Tag Archives: market commentary

Points of View: Interest Rates

Last Thursday the Bank of England (BoE) announced that it is holding UK interest rates at 0.5% on the back of weaker than expected GDP growth numbers for the first quarter of 2018 – the weakest quarterly performance in more than five years. The news resulted in the pound falling against the dollar to below $1.35, its lowest level in four months.

The central bank’s governor, Mark Carney, said that temporary weather disruptions in the first quarter of 2018 may have overstated the slowdown in economic growth. He added that the underlying pace of growth remains more resilient than the headline data suggest and that the Bank’s fundamental view on the health of the UK economy has not shifted. Seven of the nine members of BoE’s monetary policy committee (MPC) voted to keep rates unchanged and said that they wanted confirmation that the economy had merely been going through a “temporary soft patch” before voting for higher rates. The two remaining committee members, who voted to increase rates, argued that rising pay caused by falling unemployment required an immediate increase in interest rates and that the economy was strong enough to handle it.

The BoE has cut its growth forecast for the year to 1.4%, down from the forecast of 1.8% made in February. The rate hike has now been postponed to later in the year providing that the economy performs in line with updated inflation projections.

A rise in interest rates will have a negative impact on the value of traditional fixed investments. We are mindful of this and we have positioned our fixed return investments to reduce their sensitivity to interest rate changes.



Stocks in Focus: J Sainsbury Plc

This week I am looking at Sainsbury’s which recently agreed terms with Walmart to merge with its subsidiary Asda.  The proposal pleased investors, with Sainsbury’s shares soaring by 15 per cent following the announcement.  However, the deal still needs approval from shareholders and the UK Competition and Markets Authority, and there have been initial concerns over the affect that the merger could have on jobs, competition, suppliers and prices.

The merger is expected to cost Sainsbury’s £2.7bn in cash, and Walmart will hold 42% of the new combined business. The combination of Sainsbury’s and Asda will result in them becoming the biggest supermarket group in the UK, taking control of over 31% of the grocery market and overtaking Tesco as market leader, which currently has a 28% market share.  The merger will give the group more than 2,800 stores and management claim to have no plans to close any stores as a result of the agreement.

The combined group will be led by Mike Coupe, Chief Executive of Sainsbury’s, who predicts that the merger will save £500m through synergies, a saving that is expected to be passed on to consumers. With promises of reduced prices and improved quality, the combined supermarket will be in a better position to compete with the aggressive drive that we have seen in recent years from the Limited Assortment Discounters (LADs), Aldi and Lidl.  However, if the LADs react aggressively to price cuts, it could result in even more pressure for the supermarket group, who have steadily been losing market share to the LADs.

If approved, the merger is unlikely to complete until late 2019, so it will be some time before we see if management are able to deliver on their short term promises and what the long term consequences of the merger might be for staff, consumers and investors.


Stocks in Focus: Reckitt Benckiser

This week I am looking at Reckitt Benckiser, a British multinational consumer goods company.  The company, known for brands such as Dettol, Nurofen and Durex, released its first quarter trading update on 20th April, quoting a 2 per cent like-for-like sales growth against the same period last year. Whilst the results appeared reasonable, they narrowly missed analyst expectations and the share price fell on the back of this.

Management has been enthusiastically engaging in M&A activity in an attempt to promote growth in the current economic environment. The purchase in February 2017 of Mead Johnson, an international baby formula manufacturer, continues to integrate well. There have been reported cost-saving synergies of $25m so far and an expectation of $300m over the next three years. Following the acquisition, 50% of group revenue now comes from higher margin consumer healthcare brands. In an attempt to streamline the business the company also restructured itself into two separate divisions in January: health and home hygiene. With health clearly the growth driver of the business, management are now reviewing the lower margin home hygiene division.

Furthermore, following a strategic review of its food businesses, Reckitt Benckiser finalised a deal in the summer to sell its “French’s Food” brands to McCormick & Company Inc. The deal was completed for a cash sum of $4.2 billion and received well by investors. The company stated the cash would be used to reduce debt from the aforementioned Mead Johnson acquisition and continue to consolidate the business into more defined divisions.

Despite the recent setbacks, management remain confident that the steps taken to focus the business will continue to drive long term growth.  With its portfolio of power brands enabling the company to enjoy comparably high operating margins, it will be important to see whether this can be maintained under growing pressures from global competitors.


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.


Stocks in Focus: Greene King

This week I am looking at Greene King, following a strong share performance at the end of last week after announcing its pre-close update.  The share price jumped over 10% on Thursday 12 April and, at the point of writing, has continued to rise since.

Recent snow and cold weather negatively impacted sales and contributed to an overall fall in sales when compared with last year.  Like-for-like sales were down 1.8% for the first 49 weeks of its financial year.   Accommodation and drinks had positive like-for-like sales, indicating that the food-led pubs were the weakest part of Greene King’s business.  The results were broadly in line with consensus, however the shares rose strongly following the announcement.  Sentiment has been low towards the stock and investors reacted positively to a lack of bad news.

Greene King continues to operate in a competitive industry, facing a number of challenges.  Food-led pubs in particular face significant competition, which is putting pressure on margins and issues with Greene King’s Fayre and Square brand have further impacted profits.  Looking forward, consumer spending remains an on-going question and real wage growth remains flat.  However, the shares look cheap on a valuation basis and pay a dividend yield of approximately 5.8%.  Greene King’s management would also point out that the dividend has increased for the last 64 years – an impressive record.  The recent share price movement may be an indication that sentiment towards the stock is changing and goes to show that for an out-of-favour stock, no bad news can sometimes be good news.


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.


Stocks in Focus: Marks & Spencer

This week I have been looking at retailer Marks & Spencer.  The high street continues to evolve and is going through a serious period of upheaval.  Disruption is being driven by the online shopping revolution, led by Amazon, which is changing consumers’ purchasing habits.

The internet has been a deflationary influence on pricing, which has been beneficial to the “squeezed” consumer.  However, with the headwinds from an increase in business rates and the National Living Wage together with inflationary pressures of increased input costs driven by both currency and the cost of raw materials, profit margins of traditional bricks and mortar stores continue to shrink.

Marks and Spencer reported its 3rd quarter earnings in early January, which included its Christmas trading statement.  Sales at the company’s Simply Food business underperformed, previously viewed as one of the strongest growing divisions.  This was particularly disappointing versus its food peers who reported strong Christmas figures.

At the end of January the company announced the closure of 14 stores nationally, which meets with its 2016 programme of repositioning around 25% of the company’s Clothing & Home space.  This forms part of the company’s cost saving strategy which also includes the reduction in the pace of openings for its Simply Food stores.

Not only does the company need to continue with constructively cutting costs, but it also needs to demonstrate how it is innovating within Clothing & Home and Simply Food in order for the company to remain relevant in an increasingly competitive marketplace.  Marks & Spencer has a reputation for delivering good quality products, however ensuring that these products reach consumers in as efficient manner as possible will define how the company succeeds in the future.

Marks & Spencer will update the market with full year results at the end of March.