insulated from any periods of volatility created by Brexit negotiations.
What next for the FTSE?
The FTSE100 is at new all time highs this morning, but how much further can it go or is it time to sell up?
We take a look at the technical setup of the market.
In the short-term the FTSE is trading in a neat bullish channel which looks set to continue higher. The top of this channel comes in at around 7470 which may be a cap on the aggressive move we have seen this week. This could be a level for any short-term traders to think about taking profit and awaiting a pullback for re-entry.
The medium term outlook remains bullish and again we can see that the index is trading in a bullish channel. The upper end of the longer term channel comes in at around 7510, which of course will get higher as time moves on. We have not seen much in the way of corrections in recent weeks and months, dips continue to be bought by investors and therefore further upside is expected. We will maintain our bullish stance providing the bullish channel holds as well as the horizontal support at around 7100.
The weekly long-term chart on the FTSE 100 has completed a base formation, or an inverse head and shoulders. This is a powerful reversal pattern which suggests there is significant upside potential in the FTSE over the medium to long-term. The implied upside target from the break of 7100 comes in at 8695! Now this may seem a little far fetched, but we are not suggesting we will see this kind of level any time soon. This is a long-term prediction based on technical analysis and does not take into account any global macro factors that could play out in the coming months.
Overall we see no reason to back against the trends, both existing and those developing. We fully expect to see corrective periods materialise but will remain bullish providing the major support at 7100 continues to underpin prices.
Joe Neighbour from Central Markets is looking to sell stock of UK property developer Berkeley Group.
He says the sector has dipped quite sharply and Berkeley Group is a company struggling to recover strongly.
Neighbour plans to sell at market level with a stop loss above yesterday’s highs at 2750p. His target is 2250p with a possible target lower of 2000p, matching levels seen on the morning of the UK’s Brexit vote.
The market was mixed prior to the Bank of Japan meeting held overnight and still is, says Saxo Capital Markets’ macro strategist Kay Van-Petersen.
The Japanese central bank kept rates steady, but stated a new focus on the yield curve. This could see the curve steepen, says Van-Petersen while he also outlines other implications of the meeting.
Joe Neighbour, of Central Markets, is planning to trade UK supermarket chain Morrisons.
He hopes to buy the stock at 190p with a stop loss of 177p. His initial target is 210p and his medium-to-long-term target is 320p.