With the fanfare attached to the breach of 8,000 fading into the rear view mirror, the FTSE 100 is failing to break much higher than the key psychological 8K level, which could open the doors to further selling.

UK equity bulls may start to become concerned if the FTSE 100 fails to establish a sustained presence above 8,000 in the short term. Technical resistance in the 8,010 – 8,020 region is a hurdle that must be overcome soon to avoid investors booking a greater amount of recent profits and sending the FTSE 100 back to 7,900.

The FTSE 100 dipped on Tuesday morning as market focus honed in on global growth and the precarious situation equities find themselves in.

“A tale of shrinking economic activity is still unfolding in countries across the world, adding fresh nervousness to investor sentiment which is already wavering over worries about the path of interest rates,” said Susannah Streeter, head of money and markets, Hargreaves Lansdown.

Having staged a monumental rally from the lows of 2022, equity investors now have to weigh the strength of the global economy and the trajectory of interest rates.

There is an argument equities have already priced in an interest rate ‘pivot’ to lower, and eventually no, rate hikes. This has shifted attention to growth and how central banks will react to economic data.

The reality is, central banks won’t reduce interest rates until economies show signs of pain. And that’s bad for stocks.

Some commentators are talking of a ‘soft-landing’ in growth in the US, but this is very hard to achieve in practise.

HSBC

HSBC demonstrated the benefits of the recovery in China with a doubling in fourth quarter profits. HSBC noted an improvement the Chinese real estate sector as its said pre tax profits increased to $2.5bn from $5.2bn in the fourth quarter.

HSBC also hinted at a special dividend on the completion of the sale of HSBC Canada. Shares were 3.8% higher at the time of writing, helping to offset losses elsewhere in the index.

Cyclical shares such as the miners and housebuilders highlighted investors concerns about growth with Anglo American, Glencore and Persimmon among the top fallers.

Smith & Nephew shares surged on Tuesday after the medical technology company said fourth quarter sales rose 6.8% on an underlying basis.

Their sports medicine and wound management business units performed particularly well and accounted for a large proportion of the top line underlying growth.

The Ear, Nose and Throat unit (ENT) unit enjoyed the highest growth in percentage terms in the fourth quarter, rising 17% to $41m.

Before the impact of foreign exchange, full year sales grew 4.8% but reported revenue including negative FX headwinds rose 0.1% to $5,215m.

Nonetheless the underlying strength buoyed shares with Smith & Nephew gaining over 6%.

“Smith & Nephew’s struggles to return to profit growth continue, with already downgraded margin guidance for 2022 effectively being pushed out another year as inflation continues to bite,” said Derren Nathan, head of equity research  at Hargreaves Lansdown.

“However, an uptick in top line growth at the end of 2022 across all divisions is encouraging. Despite ongoing downward pressure on pricing from the previously highlighted procurement policy in China, work to fix the Orthopaedics division, Smith & Nephew’s largest, is starting to bear fruit.”  

“Smith and Nephew continues to innovate and this is its biggest weapon for targeting higher market share. In Orthopaedics we see its cementless knee systems and work in robotic surgery as core differentiators.”

HSBC profit more than doubled from $2.5bn to $5.2bn in the fourth quarter 2022 as a strong rebound in their Asian business helped support earnings.

For the 2022 full year, profit before tax dipped $1.4bn to $17.5bn with a $2.4bn impairment of their French banking business responsible for the loss.

Despite stringent economic restrictions in China due to coronavirus, a strong end to the year helped HSBC’s Asian profit before tax grow to $13.7bn in 2022 from $12.2bn a year prior. Their European unit recorded a loss before tax of $415m.

The company noted more favourable conditions in the Chinese property market which bodes well for HSBC’s earning growth next year.

Having earned $32.6bn Net Interest Income in 2022, the bank said they expect generate $36bn in 2023. This upbeat assertion clearly won the confidence of investors and HSBC shares rose 2.5% to 636p in early trade on Tuesday.

HSBC said they would pay a 23 cent final dividend to total 32 cent for the 2022 full year. The company also alluded to the possibility of a special dividend once the sale of HSBC Canada is completed.

“The numbers themselves are strong compared to market expectations but the market was hoping for a little more good news in the outlook statement, so the shares are down by around 1% this morning,” said Steve Clayton, head of equity funds, Hargreaves Lansdown.

