SThree disappoints while investors’ nerves over stimulus withdrawal show - City Comment
13 June 2013
Every so often, there are perverse occasions when stock markets perceive bad news as good, and good news as bad. Last week is a case in point as investors struggled to assess whether US economic recovery is sufficiently robust to withstand the withdrawal of stimulus measures by the Federal Reserve.
Thu, 13 Jun 2013 | By Kean Marden, head of business services equity research, Jefferies InternationalEvery so often, there are perverse occasions when stock markets perceive bad news as good, and good news as bad.
Last week is a case in point as investors struggled to assess whether US economic recovery is sufficiently robust to withstand the withdrawal of stimulus measures by the Federal Reserve.
Such nervousness is well founded. In February 1994, a surprise half a percent rise in US interest rates was announced just as economic growth was accelerating and, over the next 12 months, interest rates (which had been cut to a record low 3%...sound familiar?) doubled to 6%. Equity and bond markets collapsed.
The release of US non-farm payroll data last week provided a perfect insight into this mindset. Stock market traders celebrated a mediocre recovery after the announcement that 175,000 jobs were created last month. A Goldilocks figure that suggests continued improvement in the economy but not at a pace that will convince the Federal Reserve that its job is done.
As this debate rages, the FTSE100 pulled back by 4% over the past two weeks. Within the recruitment sector, there was perplexing divergence in share price performance. European stocks such as Randstad (-5%) and Adecco (-4%) were the main laggards. Manpower, Robert Half and Kelly were flatter despite having their shares listed in the US. The leaderboard was headed by Impellam (+5%) and Robert Walters (+4%).
Trading updates this week were limited to SThree’s second quarter results which disappointed analysts and the shares closed the day 3.5% lower having declined as much as 7% in the morning session. Net fee income was 10% below our estimate driven by weak perm momentum and a 6% decline in contractor day rates due to fee pressure in more mature markets and banking.
Analysts downgraded full year profit estimates by around 5% and the tentative UK recovery highlighted by some peers recently was not echoed by SThree, perhaps due to its greater exposure to the late-cycle IT industry.
So, the common theme of the past six months – solid temp activity but weakness in perm – remains uninterrupted. However, the desire amongst candidates to seek out greener fields hasn’t diminished and one survey caught my eye this month. According to a report published by Hay Group (a management consultancy, not recruitment firm Hays) and the Centre for Economics and Business Research, levels of staff turnover will increase sharply in the next two years, and in 2015 it is expected that there will be 765,000 more departures than in 2012.
Last week is a case in point as investors struggled to assess whether US economic recovery is sufficiently robust to withstand the withdrawal of stimulus measures by the Federal Reserve.
Such nervousness is well founded. In February 1994, a surprise half a percent rise in US interest rates was announced just as economic growth was accelerating and, over the next 12 months, interest rates (which had been cut to a record low 3%...sound familiar?) doubled to 6%. Equity and bond markets collapsed.
The release of US non-farm payroll data last week provided a perfect insight into this mindset. Stock market traders celebrated a mediocre recovery after the announcement that 175,000 jobs were created last month. A Goldilocks figure that suggests continued improvement in the economy but not at a pace that will convince the Federal Reserve that its job is done.
As this debate rages, the FTSE100 pulled back by 4% over the past two weeks. Within the recruitment sector, there was perplexing divergence in share price performance. European stocks such as Randstad (-5%) and Adecco (-4%) were the main laggards. Manpower, Robert Half and Kelly were flatter despite having their shares listed in the US. The leaderboard was headed by Impellam (+5%) and Robert Walters (+4%).
Trading updates this week were limited to SThree’s second quarter results which disappointed analysts and the shares closed the day 3.5% lower having declined as much as 7% in the morning session. Net fee income was 10% below our estimate driven by weak perm momentum and a 6% decline in contractor day rates due to fee pressure in more mature markets and banking.
Analysts downgraded full year profit estimates by around 5% and the tentative UK recovery highlighted by some peers recently was not echoed by SThree, perhaps due to its greater exposure to the late-cycle IT industry.
So, the common theme of the past six months – solid temp activity but weakness in perm – remains uninterrupted. However, the desire amongst candidates to seek out greener fields hasn’t diminished and one survey caught my eye this month. According to a report published by Hay Group (a management consultancy, not recruitment firm Hays) and the Centre for Economics and Business Research, levels of staff turnover will increase sharply in the next two years, and in 2015 it is expected that there will be 765,000 more departures than in 2012.
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