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Investors Corner
The Market
Leading shares ended a very depressing trading week on Friday
in dull fashion, holding off their lows for the day, but still
reaching their worst levels for over two years as Wall Street
shares took another tumble, rocked by a first quarter earnings
warning from telecom equipment giant, Motorola.
By the Friday close, the FTSE 100 index was down 59.4 points
at 5,943.7, above its early afternoon low of 5,904.7 and well
off its opening high at 6,023.4. All the wider FTSE indices
were also in negative territory, with the techMARK 100 index
the worst off – down 44.65 points to 2,295.66, a new all-time
low. Volume was moderate – as it had been throughout the
week, with many traders away from their desks due to the school
half-term break – with 1.737 billion shares changing hands
in 111,685 transactions.
UK blue chips managed a modest advance in early trading Friday
morning, extending the previous day’s late rally after
a steadier performance overnight on Wall Street, with both the
DJIA and the Nasdaq composite index closing off their lows after
a very choppy session. However, having reached a high for the
session by 8.10am, the FTSE 100 index went in to retreat from
then onwards, with the underlying mood in London cautious as
technology stocks stayed under pressure following after-hours
news in New York of a cut in third quarter earnings and revenue
targets by Sun Microsystems.
Blue chips had slipped below opening levels by midmorning, albeit
in very quiet trade, with thin volumes and a lack of much news
for overall direction keeping the FTSE 100 index pinned back
to a narrow trading range around the 6,000 level.
The UK economic data had little impact, being largely as expected.
December’s UK global trade gap was £2.806 billion,
compared with a downwardly revised £2.363 billion deficit
in November, and against forecasts for a December gap of £2.7
billion.
UK’s trade in goods deficit with non-EU countries narrowed
to £2.458 billion in January, compared with December’s
revised shortfall of £2.767 billion, and median forecasts
for a non-EU deficit of £2.6 billion. UK provisional fourth
quarter GDP rose 0.3 per cent, leaving it 2.5 per cent higher
year-on-year, a revision from preliminary estimates of 0.3 per
cent and 2.4 per cent respectively.
For 2000 as a whole, GDP is estimated to have grown by 3 per
cent, unrevised from the earlier estimate, up from 1999 GDP
growth of 2.3 per cent. UK blue chips saw their losses widen
later in the morning, knocked by big falls in the banking sector,
notably from Abbey National and Lloyds TSB after news that the
Department of Trade and Industry has decided to refer Lloyds’
planned
take-over bid for Abbey to the Competition
Commission.
Wider sentiment was also impacted by fears of another lacklustre
showing on Wall Street, although early on there were - for the
first time for some days - signs of the return of selective
buying interest in tech and telecom issues. However, by early
afternoon that tentative rally by selected tech and telecom
issues had been completely annihilated by the warning from US
equipment vendor Motorola that it will miss first quarter sales
and earnings estimates.
The news came as a further blow to the telecoms market, already
affected by cautious news earlier in the week from European
mobile handsets providers Philips and Siemens, with the sector
also hit by downgrades to ratings for telecom equipment firms
Marconi, Alcatel, and Nokia by Goldman Sachs. Leading shares
fell back further mid-afternoon, in tandem with an opening drop
on Wall Street in reaction to the Motorola warning, and after
Sun Microsystems’ caution.
The FTSE 100 index hit its worst levels for the session at 3.39pm,
with the DJIA plunging in early deals, although a relatively
robust performance from the Nasdaq index in spite of the bad
news, helped to stem further losses in London and pulled UK
blue chips off their hefty lows in late deals. However, by London’s
close, the Nasdaq composite index was still 51.23 points weaker
at 2,193.73, with the DJIA down 123.12 points at 10,403.69 as
fears over the state of the US economy were intensified by the
fresh earnings
warnings.
Telecom equipment firm Marconi was one of the biggest blue chip
fallers, shedding 32-1/2 pence to 484-1/2 badly hit by the Motorola
warning, having earlier been savaged by news of a downgrade
in rating from Goldman Sachs. The US broker cut its stance on
the UK blue chip rating to “market underperformer”
from “market performer” as part of a review of the
pan-European telecom sector which has also seen downgrades in
Nokia and Alcatel after recent warnings over hand set sales.
