Global equities were deep in the red on Thursday after the Federal Reserve Chair concluded a materially hawkish testimony to Congress and raised concerns of higher interest rates for longer.

The FTSE 100 was down 0.7% to 7,876 at the time of writing while the German DAX shed 0.4%. US futures were pointing to a lower open.

“The FTSE 100 took another step back on Thursday as a second day of testimony in front of Washington lawmakers by Federal Reserve chair Jerome Powell largely stuck to the hawkish tone of the previous day,” said AJ Bell investment director Russ Mould.

“While Powell softened things a little by saying nothing is decided yet, the clear message is future rate decisions will be dependent on the data and for now that seems to be tilting things more towards a 50-basis point rather than 25 basis point rate rise later this month.

“This would shatter the market’s comfortable illusion at the start of the year that rates were about to pivot and a soft landing for the US economy could be engineered.”

US 10-year Bond yields briefly touched 4%, before falling. A higher yield in US treasuries made the FTSE 100’s bond proxy stocks seem less attractive with companies including British Land, Land Securities, SSE and Whitbread falling.

Aviva

Through the gloom of the UK’s miserable weather conditions and generally negative stock markets, Aviva was a ray of light after reporting strong results for 2022. Operating profit jumped 35% to £2.2bn and the company rewarded investors with a share buyback and dividend hike.

“For investors, news of a £300m buyback was welcomed with open arms – the capital position remains strong, and the potential for further buybacks alongside a 7.8% forward yield looks attractive,” said Matt Britzman, equity analyst at Hargreaves Lansdown.

Cyclical selloff

It was a tough day for the FTSE 100’s cyclical stocks. The prospect of tighter monetary policy for an extended period damped demand for companies reliant on stronger economic conditions. The miners were down heavily. Rio Tinto dropped 4.8% while Endeavour Mining tanked 5.6% after reporting 2022 results.

The outlook for Entain in 2023 has caused concerns among investors on Thursday as group profit after tax dumped 88% to £33m due to amortisation of acquired intangibles and exceptional costs.

Underlying EBITDA grew 13% to £993.2m.

The company’s own warnings of regulatory headwinds in 2023 may prove a hurdle for higher profits in the coming year as the group pins hopes on growth in the US.

The group’s 50% stake in US joint venture BetMGM enjoyed an 18% uplift in net gaming revenue in 2021, outperforming group net gaming revenue of 12%.

The impact of regulatory changes in the UK was responsible for slow group online net gaming revenue which dipped 1%.

“Entain has been facing mounting investor pressure, and rising player protection measures in Europe are not going to help. The business opportunity in America looks much brighter.”

“Nebraska and Maine are likely to go live by H2 2023. Georgia, Kentucky, and Minnesota are possibilities, whereas Missouri and North Carolina could stall. This could deliver 15-20% TAM growth.”

“Entain’s biggest opportunity is in the online sports betting space. The Super Bowl betting record proves huge potential. Our experts say that Entain also needs to move beyond the NFL season and capitalize on other events throughout the annual sporting calendar.” 

Aviva shares perked up on Thursday after the insurance and wealth firm said operating profit surged 35% to £2.2bn smashing analyst expectations.

Unlike some of their competitors, Aviva has managed to keep a lid on costs are carve out an increase in operating profit. However, Aviva was hit the same market swings as their peers and recorded an overall loss for the year due to adverse changes in investments.

Nonetheless, an increase in insurance premiums net of reinsurance helped operating profits higher and investors cheered the news sending Aviva shares over 3% to the good.

Aviva is regarded by many as a pillar of their income portfolio and today’s announcement reinforced this assertion with a final dividend hike to 20.7p to total 31p for the 2022 full year. This is sharp increase on 2021’s 22.05p pay out.

The firm will also commit an additional £300m to share buybacks meaning Aviva has returned £5bn to investors since 2021.

“Aviva’s the latest insurer to push through hefty hikes for its general insurance premiums, a trend expected to continue over 2023 as the cost to service claims has risen in this inflationary environment,” said Matt Britzman, equity analyst at Hargreaves Lansdown.

“The tricky backdrop pushed underwriting profitability down a touch, but the diversified model showed its strengths as performance on the whole was resilient. The life insurance business should be able to benefit from the growing number of pension schemes that now find themselves in the position of being able to de-risk – we’d expect to see an uptick in bulk purchase annuity business over the coming year as a result.”

“For investors, news of a £300m buyback was welcomed with open arms – the capital position remains strong, and the potential for further buybacks alongside a 7.8% forward yield looks attractive.”

In the last few weeks there has been a considerable amount of investor interest built up in this company, especially since the issue in January this year of its 336-page document for listing new shares on the Official List.

With its Head Office in Calgary, Alberta the £20m capitalised Canadian Overseas Petroleum (LON:COPL) is engaged in the exploration, appraisal, development and production of oil and gas assets with producing assets and reserves principally in the Converse and Natrona Counties in the US state of Wyoming, where it is the operator and majority working interest owner of three oil producing units.

The Wyoming operations are environmentally responsible with minimal gas flaring and methane emissions combined with electricity sourced from a neighbouring wind farm to power production facilities.

