Broker tips: UK retailers, Prudential, European stocks
(ShareCast News) - With the retail sector now at a major strategic crossroads, investors should back companies that are best prepared for a world where data will be the new frontier, said Liberum, picking out several 'key long-term winners' including Asos, Joules and Ted Baker.
After an average 13% de-rating for FTSE 350 retailers in the first three months of the year and Liberum said re-rating potential in the sector is "likely to be limited" in the second and third quarters, except where stocks have already been punished in light of their fundamentals.
Following the snap election news on Tuesday, Liberum said the 8 June ballot could bring positive catalysts.
"It could provide the government with a strong mandate to execute a smoother and softer Brexit. Consequently this would be positive for UK domestics which could find themselves in favour again."
Liberum, which also highlighted 'buy' ratings for B&M European Value Retail, Dixons Carphone, Jimmy Choo, Joules, Inditex and McColl's, said retailers needed to invest in a broad range of areas to remain competitive, such as focusing on mobile, hybrid warehouses and digital payments.
After a revisiting of its fundamentals, Card Factory was also upgraded to 'buy' from 'hold' and the target price increase to 345p from 275p, with significant scope seen for continued store roll-out over the long-term.
Sports Direct, on the other hand, was downgraded to 'hold' from 'buy' (target price 310p) after forecasts were cut materially reflecting currency pressures and a lack of clarity on outlook.
The onset of the EU's Global Data Protection Regulation from 25 May next year, which is designed to enable individuals to better control their personal data, will "cause a seismic shift" in the way companies are allowed to market, sell and communicate with consumers.
"We see those with the right systems in place adhering to the regulation, using it as a positive catalyst to flourish," Liberum said, with Asos singled out as a stand-out leader (target price 6,400p) but SuperGroup leaving disappointing with its "relatively singular focus" .
Despite longer-term caution, SuperGroup was still maintained at a 'buy' rating (target price 1,750p) due to its shorter-term trading momentum.
While Halfords' improved momentum has seen its forecasts and target price raised, a 'sell' rating was kept due to the subdued growth outlook. Marks & Spencer and Pets at Home also remained at 'sell'.
Analysts at Berenberg hiked their target price on shares of Prudential, telling clients not to let the opportunity pass.
Historically, the stock tended to track embedded value, appraisal value and profits, which between 2014 and 2016 had risen by 34%, 34% and 48%, respectively.
Yet over the past two years it had stopped doing so, in effect 'taking a breather' and in turn creating a "very substantial valuation discount", the broker explained in a research note published on 19 August but dated the day before.
"The upward trajectory of the key metrics has continued, however, and the shares now have both excellent compounding and re-rating potential."
Several factors had dented sentiment in the meantime, including capital controls in China, slower sales of variable annuities in the States and net outflows at M&G, analyst Trevor Moss said.
However, Moss expects all of the above to improve going forward, resulting in better 'news flow' around the shares.
As well, it's likely that perhaps even the entire UK annuity book will be hived off in due course, freeing up a lot of cash that can be used "for a variety of corporate purposes", he said.
Berenberg also highlighted the insurer's strong net flows and margins and the still favourable tailwind from FX movements in the second half of 2016.
Moss upped his target price from 1,783p to 2,200p, mainly as he rolled forward his assumptions and due to the large appreciation seen in the currencies accounting for the majority of his valuation, while reiterating his 'Buy' recommendation on the shares.
"The forward-looking P/E ratios look shockingly low relative to (near) ex-growth peers in our opinion, while the shares remain heavily discounted against our fundamental valuation."
A mis-match between the performance of stocks from 'cyclical' geographical regions, such as Continental Europe, emerging markets and Japan versus cyclical sectors meant there was an opportunity to be had, strategists at Credit Suisse said as they reiterated their positive stance towards shares from the former two of those regions.
The Swiss broker also had a good word for UK stocks, which it bumped to 'benchmark'.
On Continental Europe, the strategy team led by Andrew Garthwaite pointed out how economic growth in 2017 might again be faster than that in the US, which implies shares on the other side of the Channel should outperform global stockmarkets by 16%.
Garthwaite and his colleagues added to their position in Spanish stocks, while sticking to an 'overweight' on France, while lowering Germany to 'benchmark' and went more 'Underweight' on Italy.
Weak GDP growth to cap gains in the pound
Significantly, one of the main reasons why they are more optimistic on UK equities is because in their view Sterling is not likely to strengthen much further and currency is the main driver for the group.
The other main drivers for UK stocks are global emerging markets and commodities, with 11% upside seen in the case of oil.
Offsetting the above, British GDP growth is set to disappoint, they said, growing by 1.4% this year, although that will help to cap gains in the pound.
"General retail looks very cheap, and we see a long transition period for Brexit. We continue to favour UK euro earners," the strategists said.
On GEM, Japan and the US
They also add to their 'overweight' on global emerging markets, pointing to the positive impact of "disruptive" technologies on economies' underlying health and the fact that only 16% of the outflows seen in 2016 had reversed.
"Chinese equities stand out. We would also recommend Korea and India within a global context. Taiwan offers risk hedging characteristics."
As regards Japan, the Swiss broker says it has slightly reduced its 'overweight'.
Credit Suisse also stays at an 'underweight' on the US, excluding the technology space.
That is because labour in the States is closest to gaining pricing power, monetary policy is returning to normal settings and the degree of corporate leverage is back to its previous peaks.
"It scores bottom on our composite scorecard. It is an overly defensive market pricing in a sharp slowdown in global GDP growth."