Greece Outside In: US, Italian and Greek political woes hit FTSE 100, but builders buoyed by Help to Buy

Monday, September 30, 2013

US, Italian and Greek political woes hit FTSE 100, but builders buoyed by Help to Buy

Leading shares end month on a negative note as US government faces shutdown and Italy sees confidence vote

Markets ended the month on a downbeat note as political chaos in the US and Europe sent shares sharply lower.

As the deadline approached for a US government shutdown, with politicians looking unlikely to reach an agreement on the country's budget, investors headed for safety. Elsewhere the Italian government faced the prospect of a confidence vote on Wednesday after Silvio Berlusconi told his party to resign from the coalition, while in Greece the arrest of Golden Dawn members renewed political uncertainty in the struggling country.

On top of that an HSBC manufacturing survey for China came in at 50.2, up from 50.1 but lower than the initial reading of 51.2.

So the FTSE 100 finished at 6462.22, down 50.44 points but up around 50 points on the month. Michael Hewson, senior market analyst at CMC Markets UK, said:

Market sentiment today has been primarily driven by politics and will likely continue to do so until such time the political situations in both Italy and the US get resolved to everyone's satisfaction, with widespread losses across the board, with Italian markets leading the decliners today.It's not been a great way to end the month, but...equity markets across Europe have had a broadly positive September, and a very positive third quarter, so today's declines while fairly large, do need to be put in that wider context.

Housing companies built up some good gains, following the UK government's decision to bring forward the next stage of its Help to Buy programme, a £12bn mortgage guarantee scheme to boost the housing market, and mortgage approvals reaching a five year high.

Persimmon put on 25p to £10.86, making it the biggest riser in the leading index. Among the mid-caps, Barratt Developments was 6.5p better at 308.6p. Both were also helped by positive comments from JP Morgan Cazenove. The broker said:

The housebuilders underperformed the market by around 11% in the third quarter, impacted by worries over the scale of upside and longer-term sustainability of earnings, driven in turn by concerns over eventual interest rate increases, cost inflation and speculation that Help to Buy could be withdrawn; all of which are concerns that we believe to be misplaced. Despite taking what we view as a conservative stance on house price inflation, volume growth and cost inflation, our earnings per share estimates for 2014 and 2015 are around 25% ahead of Bloomberg consensus. We view the recent sell-off as a buying opportunity.

Among the other builders, Bellway added 53p to £13.15 and Taylor Wimpey climbed 3.4p to 100.4p.

Worries about a slowdown in China, as evidenced by the HSBC survey, helped send mining shares lower. Anglo American fell 22p to £15.18, Glencore Xstrata dropped 7.3p to 336.7p and Rio Tinto lost 44p to £30.23.

Aerospace and defence group were unsettled by the possible US government shutdown, with BAE Systems down 12.3p at 454.4p and GKN 10.1p lower at 342p.

But Shire rose 11p to £24.78, lifted by City hopes for its next range of products and cost saving announcements. Analysts at JP Morgan Cazenove raised their recommendation on the pharmaceutical group from neutral to overweight and their price target from £22.70 to £30.

Among the other risers G4S - currently providing security for the Conservative party conference - edged up 0.4p to 254.3p following weekend reports that an activist hedge fund, Cevian Capital, is pushing for the company to sell its cash solutions arm, which accounts for 25% of profits.

Elsewhere Unilever was down 17p at £24.40 as ING said it could be affected by any negative comments about emerging markets from a Nestle investor presentation. After the market closed Unilever reported signs of a slowdown. The Dove and Ben & Jerry's business said it was on track to meet its 2013 priorities but said emerging markets had seen weaker growth in the third quarter, partly due to currency weakening. Developed markets remained flat to down, meaning overall growth for the quarter would be 3% to 3.5%. In the second quarter it saw a 5% rise in underlying sales.

Reckitt Benckiser edged up 2p to £45.20 despite a sell not from Liberum. It said:

The debate on Reckitt shares is more on how to value Pharmaceuticals (21% of earnings in 2012) than on the core business. Taking reasonable 11 to 12 times EBITDA multiples for the core unit implies an enterprise value for Pharmaceuticals of £6bn to £8bn which could only be justified if Pharmaceuticals' earnings grew 50%-100% in 2014 – we find that unrealistic given current competitive dynamics and recent earnings trends.

Liberum was more positive on ITV, down 0.5p at 175.3p:

Press reports out that ITV has sold the old Granada TV studios in Manchester for £26.5m subject to redevelopment planning permission. Probably not included within analyst forecasts for cashflow (it is not in ours; we have 2013 net cash of £194m) so gives ITV more flexibility if it wants to return cash.

William Hill added 1p to 403p after signing a partnership agreement with gaming system specialist Net Entertainment to distribute its casino games over the UK bookmaker's network.

But rival Ladbrokes lost another 2.5p to 169.2p after falling 9% in the wake of Thursday's profit warning, which was mainly due to a shortfall in its digital division.