“The business is performing well, but much depends on the group maintaining robust cost controls. That means more branch closures in the UK this year, with another 130 set to close. But for shareholders, that intention to pay out half of earnings suggests an ongoing yield from HSBC shares of perhaps as much as 7% this year and next, with that extra USD21c special dividend on top. 

“HSBC represents one of the most direct routes of investing into the reopening of the Chinese economy. Whilst that remains on track, we would expect to see continuing encouraging trading news coming from the bank.”

The Springfield Properties (LON:SPR) group is one of the largest homebuilders in Scotland, constructing high quality homes from the highlands to the Scottish Borders. 

The year to end May 2022 saw a record year with 1,242 completions.

However, since last summer times have been somewhat challenging for the company.

From its shares hitting 155p last April, by the middle of last month they had more than halved to just 71p.

The company, which delivers private and affordable housing, issued its first half year Trading Update in mid-December as a prelude to the latest Interims that have just been reported.

That update noted that despite a strong order book and sustained demand as it started the 2023 financial year to end May, the subsequent rise in the general economic pressures and higher interest rates had slowed its reservations down considerably.

Despite expectations of some £350m of revenues for the year, it is expecting that the 2024 year will see a 10% easing.

The six months to end November 2022 reported an 85% rise in first-half revenues to £161.9m, while its adjusted pre-tax profit was 3% higher at £6.6m (£6.4m), leaving earnings 8% lower at 4.68p (5.09p) per share.

CEO Innes Smith stated that:

“This has been a challenging period for the housebuilding industry with significant headwinds having a combined effect, which largely offset the excellent growth that we achieved in private housing. The UK government’s mini-budget in September reduced the confidence of homebuyers and the cost of mortgages increased significantly.

We have taken decisive action in response to these conditions. We’ve paused entering new long-term affordable housing contracts and reduced our fixed cost base. We’ve made a strategic land sale on good terms; reduced land buying activity; and are approaching new site openings with caution. We are also encouraged by the signs that market conditions are improving.

While it is too early to call a recovery, the green shoots we are experiencing and which are being seen across the industry, through increased reservations and visitor levels, are encouraging.”

Analyst’s Opinion – Target Price of 129p

Analyst Greg Poulton, at the group’s brokers Singer Capital Markets, is impressed by the strong land bank and rates the shares as a Buy, looking for 129p against the current 88p.

His estimates for this year to end May are for £340.0m (£257.1m) revenues and £17.0m (£20.8m) adjusted pre-tax profits, with 11.3p (15.3p) earnings and paying a 3.00p (6.20p) dividend per share.

For the 2024 year his figures are £291.7m sales, £20.0m profits, 12.4p earnings and a 5.00p dividend.

Alastair Stewart at Progressive Equity Research is looking for £339.5m sales this year, similarly a £17.0m profit showing 11.4p earnings and a 3.10p dividend.

For the coming year he has pencilled in £291.0m revenues, £20.2m profits, 12.5p earnings and a 5.10p per share dividend.

He too respects Springfield’s land bank, giving it a platform for recovery as well as for short-term land sales.

Conclusion – Scotland’s only quoted housebuilder deserves a premium rating

This £104m group’s shares, at the current 88p, yield a very attractive 5.2%, while they trade on less than 7 times prospective earnings.

A rise back up over 110p could easily occur in 2023.

Go into any food retailer in the UK and it is a fair bet that it is selling products baked by the Finsbury Food Group (LON:FIF).

The bread for your morning toast, ready for butter-spreading or egg-dipping. The candle-filled centrepiece for a memorable celebration. The buns, muffins and other treats that turn teatime into quality time – that is what this group is all about.

And remember it is ‘hot cross buns time’ soon!

A good interim showing

In the group’s first half to the end of December 2022 it increased its sales impressively, up 14.7% at £190.9m, leading to expectations of another £210m in the current six months to end June.

The pre-tax profits at the half-way were £6.1m (5.7m), while earnings were 3.7p (3.2p) and the interim dividend was 0.87p (0.83p) per share.

