Ken Baksh – Enquest #ENQ1 Bond – Oily idea with very good short and longer term income attractions!
ENQUEST 7% 15/04/22 Bond-ENQ1-ISIN-XS0880578728
Company Overview
Enquest PLC is an independent United Kingdom-based petroleum and production company which operates mainly in the United Kingdom Continental Shelf. The shares are included on the main list of the London Stock Exchange as are the bonds, the subject of this article.
The Company is one of the largest UK independent oil producers in the North Sea, and as at 31st December 2017, operated assets including Thistle/Deveron, Heather/Broom, the Dons area, Magnus, the Greater Kittiwake Area, Scolty/Crathes, Alma/Galia and Kraken.Enquest also had an interest in the non-operated Alba producing oil field.
On the 5th December 2018 the company issued a confident operating update,stating 2018 production was on target and 2019 production was expected to be in the range of 63000 Boepd to 70000 Boepd,an increase of about 20% on the mid-point. Acquisition of additional interest in Magnus, the Sullom Voe Terminal and associated infrastructure was completed with effect from 1st December 2018, and the successful rights issue had enabled the early repayment of some bank debt.
See http://www.enquest.com/media-centre/press-releases/2018/12-05-2018.aspx for more detail
Bonds
The company has,in issue some corporate bonds ,ENQ1,for which details are explained in http://www.enquest.com/investors/retail-bond.aspx
These bonds trade freely on the LSE with live pricing, transparancy etc
Essentially, these bonds maturing in 15/04/22, have a 7% coupon on face value, payable in either cash or a further bond allocation, depending on the average level of the oil price over the previous period (see link above). Payments are made to bond holders in February and August. The last payment was made in cash ,and the imminent payment is also likely to be cash based on the average oil price over the qualifying period, with just two or three days to go.
At the current price of £80%, the annual yield is 7/80=approx 8.75%,and the yield to redemption, taking into account the capital uplift of the bond and the remaining coupon payments is approximately 20% p.a.
If held within a SIPP, the capital gain (25%), plus seven coupons (approx 31.5%) will be sheltered from tax.
Shorter Term
The next “Cash payment conditional determination date” as explained in the bond notes will be around 15th January 2019 i.e. a few days time.This will officially confirm that the next coupon will be paid in cash
The next “record date” will be end January with the appropriate payment being made to bond holders on 15th February according to the company bond prospectus
At the current bond price of £80% ,this one coupon will be worth 3.5/80=4.4%, not a bad income return for one month. However the real value lies in the longer term maths!
As ever, normal health warnings apply !
Ken Baksh
Ken has over 35 years of investment management experience, working for two major City institutions between 1976 and 2002.
Since then he has been engaged as a self-employed investment consultant. He has worked with investment trusts, unit trusts, pension funds, charities, Life Fund,hedge fund and private clients. Individual asset managed have included direct equities and bonds pooled vehicles currencies, derivatives and commodities.
Projects undertaken in a number of areas including asset allocation, risk control, performance measurement, marketing, individual company research, legacy portfolios and portfolio construction. He has a BSc(Mathematics/Statistics) and is a Fellow Member of the UK Society of Investment Professionals.
Disclaimer
All stock recommendations and comments are the opinion of writer.
Investors should be cautious about all stock recommendations and should consider the source of any advice on stock selection. Various factors, including personal ownership, may influence or factor into a stock analysis or opinion.
All investors are advised to conduct their own independent research into individual stocks before making a purchase decision. In addition, investors are advised that past stock performance is not indicative of future price action.
You should be aware of the risks involved in stock investing, and you use the material contained herein at your own risk
The author may have historic or prospective positions in securities mentioned in the report.
The material on this website are provided for information purpose only.
Please contact Ken, (kenbaksh@btopenworld.com) for further information
Oil play, 5.5% yield (income paid quarterly),8% discount to assets, BREXIT currency hedge..what more do you want?
Black Rock Commodities Income Investment Trust –ISIN GB00B0N8MF98-BRCI
Oil remains one of the strongest major commodities this year and despite recent exemptions from Iranian sanctions, looks likely to stay well supported.
The major companies themselves Royal Dutch #RDSB, BP #BP, Total, Eni, Norsk Hydro etc have been major beneficiaries of the stronger spot price and, with greater capital discipline, have rebuilt balance sheets and engaged in shareholder friendly actions whether dividend increases or share buy-backs.
One way of accessing this sector is through the Black Rock Commodities Income Investment Trust.
The object of this investment trust is to achieve an annual dividend target, (currently 4p), and over the long term, capital growth, by investing primarily in securities of companies operating in the mining and energy sector.
- The fund predominantly invests in large quoted equities, the split between oil and mining being approximately oil, majors plus exploration/production 42%, and mining 56%, as at end September 2018.
- Underlying major mining companies, have for the large part responded to the historic weaker trend in resource prices, maintaining balance sheet discipline and adjusting their cost bases. There have been some examples of spectacular self-help stories e.g. Glencore and Anglo-American Mining.
- Recent mining conferences have highlighted the need for increased use of Lithium, Cobalt, Nickel and Copper relating to Electronic Vehicles.BRCI has been building exposure to these elements over the last couple of years. For example, Glencore (5.2% of assets) is now one of the leading global suppliers of Cobalt, a vital component for rechargeable batteries.
- Rising economic growth projections, supply constraints and a changing OPEC stance have significantly helped the prospects of the major oil companies held. Royal Dutch and BP have both recently announced good third quarter figures and both have annual dividend yields near 6%. Statoil and Total also confirmed the more favourable trend for oil majors.
- As at End September 2018, the Fund ‘s major holdings featured BHP (8.9%), Royal Dutch (6.7%) Rio Tinto (6.2%), First Quantum (5.7%), Glencore (5.2%), Exxon (4.2%), and Teck Resources (4. 5%). The top ten holdings represented over 55% of the total portfolio, a relatively concentrated stance.
- The global nature of these companies provides exposure to non-sterling currencies, especially the US dollar. This can benefit both capital and income when sterling is on a weaker trend. In this regard, the instrument may be seen partially as a no-deal BREXIT hedge.
- On a TECHNICAL NOTE, it should be noted that energy and material stocks represent about 27% and 24% of the FTSE100 index and the FT All-Share index respectively. If using these as benchmarks, the weighting in these sectors can materially affect the relative performance of UK active and passive funds.
- As well as targeting financially strong dividend paying equities the company also employs option writing strategies and an element of gearing, currently near 10%, to further improve the sources of income.
- On an annual yield, over 5.5%, (payable quarterly), this trust represents a high-income longer-term value play, but investors should be aware of the volatility of the underlying sector-maybe another reason to adopt a pooled approach. The trust currently trades at a current discount to net assets of near 8%, near the ten year’s low, compared with the premium on which it traded for most 2008-2016 period (see graph below). The company operates a discount management procedure from time to time.
www.trustnet.com/factsheets/t/rw98/blackrock-commodities-income-it
Ken Baksh
Ken has over 35 years of investment management experience, working for two major City institutions between 1976 and 2002.
