Tag Archives: UK

Points of View: UK Market Review

The end of June brought with it the end of the first half of this calendar year.  This week I take a look back over the period since 1 January and consider the relative attractions of the UK market.

Stock markets suffered their first meaningful fall for nearly two years at the start of the year. Having hit a peak of approximately 7800 in January, the FTSE 100 fell nearly 12% to a 12-month low of just under 6900 in late March. Since then, stock markets have promptly recovered and again sit close to all-time highs.

Despite this, the UK stock market is stubbornly out-of-favour with global investors thanks to the political uncertainties of Brexit and the threat of a left-wing government coming into power with a mandate to hike taxes and nationalise large parts of the economy. Indeed, global investors have clearly taken a consensus underweight position on the FTSE, which is arguably at its most unloved point in decades relative to other developed stock markets.

On the one hand this is frustrating for UK investors, but on the other hand it is re-assuring; looking forward, it seems to us that the UK stock market offers very attractive relative value for long-term investors. The FTSE 100, for example, currently yields approximately 3.8%; in contrast, the yield offered by the S&P is 500 is a miserly 1.9%. Moreover, it is important to remember that the UK economy is not the same as the UK stock market. There is some overlap, but it is far less deep than most people assume. The domestic macroeconomics of the UK has very little to do with the collection of international businesses the make up the UK stock market. To this extent, the UK stock market provides a natural hedge against any woes that befall the UK economy.



Stocks in Focus: McColl’s

This week I am focusing on McColl’s Retail Group, the UK-based convenience store retailer with a strong focus on neighbourhood locations (rather than high streets).

Since the early 2000s, McColl’s has been shifting away from being a traditional newsagent and towards convenience food and wine, a market that has been is growing at around 5% per annum due to demographic and structural lifestyle trends. Part of its strategy to grow faster than the market includes converting its existing newsagents into more profitable convenience stores. On top of this, the business has been expanding via the regular acquisition of new stores from independent operators. Today, McColl’s is the second largest operator by market share within the convenience retail space (behind Tesco).

In order to further accelerate its diversification away from its legacy newsagents, McColl’s recently announced a £117m deal to take over a portfolio of nearly 300 convenience stores from Co-op. The CEOs of both groups view the transaction to be in line with their respective strategies: according to Jonathan Miller of McColl’s, the size and location of the stores are perfect for its operating model; and Co-op’s Steve Murrells comments that the stores being sold are too small to accommodate all the firm’s own-brand products.

Investors have thus far received the news positively. Indeed, expectations are that the acquisition will quickly become earnings enhancing thanks to the enlarged economies of scale and synergies from a leaner operating model. The deal is expected to conclude in November (it is still subject to approval from the Competition and Markets Authority) and investors will then be keeping a close eye on how efficiently management are able to integrate the new stores.


Points of View: UK interest rates

Another week on and we continue to face more surprises following the UK’s vote to leave the European Union. Last Thursday the Bank of England (BoE) decided to keep interest rates on hold at 0.5%, despite strong expectations of a 0.25% cut.

No one knows the precise impact that Brexit will have on the UK economy, but the BoE has highlighted that business and consumer confidence has fallen significantly both before and since the vote. Specifically, data suggests that many businesses have frozen investment decisions and the fear is that this will lead to an economic slowdown and possibly a recession.

The rationale for an immediate cut in interest rates is that this would in theory mitigate any slowdown by encouraging spending and investment. So why has the BoE decided against such action? Essentially, it is on the basis that that the loss of confidence could prove temporary as the Brexit shock recedes. Nevertheless, the BoE has stated that it will do everything within its power to reduce the downside risks facing the UK and, unless there is some evidence that confidence is rebounding, a 0.25% interest cut seems likely in the coming months.

It remains difficult to predict how the economy will be affected by the Brexit vote, but unless rising inflation becomes a greater concern, the BoE looks set to keep interest rates “lower for longer” in the face of uncertainty. From an investment perspective, we would again highlight the importance of creating robust, diversified portfolios that are not overly sensitive to any one scenario in an uncertain environment.


Points of View: Brexit Aftermath

It is now over a week since the historic vote for Britain to leave the EU and stock prices continue to be relatively volatile. It is interesting to see how investors have reacted to the result – the market is up, surprising many after the initial reactions to the result, although we have seen a pronounced polarisation of share price movements depending on the size and nature of businesses.

The FTSE 100 has broken through the 6,500 level for the first time since August last year and, as at the time of writing, has risen just under 3% since the close of business on 23rd June (the day of the vote). In comparison, the FTSE 250 has fallen approximately 7% over this same period. The outperformance of many of the larger companies that make up the FTSE 100 has largely been driven by their international nature. Unilever, for example, derives over 90% of its profits overseas but has a large cost base in the UK – it is therefore a strong relative winner from the post-vote sterling weakness.

