Tag Archives: investment manager

Points of View: Current Market

Over the past month the FTSE 100 has fallen approximately 700 points, or 8.8%.  This has come as investors comprehend an environment of rising interest rates and potentially higher global inflation, following a sustained period of loose monetary policy.

The Monetary Policy Committee of the Bank of England met on 7 February 2018 and voted to keep interest rates at 0.5, however also suggested that rates may rise more quickly than previously anticipated.  Interest rates can have an impact on nearly all asset prices.  All other things being equal, a quicker than anticipated rise in interest rates means that bond yields rise, causing bond prices to fall and that in turn causes equity prices to fall.

This is broadly what has been observed in the US market recently.  Wage growth inflation has been higher than expected.  Interest rates are one of the tools used to control inflation; therefore a higher than expected inflation figure may lead to the US Federal Reserve raising interest rates faster.  This fear of rate hikes sparked a bond sell-off, which caused US equity markets to fall.  The effect was exacerbated by an outflow from investors of low volatility strategies, causing a raft of forced selling.  The US market tends to lead the way for equity markets across the globe and the fall in US stocks was a precursor for the UK market falling back.

In the short term, rising inflation and interest rates remain a headwind for UK equities, however historically companies have been able to pass rising costs on to consumers and grow earnings faster than inflation over the long term.  Our opinion remains that equities remain the best asset class to outperform inflation over the long term.  In the short term markets may be more volatile, as evident this year so far, but for investors taking a long term view short term volatility eventually becomes insignificant.

https://www.nwbrown.co.uk/news/company-report-library/

Advertisements

Stocks in Focus: GKN

This week I am looking at GKN, the British automotive and aerospace components company, which last week rebuffed a takeover approach from Melrose plc – a firm that specialises in buying and turning around manufacturing companies. The informal bid from Melrose was a £7billion cash and share offer (equivalent to 405p per share at the time it was announced) along with proposals for improving GKN’s performance. The board of GKN has turned down the unsolicited offer stating that the approach was opportunistic and that it undervalued the company.

The approach from Melrose comes at a particularly difficult time for GKN. The group has issued two profit warnings since October 2017 and the incoming chief executive Kevin Cummings stepped down at the same time with the company warning about problems at its US aerospace division which he headed up. Melrose intends to formally pursue its takeover proposal and it will present GKN shareholders with an argument that the company is “an overly complex and under-managed organisation”.

In contrast, whilst the outlook is cautious and performance has been muted in the short term, GKN stated that it is trading in line with expectations. The company remains a well-diversified, high quality engineering company that is a prime supplier to the world’s biggest aerospace companies and provides parts and systems to a number of car manufacturers.

A key consideration for long term holders of a company in a prospective takeover is whether the offer price represents good long-term value and whether higher bids might be forthcoming. Melrose has until February 9 to make a firm offer and investors expect further talks and possibly a higher offer.  In the meantime, there are rumours that US buyout company Carlyle Group is also interested in GKN.

https://www.nwbrown.co.uk/news/company-report-library/

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.

https://www.nwbrown.co.uk/news/company-report-library/

Stocks in Focus: Prudential Plc

This week I am looking at Prudential, the multinational life insurance and financial services company.  Prudential has had a strong year after economic conditions turned in its favour, reporting a new business profit increase of 17 per cent for the year to September 30. The third quarter trading update also reassured investors that there are still clear structural opportunities in each of its three key markets – Asia, the US and the UK.

Much of the rise in the new business profit has come from the Asian market. This growth is expected to continue to drive the share price going forward. Management are hopeful that the Asian business will double in size every five to seven years thanks to a growing and increasingly affluent Asian middle class that has driven demand and sales.

Elsewhere, the company intends to strengthen its position in the UK asset management market, targeting the retirement income needs of an aging UK population, following its merger with M&G asset management. Prudential also own one of the largest life insurance providers in the US, Jackson National, and expect this area to perform well given the demographic shift of Baby-Boomers moving into retirement.

The Asian business now accounts for over a third of group profits but faces strong competition, with companies such as AIA having a much greater presence in China. Other concerns include how a weakening of the US Macro backdrop could impact the US business, and whether an excessive rise in UK interest rates could threaten the UK annuity business. While the company appears to be well-poised for further growth, these threats are significant.

https://www.nwbrown.co.uk/news/company-report-library/

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.

https://www.nwbrown.co.uk/news/company-report-library/

Stocks in Focus: Kier Group

This week I am looking at property, residential, construction and services firm Kier Group, which announced preliminary full year results last week. The performance was in line with management expectations and the results showed a group pre-tax profit of £126m, compared with £116m last year, while revenues for the year have risen to £4.28bn, 3 per cent higher than the previous year.

The results were well received in a sector where a number of Kier’s competitors had experienced problems. Investors were reassured that management’s portfolio simplification programme has been a success since they made the decision to sell the Hong Kong and Caribbean businesses earlier this year. The simplification has resulted in increased focus on its three core markets; building, infrastructure and housing, which now represent 90 per cent of the group’s revenues and profits.

Management are confident that the business will remain relatively unaffected by Brexit and the firm is likely to benefit further from the increasing government focus on affordable housing, having already secured government funding over the last year to build new homes.

When writing about Kier last year, we explained that the contractor had laid out a “Vision 2020” plan of strategic targets to reach by 2020. The reassuring recent results along with the decision by the board to raise the full year dividend by 5 per cent, should help to increase investor belief that the group is on track to hit its ambitious target of £200m in annual operating profits by 2020. However, the economic environment remains challenging.

https://www.nwbrown.co.uk/news/company-report-library/

Stocks in Focus: Dunelm

This week I have been looking at national homeware store Dunelm.  The company reported annual results on Wednesday 13 September that were in line with market expectations.  The company had a weak start to the year as a result of unpredictable weather combined with the tightening of consumer spending.  The second half of the year performed better with Easter falling later and improvements in the timing of promotional and seasonal events.  It has been an eventful year for the company following the purchase of online homeware retailer Worldstores from administration, together with the sudden departure of CEO John Browett at the end of August.

Dunelm had been interested in Worldstores for twelve months before the company went into administration, allowing Dunelm to take the initiative to buy the assets for a nominal £1.  The acquisition and ongoing integration of Worldstores is allowing Dunelm to accelerate both its furniture and online offerings.  Worldstores focussed predominantly on producing and sourcing furniture and selling through their online store.  These were both areas where Dunelm was underrepresented.  Worldstores also owned the Kiddicare baby and infant products store.  Whilst not a traditional core business to Dunelm the company believes that an integration of the brand, perhaps as a mezzanine level in existing stores, could help drive footfall of an otherwise untapped customer demographic.

The change in management at the top was not so surprising given the disappointing performance of the company over the prior two years.  However, for the interim, the company seems to be in good hands under the executive leadership of Chairman, Andy Harrison (previously CEO of Whitbread), incumbent CFO Keith Down and founder and majority shareholder, Deputy Chairman Will Adderly. They have lofty ambitions to double Dunelm’s sales over the next five years or so but investors are currently wary that the company’s prospects are ultimately tied to the strength of increasingly squeezed UK consumers.