Since then he has been engaged as a self-employed investment consultant. He has worked with investment trusts, unit trusts, pension funds, charities, Life Fund,hedge fund and private clients. Individual asset managed have included direct equities and bonds pooled vehicles currencies, derivatives and commodities.
Projects undertaken in a number of areas including asset allocation, risk control, performance measurement, marketing, individual company research, legacy portfolios and portfolio construction. He has a BSc(Mathematics/Statistics) and is a Fellow Member of the UK Society of Investment Professionals.
Disclaimer
All stock recommendations and comments are the opinion of writer.
Investors should be cautious about all stock recommendations and should consider the source of any advice on stock selection. Various factors, including personal ownership, may influence or factor into a stock analysis or opinion.
All investors are advised to conduct their own independent research into individual stocks before making a purchase decision. In addition, investors are advised that past stock performance is not indicative of future price action.
You should be aware of the risks involved in stock investing, and you use the material contained herein at your own risk
The author may have historic or prospective positions in securities mentioned in the report.
The material on this website are provided for information purpose only.
Please contact Ken, (kenbaksh@btopenworld.com) for further information
Ken Baksh – November Market Report – Is it safe to put a toe in?
November 2018 Market Report
During the month to October 31st, 2018, major equity markets displayed a very weak trend, falling by 8.52% overall and the VIX index rose sharply to 22.05. The month was the worst equity performance for more than six years. There continued to be an abundance of market moving news over what is traditionally a volatile month, at macro-economic, corporate and political levels.
The European Central Bank appeared to become more certain of removing QE over coming quarters, with more hawkish policy statements, but delaying any interest rate increase until 2019, while economic news seems to have been weaker than forecast in recent months, particularly in Germany. Political events were not in short supply, and in Turkey for example, continued to affect bond and currency markets while Italian bonds oscillated with the growing tension between the two-party Government and the ECB. Angela Merkel stood down as CDU leader late in the month, a position occupied for 18 years. US market watchers continued to grapple with ongoing tariff discussions, Federal Budget, Turkish stand-off, NAFTA follow up and North Korean meeting uncertainty as well as Trump’s growing domestic issues, ominously becoming higher profile, before the important November midterm elections. US economic data and corporate results so far have generally been above expectation and the official interest rate was increased again in September to a range of 2%-2.25%. Provisional third quarter GDP growth figures showed very buoyant consumer trends but weak corporate investment and foreign trade. In the Far East, China flexed its muscles in response to Trump’s trade and other demands while relaxing some bank reserve requirements and “allowing” the currency to drift to a recent low. Recent indicators and statements would suggest a slowdown in 2018 growth to a still very respectable 6%-6.5%. Japanese second quarter GDP growth appeared higher than expected and Shinzo Abe consolidated his political position, both perceived as market friendly, and the ten-year bond continues to trade near the recent yield high. At the October BoJ meeting, the current easier fiscal stance was reconfirmed. The UK reported mixed economic data with satisfactory developments on the government borrowing side, inflation higher than expected, but poor relative GDP figures and deteriorating property sentiment, both residential and commercial. Recent retail data shows mixed trends, some “weather related”. Market attention, both domestic and international is clearly focussed on ongoing BREXIT developments and their strong influence on politics. Although the Budget presented on October 29th, showed a slightly higher GDP forecast and a more expansionary fiscal approach, the Chancellor made frequent references to the unsettling effects of any unsatisfactory Brexit outcome.
Aggregate world hard economic data continues to show steady expansion, although forecasts of future growth have been trimmed in recent months by the leading independent international organization. Fluctuating currencies continued to play an important part in asset allocation decisions, the stronger Yen being the major recent feature recently, largely for haven reasons. Emerging market currencies have had a particularly volatile period, showing some relative recovery over October from very weak levels. Government Bond holders saw mixed moves over the month-some more inspired by equity market turmoil rather than changed fundamentals.
At the end of the ten -month period, “mixed investment” unit trusts all showed negative performance, and only a small number of asset class sub sectors are showing a positive return. Source: Morningstar
Equities
Global Equities displayed a strong downwards trend over the month of October the FTSE ALL World Index falling 8.52% in dollar terms and now showing a negative return of 6.55% return since the beginning of the year. The UK broad and narrow market indices fell by 5.09% and 5.42% respectively over the month and have both underperformed world equities in sterling adjusted values from the end of 2017 by about 6%. The NASDAQ index, driven by technology companies, saw some of the steepest declines with many bell weather stocks showing significant falls. In sterling adjusted terms, America and Japan are the only two major markets now showing positive returns year to date The VIX index rose 75.84 % over the month, and at the current level of 22.05 is up about 115% from the year end.
UK Sectors
Sector volatility remained high during the month, influenced by both global factors e.g. commodity prices, tariffs, as well as corporate activity and a general risk aversion mood. Industrial stocks fell significantly while utilities and banks registered positive returns. Over the ten-month period, pharmaceuticals are outpacing the worse performing major sector, telecommunications by around 45%.
Fixed Interest
Gilt prices rose marginally over the month largely on haven buying but are still down 2.67% year to date in capital terms, the 10-year UK yield standing at 1.26% currently. Other ten-year yields closed the month at US 3.1%, Japan 0.13%, and Germany 0.3% respectively. UK corporate bonds rose 1% in price terms ending October on a yield of approximately 2.71%. Amongst the more speculative grades by contrast, yields rose, although US lower grade bonds are still one of the few sub-categories showing year to date price gains. Floating rate bond prices underperformed gilts over the month but are still showing positive year to date total returns. I continue to strongly recommend this asset class. See my recommendations in preference shares, convertibles, corporate bonds, floating rate bonds etc. A list of my top thirty income ideas (all yielding over 5%) from over 10 different asset classes is available.
Foreign Exchange
Amongst the major currencies, a stronger Yen was the monthly feature largely on safe haven buying as global equities tumbled. Currency adjusted, the FTSE World Equity Index is now outperforming the FTSE 100 by around 6% since the end of 2017 and about 20% since the June 2016 BREXIT vote.
Commodities
A generally weak month for commodities with the notable exception of gold, related precious metals, iron ore and sugar Over the year so far, oil, wheat and uranium (renegotiation of longer-term contracts) have shown the greatest gains.
Looking Forward
Over the coming months, geo-political events and Central Bank actions/statements will be accompanied by the continuation of the third quarter corporate reporting season, resulting in an abundance of stock moving events. With medium term expectation of rising bond yields, equity valuations and fund flow (both institutional and Central bank) dynamics will also be increasingly important areas of interest/concern, and it is expected that any “disappointments”, economic or corporate, will be severely punished.
