European markets rebound as investors fish for bargains, and slimmed down Prudential impresses

“Markets across Europe saw strong gains on Wednesday following decisions by the UK, US and EU to ban or curb Russian oil and gas imports, thereby putting further financial pressure on Russia,” says Russ Mould, Investment Director at AJ Bell.

“After a strong run for commodity producers on the market, names like Rio Tinto and Glencore slipped back on the FTSE 100, with investors instead fishing for bargains among more beaten-up consumer-facing stocks including International Consolidated Airlines and Primark Associated British Foods.

“In Germany, the DAX jumped 3.8%, led by another consumer-facing stock, Adidas, as well as Deutsche Post. Adidas’ shares were helped by expectations of a sales recovery in China and guidance for improved operating margins, but it set the tone for many companies to come by quantifying the expected hit from halting business in Russia, which in its case is up to €250 million.

“After Coca-Cola and McDonald’s caved into public pressure to pause business in Russia, Mothercare has followed suit. While its UK business is now limited to online-only, it still has a big overseas presence run by franchisees and Russia accounts for about a fifth to a quarter of its sales. Every month the Russian operations are paused will cost the group half a million pounds in lost profit.

“There have been concerns in the City of London that M&A deals would dry up while markets are extremely choppy, just as we recently saw with the very short-lived attempt by Spectris to buy Oxford Instruments. However, the M&A juggernaut keeps on trucking as evidenced by a counterbid for transport group Stagecoach from infrastructure investor DWS.

“National Express’ takeover offer for Stagecoach has now been trumped by a considerable margin, which explains why the target’s board has switched allegiance to the new suitor.

“With share prices down across so many sectors, someone looking to acquire could find more attraction valuations in the current market so opportunistic bids could become a theme over the coming months.

“The key challenge will be convincing shareholders to accept a bid as there would be a strong argument to suggest that current share price weakness may only be short-lived.”

Prudential

“Like a slimming club member celebrating reaching their goals, newly streamlined Prudential has marked its first set of numbers since offloading both its UK and US businesses by beating expectations.

“While the UK arm is firmly in the rear-view mirror after a 2019 spin off, the US division remained a drag on performance in 2021 until the demerger completed in the autumn.

“There is now real clarity to the strategy as the company is purely focused on Asia and, to a lesser extent, Africa. These insurance and investment markets are much less mature and should allow Prudential to grow more rapidly than rivals focused on the West as it sells financial products to these underserved populations.

“Further evidence for the company’s pivot to Asia is evident in the fact the replacement for retiring CEO Mike Wells will be based permanently in the region.

“For the time being Prudential has signalled it has no intention of shifting its primary listing from the London market. However, this might change under Wells’ successor given the natural gravity of the business will be in the East.

“By raising funds in Hong Kong in the latter part of last year, Prudential managed to add Asian investors to the shareholder register and bolster its balance sheet to grow in its two core territories through acquisitions.

“This creates an enticing looking set of circumstances for whoever comes in to replace Wells but, before they get carried away, there are a few clouds on the horizon too. These include the unpredictable outcomes from the war in Ukraine and the closure of the border between mainland China and its current base of operations, Hong Kong.

“Their hope must be that it falls to interim CEO Mark Fitzpatrick to sort out these issues before he steps down from a job which he’s been clear he doesn’t want on a permanent basis.”

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