Share prices of UK-focussed businesses, on the other hand, have been very weak and are to some extent pricing in the probability of a recession. Clearly, companies with earnings predominantly or entirely derived in the UK are more exposed to any slowing of the domestic economy and will also suffer from any increase in the cost of imported goods that arises from sterling weakness.

Volatility is likely to continue for some time until the implications of the vote become clearer. For long-term investors, volatility is a positive insofar as it can throw up interesting opportunities to buy good quality businesses at attractive prices.  The challenge for investors looking at UK-focussed businesses is in determining whether current prices are attractive compared to the likelihood or otherwise of a Brexit-induced UK recession.


Points of View: Inflation

Consumer prices in the United Kingdom increased 0.3 percent year-on-year in May. At this low level, and after years of falling headline numbers, investors may be forgiven for not giving this too much thought. However, despite the historically low inflationary environment, the longer term effects and the power of compounding cannot be ignored – the value of £100 ten years ago, for example, is worth less than £80 today.

Einstein once said “Compound interest is the eighth wonder of the world. He who understands it, earns it, he who doesn’t, pays it.” Inflation can be seen as a compound interest which we are all forced to ‘pay’, and by understanding it we should seek to find assets which consistently protect against it in the long term.

Equities, property, inflation-linked bonds and commodities are often championed as hedges against inflation, but none of these are perfect; property is illiquid and vulnerable to prolonged periods of depressed values; inflation-linked bond prices are influenced by inflation expectations, which are only loosely correlated with changes in actual inflation; and commodities can be volatile and do not provide an income. Equities are also volatile in the short term but are arguably the most reliable source of real returns over the long-term, not least because the underlying companies buy and sell products at prevailing market prices. In any five year holding period over the last 30 years, for example, UK equities produced a real (above inflation) return 80% of the time.

It is this relatively reliable ability to generate attractive real returns over time that leads us to build long term portfolios around a dominant core of equity exposure.


Brexit – Put Right the Mistake of 1054

Is there anything positive to say about the EU? Marcus Johnson admits there is a very strong case to remain in the EU but it is nuanced and complex.

When I wrote about Brexit in the April issue of Cambridge Business Magazine my friends, wife and business colleagues all accused me of being wholly negative. It is true that I concentrated on the near term certain costs to the UK and the risks to European and world peace and had nothing good to say about the regulatory mess we label Brussels. That is because, in the short term, I believe we would be poorer and the longer term risks of war are ignored at our peril. A decade of depression might lead to social unrest on a Victorian scale, and Russia would certainly take advantage of a break-up of the EU. So I make no apologies for emphasising the disturbing possible consequences of an ‘out’ vote. Likewise I make no apology for condemning the over detailed counter productive regulatory web we live within, although I have my suspicions that the regulatory burden would stay the same or worsen if we had Whitehall in sole charge.

But what, I was asked, could I say positive about remaining in? I do believe there is a strong positive case to make, but it is nuanced and complex, and involves a belief in human progress and a confidence in the system of parliamentary democracy we have evolved in the UK and now in the EU. I believe that the EU can do two hugely valuable things; one for us in the UK, the other for the world.

The reason that Oxford and Cambridge are in the top ten universities of the world has less to do with the brilliant minds who constitute these intellectual powerhouses and much more to do with the stability of the environment in which they have operated over the centuries. This has allowed academic excellence to flourish without the interruption of invasions, insurrections or dispossession.  It is not unreasonable to believe this relative stability springs from Magna Carta and the representation of all powerful interest groups in parliaments over succeeding generations. Magna Carta recognised that successful government involved an accommodation to the interests of commerce and civil society and that social order was best maintained by self restraint and a common adherence to a written system of laws and justice. This was preserved by a representative system where the most powerful were consulted and a broad consensus preserved. The interests then were Crown, Church, and Land and that has evolved over the years to Commerce, Finance, Industry, Civil Service and Unions but the same idea of putting representatives together and letting them try to create a consensus has with one or two problems along the way proved a success for the best part of a 1,000 years. This settlement is under threat today as never before in all democracies by two powerful forces. The first is an increase in the ease and speed of mass communications; this is leading to a threat to the representative system.  The ability to sample and observe public opinion on individual decisions is tending to replace informed debate by representatives with uninformed short term fashion driven popularity seeking. Referenda are one example but frequently the use of opinion polls and focus groups is replacing “what is the best solution?” by “what is the most acceptable solution?” within both the government and our political parties. The second powerful force is the creation of ever more “entitlements” by politicians seeking votes.  In a system when 300,000 people pay one third of all income tax received by HMRC it is very easy for voters to vote for benefits in the belief that someone else will pay. In a UK which had no treaty commitments to respect private property, and with borders closed to free movement of capital and people, there would be no control on such dictatorship of the majority. So the first great positive contribution the EU can offer in future years is a control over populism and over politicians using bribery to buy votes. The reason the EU offers a control is simple – as long as there is freedom of movement of people, of goods and of capital, those who suffer as a result of uncontrolled populism or electoral bribery can move their business, their capital and their home to a more congenial country and the knowledge that this could happen – or evidence it was starting to happen – would of itself offer a control over extremism of this sort. The Treaty of Rome itself provides protection for individual rights and against seizure of property in the same way which the Constitution does for the USA.