US watchers will continue to speculate on the timing and number of interest rate hikes 2018/2019 and longer-term debt dynamics, as well as fleshing out the winners and losers from any tariff developments -a moving target! Third quarter figures (and accompanying statements) will be subject to even greater analysis after the buoyant first half year, and the growing list of headwinds. Additional discussions pertaining to Saudi Arabia, North Korea, Russia, Iran,Brazil, Venezuela, and Trump’s own position could precipitate volatility in equities, commodities and currencies, especially with the November mid-term elections just days away. In Japan market sentiment may be calmer after recent political and economic events although international events e.g. exchange rates and tariff developments will affect equity direction. The recent China/Japan summit may signal closer co-operation in the area. European investment mood will be tested by economic figures, EU Budget discussions, Italian bond spreads, German, Turkish and Spanish politics, and reaction to the migrant discussions. It must also be remembered that the QE bond buying is being wound down over coming months. Hard economic data and various sentiment/residential property indicators will continue to show that UK economic growth will be slower in 2018 compared to 2017, and any economic upgrade over current quarters appear extremely unlikely. Whichever Brexit outcome is agreed, it is highly likely that near term quarterly figures will be distorted. The current perceptions of either a move to a “softer” European exit, or a “no deal” will undoubtedly lead to pressure from many sides. Political tensions stay at elevated levels both within and across the major parties and considerable uncertainties still face individual companies and sectors. Industry, whether through trade organisations, international pressure e.g Japan, or directly e.g. Bae, BMW, Jaguar Land Rover, Toyota, Honda, Ryanair is becoming increasingly impatient, and vocal, and many London based financial companies are already “voting with their feet”.
On a valuation basis, most, but not all, conventional government fixed interest products continue to appear expensive against current economic forecasts and supply factors, and renewed bond price declines and further relative underperformance versus equities should be expected in the medium term, in my view. See my recent ‘iceberg’ illustration for an estimate of bond sensitivity, particularly acute for longer maturities. Price declines are eroding any small income returns leading to negative total returns in many cases. On the supply point there are increasing estimates of US bond issuance against a background of diminished QE and overseas buying. European bond purchases are also winding down. Apart from debt implications, corporate earnings growth and discounting purposes, remember that higher bond yields also are starting to play into the alternative asset argument. In the US for example the ten-year bond yield at 3.1%, is over 100 basis points higher than that on equities.
Equities appear more reasonably valued after recent price falls, but there are wide variations. Equity investors will be looking to see if superior earnings growth can compensate for higher interest rates in several areas. Helped in no small part by tax cuts, US companies have been showing earnings growth more than 20% so far this year, although the current quarter is widely expected to be the peak comparison period, and ‘misses’ are being severely punished e.g. Caterpillar,3M Facebook, General Electric,Kellogs, and Twitter. Accompanying corporate outlook statements are being carefully scrutinised.
Outside pure valuation measures, sentiment indicators and the VIX index are showing significant day to day variation, after the complacency of last year. The current level of 22.05 reflects the uncertain market mood, as does the relatively high put/call ratio.
In terms of current recommendations,
Depending on benchmark, and risk attitude, first considerations should be appropriate cash/hedging stance and the degree of asset diversification.
An increased weighting in absolute return, alternative income and other vehicles may be warranted as equity returns will become increasingly lower and more volatile and holding greater than usual cash balances may also be appropriate, including some outside sterling. Among major equity markets, the USA is one of the few areas where the ten-year bond yields more than the benchmark equity index. The equity selection should be very focussed. Certain equity valuations are rather high, especially on a PE basis (see quarterly), although not in “bubble” territory. A combination of sharper than expected interest rate increases with corporate earnings shocks would not be conducive to strong equity returns. Ongoing and fluid tariff discussions could additionally unsettle selected countries, sectors and individual stocks Harley Davidson, German car producers, American and Brazilian soy producers etc.
- UK warrants a neutral allocation but is starting to look good value on certain metrics. Ongoing Brexit debate, political stalemate and economic uncertainty could cause more sterling wobbles, which in turn could affect sector/size choices. I would expect to see more profits warnings (Countryside,Foxtons,H&M,BHS,Homebase,WPP,Computacentre- latest casualties) and extra due diligence in stock/fund selection is strongly advised.
- Within UK sectors, some of the higher yielding defensive plays e.g. Pharma, telco’s and utilities have attractions relative to certain cyclicals and many financials are showing confidence by dividend hikes and buy-backs etc. Over recent months, value stocks have been staging a long overdue recovery compared to growth stocks. Oil and gas majors may be worth holding despite the outperformance to date. Remember that the larger cap names such as Royal Dutch and BP will be better placed than some of the purer exploration plays in the event of a softer oil price. Mining stocks remain a strong hold, in my view (see my recent note for favoured large cap pooled play). Corporate activity, already apparent in the engineering (GKN), property (Hammerson), pharmaceutical (Glaxo, Shire?), packaging (Smurfit), retail (Sainsbury/Asda), leisure (Whitbread), media (Sky), mining (Randgold) is likely to increase in my view, although the Government has recently been expressing concern about overseas take-overs in certain strategic areas.
- Continental European equities continue to be preferred to those of USA, for reasons of valuation, and Central bank policy, although political developments in Italy, Spain and Turkey should be monitored closely. European investors may be advised to focus more on domestic, rather than export related themes. Look at underlying exposure of your funds carefully and remember that certain European and Japanese companies provide US exposure, without paying US prices. I have recently written on Japan, and I would continue to overweight this market, despite the large 2017 and 2018 to date outperformance. Smaller cap/ domestic focussed funds may outperform broader index averages e.g. JP Morgan Japanese Smaller Companies and Legg Mason.
- Alternative fixed interest vehicles, which continue to perform relatively well,in total return terms, against conventional government bonds, have attractions e.g. floating rate funds, preference shares, convertibles, for balanced, cautious accounts and energy/ emerging/speculative grade for higher risk. These remain my favoured plays within the fixed interest space. See recent note
- UK bank preference shares still look particularly attractive and could be considered as alternatives to the ordinary shares in some cases. If anything, recent sector “news” has highlighted the attractions of the sector.
- Alternative income, private equity and renewable funds have exhibited their defensive characteristics during the October market wobble and are still strongly recommended as part of a balanced portfolio. Most of these are already providing superior total returns to both gilts and equities so far this year, and indeed some produced positive returns during October. Reference could be made to the renewable funds (see my recent solar and wind power recommendations). Recent results from Green coat and Bluefield Solar reinforce my optimism for the sector. Selected infrastructure funds are also recommended for purchase after the recent Corbyn/Carillion inspired weakness (see note). The take-over of JLIF during the month highlights the value in the sector!
