Monthly Archives: October 2015

Points of View: Europe

This week I am focusing on the European stock market, which has suffered bouts of volatility in recent months.

Like its global peers, Europe has fallen prey to a range of macroeconomic events including the slowdown in China, the timing of an interest rate rise in the US, and the prospect of a referendum on the UK’s continued membership of the EU. Within the bloc itself Greece has dominated the media, raising concerns that Spain may elect an anti-austerity party in December. Consequently, the FTSE Eurofirst 300 index – comprising the region’s 300 largest companies by market capitalisation – has fallen by 18% from peak to trough year-to-date.

Even Germany – widely viewed as Europe’s industrial powerhouse – has not escaped, with the DAX index declining by 24% between April and September. Carmakers have been key drivers, which is unsurprising not least because of the VW emissions scandal, but also because Germany exports the greatest number of vehicles to China of all 28 EU member nations.

There are, however, reasons to be positive. ECB president Mario Draghi stunned markets this week by announcing his willingness to cut interest rates and expand quantitative easing (QE) to prevent another economic slump. The weak currency has boosted demand for goods and services, reflected in stronger corporate earnings growth.

In this uncertain environment, it is important to look through the immediate noise and focus on the longer-term picture. Investment trusts are ideally placed to take such a long-term view, as their closed-ended structure removes the need for their managers to be mindful of redemption requests from short-term investors.

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Stocks in Focus: Unilever

This week I am looking at Unilever, which is one of the world’s leading suppliers of consumer goods within the Food and Home & Personal Care markets. Its portfolio includes well-known brands such as Comfort, Surf, Dove, TRESemme, Flora and Magnum. Most notably, following on from four bolt-on acquisitions this year, Unilever is now the world’s second biggest Personal Care product provider after L’Oreal.

One of the main attractions of Unilever from an investment perspective is that its products are always in demand, being purchased by millions of customers every day, regardless of the economic weather.  In addition to this, one of the core drivers of its growth over recent years has been its exposure to an ever growing band of Emerging Market consumers.  However, with Emerging Markets now accountable for more than 50% of sales, the recent slow down of growth in these areas have led to concerns that the company may not be able to continue its hitherto reliable growth. In light of these concerns, Unilever’s recently released third quarter results, which revealed its highest rate of growth in three years, were well received.  Indeed, on the day of the results last Thursday, the shares rose an encouraging 4%.

With companies struggling to drive growth amid economic uncertainty, Unilever has again demonstrated the strength of its business model.  However, a good company is not always a good investment and it remains vital that investors targeting attractive long term returns do not overpay for a company’s prospects.

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Points of View: Markets bounce

Hopes that central banks will maintain accommodative policy stances helped global stocks to a strong bounce last week.  From a low of just over 5,900 on 29 September, the FTSE 100 recorded eight consecutive positive days and finished last week at a seven-week high of just over 6,400.

The trigger for this bounce was the release of less than impressive US employment data.  Following the US Federal Reserve’s decision to leave rates on hold in September, this disappointing economic data suggests the economy may not be ready for monetary tightening and has therefore pushed rate hike expectations even further out into the future. In turn, this has prompted a sharp rally in equities and commodities as a “lower for longer” rate policy is supportive of economic activity and asset prices.  Weighing against this, disappointing economic data clearly suggests that a stagnant earnings environment may also persist.

Whether this proves to be the start of an extended recovery or not will likely depend on China and whether its leaders are able to keep the economy growing at acceptable levels whilst  engineering a tricky transition from an export and investment-led economy to a consumption-driven one.  Interestingly, the Communist Party of China is set for its annual “plenum” next week and high on the agenda will be its 13th five-year plan of national development (2016-2020). This will no doubt shed greater light on its policy stance going forward.

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Stocks in Focus: Vodafone

This week I am looking at Vodafone, the global telecommunications giant that provides voice, messaging, data and fixed line services to around 440 million customers in over 25 countries. The company recently terminated talks of a possible exchange of selected european assets with Liberty Global, the parent company of Virgin Media. It was difficult for the two companies to agree on a valuation for the deal as they specialise in different sectors of the market, which in turn are valued differently; Vodafone specialises in mobile telecommunications whereas Liberty Global is primarily a cable business. They each have intricate tax and debt frameworks which made it difficult to agree on a suitable structure for a mutually beneficial deal. There were also regulatory concerns in some of their common markets where a partnership could hinder competition within the industry.

That said, the companies appear well suited for each other as the industry converges towards the so called “quadplay service”, where providers offer packaged mobile, fixed line, internet and TV bundles to the market. Virgin Media already offers “quadplay” but it currently “piggybacks” onto the EE network to offer mobile services in its bundles. There could be significant cost savings to the cable company owning its own mobile assets. Similarly, Vodafone would benefit from owning its own cable network. The asset swap deal may have fallen through but Vodafone and Liberty Global are in no rush, and a takeover bid remains a possibility.

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September 2015 Market Review

This edition of the Market Review discusses recent market weakness and the implications of slower Chinese growth.

September 2015 Market Review

The last three months have proved to be a tumultuous period for global equity markets, which have experienced sharp falls on the back of fears about slowing growth in China and uncertainty around the timing of interest rate rises in the US. This issue of the Market Review therefore focuses on these two concerns and offers our views on whether long-term investors need to panic – to which the short answer is no! At the time of writing, the FTSE 100 has fallen approximately 15% since its peak in April this year. Such falls feel painful in the short term but are somewhat irrelevant to long-term investors who do not need to liquidate holdings; dividend income has not dropped since April and in the long term capital growth can be expected to resume.

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