Leading shares edge higher but worries about an end to central bank stimulus measures continue
A volatile week of failed and new bids, banking resignations and fears that central banks would switch off the money taps supporting the markets ended on a calm note.
The FTSE 100 finished at 6308.26, up just 3.63 points on the day but down 103 points since Monday's open.
One of the week's biggest fallers was Severn Trent, down another 25p on Friday to £17.60 after a proposed £22 a share bid from the LongRiver consortium fell through. LongRiver, comprising Canada's Borealis, a Kuwait sovereign wealth fund and the UK Universities Superannuation Scheme, walked away just before a deadline on Tuesday after failing to persuade the water company to open talks.
Severn fell more than £3 over the week to well below the £18.25 level prevailing before the consortium's approach was revealed.
Still with takeovers, Vodafone confirmed long standing reports that it was interested in Germany's Kabel Deutschland, allowing it to offer customers television, broadband and fixed line services as well as mobile. After the German group reportedly rejected a €7.2bn (£6.1bn) approach, Vodafone was said to be preparing to increase its offer, perhaps early next week. Vodafone added 1.35p to 180.05p.
Meanwhile Royal Bank of Scotland was on the slide immediately after the surprise resignation of chief executive Stephen Hester, amid concerns of political interference at the state-controlled bank. But following a 3% fall on Thursday it edged up 1p to 316p on Friday.
Overall, the week was dominated by growing concerns that central banks would begin withdrawing their financial stimulus packages, which have been designed to boost global economic growth. With central banks pumping an estimated $12trn of extra liquidity into the system since the financial crisis of 2008, the prospect of this ending has unsettled investors, particularly in emerging markets, which have been major beneficiaries of this policy.
The Bank of Japan set the tone, disappointing traders by failing to unveil new measures after its meeting on Tuesday. With worries that the government's economic plan would not be enough, the Nikkei 225 went into a tailspin and slumped firmly into bear market territory - a 20% decline from its recent peak. Comments on Friday from Japanese prime minister Shinzo Abe promising no let up in his drive to improve growth helped to undo a little of the damage.
The US Federal Reserve's future plans also came into focus, with talk it might consider reining in its bond buying programme at next week's scheduled meeting, although some reports overnight suggested this was unlikely. Mixed US economic data, including unchanged industrial production in May and disappointing consumer sentiment figures, gave little clue to the Fed's likely intentions.
Michael Hewson, senior market analyst at CMC Markets, said:
Despite the fact that it remains unlikely that either the Fed or the Bank of Japan are likely to start reining back on their stimulus measures any time soon, investors appear to have decided that the mere prospect of an exit strategy is enough of a reason to look at pulling money off the table on a fairly comprehensive scale.
Political tensions in Greece, where the government made the controversial decision to close state broadcaster ERT, and in Turkey added to the general uncertainty.
Mining shares recovered ground yesterday on Friday, helped by analysts at Citigroup changing their view on the sector from bearish to neutral given recent share price falls. Glencore Xstrata ended 9.8p better at 315.9p after it signed a new $17.4bn credit facility, while Randgold Resources rose 122p to £48.81.
Property groups were among the risers, with Hammerson up 10.5p to 507p and British Land climbing 12p to 595.5p. Great Portland Estates added 20.5p to 548p after UBS moved from neutral to buy:
Recent acquisitions should deliver short-term income streams which will boost earnings but these also form the longer-term development pipeline. Management sees more opportunities to exploit within, rather than outside, its portfolio and has facilities of nearly £300m to fund it, more than enough for the next two years.
Tullow Oil added 15p to £10.48 despite a sell note from Investec. Analyst Brian Gallagher said:
On the 3 July Tullow will release a trading and operational update. Ahead of the event, we take the opportunity to highlight pending catalysts and reiterate our bearish stance. We continue to view the FTSE 100 explorer as overvalued, with a suboptimum balance between [exploration and production]. This dynamic, in our view, has the potential to put continued upward pressure on net debt as Tullow seeks to negotiate farmdowns at capex heavy projects in Ghana and Uganda. We reiterate our sell and 930p sum of the parts derived target price.
Compass slipped 1p to 839.5p even though the City gave a positive reaction to its first investor day in five years, with analysts suggesting it could do a £1.5bn buyback over the next three years. Compass gave presentations on Thursday about its global operations and their growth prospects. At Morgan Stanley, Jamie Rollo kept his equal-weight rating but raised his target price from 810p to 830p. He said:
Compass hosted an impressive investor seminar yesterday. While it gave no targets, we were very encouraged by its assessment of the structural outsourcing opportunity, the scope for further efficiencies, and the various case studies, which all gave us a feeling for the depth of management.
Among the mid-caps Unite, the student accommodation specialist, rose 18.8p to 353.9p in the wake of this week's £51m placing at 320p a share. Espirito Santo said:
The placing proceeds will be used to part-fund the development of around 2,500 new beds in regional markets with exposure to Russell Group or 'rising star' universities suffering from a lack of purpose-built student accommodation. Unite has delivered around 34,000 beds over the past decade meaning we are relaxed over its ability to source and deliver 2,500 beds in 2015/16. We have increased our fair value by 10p to 381p and remain buyers.
Finally WH Smith edged up 1p to 716p as a weak performance from its high street stores revived talk of a possible break-up of the retailer. In chief executive Kate Swann's last trading update on Thursday, the group reported a 7% decline in high street sales with a 4% fall in sales at its travel business, which covers airports, railway stations and motorway service stations. Analyst Nick Bubb said:
[New chief executive] Steve Clarke will no doubt have to... listen to all the hard-working investment bankers from the City anxious to secure the mandate to demerge the travel Division. Conventional wisdom has it that if you spin off the good bit of the group, nobody would want the bad bit and that shareholders would be no better off if the high street [division] was de-rated, undermining the re-rating from travel. Well, arguably, the implicit rating of the high street part of WH Smith is so low anyway, despite its free cash flow generation, that nothing might be lost if it was demerged/or sold off. And maybe a private equity company (who wouldn't have to keep reporting its like for like sales every few months) might be a good owner for WH Smith high street. The great irony here, of course, is that Kate Swann has pursued a classic private equity approach to running WH Smith in the high street in recent years and highly successful it has been too, even if it has offended the retail purists.
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