- Any new commitments to the commercial property sector should be more focussed on direct equities and investment trusts than unit trusts (see my recent note comparing open ended and closed ended funds), thus exploiting the discount and double discount features respectively as well as having liquidity and trading advantages. However, in general I would not overweight the sector, as along with residential property, I expect further price stagnation especially in London offices and retail developments e.g. (Hammerson, Intu). The outlook for some specialist sub sectors e.g. health, logistics, student, multi-let etc and property outside London/South-East, however, is currently more favourable. Investors should also consider some continental European property See my recent company note.
- I suggest a very selective approach to emerging equities and would continue to avoid bonds. Although the overall valuation for emerging market equities is relatively modest, there are large differences between individual countries. A mixture of high growth/high valuation e.g. India, Vietnam and value e.g. Russia could yield rewards and there are signs of funds moving back to South Africa on political change. Turkish assets seem likely to remain highly volatile in the short term and much of South America is either in a crisis mode g. Venezuela or embarking on new political era e.g. Mexico and Brazil. As highlighted in the quarterly, Chinese index weightings are expected to increase quite significantly over coming years and Saudi Arabia, is just being allowed into certain indices.
Full fourth quarter report will shortly be available to clients/subscribers and suggested portfolio strategy/individual recommendations are available. Ideas for a ten stock FTSE portfolio, model pooled fund portfolios (cautious, balanced adventurous, income), 30 stock income lists, hedging ideas and a list of shorter-term low risk/ high risk ideas can also be purchased, as well as bespoke portfolio construction/restructuring. Feel free to contact regarding any investment project.
Good luck with performance! Ken Baksh 01/10/2018
Ken has over 35 years of investment management experience, working for two major City institutions between 1976 and 2002.
Since then he has been engaged as a self-employed investment consultant. He has worked with investment trusts, unit trusts, pension funds, charities, Life Fund,hedge fund and private clients. Individual asset managed have included direct equities and bonds pooled vehicles currencies, derivatives and commodities.
Projects undertaken in a number of areas including asset allocation, risk control, performance measurement, marketing, individual company research, legacy portfolios and portfolio construction. He has a BSc(Mathematics/Statistics) and is a Fellow Member of the UK Society of Investment Professionals.
Phone 07747 114 691
Disclaimer
All stock recommendations and comments are the opinion of writer.
Investors should be cautious about all stock recommendations and should consider the source of any advice on stock selection. Various factors, including personal ownership, may influence or factor into a stock analysis or opinion.
All investors are advised to conduct their own independent research into individual stocks before making a purchase decision. In addition, investors are advised that past stock performance is not indicative of future price action.
You should be aware of the risks involved in stock investing, and you use the material contained herein at your own risk
The author may have historic or prospective positions in securities mentioned in the report.
The material on this website are provided for information purpose only.
Please contact Ken, (kenbaksh@btopenworld.com) for further information
Ken Baksh – The sun is still shining – look at Bluefield Solar Income Fund #BSIF!
BLUEFOLD SOLAR INCOME FUND (BSIF)
Renewables have grown to a large investment trust sector in a relatively short period of time.
They have unique characteristics (RPI linked dividends, high proportion of regulated cash flows, direct exposure to power prices) and have delivered good total returns to investors, often bearing little correlation to other asset classes. Their geographical remit is predominantly/exclusively UK.
A rapidly growing % of UK energy needs are being met by renewable output.
Common key cash flow, and ultimately dividend, drivers tend to be the natural resource, the plant availability and performance, the business mix (usually RPI linked subsidies and sale of electricity), gearing and cost control.
Being live quoted investment trusts, they are liquid, transparent and usually pay dividends at least twice yearly
The sector currently comprises a few funds in the solar, wind and waste areas.
Currently, my sector favourite is Bluefield Solar Income Fund, code BSIF, ISIN GG00BB0RDB98, which produced another set of fine figures on September 27th, www.londonstockexchange.com/exchange/news/market-news/market-news-detail/BSIF/13806229.html
This company (BSIF), is a Guernsey based closed ended investment fund, which invests in a diversified portfolio of solar energy assets, each located in the UK.
- In the five years since the IPO,total returns for shareholders on an NAV and total return basis have exceeded 50%.
- At the end of June,2018, the fund had a total of 45 large solar assets,39 micro solar assets and 2 rooftop assets, with an estimated generating capacity of 460.3MWp.
- Energy generation for the year ended June 2018 was above target with both plant performance and solar irradiance exceeding expectations.
- An independent valuation of the Company’s portfolio at £1.29/MWp leads to a NAV per share of 113.3p as at the end of June.
- In September 2016, the fund agreed £187 million 18 year fully amortising debt with Aviva. Part of this debt is fixed at a cost of 2.875% and part price at 0.7% plus RPI.
- There is a highly disciplined approach to acquisition policy due to “the present high transaction values evident in the secondary market for solar assets”.
- The company has negligible foreign exchange exposure and does not expect to be significantly affected by BREXIT-whatever the outcome.
- The fund has a full pay-out model and declared a dividend of 7.43p for the year just ended, with a company objective of increasing the dividend in line with RPI each year. At current prices, the yield is around 6.2%, paid quarterly.
- BSIF is recommended as part of the alternative income allocation offering an above average inflation protected yield, low market correlation and having live, transparent pricing on the LSE and negligible sterling/Brexit issues.
- A significant percentage of the shares are held by longer term institutions and there is growing interest from ESG funds.
Ken Baksh
Ken has over 35 years of investment management experience, working for two major City institutions between 1976 and 2002.
Since then he has been engaged as a self-employed investment consultant. He has worked with investment trusts, unit trusts, pension funds, charities, Life Fund,hedge fund and private clients. Individual asset managed have included direct equities and bonds pooled vehicles currencies, derivatives and commodities.
Projects undertaken in a number of areas including asset allocation, risk control, performance measurement, marketing, individual company research, legacy portfolios and portfolio construction. He has a BSc(Mathematics/Statistics) and is a Fellow Member of the UK Society of Investment Professionals.
Disclaimer
All stock recommendations and comments are the opinion of writer.
Investors should be cautious about all stock recommendations and should consider the source of any advice on stock selection. Various factors, including personal ownership, may influence or factor into a stock analysis or opinion.
All investors are advised to conduct their own independent research into individual stocks before making a purchase decision. In addition, investors are advised that past stock performance is not indicative of future price action.
You should be aware of the risks involved in stock investing, and you use the material contained herein at your own risk
The author may have historic or prospective positions in securities mentioned in the report.
The material on this website are provided for information purpose only.
Please contact Ken, (kenbaksh@btopenworld.com) for further information
Ken Baksh – October market report…..trickery or treats!
October 2018 Market Report
During the month to September 30th, 2018, major equity markets again displayed a mixed trend, rising by 1.19% overall and the VIX index fell. There continued to be an abundance of market moving news over what is traditionally a quieter month, at macro-economic, corporate and political levels.
