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Points of View: UK Market Review

The end of June brought with it the end of the first half of this calendar year.  This week I take a look back over the period since 1 January and consider the relative attractions of the UK market.

Stock markets suffered their first meaningful fall for nearly two years at the start of the year. Having hit a peak of approximately 7800 in January, the FTSE 100 fell nearly 12% to a 12-month low of just under 6900 in late March. Since then, stock markets have promptly recovered and again sit close to all-time highs.

Despite this, the UK stock market is stubbornly out-of-favour with global investors thanks to the political uncertainties of Brexit and the threat of a left-wing government coming into power with a mandate to hike taxes and nationalise large parts of the economy. Indeed, global investors have clearly taken a consensus underweight position on the FTSE, which is arguably at its most unloved point in decades relative to other developed stock markets.

On the one hand this is frustrating for UK investors, but on the other hand it is re-assuring; looking forward, it seems to us that the UK stock market offers very attractive relative value for long-term investors. The FTSE 100, for example, currently yields approximately 3.8%; in contrast, the yield offered by the S&P is 500 is a miserly 1.9%. Moreover, it is important to remember that the UK economy is not the same as the UK stock market. There is some overlap, but it is far less deep than most people assume. The domestic macroeconomics of the UK has very little to do with the collection of international businesses the make up the UK stock market. To this extent, the UK stock market provides a natural hedge against any woes that befall the UK economy.



Points of View: Schroder Asia Pacific

This week I am looking at Schroder Asia Pacific, an investment trust which invests in equities listed in the Asia Pacific region excluding Japan. The fund has been managed by Matthew Dobbs since inception in 1995 and has become the largest trust in the sector.

Performance of the fund has been very strong over the last 3 years, 51% vs 29% for the MSCI Asia ex Japan benchmark, which has been driven by large weightings to Chinese and technology based stocks.

Chinese equities make up around half of the portfolio (this is c3.7% overweight compared to the benchmark) and this has been steadily increasing over the last couple of years. Mr Dobbs gains exposure to these stocks through the Chinese and Hong Kong stock exchanges, traditionally preferring the Hong Kong listed companies due to tougher listing requirements and better corporate governance. Mr Dobbs feels that this weighting is justified due to favourable economic conditions and a shift towards services and the consumer.

Technology is the largest sector weighting in this fund at 34%. Over the last 18 months the technology sector has seen strong performance and those listed in Asia have been no different. Despite the strong rise in the share price of companies like Alibaba and Tencent (the Chinese equivalent of Amazon and Facebook respectively), Mr Dobbs feels that these companies will continue to be the key beneficiaries of the technological disruption going on in the region. Tencent already has around 320m users who spend more than 4 hours a day on the platform.

Arguably, the large weightings to China and technology increase the risk of the fund. However, over the 23 years since inception, Mr Dobbs and his team have established a great track-record of identifying drivers of growth for the fund to benefit from.


Point of View: US/China Trade

The swing towards populist politics around the world continues to add strength to nationalist agendas and, in turn, act as a catalyst for trade frictions. Of particular concern to investors is the escalating trade fight between the US and China, which has been set in motion by the protectionist policies that have been coming out of the White House since early March.

Initially, the Trump administration announced hefty tariffs of 25% and 10% on steel and aluminium imports respectively. The move was broadly condemned (the EU, for example, threatened tariffs on bourbon, jeans and Harley-Davidson motorcycles in response) and broad-based exclusions were quickly rolled out for its allies. Subsequently, and more significantly, Mr Trump has chosen to target China alone. Towards the end of March he announced tariffs on up to $60bn of annual Chinese imports and stated that Beijing needs to pay the price for decades of unfairly acquiring US intellectual property. For its part, Beijing quickly revealed plans to apply tariffs on 128 US products (accounting for roughly $3bn in imports) and stated its intention not to back down. Since those announcements, there have been further tit-for-tat statements and the Trump administration is reportedly planning tariffs on an additional $100bn of Chinese imports.

This is clearly a concern as escalating trade tensions between the two largest economies in the world could inflict meaningful damage to global growth prospects. Our view is that investors should expect common sense to prevail. Politicians in democracies need growth and prosperity to be re-elected. Tariffs are therefore likely to settle at a level that is mildly inflationary but does not significantly curtail economic activity and growth.


Points of View: Witan Investment Trust

This week I am looking at Witan Investment Trust, a UK-listed fund that invests in global equities through a multi-manager approach. The manager and CEO, Andrew Bell, has been leading the Trust since 2010 and has been responsible for a significant refinement of the strategy, moving the fund towards managers that have higher conviction portfolios and a greater focus on company fundamentals.

