The pronouncement of a ceasefire between Israel and Iran and the lack of meaningful response from the latter to the US strikes over the weekend have lifted investor spirits and removed a plank of uncertainty.
The news gives fresh impetus to a risk-on approach, which has lifted shares across most developed markets, while also weighing on the gold price as investors switched their attention elsewhere. Perhaps the most notable casualty has been the oil price, which flitted from a gain of almost 5% just yesterday to a decline of 8.3% in the year to date as supply concerns evaporated.
In the UK, the premier index powered to a positive start despite some inevitable headwinds. The heaviest weight came from declines in BP (LON:BP) and Shell (LON:SHEL), added to which Endeavour Mining and Fresnillo (LON:FRES) followed the gold price south and BAE Systems (LON:BAES) reacted to the cessation of Middle Eastern tensions.
Even so, a notable rebound in International Consolidated Airlines Group S.A. (LON:ICAG) and easyJet (LON:EZJ), coupled with strength in travel stocks such as InterContinental (LON:IHG Hotels), the banks, and the more diversified miners, was enough to offset the weakness seen elsewhere in the index.
The return of the feelgood factor leaves the FTSE 100 ahead by 7.6% in the year to date, with hopes for a renewed attempt towards the recent record high a distinct possibility.
Nearer to home, US stocks were also boosted by comments from members of the Federal Reserve, which suggested that a July interest rate cut could yet be on the table if the feared inflationary effects of the tariffs do not materialise.
An update is expected later today from Chair Powell, which could throw further light on the Fed’s current thinking, although the consensus remains that rates will not change until later in the year. In the meantime, the relief rally has dragged each of the main indices into positive territory for the year so far, with gains of 0.1%, 1.7% and 2.4% for the Dow Jones, Nasdaq and S&P 500 respectively.
Bunzl
The savage share price reaction to the profit warning in April left a sour taste in the mouth for investors. Indeed, the best that can be said for this update is that conditions do not appear to have worsened, with the shares edging higher accordingly.
The group’s largest market is North America, which accounts for over half of the overall revenues, and this region is at the eye of the storm. A combination of sales weakness, product price deflation, and costs following the rollout of its own branded offering led to Bunzl (LON:BNZL) suspending its share buyback programme in an effort to stabilise its balance sheet.
This has also led to questions surrounding the group’s bolt-on acquisition strategy, which has served the group well over recent years. Although the group announced a small acquisition of Brazilian company Solupack, its third this year, it seems that the immediate outlook for further purchases will slow significantly.
This has other implications; revenues are expected to grow by 4% for the half-year, driven solely by acquisitions, with underlying revenues flat. At the same time, the group’s geographical diversification also leaves it exposed to currency movements, and at actual exchange rates expected growth of 1% is at best anaemic.
Operating margin for the remainder of the year is estimated at around 8%, compared to 8.3% previously and 7% at present. The adjusted operating profit remains depressed and is now in line with the lower forecasts, and there is the possibility that the second half will show an improvement.
Despite its current woes, the company is one that has been well regarded for some considerable time, and so all is not lost. Bunzl is a global leader in its space and will no doubt return to its selective acquisition policy, while its success hitherto has led to 30 consecutive years of increases to the dividend, where the current yield of 3.2% has edged higher in direct response to the decline in the share price.
Nonetheless, the current damage will take some time to repair, and investors can be unforgiving, especially after a profits shock.
The 23% fall in the share price over the last year, as compared to a gain of 5.7% for the wider FTSE100, is entirely driven by the performance since the April announcement, although ironically the decline has left Bunzl looking undervalued on a historic basis. However, the market consensus should have weakened to a hold, also reflecting investors’ reticence to become involved until such time as a sustained recovery is in evidence.