Other telecoms blue chips also fell under the cosh, with Colt
Telecom shedding 57 pence at 1,308, Vodafone losing 5 pence
at 184-1/2, BT down 10 pence at 595, and Energis 8-1/2 pence
lower at 440-1/2.
IT services group CMG led the blue chip fallers, under pressure
ahead of impending full year results, after recent rumours of
profit warnings - albeit denied by the company. CMG shares dropped
110 pence at 690. Among other leading technology fallers, ARM
Holdings shed 15-1/2 pence at 334-1/2, Misys fell 9 to 596,
and Dimension Data lost 8 at 410. Logica slipped back 2 at 1,323
experiencing a two-way pull after diverse moves by brokers today.
ABN Amro upped its stance on Logica to “buy” from
“add” but HSBC Securities cut its rating back to “hold”
from “add”, reducing its price target to 1,500 pence
from 1,550.
ICI
ICI, the speciality chemicals and paints group, reported that
in contrast to the exceptionally strong final quarter of 1999,
the fourth quarter of 2000 saw all the international businesses
affected by slowing US demand. ICI’s Quest, however, delivered
seven per cent comparable profit growth, paints matched its
strong 1999 result and performance specialities profits declined
by only three per cent. In National Starch the combination of
the slowdown and continued high raw material prices resulted
in a 29 per cent fall in comparable trading profit. Overall,
ICI’s comparable sales and profits for the International
Businesses were down by three per cent and 13 per cent respectively.
During the fourth quarter, the Group announced the divestment
of the Chlor-Chemicals, Klea and Crosfield businesses and provision
has been made in the 2000 results for the loss on disposal.
These proceeds were received in January 2001 on completion.
The Group completed the sale of the Methanol business and ICI’s
50 per cent interest in Phillips-Imperial Petroleum during December
2000. Proceeds of £175 million were received from the
divestment of businesses and property during 2000. This includes
the divestments of Methanol and ICI’s 50 per cent stake
in PIP.
Loss on sale of operations included a provision for the expected
pre-tax loss of £503 million from the sale of the Chlor-Chemicals,
Klea and Crosfield operations. This provision takes account
of the book value of fixed assets disposed, including goodwill,
at £372 million. The balance within loss on sale of operations
was attributable to the divestment of Methanol, ICI’s 50
per cent interest in Phillips-Imperial Petroleum and a number
of smaller disposals.
ICI’s payments against divestment provisions amounted to
£242 million, £77 million less than 1999. The special
top-up payment to the ICI UK Pension Fund was £100 million.
Future payments are expected to be much lower following the
favourable triennial valuation of the fund during 2000. Tax
payments relating to divestments were £67 million. In
the fourth quarter, income from associates (net of interest)
of £6 million was £14 million lower than a year
ago, partially as a result of lower profits in Phillips-Imperial
Petroleum.
1999 fourth quarter profits for HICI included £5 million
related to the third quarter. January in isolation is often
not a reliable predictor of full year performance. Nevertheless,
sales in January 2001 recovered from December levels and were
broadly in line with January 2000. The sharp decline in GDP
growth in the United States will reduce the rate of global economic
activity during 2001. However, the company remains confident
that the quality of its portfolio, and the tight management
controls in place over costs and cash mean that it is well positioned
to respond to the more difficult trading environment that has
emerged.
Analysts prepared to reduce their forecasts for the speciality
chemicals group in the wake of the post-results meeting with
the management. With the in-line results, ICI revealed a very
tough fourth quarter, and disastrous results from its National
Starch business - which ended its unbroken 31-year profits growth
run. Analysts said the planned profit downgrades reflect concerns
about the impact of continued high raw material costs on ICI
and the uncertain outlook for the US economy, which could have
a wider impact on global demand.
The current consensus pre-tax profit forecast for ICI’s
2001, according to The Estimates’ Guide, is £502
million, with most forecasts clustered around the £480
million mark. Sector followers said ICI was cautious about the
near-term outlook for raw material prices, saying that, though
there may be some easing in pressures towards the end of the
second quarter, there will be little sign of any real fall in
prices to more normal levels until the second half. ICI was
also cagey on the outlook for the US economy, which is key for
many of its core businesses.
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