Week Ahead: Big Banks | Miners | Rolls Royce’s turnround | EU inflation data

Good morning and welcome to the Week Ahead, your weekly destination for discussion and analysis of the largest stocks in the UK and overseas.

This week is anticipated to be comparatively quieter on the macroeconomic front, especially following last week's flurry of activity. The US inflation figures came in higher than expected, causing a 1.3% drop in both the S&P 500 and the FTSE 100, as investors scaled back their hopes that interest rate cuts would come quickly this year. On Wednesday, the UK announced its own CPI figures, which dropped to 4%. Although with food prices falling for the first time in more than two years, the domestic markets recovered some of their previous losses.

This week, the focus will be on the CBI industrial trends (orders) data. This report holds a crucial place in assessing the expectations of manufacturers and provides insights into prevailing business conditions.

Thursday will mark another important day on the economic calendar with the Eurozone CPI print and the release of US jobless claims. Given the market volatility witnessed following the US CPI and PPI prints last week, Thursday holds the promise of further turbulence. Investors will closely scrutinise both the Eurozone and US economic indicators, seeking cues for potential shifts in monetary policies and market trajectories. This data is likely to have an impact on the UK markets.

Rounding off the week on Friday is the German GDP data. This will help shed further light on Germany's economic performance, which has been struggling over the past year, and its broader implications for the Eurozone and global markets. The figures are expected to come in showing a -0.2% contraction year on year.

Companies reporting

Betting on the Big Banks?

Many of the UK’s biggest banks will be reporting full year results this week. Leading the charge will be Barclays (LON:BARC) on Tuesday, which will hope to provide a better update to investors than its Q3 results last October.

Despite the company's headline profits having exceeded analysts' forecasts, Barclays disappointed the market with a cut to its guidance for UK net interest margin (NIM), a key measure of profitability in retail banking. This downward revision, coupled with concerns about margin pressure and challenges in its investment banking division led to the share price falling 6% on the day.

The share price has subsequently recovered to higher levels, but Barclay’s still trades at a considerable discount, 50% below book value when compared to some of its peers.

Investors will be eager for updates on Barclay’s ambitious £1bn cost-saving plan and further insights into the recent Tesco banking acquisition, valued at £600m. The strategic move aims to leverage Tesco's retail reach and enhance revenue streams, with 2,800 Tesco employees set to transition to Barclays by the acquisition's expected completion in H2 2024, subject to regulatory approval.

With HSBC Holdings (LON:HSBA) reporting on Wednesday, followed by Lloyds Banking (LON:LLOY) on Thursday and Standard Chartered (LON:STAN) on Friday, investors will have plenty to look out for. The common theme across the sector is that UK banks are trading very cheaply compared to their historical averages.

In fact, the Bank of England Governor, Andrew Bailey, recently said: “One remaining puzzle is the market valuation of the large UK banks, which by the way is not uniform. The cost of risk - the return equity investors demand - does not seem to have fallen in line with what appears to be greater stability and lower risk per unit of equity. The cost of equity remains at pre-crisis levels even though it was clearly mispriced before the crisis”

Look out for: Outlook on Net Interest Margins in the upcoming year, as the Bank of England may start to cut rates. Plus, any mention of engaging in more aggressive buybacks by UK banks due to their persistent undervaluation vs international peers.

The Mining Giants

BHP (LON:BHP) is set to unveil its half-year results before the Australian market opens on Tuesday, so UK investors will be able to digest the information late on Monday evening. The company’s shares have endured a difficult start to 2024, down around 12.5% at the time of writing.

BHP has faced several challenges that contributed to its poor financial performance over the past year. Notably, the cyclical nature of iron ore earnings has impacted the company, as fluctuations in demand, particularly from China, and changes in market conditions led to lower levels of profitability. As a result, BHP’s earnings of $30.9bn seen in 2022 are expected to more than halve this year. 

However, it's important to highlight that iron ore prices have shown a consistent upward trajectory since August last year, marking an impressive increase of over 22% in the last six months alone. Should Chinese markets experience a rebound from stimulus measures, it could yield some promising results for mining majors that have faced much market skepticism over the past year.

Despite being a world leader in mining with efficient operations, BHP's reliance on iron ore (which accounts for just under half its revenue) and continued struggles in its nickel operations (which were exacerbated by a sharp decline in nickel prices amid an oversupply in the market), have added pressure to BHP’s overall performance. Furthermore, the company is having to make significant provisions for the dam burst incident at the Samarco iron ore mine in Brazil.