The second major positive influence of keeping the EU (and our departure would set off several others unless the nasty consequences showed themselves very fast so as to deter others from following suit) could be on the rest of Europe. In 1054 the Great Schism was the first act in 1,000 years of bitter dispute between East and West which is still going on today in the Ukraine, was recently in evidence in Bosnia and for most of the last century has regularly surfaced in hostilities between Russian and her neighbours and Turkey and her neighbours. The latter was the cause of the three Balkan wars and then the First World War and the Russia today has soldiers occupying some or all of several of her neighbours. The EU has already shown it can persuade former fascist and communist dictatorships to adopt democratic forms of government and to open their borders to free movement of labour, goods and capital. The extent to which Eastern Europe has changed to adopt our democratic norms is not yet proved, and Poland and Romania are both in different ways profound challenges to the liberal and free society the EU has tried to impose, but to date the model has, broadly speaking, worked both to attract new members and to keep them in line once admitted. The almost unimaginably worthwhile and desirable positive which the EU then holds out is the possibility of integrating Turkey and Russia into our UK and western European model of civil society. The adoption of a secular free social order in these two nations would be the single most positive development we could aspire to in our lifetimes, and it is perhaps achievable if we can show the EU has surmounted its current problems. There are those who might argue that a Brexit followed by depression and disorder in the UK would be a good way of demonstrating first how beneficial the EU can be but this assumes that the EU would survive without us, and as I argued in my previous article we should assume that a success for UKIP here would be rapidly followed by others playing the same nationalist theme elsewhere and the breakdown of the Union as we know it.

So my positive statement about the potential for the future is rather similar to the hopes of those sitting down to sign the Rome Treaty sixty years ago. But whereas their dream was limited to making the next 50 years peaceful in Western Europe my suggestion is that in the next 50 years our aim should be to heal the great divide which opened up in 1054, to bring an end to the instability on the eastern and southern borders of the current EU by making it very obvious that the system of parliamentary democracy we have built can lead to peaceful resolution of disputes and offers a framework within which individual countries can maximise the well-being of their citizens. I believe that the existence of a common agreed framework which sets rules of civilised behaviour will also be likely to help preserve the UK as a united country, and most importantly to help preserve representative democracy and thus the freedom we enjoy today for future generations. If we can extend the current union to bring in Turkey, its first Muslim nation, and Russia, the most aggressively threatening European power, we will have made the world a much safer place for our children and reversed the single most costly policy error of post Roman European governments.

This article was published in the Cambridge Business Magazine – May 2016 Issue 54

Points of View: UK Telecoms Sector

This week I will be looking at the UK telecommunications sector, within which there has been some notable news flow recently. First, there was the TalkTalk hacking scandal where 1.2 million customers’ personal information was stolen. Subsequently, Vodafone also stated that their mobile network was subject to a cyberattack last week leaving just under 2,000 customer accounts exposed. Both companies are now taking necessary measures by collaborating with authorities and advising their customers accordingly.

BT Group has also been in the news last week as the Competitions and Markets Authority (CMA) provisionally approved the company’s £12.5bn acquisition of mobile network EE. Despite rivals arguing that the takeover would create a dominant fixed-line and mobile company, the CMA concluded that the acquisition “is not expected to result in a substantial lessening of competition in any market in the UK”. Meanwhile, the European Commission has started an in-depth investigation into the proposed acquisition of Telefonica UK’s O2 operations by Hutchison Three UK. The investigation will consider whether the combined company would harm competition following the Commission’s concerns that the deal could lead to higher prices, less choice and reduced innovation for customers of mobile telecommunications services in the UK. The formal assessment will take approximately three months to complete.

Consolidation in the telecommunications sector is seen by many as the best way for these companies to reduce costs, increase revenue and realise significant synergies.  However, competition authorities will be keen to protect consumer interests and cybersecurity is clearly becoming an issue that the industry needs to address.