Over the last 18 months the fund has made several changes to the line-up of external managers to reflect the new strategy. Previously, the fund has used index-trackers to gain exposure to Europe and Emerging Markets as the investment team felt that they needed more time to identify suitable active managers. The fund now only consists of active managers and has seen the total number of managers used fall to 10, as Andrew felt they did not need five global portfolio managers and moved the assets to be split evenly between the three in which they had the highest conviction.

Mr Bell and his team feel that with higher global debt, rising interest rates and the reduction of global quantitative easing it was extremely important to focus on portfolios where the managers have the highest conviction in their best ideas. As a result of these changes the fund is now invested in around 350 companies, down from around 550. These changes also mean that its ‘active share’, a measure of how different the underlying holdings are to the index, increased from 70% to 77%.

The multi-manager approach adopted by Witan has proved successful so far and has outperformed the peer group over the long-term. However, the fund does still hold a larger than usual number of underlying holdings. Some funds with this many holdings run the risk of becoming similar to an index-tracker but with higher ongoing costs for the investor.


Stocks in Focus: Centrica

This week I am looking at Centrica, the parent company of British Gas and the biggest energy supplier in the UK. The company announced its full-year 2017 results last week, which reported a 3% rise in group revenue, but a 17% fall in operating profit due to the poor performance of its business energy supply unit. These results were broadly in line with expectations following the company’s profit warning in November 2017 where concerns were raised about the struggling business energy supply division and the impending price cap on standard variable tariffs (SVTs). What the market did not expect however was that the group would announce its intention to hold full year dividends steady at 12p per share this year and out to 2020 subject to cash flow and net debt targets being met. Shares reacted positively on the news.

Centrica is one of a number of energy suppliers that will be affected by the introduction of the price cap on SVTs. In response to this, the chief executive has announced plans to cut 4,000 jobs on top of the 5,500 he has already axed. He explained that greater digitisation in the industry as customers move online and intense industry competition are also part of the reason for the job cuts. He also added that cost cuttings programmes involving investment in technology and the simplification of core business processes would result in cost savings of £1.25bn per year by 2020 and the creation of 1,000 jobs.

With the price cap looming, cash generation seems to be heading in the right direction and debt reduction is on track. However, cost cutting cannot continue forever. Centrica has around 25 million existing customers as well as strong, recognisable brands. It will be interesting to see whether it can play to these strengths to drive future growth.


Points of View: Bitcoins

At the moment investor news is flooded by the Bitcoin phenomenon.  Bitcoins were the first decentralised digital currency, which were created in 2009 following concerns for the global banking system after the financial crisis.  The price of bitcoins took nearly 5 years to break through $1000 but has recently exploded in value and now fluctuates by $1000 in a matter of hours.

Bitcoins are essentially a string of computer code.  They cannot be printed by a central bank and are instead “mined” by computers solving a complex mathematical problem that unlocks its security.  Every 10 minutes the miner who solves the problem is rewarded with 12.5 bitcoins.  The number of bitcoins rewarded started at 50 and halves approximately every 4 years, up to around 2140 when the last bitcoin will be mined.  This means there is a limit of 21m bitcoins that can exist.  Transactions in bitcoins are only confirmed at these 10 minute mining occurrences.  The transaction history of a bitcoin is known as the blockchain and confirms the current owner of a bitcoin.

So should we consider bitcoins as an investment?  For us, an investment has to be based on certain fundamentals such as its ability to generate an income – without this one cannot calculate an intrinsic value.  On this basis we do not consider bitcoins to be an investment. Indeed, the incremental buyer of bitcoins now seems to be motivated by the fear of missing out and desire to make a quick gain, rather than concerns about the financial system and traditional currencies.  This has all the hallmarks of speculation, not investment.


Stocks in Focus: Vodafone

This week I am looking at telecommunications giant Vodafone, which recently published its half-year results. For the past couple of years the company has been facing tough competition in Europe and losing market share in Germany, Italy, Spain and the UK. Furthermore, Vodafone had to write-down £4.3 billion earlier this year in India, its most promising growth market, when competition intensified with the introduction of a new mobile carrier that offered six months free service to customers.

However, these concerns seem to be easing as Vodafone surprised investors last week by raising its annual profit forecast. The revised outlook is the result of a stronger than expected start to the year with notable improvements in operating profit, service revenue and cash flow. European operations have performed well with strong performances in Spain and Italy. The group also announced that the merger of its Indian operations with former local rival, Idea Cellular, is progressing well, which gives hope that the combined business can recover in the near future. Management has raised its guidance for full-year profit growth to around 10% from 4%-8% and the interim dividend was increased, which reflects a growing confidence in the future positive performance of the group.

Several undertakings led to these encouraging results, namely improvements in the quality of products and services, investment in networks, cost cutting measures and the merger of underperforming operations. Nonetheless, the cost of delivering these enhancements, including spending on infrastructure and mobile spectrum, is enormous. Investors should not neglect the importance of sustainable revenue and strong cash flow generation when evaluating companies.