Greenmantle

Morgan Stanley may say Rolls-Royce shares are ‘woefully mispriced’, but I do not think it is time to jump in for a bargain. Their view appears to be based mainly on an optimistic outlook of future earnings from a global aviation recovery. The aviation sector, with greater demands on environmental costs, will be challenging. In defence, economic and national security will be high on western government agendas as they reassess future requirements. This is more likely to result in greater spending from which Rolls Royce should benefit. Schell, President of the Power Systems division is to leave the company at the end of the year but on a positive note, the order book is said to be strong. I do not think the fundamentals are aligned for a long-term buy. Looking at risk (liquidity and solvency) a concern is interest cover. More generally, the company’s Altman Z score should be a signal of concern. My measure of management effectiveness does not indicate either profitability or efficiency is yet in good shape. A return to profitability is good news but the lack of a dividend does not help the situation. Future growth looks promising and is important in helping assess value but they are estimates and for me, there is simply too much uncertainty around the company to buy at the moment or to think the company is significantly undervalued. On the technical side, the long-term trend is still down, with the price settled around what I see as a support level. From a long-term investment perspective, I do not think Rolls Royce is an immediate buy but possibly worth watching. A recovery stock requires stronger fundamentals than those Rolls Royce possesses right now. However, in the nearer term the price may yet return to the 135p – 140p levels we have already witnessed since the dramatic fall from 344p in early 2019, although a fair valuation probably sits around 100p.

NOT A DIP OR DUE A BOUNCE? It has been a bad week overall for equity buys. We have seen higher interest rates from the Fed and BoE but do we have a recession ahead or simply slower growth? At the time of writing 80% of FTSE 100 stocks are positive today. So, looking at the chart below are we due a bounce back to around 7650 that we saw in March and May? Comments are welcome, especially from the IG Smart Portfolio managers, on the FTSE market direction and whether we will see a sustained bounce providing opportunities to invest in equities in the forthcoming weeks.

A further thought on interest rates: A change in interest rates is likely to impact the share price immediately. Conventional wisdom suggests the expected rise in interest rates from the Fed (Wednesday) and BoE (Thursday) will have negative effect on share prices. It is obviously more complicated than these two statements but I still see a further fall in the market with a further interest rate rise this week. However, there may still be some interest in financials. Is anyone looking at this sector: particularly Standard Chartered and HSBC?

Being new to forums I may not have been clear about my intended conversation which is “FTSE Buys This Week” i.e. potential investment buys for those of us with IG Share dealing accounts. I disagree that in a falling market, as we have this week, staying out of buying shares is either an emotional or beginner’s decision. For me, it is soundly sensible. However, if anyone has purchased FTSE shares for their portfolio this week it would be interesting to hear about their strategy for doing so as I am eager to learn. If there is interest in investment strategy amongst new traders, I will move this thread over to “New Client Trading Questions” under “New to IG” next week to continue, hopefully, an exchange of ideas. I accept things may be a little quiet whilst the market continues down but it would be good if we could all catch the bounce when it eventually arrives. With announcements by the US Federal Reserve and the Bank of England due tomorrow I am still very much keeping out of (buying) the FTSE market. Does anyone disagree?

Well, the market went red and so to stay away seems the right thing to do. Fresnillo and National Express bucked the trend but their fundamentals do not suggest they are a buy. Precious metals may be a safer sector but I not really see any opportunities in the FTSE.

Last week the market dropped over 2% with every sector in the red except precious metals and mining. The market PE continues to fall, presently 13.1 against a one-year average of 16.8. Should we be concerned about PE contraction in the market, it being one indicator we are extending into a bear market? However, this is not the case with all sectors and so does this mean we can still find opportunities? Possibly, but this week I am sitting on my hands. Let us also wait and see tomorrow morning's UK data.