The group also has interests in sub-Saharan Africa through its ShoreCan joint venture in Essar Nigeria, as well as independent interests in other countries.

The ‘game changer’

However, the ‘game changer’ was declared by the company in late December 2022. 

That was at its Frontier 1 11-27 recompletion which has been defined as the oil-bearing reservoir covering a large area at its Cole Creek asymmetrical anticline, some 9 miles in axial length with around 2,500 feet of structural/stratigraphic closure.

There are five known conventional oil reservoirs at Cole Creek – Lakota, Dakota, Frontier 2, Frontier 1 and the Shannon. The group has a 100% working interest in the Cole Creek leasehold on all rights below the Shannon.

An ‘Oil Down To’ elevation at the base of the Frontier 1 perforations has been determined. This elevation is some 760′ below the crestal elevation of the Cole Creek Anticline. The area within the ‘Oil Down To’ elevation is about 8,000 acres with reservoir sand thickness ranging from 50-115′, thinning in the northern area. 

In late January the announced the first oil production from the Frontier 1 reservoir sands.

In an Operations Update issued at the start of March the company reported that severe winter storms from late December to late February had impacted production operations at its Barron Flats Shannon Unit and its Cole Creek field.

The high winds, very low temperatures and drifting snow caused it to suspend operations during the storms. 

The Group’s Strategy

The strategy of the group has two key elements: the first is to accelerate production at the company’s Wyoming assets through increased gas injection, drilling and development; the second is to expand its activities in Sub-Saharan Africa and elsewhere by accessing exploration, un-appraised and undeveloped assets as well as producing assets.

Conclusion – taking a positive out of the negative

Some 19 pages in the early part of the Prospectus were Risk Factors, negatively covering almost every eventuality.

In the last year the shares of have fallen 85% from 39p to around the current 5.9p, the big question now is – are the shares oversold?

The FTSE 100 recovered early losses on Wednesday after a terrible session overnight in the US sparked by interest rate concerns following Federal Reserve chair Powell’s hawkish testimony to Congress.

Jay Powell struck a hawkish tone in his delivery and suggested markets should prepare for more 50bps rate hikes, and for rates to remain higher for longer.

“The broad-based rally in stock and bond markets since the October lows rests largely upon their conviction that inflation will retreat, the global economy will suffer no more than a shallow recession (or even avoid a downturn altogether) and central banks will be able to start cutting interest rates sooner rather than later as a result,” said AJ Bell investment director Russ Mould.

“The statement from US Federal Reserve chair Jay Powell to the Senate Banking Committee in Washington on Tuesday challenges this oh-so-cosy consensus and that is why stock markets are stumbling.”

The FTSE 100 was trading at 7,916 at the time of writing, down just 2 points. The index touched lows of 7,891 earlier in the session. The S&P 500 was down around 1.5% overnight in a market reaction to a hawkish Fed chair that was to be expected.

Hiscox

Hiscox was the FTSE 100’s top riser after their gross premiums and premiums written rose in 2022. Poor investment results meant profit before tax fell, but delivery on their strategy ultimately helped shares higher.

“I am very pleased with the progress made across the Group during 2022, as we delivered the strongest underwriting result in seven years. We have a refined strategy, a new experienced and energetic leadership team, we have made significant progress in rolling out new-generation technology in the USA and Europe and we are enjoying our highest employee engagement scores in ten years,” said Aki Hussain, Group Chief Executive Officer, Hiscox.

Hiscox shares were 3.5% higher at the time of writing.

Schroders was the top faller, down 3.4%, after peer Legal & General reported their full year results and provided an insight into the damage Liz Truss’s doomed mini-budget did to their investment business. Legal & General were 2% lower. Schroders reported their results earlier in March.

Legal & General investors booked profits on Wednesday as the company confirmed positive results for 2022 which included a 12% jump in operating profit and a 5% dividend hike to 19.37p.

Legal & General shares were 2% lower on Wednesday after the company’s shares yesterday touched the highest level since the Liz Truss Gilt debacle last year.

L&G shares are roughly 30% higher from the intraday lows recorded in October 2022.

Their higher group operating profit pays testament to L&G’s risk management as they successfully navigated the mini-budget gilt market volatility without suffering a significant level of disruption to their investment business. Legal & General Investment Management operating profit slipped 19% to £340m and Assets under management also fell.

Despite weakness in the investment management business, Legal & General’s cash generation rose 14% to £1.9bn.

“The outlook for the group looks positive, regardless of the impact of last year’s bond market rout. The group are bringing in new assets at pace and pension funds are increasingly looking to L&G to assume their liabilities in exchange for substantial premiums. The group’s Capital business is growing strongly and has maintained asset quality at high levels to date,” said Steve Clayton, Head of Equity Funds at Hargreaves Lansdown.

“The dividend is set to rise 5% this year and next, in line with the group’s stated policy. That puts L&G onto a yield of approaching 7.8%. It is rare to find businesses that can sustain that level of dividend pay-out, but in L&G’s case, the dividend is well covered by earnings and capital generation.”