Weak Chinese economic data has spooked investors in the mining sector, causing a sell-off amid fears that the Asian superpower might scale back commodity purchases.
China’s GDP grew by 4.3% in the second quarter year-on-year, below the 4.5% to 5% target. The data reading took the market by surprise and might stir speculation that the Chinese government will dig deeper with economic stimulus measures.
HSBC was caught up in the malaise as China is an important region for the group. As well as chasing opportunities in wealth management and corporate banking, HSBC has investments in Chinese companies including a strategic stake in Bank of Communications, one of the country’s largest state-owned banks.
The course of events in the Middle East continues to take twists and turns, with the latest being Donald Trump reversing a threat of a 20% fee on all Strait of Hormuz cargo shipping. He has since threatened to ‘knock out’ power plants and bridges unless peace talks resume. This ongoing uncertainty continues to leave investors slightly cautious, with markets down across Europe.
B&M
B&M is still wading through mud, putting in a lot of effort for limited progress. First-quarter group sales growth of 2% is nothing to write home about.
The UK is to blame with a sluggish performance, not helped by B&M cutting prices to stay competitive with fast moving consumer goods. That puts greater emphasis on making this a volume game, shifting as many products as possible rather than prioritising profitable sales.
B&M is a discount retailer, and its business model is a ‘pile ‘em high, sell ‘em’ cheap one, but the margin pressure from price cuts is still something to watch.
France might have been kicked out of the World Cup, but the country was a saving grace for B&M. Its French operations enjoyed decent revenue growth from a mixture of existing and new stores. Unfortunately, France is only a small part of the group and what happens in the UK is ultimately what moves the dial for the share price.
Investors are displeased with the overall performance, sending the shares down. Contrarian investors might like the cheap valuation at B&M, but it continues to be a waiting game for the share price to regain the strength it once enjoyed.
PayPal
After years of miserable share price performance, it looks like PayPal could be put out of its misery as a standalone company. Reports suggest Stripe and Advent are teaming up to make a $53 billion joint takeover offer.
The payments sector has long been a hive of activity for takeover activity, and one must wonder why PayPal hasn’t already been picked off. Spun out of Ebay, the payments group was merrily on its way to greatness when suddenly Apple Pay and Google Pay took off and grabbed some of PayPal’s market share.
PayPal has tried many things to fight back but has been left behind in a busy market that has also seen the likes of Stripe, Block and Adyen become credible challengers.
The pandemic triggered an e-commerce boom as people were stuck at home in lockdown and bought items online to relieve their boredom. PayPal enjoyed a purple patch, but it didn’t last.
If the bid rumours are true, Stripe and Advent obviously see an opportunity to buy a company that’s down but not out.
The brand still has considerable trust among the public and business community, and it makes a decent profit. It is plugged into many of the hot payment themes including mobile payments, digital wallets and buy now, pay later. For Stripe, it provides a consumer-facing brand.
Importantly, PayPal is dirt cheap. At its peak, the shares traded on more than 60 times earnings. They’re now on less than nine times which is the sort of rating that’s rarer than hen’s teeth in the payments sector.
Barratt Redrow
After the housebuilding sector was rocked by Vistry’s profit warning last week, there was relief at the resilience of Barratt Redrow’s trading update.
The number of homes built and sold was ahead of market expectations and it has no balance sheet concerns. This should provide a useful buffer as Barratt seeks to navigate a tricky market backdrop while still rewarding investors for their patience.
The decision to prioritise buybacks over dividends follows pressure from activist investor Phoenix. Given the depressed valuation this move is understandable, though only paying a nominal dividend for a period may alienate some shareholders.
Selling prices ticked higher despite all the recent turmoil. While cost inflation looks like it will remain a meaningful headwind, it looks manageable for now.
Barratt has dialled back land acquisitions although it still expects to sell an increased number of homes in the current financial year.
With incoming CEO Dean Banks set to take over from incumbent David Thomas in September, the market will be primed for any potential shift in strategy, but Banks is likely to pursue a similarly disciplined approach.
ASML
Making the high-end kit used in the manufacture of AI is proving a profitable enterprise for ASML.
Just like those selling picks and shovels to prospectors in the 1840s, ASML is benefiting from the 21st century equivalent of the gold rush.
While there have been questions over the durability of AI-related demand, ASML’s plans to raise production capacity for its most advanced machines is testament to its faith in the outlook. This may help calm some of the recent jitters around the AI theme.
Increasing manufacturing output will be expensive and hard to unwind if demand diminishes. ASML says it is already close to receiving all the orders it needs for 2027 and a decent chunk of the following year too, giving it strong visibility on future revenue, profit and cash flow.
ASML’s chip-making customers are tying their own clients into long-term agreements which in turn increases their incentive to commit to buying its lithography machines.
The planned Terafab semiconductor fabrication plant, a pet project for Elon Musk being pursued by Tesla and SpaceX alongside Intel, offers further blue-sky potential for ASML given its involvement in discussions over the hugely ambitious project.
Thames Water
At this point you would need a lot more than H2O to clean up the mess at Thames Water. Borrowings have swelled, customer complaints are surging, fines for missed targets are piling up, and the rescue deal on the table from lenders is hanging in the balance.
While the company announced a return to profit for the year ended in March it is cash that really matters, and a long-term resolution is needed to secure its future.
The potential for the expected next prime minister Andy Burnham to consider nationalisation as an option looms over Thames Water, and the coming weeks could be crucial ones for the destiny of the business.
Dan Coatsworth: Head of Markets
Dan Coatsworth is AJ Bell's Head of Markets. Dan has been with the company since December 2012 and has more than 18 years' experience in the industry, following the markets and all things investing. He...