Looking ahead to the upcoming results, analysts anticipate a mixed picture for BHP. While revenue is projected to increase by 5.2% to over $27bn, earnings per share (EPS) are forecasted to decrease by 8.4% to $1.19, reflecting the difficulty of current market conditions and the impact of global economic uncertainties. BHP’s first-half dividend is also expected to fall to $0.78.

Despite short-term challenges, BHP's future outlook remains promising. The company's strategic diversification towards greener commodities, such as copper and potash, will expand its non-iron exposure and allow BHP to better manage risks associated with commodity price volatility.

Rio Tinto (LON:RIO) and Glencore (LON:GLEN) will unveil their FY results on Wednesday, with Anglo American (LON:AAL) following suit on Thursday. BHP's results are likely to offer insightful parallels to Rio's, as both companies heavily depend on iron ore revenues for the bulk of their earnings.

Glencore’s results may highlight hurdles of its own stemming from coal price exposure, while Anglo American, which I recently covered in a mining review piece, grapples with ongoing challenges in the PGM market.

Look out for: Copper production forecasts in the coming year as inventories continue to be tight, which could support higher pricing.

Successful British Turnaround stories

Whilst it may feel like a relatively rare occurrence in UK markets these days, there have still been a few excellent mid-large cap performers in recent years. One such case that particularly stands out was the best performer of the FTSE 100 in 2023, Rolls-Royce Holdings (LON:RR.).

Rolls-Royce’s remarkable turnaround story saw its share price more than treble from just under 100p per share at the start of 2023, to over 314p today. After dealing with the turbulence of the pandemic and grappling with longstanding operational issues, the engineering company embarked on a transformative journey under the stewardship of CEO Tufan Erginbilgic.

Central to the company's resurgence has been its relentless focus on addressing fundamental weaknesses while capitalising on emerging opportunities. Rolls-Royce's commitment to streamlining operations, reducing costs, and enhancing efficiency whilst simultaneously expanding its portfolio to include promising ventures such as small nuclear reactors and advanced aerospace technologies, has reaped rewards.

As a result, brokers have been scrambling to upgrade forecasts over the past year. In December 2023, Citi raised its price target to 431p from 294p after it saw EPS forecasts 27% higher in the near-term and 52% over the longer-term. This followed previous target price upgrades to 400p by UBS and Deutsche Bank.

Bank of America also expects Rolls Royce to resume its dividend payments in 2024, and carry out significant buybacks in 2026-2027.

Another strong performer on the UK markets in recent years, BAE Systems (LON:BA.), has also consistently garnered higher estimates from brokers. The UK’s largest defence company will report its FY results a day before Rolls Royce, on Wednesday 21 Feb.

Analysts continue to foresee a supportive backdrop for BAE Systems, underpinned by persistent geopolitical tensions across the globe. Bank of America anticipates another year of robust organic revenue growth exceeding 6% for BAE Systems, while also forecasting a return of approximately 6% of its market value to shareholders in the coming year.

Look out for: Any mention of future dividends for Rolls Royce or further shareholder returns for BAE systems.

Pharma

The global pharmaceutical company, Hikma Pharmaceuticals (LON:HIK), is set to report its full year results on an action packed Thursday for the UK markets. Hikma, which featured in our New Year NAPS 2024 portfolio, will be hoping to build upon its recent strong price and earnings momentum. Another UK pharmaceutical company, Indivior (LON:INDV), is set to report its full year results on the same day.

US Announcements & Insurers in Europe

Over in the US, the main feature of the week will be NVIDIA's (NSQ:NVDA) Q4 earnings release on Wednesday. The company became the third most valuable in the US last week, as its market capitalisation surpassed a staggering $1.8trn. Nvidia’s incredible success and dominance in the semiconductor industry, particularly in providing chips for AI technology and machine learning models, has seen its shares more than triple in price over the past year.

The market doesn’t currently seem to see an end in sight for the company’s meteoric rise, with broker price targets now reaching $1,200 a share. After a stellar start to the year, with all US indices reaching all time highs, the market may hold its breath for a minute as Nvidia reports after market close.

Other notable announcements will come from Walmart and home improvement firm Home Depot on Tuesday, oil major Marathon Oil on Wednesday, and travel services provider Booking Holdings on Thursday.

In mainland Europe, plenty of the continent's largest insurers will be reporting results, with Axa and Zurich Insurance Group reporting on Thursday and Allianz on Friday.

Wishing you all a great week ahead!