CEO John Duffy stated that:

“Finsbury has once again delivered a robust performance in the first half to December 2022. We have seen a stable performance in UK retail, ongoing recovery in UK foodservice and continued growth in our Overseas division all despite the challenges of continued significant input cost inflation and falling consumer confidence. 

Looking ahead, we expect to continue to navigate a challenging macro environment as inflationary pressures look set to persist with the short-term outlook remaining difficult to predict. However, Finsbury is now a nimble and adaptable group and I am confident that we remain well placed to continue successfully executing on our strategy.”

The Business – 98 years old

It is one of the leading speciality bakers in the UK, with a product range taking in large premium and celebration cakes, small snacking bites and slices, rolls, muffins, morning pastries, gluten free breads, cakes and morning goods. 

This group supplies to the major multiple retail grocers, ‘out of home eating’ venue operators and other foodservice providers.

It has bakery division sites in East Kilbride, Salisbury, Hamilton, Manchester, Cardiff, Sheffield and Pontypool.

There is also an 85% owned operation in Poland through which it supplies and distributes its own and also third-party products.

At the end of last month, it acquired the Coatbridge, Scotland-based Lees Foods company in an earnings-accretive £5.7m cash deal. 

Two main market segments

In the Bread and Morning Goods market, the company bakes and supplies artisan and speciality bread, buns and rolls, hot-cross buns, muffins, doughnuts, and much more, both pre-packed or for in-store bakeries. 

In the Cake sector the group is renowned for its celebration cakes, round cakes, cake bites, cake bars and seasonal cakes, before adding the Lees Foods range of meringues, teacakes and snowballs.

Analyst Opinion – worth 135p a share

Estimates by analyst Alex Chatterton at Panmure Gordon suggest sales to end June this year of £399.1m, with adjusted pre-tax profits of £16.1m, generating 11.0p in earnings and paying out a 2.6p dividend per share.

For the coming year his figures are going for revenues of £425.7m, while profits could rise to £17.6m, with 11.3p earnings and a 2.6p dividend.

Chatterton has already raised his Target Price twice in 2023, from 127p, to 130p and recently up to 135p a share.

Conclusion – a takeover possibility

This leader in its various markets has in the last year been implementing efficiency improvements which should prove beneficial.

It has a resilient business model and its shares at 99p are on a significantly undervalued rating, while offering a big upside, especially if it succumbs to a takeover.

The FTSE 100 was treading water on Monday with US equity markets closed for the President’s Day holiday providing little new impetus for major repositioning in European stocks.

“Volumes are set to be more muted during the sessions in Europe given that Wall Street is closed for the President’s Day holiday, so traders are likely to be searching around for a bit of a sense of direction today, looking ahead to fresh data out this week,” said Susannah Streeter, head of money and markets, Hargreaves Lansdown.

There was strength in Asian markets overnight after the Chinese central bank kept rates on hold as their economy emerges from a prolonged period of covid restrictions.

 “Asian stocks were higher as China’s central bank kept rates unchanged for a sixth consecutive month – hopes for a continuing recovery in demand from the world’s second largest economy helped support commodity prices,” said AJ Bell investment director Russ Mould.

Higher commodity prices helped provide support for miners sending Rio Tinto 1.2% higher while Anglo American added 1.7%.

Lloyds shares were 1% higher ahead of the release of their full year results on Wednesday. Both NatWest and Barclays had disappointing market reactions to their recent releases with shares falling heavily.

Tesco

Tesco shares were flat after reports it was exploring a potential demerger of their banking unit. A sale of their banking unit would allow for greater focus on their core operations at a critical point for supermarkets in the cost-of-living crisis and continued growth of the discounters, Lidl and Aldi.

“We’ve seen numerous demergers in recent years as companies streamline to have a sharper focus and unlock hidden value in their business. Doing less is more, as it provides management with an opportunity to make small incremental changes to operations and have the core business running like a well-oiled machine,” said Russ Mould.

 “With that backdrop in mind, one should expect to see many companies like Tesco concentrate on what they do best and find someone else to take over activities on the periphery.”

 “Offloading Tesco’s banking arm makes perfect sense. Supermarkets should concentrate on grocery and core essentials that fall under general merchandise, such as frying pans, greetings cards and a small line of toys to keep the kids happy while their parents shop. Things that people can pop into their basket without much thought.”