The European Central Bank appeared to become more certain of removing QE over coming quarters, with more hawkish policy statements, but delaying any interest rate increase until 2019, while economic news seems to have been more upbeat than in recent months, particularly in Germany. Political events were not in short supply, and in Turkey for example, continued to affect bond and currency markets while Italian bonds and the anniversary of the Greek rescue package also attracted headlines. US market watchers continued to grapple with ongoing tariff discussions, Federal Budget, Turkish stand-off, NAFTA follow up and North Korean meeting uncertainty as well as Trump’s growing domestic issues, ominously becoming higher profile, before the important November midterm elections. US economic data and corporate results so far have generally been above expectation and the official interest rate was increased again in September to a range of 2%-2.25%. In the Far East, China flexed its muscles in response to Trump’s trade and other demands while relaxing some bank reserve requirements. Japanese second quarter GDP growth appeared higher than expected and Shinzo Abe consolidated his political position, both perceived as market friendly, and the ten-year bond continues to trade near the recent yield high. The UK reported mixed economic data with satisfactory developments on the government borrowing side, inflation higher than expected, but poor relative GDP figures and deteriorating property sentiment, both residential and commercial. Recent retail data shows mixed trends, some “weather related”. Market attention, both domestic and international is clearly focussed on ongoing BREXIT developments and their strong influence on politics.
Aggregate world hard economic data continues to show steady expansion, excluding the UK, as confirmed by the IMF and the OECD with some forecasts of 2018 economic growth in the 3.3% to 3.6% area, a little lower than January forecasts. Fluctuating currencies continued to play an important part in asset allocation decisions, the stronger US dollar again being the major recent feature recently, although lagging the yen year to date. Emerging market currencies have had a particularly volatile period. Government Bond holders saw small price moves over the month. Of note was the continuing rise in the Japanese Government Bond Yield, albeit from a low level. Oil was again about the only major commodity to show a price gain in September.
At the end of the nine -month period, “mixed investment” unit trusts show a very small positive price performance, with technology and most overseas equity regions showing above average performance, and bonds, Asia excl-Japan and Emerging markets in negative territory. Source: Morningstar
Equities
Global Equities displayed a mixed performance over the month of September, the FTSE ALL World Index gaining 1.19% in dollar terms and showing a small positive return since the beginning of the year. The UK broad and narrow market indices lagged other major markets over the month in local terms and have underperformed in both local and sterling adjusted values from the end of 2017 by 4.4% and 9.3% respectively. Europe ex-UK also declined while USA and Japan outperformed. The NASDAQ index, driven by technology companies, remains by far the best asset class year to date. In sterling adjusted terms, America, helped to a large degree by the tech sector, has jumped to the top of the leader board year to date, with Japan following. The VIX index fell 5.22 % over the month, and at the current level of 12.54 is up about 22% from the year end.
UK Sectors
Sector volatility remained high during the month, influenced by both global factors e.g. commodity prices, tariffs, as well as corporate activity. Banking stocks fell significantly while oil and gas gained 1.8%. Over the nine-month period, pharmaceuticals are outpacing the worse performing major sector, telecommunications by around 40%.
Fixed Interest
Gilt prices fell over the month and are now down 3.55% year to date in capital terms, the 10-year UK yield standing at 1.46% currently. Other ten-year yield closed the month at US 3.06% Japan, 0.09% and Germany 0.46% respectively. UK corporate bonds fell, ending August on a yield of approximately 2.74%. Amongst the more speculative grades, emerging market bonds continued to fall in capital terms. Floating rate bond prices outperformed gilts over the month and both of my recommended funds are showing significant capital and total return outperformance of conventional gilts year to date. I continue to strongly recommend this asset class. The monthly dip in the convertible fund may provide a buying opportunity, with a stable running yield near 5% See my recommendations in preference shares, convertibles, corporate bonds, floating rate bonds etc. A list of my top thirty income ideas (all yielding over 5%) from over 10 different asset classes is available.
Foreign Exchange
Amongst the major currencies, a slightly weaker Yen was the monthly feature largely on political and economic developments. Sterling showed just small moves against the major currencies over the month. Currency adjusted, the FTSE World Equity Index is now outperforming the FTSE 100 by over around 9.3% since the end of 2017.
Commodities
A generally weak month for commodities with the notable exception of oil, largely on supply issues. Over the year so far, oil, wheat and uranium (renegotiation of longer-term contracts) have shown the greatest gains.
Looking Forward
Over the coming months, geo-political events and Central Bank actions/statements will be accompanied by the onset of the third quarter corporate reporting season, resulting in an abundance of stock moving events. With medium term expectation of rising bond yields, equity valuations and fund flow (both institutional and Central bank) dynamics will also be increasingly important areas of interest/concern.
US watchers will continue to speculate on the timing and number of interest rate hikes 2018/2019 and longer-term debt dynamics, as well as fleshing out the winners and losers from any tariff developments (steel, aluminium, EU, China,NAFTA)-a moving target! Third quarter figures (and accompanying statements) will be subject to even greater analysis after the buoyant first half year, and the growing list of headwinds. Additional discussions pertaining to North Korea, Russia, Iran, Venezuela, and Trump’s own position could precipitate volatility in equities, commodities and currencies, especially with the November mid-term elections edging closer. In Japan market sentiment may be calmer after recent political and economic events although international events e.g exchange rates and tariff developments will affect equity direction. European investment mood will be tested by economic figures, EU Budget discussions, Italian bond spreads, Turkish and Spanish politics, and reaction to the migrant discussions. It must also be remembered that the QE bond buying is being wound down over coming months. Hard economic data and various sentiment/residential property indicators will continue to show that UK economic growth will be slower in 2018 compared to 2017, and further down grades may appear as anecdotal third quarter trends are closely analysed. Brexit discussion has moved to a new level, discussions, and several target EU/ BREXIT dates and the Conservative Party Conference, starting today, will inevitably lead to speculation of all sorts. The current perceptions of either a move to a “softer” European exit, or a “no deal” will undoubtedly lead to pressure from many sides. Political tensions stay at elevated levels both within and across the major parties and considerable uncertainties still face individual companies and sectors. Industry, whether through trade organizations, international pressure e.g Japan, or directly e.g. Bae, BMW,Toyota, Honda, Ryanair is becoming increasingly impatient, and vocal, and many London based financial companies are already “voting with their feet”.
On a valuation basis, most, but not all, conventional government fixed interest products continue to appear expensive against current economic forecasts and supply factors, and renewed bond price declines and further relative underperformance versus equities should be expected in the medium term, in my view. See my recent ‘iceberg’ illustration for an estimate of bond sensitivity, particularly acute for longer maturities. Price declines are eroding any small income returns leading to negative total returns in many cases. On the supply point there are increasing estimates of US bond issuance against a background of diminished QE and overseas buying. European bond purchases are also winding down.
