Monthly Archives: May 2015

Points of View: Tobacco companies and plain packaging

Some of the world’s largest tobacco companies have launched one of the biggest ever claims against the UK government over the legality of plain packaging regulations and the deprivation of highly valuable intellectual property. British American Tobacco, Philip Morris and Imperial Tobacco claim that the regulations – which prohibit the use of colours, design and trademarks on tobacco packaging, with full roll-out by 2017 – violate EU property law, which allow companies to use their trademark. Additionally, concerns have arisen that the easy replication of generic packs could fuel counterfeit trade.

The UK government first announced plain packaging regulations in 2013, shortly after a similar move in Australia, claiming that the advertisement of tobacco products encouraged children to take up smoking. From the outset this has been strongly opposed by tobacco firms, who state there is little supportive evidence; rather, they highlight official reports that suggest children are most influenced by their peers, and that the size of health warnings do not directly reduce tobacco consumption.

Interestingly, the outcome of the lawsuit is expected to be positive for tobacco companies either way. If successful, they may secure a collective compensation pay-out of as much as £11bn for trademark losses (to put this in perspective, this could almost singlehandedly wipe out the UK government’s planned welfare savings). If unsuccessful, they will need to spend less on marketing and production costs and the legal action may at least further delay implementation or discourage other countries from taking similar action.

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Stocks in Focus: BT Plc

This week I am looking at BT following the publication of Ofcom’s report reviewing the internet connectivity market for businesses.  In its report, the telecoms regulator has proposed that BT should open its fibre network to competing firms, giving them full control of their services to customers. Rivals hope that this decision will help them provide a better service than BT currently does, especially in the time taken for a new line to be installed. Commenting on the proposals, Talk Talk’s CEO Dido Harding said: “It’s good to see that Ofcom is taking regulation of the business telecoms market seriously. For too long BT has been able to get away with delivering poor service to Britain’s businesses at inflated prices and these recommendations will help drive competition into the commercial market and improve the service they receive.”  In contrast, BT cautioned that the decision risks favouring companies that have the greatest capability to deploy their own equipment to the disadvantage of all other firms. Nevertheless, it welcomed the decision that the new rules will not apply to fibre optic lines inside London where Ofcom concluded that sufficient competition is already in place. Looking forward, Ofcom will start its consultation stage within the coming months and hopes to issue a final decision by early 2016.

In the meantime, the Competition and Markets Authority (CMA) is yet another regulator looking at BT for its proposed buyout of mobile network EE for £12.5bn. The CMA is expected to make a decision on this early next month.

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Points of View: Election clarity

As a general rule, stock markets do not like uncertainty. So when the General Election delivered the unexpectedly decisive result of a majority government, it was not surprising to see the FTSE 100 enjoy a strong one-off relief rally. On the Friday of the result, it rose 2.3% and back above the 7000pts level following pre-election jitters. The fact that the government is a Conservative majority also means that there is minimal disruption to ongoing projects.

The sectors leading the rally were as follows: utility companies, which no longer have to fear a Labour government freezing prices; house builders, which benefit from the mansion tax no longer being on the political agenda; public sector outsourcing companies, which are set to benefit from a Conservative government more likely to use them; and gambling stocks, since the Labour party were proposing tougher regulation on betting terminals.

So which FTSE 100 stock enjoyed the biggest relief rally?  That prize goes to Babcock, which is in the consortium to upgrade the UK’s Trident nuclear submarine fleet; an upgrade supported by the Tories but which was delayed by the coalition and opposed by the Scottish National Party.  The stock enjoyed a near 10% surge on the Friday following three months of nervous trading during which the share price fell 7% compared to peers.

However, the result was not universally good news on the stock market.  One of the notable losers from the election results was YouGov, a polling company whose predictions of a hung government proved inaccurate.

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Behavioural Finance

Peoples’ personality traits can hugely affect the way they react to the actual performance of their portfolio in the future. For example, consider a situation where two investors (Bill and Ben) have made the same investment. Over one year, the market average rises 10 per cent but the individual investment value increases by 6 per cent.

Bill cares only about the investment return and frames this as a gain of 6 per cent. Ben is concerned with how the investment performs relative to the benchmark of the market average. The investment has lagged behind the market’s performance and Ben frames this as a loss of 4 per cent.

Because of the way that individuals feel losses more than gains, Bill is much more likely to be happy with the investment than Ben. Their differing reactions here will frame their future investment decisions. Another problem for investors is the strong tendency for individuals to frame their investments too narrowly – looking at performance over short time periods, even when their investment horizon is long term. People also struggle to consider their portfolio as a whole, focusing too narrowly on the performance of individual components.

The 70% rule

Consider the “70% rule” that advises people to plan on spending about 70 per cent of their current income during their retirement.

For most people, this rule of thumb is intuitively appealing, which could explain why it has become so popular among financial planners. What if  the 70 per cent rule becomes the 30 per cent rule. That is, rather than focusing on the 70 per cent of expenditures someone would sustain through retirement, let’s consider the 30 per cent of expenditures that should be eliminated. Most people find the 30 percent rule unpalatable, even though the 70 per cent and 30 per cent rules are mathematically identical.

Myopic thinking can lead to investment mistakes

While it’s not uncommon for an average stock or fund to fluctuate a few percentage points in a very short period of time, a myopic (i.e. shortsighted) investor may not react too favourably to the downside changes. Therefore, it is believed that equities must yield a high-enough premium to compensate for the investor’s considerable aversion to loss.

Over-monitoring performance

Observing short-term fluctuations in the value of an investment is likely to cause more discomfort for investors who are particularly sensitive to losses. This may prevent them from investing in such a portfolio and thus lose out on the higher potential returns that they would get by taking on appropriate levels of risk.

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Stocks in Focus: Kier Group plc

In late March I reported on Kier Group plc following the release of an encouraging set of interim results. Last week, the construction, services and property company announced it has reached an agreement to acquire Mouchel in a £265m all-cash deal.

Mouchel is the UK’s largest maintainer of national roads as well as providing design, managerial, engineering and operational services around the world. Additionally it has a small Business Process Outsourcing business that provides an integrated portfolio of support services to a range of establishments including local authorities, schools, and rescue services.

Combined, the two businesses will create the sector leader in the UK highways management and maintenance market (where Highways England plans a £17bn spending programme), servicing almost a third of the UK’s road network. Specifically, based on historic 2014 figures, the combined entity will have pro forma revenue of £3571m (Kier £2954m), EBIT of £115.7m (Kier £88m) and order book of £9.3bn (Kier £6.5bn).

To fund the acquisition, which will include taking on Mouchel’s £40m net debt and £45m of net pension liability, Kier is aiming to raise £340m in a fully underwritten rights issue. Management’s rationale for the deal is that it should be “materially earnings enhancing” in the year to June 2016 and facilitate £10m of cost synergies in the year to June 2017.  As always, the success of the deal will hinge on whether the price paid proves attractive and management’s ability to successfully amalgamate the two businesses.

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