Tag Archives: market volatility

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.

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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: Smith & Nephew

This week I am looking at Smith & Nephew, a leading UK-based global manufacturer of medical devices, following a transitional year bringing the business back to growth. The company operates across three specialist divisions: Reconstruction (hips and knees), Advanced Wound Management and Sports Medicine & Trauma.

The group has faced a number of setbacks in recent years, many of which stemmed from a flawed corporate structure of separately operated ‘silo’ divisions, which led to restricted innovation. This allowed competitors to catch up and take market share, although the company still enjoys a top 5 position across all the categories it operates in.

Management was then put in to question last year with the announcement that the CEO, Olivier Bouhon, had been diagnosed with cancer and would require treatment across much of the year. In addition to this, it was revealed that the CFO, Julie Brown, would be leaving to join Burberry after 3 ½ years with the company.

Despite these challenges, Smith & Nephew recently published positive full year results, demonstrating a return to growth and an encouraging outlook for the future, particularly within Sports Medicine. The internal restructuring of the business is now complete, which promises improved execution across the divisions and a stronger pipeline of new products. Olivier Bouhon (CEO) is now back at the helm and has recently announced the appointment of a new CFO, Graham Baker, who has 20 years’ experience at AstraZeneca and is expected to be a good addition to the board.

With a better structure in place and strong management team behind it, Smith & Nephew should now be well positioned to take advantage of an era where an ageing population and active younger generation mean health solutions are more essential than ever. Nevertheless, competition remains fierce and management will need to continue to drive innovation within key growth areas to keep ahead in this market.

http://www.nwbrown.co.uk/library/

Stocks in Focus: Hilton Food Group

This week I am looking into Hilton Food Group further to its recently published full year results for 2016. Hilton was established as a meat packing facility in Huntingdon in 1994. Since then it has grown to build processing and packing facilities and factories across Europe, with the business focusing on helping customers improve processes and become more efficient. More recently they have expanded further overseas through joint ventures with supermarket group Woolworths in Australia and food retail group Sonae in Portugal.

Following the results, which were above expectations thanks to strong volume growth in the UK, Ireland and Australia, I spoke with Robert Watson (CEO) and Nigel Majewski (CFO). The model for expanding into new territories is interesting. To develop the relationship with Sonae, Hilton initially sent a consultancy team to Portugal to review their current processes and systems. The consultancy period gave Hilton the opportunity to demonstrate their business case and as with the arrangement with Woolworths in Australia, Sonae went on to sign a full joint venture to redevelop its production facilities. While the core business is focussed on the processing and packing of meat, Hilton have been able to respond to their customers’ needs in wide range of fresh food preparation and packaging solutions, as shown with their fresh pizza range in Sweden.

Hilton now operates as a more diverse business geographically, with the ability to offer customers a more extensive range of solutions.  Expanding too far from the core business could create some challenges, but management remain optimistic that Hilton will be able to steer through these challenges and remain in a strong market position.

http://www.nwbrown.co.uk/library/

Stocks in Focus: GlaxoSmithKline

This week I am looking at GlaxoSmithKline (GSK) following the appointment of a new Chief Executive, Emma Walmsley, on Monday 3 April. She takes over from Sir Andrew Whitty, who steps down after nearly 10 years in the role, and inherits a business that has recently diversified away from its core Pharmaceuticals division and towards its Consumer Health and Vaccine divisions (following an asset swap with Novartis). Nonetheless, Pharmaceuticals remains the largest division and the focus of this article.

The pharmaceuticals industry relies on heavy investment in research and development to create new treatments. This pipeline is essential as older products lose their patent protections and generic alternatives come into the market, driving down pricing. The development process is expensive, as a drug needs to go through a rigorous process to gain approval. The skill of the new Chief Executive will be to select at an early stage those drugs with a strong likelihood of gaining approval and thereby recouping the development costs and to avoid those that have a low possibility of succeeding.

The UK’s exit from the EU will throw up further uncertainties as the European Medicines Agency currently approves drugs across all 28 member states.  It is possible that a new UK regulator could drive companies away from developing drugs in the UK, forcing them instead to focus on Europe.

The long-term prospects for pharmaceutical companies remains their ability to develop successful new drugs and to get those drugs through expensive clinical trials. GSK has a strong pipeline with a number of drugs expected to gain FDA approval this year. Ms Walmsley’s role as Chief Executive will be to guide the company through the aforementioned uncertainties and focus on the specific treatments and markets that will generate growth over the long term.

http://www.nwbrown.co.uk/library/

Stocks in Focus: Smiths Group

This week I am taking a closer look at the global technology company, Smiths Group, 18 months on from the change of its top management team. The group operates across five separate divisions that provide a range of products and services including mechanical seals to the energy services sector, speciality medical devices for hospitals, electrical components for power applications and devices for detecting explosives and other threats.

With several parts of the business operating in difficult sectors and a meaningful exposure to the oil and gas industry, Smiths Group has certainly had a difficult few years with declining sales and very little organic growth.

Following a profit warning in 2014, Smiths Group welcomed their new CEO, Mr Reynolds Smith (previously of GKN) to the helm in September 2015.  Along with a new CFO, Mr O’Shea, the new team brought with them hopes of reenergising the business without the need to split up the various divisions.  Management took this opportunity to conduct a thorough strategic review which has resulted in a new focus on improving cash generation, margin improvements and using the combined strength of the Group in order to drive ongoing growth.

So has the new strategy paid off? Eighteen months on and already there have been encouraging signs of simplifying the business with sales of several of the non-core and loss-making assets to free up cash to invest in key growth areas. The company has performed reasonably well since the change of management and has reported revenue growth across four out of five divisions throughout 2016, although there was a decline for the group as a whole. Despite these initial improvements, the business continues to face considerable challenges due to ongoing concerns about government spending and the outlook for the oil and gas industry.

http://www.nwbrown.co.uk/library/

Stocks in Focus: Next

This week I am writing about Next, the fashion retailer that provided a disappointing trading update last week. Next is often regarded as a bellwether for fashion retailers, many of which will provide their own trading updates later this week. Next had hoped to improve on the poor sales it had in the run up to Christmas 2015, which were hampered by understocking of popular items. However, it announced a modest fall in sales for the equivalent Christmas trading period in 2016 and a fall of 7% in the post-Christmas sales promotion period.

As with the rest of the retail sector, Next has had to contend with unusual weather patterns that have made stocking relevant seasonal items challenging. The British consumer is also moving away from spending on fashion, with data indicating people are spending more on leisure and experience activities than high street retail.

Looking forward, management guided towards ‘an even tougher sales environment for the retailers’ in 2017 and suggested a further fall in profits of between 2% and 14% for the year. Uncertainty over rising inflation eroding earnings growth and putting a squeeze on consumer spending were cited as challenges the company faces in the coming year. In an attempt to reassure investors, the group have adjusted its return of surplus cash to four quarterly dividends of equalling amounts.

The consideration for investors is now to assess whether Next is suffering from self-inflicted, company specific issues, or whether their figures are indicative of the wider fashion retailer landscape. It will be interesting to see whether other retailers’ announcements over the coming days shed any further light on this as we move into a very uncertain year for the UK retail sector.

http://www.nwbrown.co.uk/library/