Stocks rally on Fed comments, Diageo bounces back after broker upgrade, Keywords Studios gets firm takeover offer

“Federal Reserve chair Jerome Powell has developed a reputation for refusing to categorically state something will happen, which means the market has to interpret what they think he is saying,” says Russ Mould, Investment Director at AJ Bell.

“In a speech on Tuesday, Powell said the US was back on a ‘disinflationary path’ but added that more data was required before the Fed would consider cutting rates.

“The latter phrase sounds a bit like a broken record as far as the market is concerned, so the most important part of Powell’s speech was the reference to disinflation, as investors interpreted it to mean there is a stronger case for cutting rates soon.

“That was enough to trigger a risk-on rally in the markets, with investors bidding up shares in the US, and for the dollar to fall. The equity market buzz extended to Asia and parts of Europe on Wednesday with widespread gains.

“The FTSE 100 advanced 0.4% to 8,155, led by commodity producers, banks and Diageo, the latter being the recipient of a bullish broker note from Citi.

“JD Sports was also subject to broker coverage, except this time it wasn’t favourable commentary. Barclays downgraded its rating on the stock to ‘underweight’ which triggered a share price decline in the retailer. JD Sports is one of the worst performing FTSE 100 stocks this year as investors worry that demand is weakening for athleisure and expensive trainers. It hasn’t helped that trainers giant Nike keeps issuing gloomy updates, spelling out the problems in the industry.”

Diageo

“Diageo benefited from a positive broker note on Wednesday following an extensive sell-off in the share price over the past 12 months.

“Diageo last night traded at a four-year low, the stock depressed by problems in Latin America and growing questions from the market over the current management team’s ability to put the company back on track.

“This situation had left the stock on its lowest valuation for 12 years at 16 times forward earnings, a far cry from the 28 times earnings metric seen just three years ago.

“That bargain valuation, at least relative to Diageo’s history, could make it a takeover target for an opportunistic rival with deep pockets or a private equity firm loaded up with cash to do deals. A prospective bidder might take the view that current problems are fixable and that now is a good time to swoop on a portfolio of well-known brands.

“The key risk to Diageo longer term is the rise of consumers choosing to drink less or no alcohol.

“For years, it rode the tailwind of premiumisation in the drinks industry, where consumers were happy to pay more for quality products. However, the cost-of-living crisis showed that even wealthier individuals were paring back their spending and so it has been harder for premium-end drinks companies to grow.

“A prospective bidder for Diageo might argue the premiumisation trend could easily bounce back and that there is still a big opportunity with alcohol, as well as offering low or no alcohol versions of well-known products.”

Keywords Studios

“After an extended song and dance, EQT finally stumped up a formal offer for computer games services group Keywords Studios. The target’s board has recommended the deal and if successful, it would conclude 11 years on the market for one of AIM’s biggest success stories.

“Keywords was only worth £49 million when it floated in 2013, but the shares subsequently spent many years shooting upwards as it hoovered up all kinds of businesses related to the computer games industry.

“At its peak in 2021, Keywords was valued at £2.5 billion, which is quite an ascent from its IPO. The gaming industry has gone through a difficult patch of late, hence why Keywords’ shares suffered from a big pullback in 2023, but EQT has clearly spotted an opportunity to buy a comprehensive entity for a slight discount versus its heyday. Its bid values the group at £2.1 billion.”

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