Market snapshot: stocks resume rally, Babcock results

The relief rally continued cautiously as the immediate Greenland threat receded but tensions remained high between the interested parties at Davos.

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The EU showed signs of increasing resistance to the whims of the White House, promising to defend itself “against any form of coercion” while also leaving the door ajar to the resumption of the trade deal which had been suspended. It remains to be seen whether this shot across the bows lands with the President over the coming months.

Meanwhile, the domestic economy received some promising news, which was another factor in a positive day for the main indices. GDP growth and consumer spending came in higher than expected, jobless claims fell, and inflation was in line with estimates. This removes any immediate fears of a slowdown in the US economy, although by the same token it reduces the likelihood further of any corrective action from the Federal Reserve on interest rates.

The slight spike in shares took the Dow Jones into positive territory for the week, and the index is now up by 2.7% this year. The S&P500 and Nasdaq are marginally down this week but ahead by 1% and 0.8% respectively in the year to date. At the same time, the Russell 2000 remains the subject of most attention, with a further gain of 2% propelling the smaller cap index to another record close.

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The FTSE100 edged higher at the open in slightly unconvincing fashion. The continuing strength of the gold price serves as a reminder that investors remain selectively skittish, although its further gains underpinned Endeavour Mining shares once more. Elsewhere, there was buying interest in some more defensive (as well as defence) stocks, consolidating a 2.4% gain for the premier index in the year to date.

Elsewhere, a surprise rise in retail sales over December and an improvement in a consumer confidence survey weighed on the more domestically focused FTSE250 as it further reduced the likelihood of any immediate stimulus from the Bank of England. By the same token, the economy’s resilience as seen in recent data releases, along with the increasing attraction of the UK as an investment destination, has enabled a rise of 3.8% for the index so far in January.

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Babcock International Q3

Babcock International Group (LSE:BAB) delivered a topical trading update which underlined the reasons why the defence sector has been at the heart of investor interest in recent times.

Quite apart from being a major contractor for the UK government, the group has interests across many jurisdictions within its numerous business units. Babcock revealed that its strong momentum from the first half continued into the third quarter, with some significant strategic developments which included, but were not limited to, being selected as the prime industrial partner in Indonesia’s £4 billion Maritime Partnership Programme and agreeing to two further Arrowhead 140 licences.

By unit, Nuclear growth continued with the business extended its partnership in the US Virginia Class submarine build. Aviation and Maritime were also strong, more than offsetting any weakness in the Land division given lower Rail activity.

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Meanwhile, the £200 million share buyback programme is ongoing and, in terms of outlook, the group reiterated its guidance given that the vast majority of forecast revenue for the year was now contracted, and confirmed that it was likely to meet its stretching 8% margin target.

Expectations for prospects have been on a march, which has weighed on the opening reaction to the update, but for the most part the likes of Babcock have lived up to their billing. The shares have risen by 193% over the last year, as compared to a gain of 19% for the wider FTSE100, and by 385% over the last three years. Despite this meteoric rise, investor appetite is undiminished given the global backdrop and the market consensus of the shares as a strong buy is unlikely to waver any time soon.