Equities appear more reasonably valued, apart from some PE metrics, (especially in the US), but there are wide variations, and opportunities, in both broad asset classes. Equity investors will be looking to see if superior earnings growth can compensate for higher interest rates in several areas. Helped in no small part by tax cuts, US companies have been showing earnings growth more than 20% so far this year, although the current quarter is widely expected to be the peak comparison period, and ‘misses’ are being severely punished e.g. Facebook and Twitter. Corporate results from US, Europe and Japan have, on aggregate, been up to expectations over the current period.
Outside pure valuation measures, sentiment indicators and the VIX index are showing significant day to day variation, after the complacency of last year. The current level of 13.54 appears rather low in the context of potential banana skins.
In terms of current recommendations,
Continue to overweight equities relative to core government bonds, especially within Continental Europe and Japan. However, an increased weighting in absolute return and other vehicles may be warranted as equity returns will become increasingly lower and more volatile and holding greater than usual cash balances may also be appropriate. Among major equity markets, the USA is one of the few areas where the ten-year bond yields more than the benchmark equity index. The equity selection should be very focussed. Certain equity valuations are rather high, especially on a PE basis (see quarterly), although not in “bubble” territory. A combination of sharper than expected interest rate increases with corporate earnings shocks would not be conducive to strong equity returns. Ongoing and fluid tariff discussions could additionally unsettle selected countries, sectors and individual stocks Harley Davidson, German car producers, American and Brazilian soy producers etc.
- UK warrants a neutral allocation after the strong relative bounce over the quarter on the back of stronger oil price, sterling weakness and corporate activity. Ongoing Brexit debate, political stalemate and economic uncertainty could cause more sterling wobbles, which in turn could affect sector/size choices. I would expect to see more profits warnings (Countryside,Foxtons,H&M,BHS,Homebase- latest casualties) and extra due diligence in stock/fund selection is strongly advised.
- Within UK sectors, some of the higher yielding defensive plays e.g. Pharma, telco’s and utilities have attractions relative to certain cyclicals and many financials are showing confidence by dividend hikes and buy-backs etc. Over recent months, value stocks have been staging a long overdue recovery compared to growth stocks. Oil and gas majors may be worth holding despite the outperformance to date. Remember that the larger cap names such as Royal Dutch and BP will be better placed than some of the purer exploration plays in the event of a softer oil price. Mining stocks remain a strong hold, in my view (see my recent note for favoured large cap pooled play). Corporate activity, already apparent in the engineering (GKN), property (Hammerson), pharmaceutical (Glaxo, Shire?), packaging (Smurfit), retail (Sainsbury/Asda), leisure (Whitbread),media (Sky),mining (Randgold) is likely to increase in my view, although the Government has recently been expressing concern about overseas take-overs in certain strategic areas.
- Continental European equities continue to be preferred to those of USA, for reasons of valuation, and Central bank policy, although political developments in Italy, Spain and Turkey should be monitored closely. Improving economic data adds to my enthusiasm for selected European names, although European investors may be advised to focus more on domestic, rather than export related themes. Look at underlying exposure of your funds carefully. Remember that certain European and Japanese companies provide US exposure, without paying US prices. I have recently written on Japan, and I would continue to overweight this market, despite the large 2017 and 2018 to date outperformance. Smaller cap/ domestic focussed funds may outperform broader index averages e.g. JP Morgan Japanese Smaller Companies and Legg Mason.
- Alternative fixed interest vehicles, which continue to perform relatively well against conventional government bonds, have attractions e.g. floating rate funds, preference shares, convertibles, for balanced, cautious accounts and energy/ emerging/speculative grade for higher risk. These remain my favoured plays within the fixed interest space. See recent note
- UK bank preference shares still look particularly attractive and could be considered as alternatives to the ordinary shares in some cases. If anything, recent sector “news” has highlighted the attractions of the sector.
- Alternative income, private equity and renewable funds have exhibited their defensive characteristics during recent equity market wobbles and are still recommended as part of a balanced portfolio. Many of these are already providing superior total returns to both gilts and equities so far this year. Reference could be made to the renewable funds (see my recent solar and wind power recommendations). Results from Greencoat on February 26nd and Bluefield Solar (last week) reinforce my optimism for the sector. I will be writing on Bluefield shortly. Selected infrastructure funds are also recommended for purchase after the recent Corbyn/Carillion inspired weakness (see note). The take-over of JLIF during the month highlights the value in the sector!
- Any new commitments to the commercial property sector should be more focussed on direct equities and investment trusts than unit trusts (see my recent note comparing open ended and closed ended funds), thus exploiting the discount and double discount features respectively as well as having liquidity and trading advantages. However, in general I would not overweight the sector, as along with residential property, I expect further price stagnation especially in London offices and retail developments e.g. (Hammerson, Intu). The outlook for some specialist sub sectors e.g. health, logistics, student, multi-let etc and property outside London/South-East, however, is currently more favourable. Investors should also consider some continental European property See my recent company note.
- I suggest a very selective approach to emerging equities and would continue to avoid bonds. Although the overall valuation for emerging market equities is relatively modest, there are large differences between individual countries. A mixture of high growth/high valuation e.g. India, Vietnam and value e.g. Russia could yield rewards and there are signs of funds moving back to South Africa on political change. Turkish assets seem likely to remain highly volatile in the short term and much of South America is either in a crisis mode g. Venezuela or entering an uncertain election process e.g. Brazil. As highlighted in the quarterly, Chinese index weightings are expected to increase quite significantly over coming years and Saudi Arabia, is just being allowed into certain indices.
Full fourth quarter report will shortly be available to clients/subscribers and suggested portfolio strategy/individual recommendations are available. Ideas for a ten stock FTSE portfolio, model pooled fund portfolios (cautious, balanced adventurous, income), 30 stock income lists, hedging ideas and a list of shorter-term low risk/ high risk ideas can also be purchased, as well as bespoke portfolio construction/restructuring. Feel free to contact regarding any investment project.
Good luck with performance! Ken Baksh 01/10/2018
Ken has over 35 years of investment management experience, working for two major City institutions between 1976 and 2002.
Since then he has been engaged as a self-employed investment consultant. He has worked with investment trusts, unit trusts, pension funds, charities, Life Fund,hedge fund and private clients. Individual asset managed have included direct equities and bonds pooled vehicles currencies, derivatives and commodities.
Projects undertaken in a number of areas including asset allocation, risk control, performance measurement, marketing, individual company research, legacy portfolios and portfolio construction. He has a BSc(Mathematics/Statistics) and is a Fellow Member of the UK Society of Investment Professionals.
Phone 07747 114 691
Disclaimer
All stock recommendations and comments are the opinion of writer.
Investors should be cautious about all stock recommendations and should consider the source of any advice on stock selection. Various factors, including personal ownership, may influence or factor into a stock analysis or opinion.
All investors are advised to conduct their own independent research into individual stocks before making a purchase decision. In addition, investors are advised that past stock performance is not indicative of future price action.
You should be aware of the risks involved in stock investing, and you use the material contained herein at your own risk
The author may have historic or prospective positions in securities mentioned in the report.
