Tag Archives: market value

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.



Stocks in Focus: Templeton Emerging Markets

This week I am reviewing Templeton Emerging Markets (TEM), which is the largest investment trust within the Emerging Markets sector. The Trust has recently seen an unexpected change, with lead manager, Carlos Hardenberg, handing in his resignation.

Last September I wrote an article reviewing the Trust and Mr Hardenberg’s first two years as lead manager. During this time Mr Hardenberg outperformed his benchmark (96% vs 67%) and transformed the Trust into quite a different beast than the one he took over. One of the more significant changes was his push into the technology sector. At the end of December 2017 the technology sector was the largest weighting within the Trust at 31% (vs 6% in mid 2015), with giants such as Samsung, Alibaba and Tencent featuring in the top 10 holdings.

Effective immediately, Chetan Sehgal will be taking over as lead manager. Our early understanding is that he will look to keep the Trust running with the same investment process. Mr Sehgal has been with Franklin Templeton since 1995 and is a senior Managing Director and Director of the Global Emerging Markets and Small Cap Strategies. He should be capable of maintaining the process as he has been working closely with Mr Hardenberg during his tenure and was a part of the previous team under emerging market veteran Mark Mobius.

Given how much Mr Hardenberg had turned the Trust around and developed the existing strategy, this is quite a large disruption and causes some concern. We will monitor developments closely and expect to meet with Mr Sehgal in the near future to hear his plans for the Trust’s portfolio.


Stocks in Focus: Diageo

This week I am looking at Diageo plc, one of the world’s largest beverage groups. The business, which is known for its stable of recognisable brands such as Johnny Walker, Guinness and Smirnoff, has recently announced its interim results for the period ending 31 December 2017.

Overall, the results were encouraging. The company’s year-on-year increase in sales was above analysts’ growth expectations, pre-tax profits rose by 6% and earnings per share grew 9.4% compared to the previous year. Management has raised the interim dividend by 5% and stated that they expect further margin growth and improvements in net sales over the next 18 months. They also highlighted that the recent strengthening of the pound against the dollar would hit full-year sales and operating profits as the US is Diageo’s largest market and contributes nearly 45% of its profits. However, management also added that the Trump administration’s recent tax cuts would offset some of the negative currency impact.

CEO Ivan Menezes launched a cost-saving programme a couple of years ago and the recent interim results show that the project has been diligently executed. The underlying business is delivering well against expectations and is on track to meet its 2019 target to become more efficient, leaner, and more agile. Looking at Diageo’s market segments, a growing middle class in emerging markets is playing into the group’s hands too. As consumers move up the value chain, the advantage of Diageo’s big portfolio of brands is that it can provide premium labels to meet every taste. Furthermore, cash flow remains robust and the recent dividend increase continues an enviable record of dividend growth that stretches back to the 1990s.


Stocks in Focus: Rolls-Royce

This week I am looking at Rolls-Royce, the British engineering giant, which announced restructuring plans last week that included the possibility of selling its commercial marine business. The news was welcomed by investors as the marine division has struggled in recent years, reporting losses of £27m on sales of £1.1bn in 2016, despite having cut its staff by 30% and significantly reducing its number of sites in response to the downturn in oil and gas markets.

The review of the division comes as part of Chief Executive Warren East’s drive to simplify the business by consolidating the company’s current five divisions into three core operating units based around Civil Aerospace, Defence and Power Systems.  The overhaul will also see the winding up of the company’s nuclear division, with the nuclear submarine operations being moved to the defence business, and civil nuclear operations becoming part of the group’s power systems business.

The restructuring is the second for the company since Mr East became CEO in 2015. Soon after taking control of the business he introduced a new senior management structure, with the intention of cutting the company’s cost base and simplifying decision making – a move that proved to be successful. The company targeted £200m a year in cost savings in 2015 and are expected to achieve this.

Although the market has initially reacted positively to the news of the restructuring and the potential sale of the marine business, a decision on whether to sell all or part of the division is not expected to be made until later this year. Further details of the restructuring plans will be provided in the company’s full-year results in February.


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.


Points of View: Market Outlook

Looking forward, the global economy looks set to continue to grow at 3% per annum, but will this growth continue to reward equity investors over the long term?

Our view is that equities will continue to deliver the best long term returns compared to the alternatives of cash and fixed income. There are two main reasons for this. First, starting dividend yields are very attractive on a relative basis. The FTSE All Share, for example, yields approximately 3.6%. In contrast, cash savings rates and gilt yields remain remarkably low. Second, equity dividends should continue to grow from this attractive starting point thanks to underlying economic growth. Whilst there will at some point be another recession or crisis, growth over the long term is remarkably robust.

Having said this, we apply two important caveats. First, we expect equity returns to moderate. Global equities are up nearly 200% since reaching a post Financial Crisis low in 2009, driven by economic recovery, monetary stimulus and a starting point of cheap valuations. However, it seems unlikely that these strong returns will be repeated over the next ten years. This is because the starting point is less attractive. Compared to 2009, debt levels are higher, valuations are higher, and monetary policy has started to tighten. Second, short term risks are elevated thanks to valuation bubbles in certain parts of the market at a time of heightened political risk.

The key to equity ownership is to ensure you are never in the position of being a forced seller when markets are weak – we help manage this risk for our clients via the tools of diversification and asset allocation.


Points of View: 2017

Despite heightened political risk, 2017 turned out to be a good year for equity markets. This was in large part thanks to accommodative monetary policy and a supportive economic environment of low inflation and steady growth. This week I will be looking at a couple of the key topics of the year.

In the UK, Theresa May has managed to cling on to power having unexpectedly lost her parliamentary majority in June’s General Election. Her authority however remains in doubt and this heightens the possibility that a resurgent Jeremy Corbyn will trigger a change of government and/or a shift towards policies that the market perceives as business-unfriendly and risky.

Central Bank policy also continued to greatly influence markets, as historically low interest rates and quantitative easing have pushed borrowing costs down and thereby promoted the further accumulation of debt. According to the Institute of International Finance (IIF), global debt levels continued to rise in 2017 and total global debt has reached a record high of $217 trillion (327% of global GDP) compared to $149 trillion in 2007 (276% of GDP).

In contrast to uncertainties discussed above, there has been ample evidence that global growth is now at its strongest since the Financial Crisis of 2008 and that a prolonged but muted recovery is at last turning into syncronised global growth. With this growth being neither too hot to cause excessive inflation, nor too cold to derail consumer spending and profit growth, investors are currently enjoying “Goldilocks” conditions, which has contributed to a strong year for equity markets.