Tag Archives: market commentary

Stocks in Focus: Fidelity Special Values

This week I am looking at Fidelity Special Values (FSV), an investment trust that has recently released results for the year to 31 August 2017 and is celebrating five years under the management of Alex Wright.

Mr Wright adopts a contrarian and value style to picking stocks. This means that he focusses on finding out of favour companies that he feels are being priced substantially below their true value. This undervaluation usually stems from the market over-reacting to negative news concerning a stock or sector.

The trust sits within the UK All Companies sector and is able to operate in a completely unconstrained manner versus its FTSE All-Share benchmark. This has allowed Mr Wright to have a higher level of exposure to medium and small sized companies relative to his peers. This area is where Mr Wright and his colleagues are currently finding the most value. They are also looking at companies that earn the majority of their earnings in Sterling, as the team feel those with substantial overseas earnings are currently looking more expensive.

With the current uncertainty surrounding markets, the ability to pick stocks successfully on a bottom-up basis becomes evermore important. Mr Wright’s contrarian and value-based approach can sometimes result in a share price that underperforms the wider market in the short-term. However, his track record since taking over the management of FSV in late 2012 is impressive and suggests that his approach is adding value over the long term.



Points of View: Interest Rates

On Thursday the Monetary Policy Committee (MPC) voted 7 to 2 in favour of raising interest rates.  This came as no surprise to investors who had priced in a greater than 90% chance of a rate rise.

The market reacted counter-intuitively to the announcement.  The yield on 10 year gilts fell 0.08% and sterling fell 1.4% against the dollar.  Previously the Bank of England (BoE) had given guidance that rates might need to rise faster than markets anticipate.  Instead, the latest announcement said subsequent rate rises would be gradual – a more conservation tone.  The BoE also revised inflation figures downwards and made reference to a negative impact from Brexit on the economic outlook.

One of the main concerns in raising interest rates is the impact it will have on household mortgage payments.  The BoE estimates that the servicing cost of the average mortgage will increase by £15 per month once fully passed on by lenders.  However, the overall impact of this will take time to filter through.  Fewer households own a mortgage than previously and there has also been an increase in the number of households on fixed rate mortgages.

The BoE faces the same problem as the US Federal Reserve, aiming to increase rates so as to prevent a sustained rise in inflation but not so quickly as to damage the economy.  While the BoE have been clear that this rate rise is not a one-off but part of a sustained policy, the market’s reaction has been one suggesting further rate rises are further away than previously estimated.  It is important for the BoE to get interest rates back to more normal levels to allow them more options for the next economic downturn. However, any further increases would put pressure on households and companies struggling to service their debt.


Stocks in Focus: British American Tobacco

This week I’m looking at British American Tobacco (BAT), which is a leading company in the global tobacco industry. I last wrote about BAT a year ago following its offer to acquire the 57.8% of Reynolds (a US-focussed peer) that it did not already own. The deal was approved by shareholders earlier this year, taking BAT back into the $130bn US market after a 12-year absence.

Shortly after the takeover, the US Food and Drug Administration announced that it aims to reduce nicotine in cigarettes to non addictive levels, causing investors to become more cautious of the tobacco sector. However, the management of BAT reassured investors that the news was not unexpected to the company, and that they continue to focus more on the ‘Next Generation Products’ (NGP) part of the business. The NGP products, which BAT have invested more than $1bn into developing, include Vapour Products like e-cigarettes and Tobacco Heating Products, offering consumers alternatives thought to be healthier than traditional cigarettes. Management have since announced that they will be integrating NGP into their existing business infrastructure, hoping to strengthen an area that is fast becoming a key part of their mainstream business.

Although it is likely that traditional tobacco sales volumes will continue on a downward trend, BAT seem well placed to offer alternatives to consumers, with demand for e-cigarettes continuing to grow. In the meantime, cost cutting and consolidation have enabled earnings and dividends to continue to rise in recent years. Looking forward, investors need to consider whether this can continue – to what extent are NGP products an opportunity and to what extent are falling sales in traditional cigarettes and ongoing regulatory pressures a threat?


NW Brown September 2017 Market Review

This edition of the Market Review considers whether markets will continue to climb a “wall of worry”.

September 2017 Market Review

Points of View: Insurance

This week I have been looking at the unfolding 2017 hurricane season and the effects that Harvey, Irma and Maria could have on the US economy and the broader insurance sector.  These events have caused devastation across the Caribbean, Texas and Florida.  The financial impact that they will have is difficult to judge this early on.  However, total losses are expected to be between $80 and $125 billion.  Over the short term there will be a negative impact to the US economy. US jobs data has already shown that the number of jobs created by the economy has contracted for the first time since 2010 and the hurricanes have been seen as a large contributor. However, economic activity is expected to return as insurance policies pay out, property is rebuilt and damaged items such as cars are replaced.

Closer to home the impact will be felt by Lloyd’s Insurers, the London based, global insurance market. They have estimated that Harvey and Irma will cause around $4.5bn in losses to their members.  This is expected to lead to an underwriting loss for the year but CEO, Inga Beale, has stated that this is to be expected in such events and that “this is what we are here for”.

Natural disasters are both good and bad for those insurers covering this market. On one hand, they will suffer some large capital pay-outs in the short term. On the other hand, such events inevitably help push future premiums up. This is especially relevant at the moment given that the lack of disasters in recent years has driven premiums down to a level that has caused problems in the market.



Stocks in Focus: Shell

This week I am writing on Royal Dutch Shell, a company I last wrote about in 2015, when it agreed to buy BG for a consideration of £47bn.

The integration of BG’s assets remains on track and with synergies from this deal and leveraging efficiencies, Shell has stripped $10bn of annual operating costs from its business.  On top of this, the enlarged company is continuing to drive down its debt ahead of targets and has reduced capital expenditure by $20bn.

While the integration of BG’s assets is running to plan, Shell cannot rest on its laurels.  A switch from fossil fuels to more clean energy sources over the long term will put pressure on demand.  One example of this is the move of car manufacturers towards producing electric vehicles (EV) or hybrids.  To counter the move away from fossil fuels, many of the big oil and gas companies are investing heavily in renewable energy solutions.  Shell has committed to invest up to $1bn per annum in “new energy” by 2020, including an investment in hydrogen production to rival the EV market.  While this is a fraction of their overall capital expenditure it shows that the company is trying to future-proof its business as the demand for oil inevitably falls.

Shell also highlights that there will need to be a stable source of electricity when wind and solar are not available.  The management see gas providing this stability and have increased their liquefied natural gas (LNG) capabilities with the purchase of BG.

The success of Shell compared with its peers will be determined by how well it manages this switch to renewable energy sources.  Any heavy investment now would be a drag on cash and the adoption rate for electric vehicles, for example, may be slower than anticipated.  However if Shell delays investing in renewable energy it risks being left behind in a declining sector.


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.