The material on this website are provided for information purpose only.
Please contact Ken, (kenbaksh@btopenworld.com) for further information
Ken Baksh: August Investment Review….Stay with equities versus bonds….for the time being!
August 2018 Market Report
During the month to July 31 st, 2018, major equity markets displayed a stronger trend and the VIX index fell significantly, indicative of a preference for greater risk-taking. There continued to be an abundance of market moving news over the period whether at corporate, economic or political level.
The European Central Bank appeared to become more certain of removing QE over coming quarters but delaying any interest rate increase until 2019, while economic news was generally dull. Political events were not in short supply, and in Turkey for example, dramatically affected bond and currency markets. European leaders and policy makers are having an uncharacteristically active summer, with debates on US tariffs, immigration, Japanese trade pact and post Brexit implications just four of the more topical issues. US market watchers continued to grapple with ongoing tariff discussions, Federal Budget, Iranian nuclear/sanctions, NAFTA friction and North Korean meeting uncertainty as well as domestic issues. Economic data and corporate results so far have generally been above expectation. In the Far East, North and South Korea made faltering progress towards an agreement while China flexed its muscles in response to Trump’s trade and other demands and relaxed bank reserve requirement late in the month. Chinese economic growth slowed slightly while there was a little speculation that the Bank of Japan may tweak it’s QE programme. The UK reported mixed economic data with satisfactory developments on the government borrowing side, inflation slightly lower than expected, but poor relative GDP figures and deteriorating property sentiment, both residential and commercial. The data and ongoing Brexit confusion appear to be keeping the MPC in a wait and see mode regarding interest rates, although mathematically the’ hawks’ are gaining ground. An important day for MPC policy statements tomorrow (2nd August).
Aggregate world hard economic data continues to show steady expansion, excluding the UK, as confirmed by the IMF and the OECD with some forecasts of 2018 economic growth in the 3.3% to 3.6% area, a little lower than January forecasts. Fluctuating currencies continued to play an important part in asset allocation decisions, the stronger US dollar again being the major recent feature recently, although lagging the yen year to date. Government Bond holders saw modest price falls over the month. Of note was the large jump in the Japanese Government Bond Yield. Oil was the main commodity feature during the month, falling after the long rally seen so far this year. Tariffs, whether actual or rumoured, are continuing to bear on certain metals and soft commodities, the latter also responding to extreme weather conditions. The price of wheat for example has climbed nearly 30% so far this year.
At the end of the seven-month period, “mixed investment” unit trusts show a very small positive price performance, with technology and most overseas equity regions showing above average performance, and bonds, Asia-excl Japan and Emerging markets in negative territory. Source Trustnet:01/08/2018
Equities
Global Equities rose over the month the FTSE ALL World Index gaining 3.43% in dollar terms and now showing a positive return since the beginning of the year. The UK broad and narrow market indices lagged other major markets over the month in local terms and have underperformed in both local and sterling adjusted values from the end of 2017.Asia and emerging markets were the relative underperformers and declined in absolute terms while Europe jumped quite strongly, although the DAX Index is still down in absolute returns since the beginning of 2018. In sterling adjusted terms, America has jumped to the top of the leader board year to date, largely helped by the technology component (NASDAQ up 10.9%) and a recently strengthening dollar. The VIX index while still up about 30% from the year end, dropped 13% over the month, as “risk on “trades returned.
UK Sectors
Sector volatility picked up during the month, influenced by both global factors e.g. commodity prices, tariffs, as well as corporate activity and ex-dividend adjustments. Utility stocks fell over 4%, while pharmaceuticals gained 5.8 %, largely on encouraging results and lingering corporate activity. Over the seven-month period, pharmaceuticals are outpacing the worse performing major sector, telecommunications by nearly 33%.
Fixed Interest
Gilt prices fell marginally over the month and are now down 1.64% year to date in capital terms, the 10-year UK yield standing at 1.39% currently. Other ten-year yield closed the month at US 2.97% Japan, 0.06% and Germany 0.33% respectively. UK corporate bonds remained broadly unchanged, ending July on a yield of approximately 2.75%. Amongst the more speculative grades, emerging market bonds fell while US high yield rose, in price terms. Floating rate and convertible bond prices showed mixed performance over the month. See my recommendations in preference shares, convertibles, corporate bonds, floating rate bonds etc. A list of my top thirty income ideas (all yielding over 5%) from over 10 different asset classes is available.
Foreign Exchange
Amongst the major currencies, a stronger dollar was the major monthly feature rising largely on relative economic news. Sterling fell versus the dollar while rising against the Yen and Euro. Currency adjusted, the FTSE World Equity Index is now outperforming the FTSE 100 by over 3% since the end of 2017.Just over two years since the BREXIT vote, the FTSE has risen by about 19% compared with the 32% gain in sterling adjusted world indices.
Commodities
A generally weak month for commodities with the notable exception of some of the softs, the latter largely reflecting weather conditions! Over the year so far, oil seems to be stabilising over $70, while gold, falling on the month and year-to date languishes at around $1223 currently.
Looking Forward
Over the coming months, geo-political events and Central Bank actions/statements will continue be key market drivers while early second quarter company results will likely add some additional volatility. With medium term expectation of rising bond yields, equity valuations and fund flow dynamics will also be increasingly important areas of interest/concern.
US watchers will continue to speculate on the timing and number of interest rate hikes 2018/2019 and longer-term debt dynamics, as well as fleshing out the winners and losers from any tariff developments (steel, aluminium, EU, China,NAFTA)-a moving target! Additional discussions pertaining to North Korea, Russia, Iran, Venezuela, and Trump’s own position could precipitate volatility in equities, commodities and currencies. In Japan market sentiment is likely to be influenced by economic policy and Abe’s political rating. It will be interesting to see if there is any follow through from recent BoJ speculation regarding bond yield policy. Recent corporate governance initiatives e.g. non-executive directors, cross holdings, dividends are helping sentiment. European investment mood will be tested by economic figures (temporary slowdown or more sustained?), EU Budget discussions, Italian, Turkish and Spanish politics, and reaction to the migrant discussions. Hard economic data and various sentiment/residential property indicators will continue to show that UK economic growth will be slower in 2018 compared to 2017, and further down grades may appear as anecdotal second quarter figures trends are closely analysed. Brexit discussion have moved to a new level, discussions on the “custom union” being currently hotly debated. The current perception of a move to a “softer” European exit will inevitably lead to pressure from many sides. Political tensions stay at elevated levels both within and across the major parties and considerable uncertainties still face individual companies and sectors. Industry, whether through trade organizations or directly e.g. Bae, BMW, Honda, Ryanair is becoming increasingly impatient, and vocal, and many London based financial companies are already “voting with their feet”.
