About 40 teams of sell-side analysts cover Tesco, the nation’s leading grocer, slavishly updating their forecasting models with every grain of fresh shopping info. Did any of those number crunchers fully anticipate the recent “strain” on Tesco’s profitability and the subsequent warning that profit growth in the coming year will be “minimal”? Not if the share price reaction is any guide: down 16 per cent on the day of the news.
That’s an extraordinary move for what happens to be one of the most liquid stocks on the London market. The investment community was comprehensively wrongfooted. And yet it is not as though Tesco is a particularly difficult entity to analyse: you can walk into the stores, count the shoppers, look at what’s being sold, at what price, and so on. Analysts simply hadn’t cottoned on that weak trading would require a rethink at a structural level for chief executive Philip Clarke and his team. In fact, investors’ nerves have been a-jangle over a number of British blue-chips in recent days. Vodafone, for instance, saw its share price fall 3 per cent on Friday despite denying market chatter that it was guiding analysts lower. Meanwhile, over in the drugs sector, both GlaxoSmithKline and AstraZeneca have had a pretty uncomfortable week as analysts have responded in knee-jerk fashion to drug pipeline disappointments.
That’s what shares do, of course – move up and down in response to fresh developments, sometimes violently.
But think for a moment about all those “steady-eddie” government bond investors, who have been told over recent months that with yields on gilts and other “safe” assets heading towards zero, they should look to blue-chip equities as a way to boost income while also preserving capital. With the yield spread between FTSE 100 constituents and 10-year gilts at levels rarely seen since the 1960s, the temptation to rebalance portfolios has been overwhelming. Those who did switch will have received a lesson in volatility. While the broad FTSE 100 index is showing a fractional gain since the end of December, price movements in a number of our best known corporate names have been violent. Tesco has just been the most extreme example, year-to-date.
So can we now expect British blue-chips’ reputation as a “safe haven” during extraordinary times to be rapidly reversed?
Not so fast, it seems. Tesco’s issues are very Tesco-specific and, as Lex told us on Friday, the grocer has become too big and is fast losing business to rivals at both the high and low ends of the supermarket sector. Similar company-specific explanations can be rolled out for each of those British large-caps showing a wobble or two over recent days.
At the level of strategic investment advice, the blue-chip stock story appears intact. HSBC strategist Peter Sullivan has been telling clients this week that while the eurozone debt crisis is continuing and still has the potential to derail equities, shares remain attractively priced. Writing in the bank’s latest Insights Quarterly, he declares that “with risk appetite at such low levels and valuations as depressed as they have been in 20 years there is the potential for equities to recover surprisingly sharply”.
This is despite HSBC’s base case scenario for Europe as a whole being one of weak economic growth, subdued corporate earnings growth and generally low confidence. But Sullivan states: “However, the extent to which valuations and risk appetite have fallen means that equities could recover surprisingly sharply and we want at least part of our portfolio to be positioned for this.”
Andrew Garthwaite at Credit Suisse is similarly upbeat for stocks, arguing that equities are around 20 per cent “cheap” against “expensive” bonds and pointing out that investors generally remain very much in a “panic” mindset. “Given this negative sentiment priced into asset markets, there is in our view scope for an upside surprise.”
The global equity strategist does of course acknowledge the risks here: a hard landing in China, a eurozone break-up or geopolitical worries sending oil to $140 a barrel. Which leads him to another forecast: share price volatility will certainly rise in 2012. Which brings us full circle. Blue-chips may still be relatively safe and a good source of income, but only for investors with strong stomachs.
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