European markets down, takeover frenzy continues, big week for US tech and fast food and drink stocks, ASOS targeted by short seller ShadowFall

“A sea of red across European indices says everything you need to know about investors’ mood. While the losses are relatively minor, the fact the key European markets are falling at the start of the new trading week suggest that investors are nervous once again about the outlook,” says Russ Mould, Investment Director at AJ Bell.

“One of the key issues is the gloomier picture for corporate earnings growth. Earnings drive share prices and the prospect of slower growth and/or squeezed margins doesn’t bode well for equities.

“Economically sensitive sectors including mining and energy were among the biggest fallers on the FTSE 100, including a 1.9% decline in Glencore and a 1.5% fall in BP.

“In the US, all eyes are on the big tech names which report earnings throughout the week. Tuesday sees Microsoft, Alphabet and Visa report numbers, with Meta Platforms on Wednesday, and Amazon and Mastercard on Thursday. Cost-cutting has been a key driver for many of their share prices in recent months, yet investors will want to know that underlying business is still healthy otherwise the recent rally in US tech names could grind to a halt.

“We’re also getting updates from companies that provide popular food and drink products, namely Coca-Cola which reports today and PepsiCo and McDonald’s tomorrow. They are expected to have seen resilient demand given their low-price points.”

Takeovers

“The takeover juggernaut keeps on trucking with private equity players swooping on Germany’s Software AG and UK teleradiology group Medica. This continues a trend that has gathered pace in 2023 as private equity firms, already flush with cash, take advantage of depressed valuations across Europe.

“Both Software AG and Medica have experienced growing pains over the years. Software AG has seen a decline in demand for database-management products, while Medica has struggled in the past to get enough qualified radiologists to interpret CT and MRI scans. However, both firms have been fighting back, which might explain why there are parties interested in taking them over.

“In January, Software AG reported its seventh consecutive quarter of digital business revenue growth. In March, Medica reported a 12% rise in full year underlying pre-tax profit.

“Often with investing, it’s all about recognising a turning point for businesses that have previously struggled, or realising that certain operations are worth more than the entire market cap of a company. Private equity firms often buy companies so they can merge certain operations with other interests they own.”

ASOS

“ShadowFall sounds like something which would haunt your dreams and news the short seller has set its sights on online retailer ASOS could certainly cause its directors and shareholders a few sleepless nights.

“Known as the ‘dark destroyer’, a nickname which will only add to the feeling of distress, ShadowFall has previously targeted ASOS rival Boohoo as well as publisher Future and banking software firm Temenos. Perhaps its biggest success was in spotting the accounting irregularities at fraudulent payments processing firm Wirecard before its implosion in 2020.

“ShadowFall adds its name to a list of several other institutions targeting ASOS, with more than 10% of the company’s stock out on loan.

“It’s easy to see why corporate vultures are circling. Chief executive Jose Antonio Ramos is desperately reducing inventory and slashing costs as he looks to stem the flow of cash which is bleeding out of the business.

“The company failed to fix the roof while the sun was shining. Online retail had a good thing going during the pandemic. People had lots of disposable income, there was nowhere else to buy clothes and the thought of braving a queue at the post office meant people were put off from making returns – which are such a costly part of doing business.

“Now a lot of those factors have reversed, household budgets are tight, returns are easier to make and physical retail is now an option.

“Ramos faces a real battle to get things back on track and an increasing number of observers are now betting against him.”

These articles are for information purposes only and are not a personal recommendation or advice.