On a valuation basis, most, but not all, conventional government fixed interest products continue to appear expensive against current economic forecasts and supply factors, and renewed bond price declines and further relative underperformance versus equities should be expected in the medium term, in my view. See my recent ‘iceberg’ illustration for an estimate of bond sensitivity. Price declines are eroding any small income returns leading to negative total returns in many cases. On the supply point there are increasing estimates of US bond issuance against a background of diminished QE and overseas buying. European bond purchases are expected to wind down later this year.
Equities appear more reasonably valued, apart from some PE metrics, (especially in the US), but there are wide variations, and opportunities, in both broad asset classes. Equity investors will be looking to see if superior earnings growth can compensate for higher interest rates in several areas. Helped in no small part by tax cuts, US companies have been showing earnings growth more than 20% so far this year, although the current quarter is widely expected to be the peak comparison period, and ‘misses’ are being severely punished e.g. Facebook and Twitter. Corporate results from US, Europe and Japan have, on aggregate, been up to expectations over the current period.
Outside pure valuation measures, sentiment indicators and the VIX index are showing significant day to day variation, after the complacency of last year. The current level of 13.23 appears rather low in the context of potential banana skins.
In terms of current recommendations,
Continue to overweight equities relative to core government bonds, especially within Continental Europe and Japan. However, an increased weighting in absolute return and other vehicles may be warranted as equity returns will become increasingly lower and more volatile and holding greater than usual cash balances may also be appropriate. Among major equity markets, the USA is one of the few areas where the ten-year bond yields more than the benchmark equity index. The equity selection should be very focussed. Certain equity valuations are rather high, especially on a PE basis (see quarterly), although not in “bubble” territory. A combination of sharper than expected interest rate increases with corporate earnings shocks would not be conducive to strong equity returns. Ongoing and fluid tariff discussions could additionally unsettle selected countries, sectors and individual stocks Harley Davidson, German car producers, American and Brazilian soy producers etc.
- UK warrants a neutral allocation after the strong relative bounce over the quarter on the back of stronger oil price, sterling weakness and corporate activity. Ongoing Brexit debate, political stalemate and economic uncertainty could cause more sterling wobbles, which in turn could affect sector/size choices. I would expect to see more profits warnings (Countryside,Foxtons,H&M- latest casualties) and extra due diligence in stock/fund selection is strongly advised.
- Within UK sectors, some of the higher yielding defensive plays e.g. Pharma, telco’s and utilities have attractions relative to certain cyclicals and many financials are showing confidence by dividend hikes and buy-backs etc. Oil and gas majors may be worth holding despite the outperformance to date. Remember that the larger cap names such as Royal Dutch and BP will be better placed than some of the purer exploration plays in the event of a softer oil price. Mining stocks remain a strong hold, in my view (see my recent note for favoured large cap pooled play). Corporate activity, already apparent in the engineering (GKN), property (Hammerson), pharmaceutical (Glaxo, Shire?), packaging (Smurfit), retail (Sainsbury/Asda) is likely to increase in my view, although the Government has recently been expressing concern about overseas take-overs in certain strategic areas.
- Continental European equities continue to be preferred to those of USA, for reasons of valuation, and Central bank policy, although political developments in Italy, Spain and Turkey should be monitored closely. Improving economic data adds to my enthusiasm for selected European names, although European investors may be advised to focus more on domestic, rather than export related themes. Look at underlying exposure of your funds carefully. Remember that certain European and Japanese companies provide US exposure, without paying US prices. I have recently written on Japan, and I would continue to overweight this market, despite the large 2017 outperformance. Smaller cap/ domestic focussed funds may outperform broader index averages e.g. JP Morgan Japanese Smaller Companies and Legg Mason.
- Alternative fixed interest vehicles, which continue to perform relatively well against conventional government bonds, have attractions e.g. floating rate funds, preference shares, convertibles, for balanced, cautious accounts and energy/ emerging/speculative grade for higher risk. These remain my favoured plays within the fixed interest space. See recent note
- UK bank preference shares still look particularly attractive and could be considered as alternatives to the ordinary shares in some cases. If anything, recent sector “news” has highlighted the attractions of the sector.
- Alternative income, private equity and renewable funds have exhibited their defensive characteristics during recent equity market wobbles and are still recommended as part of a balanced portfolio. Many of these are already providing superior total returns to both gilts and equities so far this year. Reference could be made to the renewable funds (see my recent solar and wind power recommendations). Results from Greencoat on February 26nd and Bluefield Solar the following day reinforce my optimism for the sector. Selected infrastructure funds are also recommended for purchase after the recent Corbyn/Carillion inspired weakness (see note). The take-over of JLIF during the month highlights the value in the sector!
- Any new commitments to the commercial property sector should be more focussed on direct equities and investment trusts than unit trusts (see my recent note comparing open ended and closed ended funds), thus exploiting the discount and double discount features respectively as well as having liquidity and trading advantages. However, in general I would not overweight the sector, as along with residential property, I expect further price stagnation especially in London offices and retail developments e.g(Hammerson,Intu). The outlook for some specialist sub sectors and property outside London/South-East, however, is currently more favourable. Investors should also consider some continental European property See my recent company note.
- I suggest a selective approach to emerging equities and would currently avoid bonds. Although the overall valuation for emerging market equities is relatively modest, there are large differences between individual countries. A mixture of high growth/high valuation e.g. India, Vietnam and value e.g. Russia could yield rewards and there are signs of funds moving back to South Africa on political change. Turkish assets seem likely to remain highly volatile in the short term. As highlighted in the quarterly, Chinese index weightings are expected to increase quite significantly over coming years and Saudi Arabia, is just being allowed into certain indices.
Full third quarter report is available to clients/subscribers and suggested portfolio strategy/individual recommendations are available. Ideas for a ten stock FTSE portfolio, model pooled fund portfolios (cautious, balanced adventurous, income), 30 stock income lists, hedging ideas and a list of shorter term low risk/ high risk ideas can also be purchased, as well as bespoke portfolio construction/restructuring.
Good luck with performance! Ken Baksh 01/08/2018
Ken has over 35 years of investment management experience, working for two major City institutions between 1976 and 2002.
Since then he has been engaged as a self-employed investment consultant. He has worked with investment trusts, unit trusts, pension funds, charities, Life Fund,hedge fund and private clients. Individual asset managed have included direct equities and bonds pooled vehicles currencies, derivatives and commodities.
Projects undertaken in a number of areas including asset allocation, risk control, performance measurement, marketing, individual company research, legacy portfolios and portfolio construction. He has a BSc(Mathematics/Statistics) and is a Fellow Member of the UK Society of Investment Professionals.
Phone 07747 114 691
Disclaimer
All stock recommendations and comments are the opinion of writer.
Investors should be cautious about all stock recommendations and should consider the source of any advice on stock selection. Various factors, including personal ownership, may influence or factor into a stock analysis or opinion.
All investors are advised to conduct their own independent research into individual stocks before making a purchase decision. In addition, investors are advised that past stock performance is not indicative of future price action.
You should be aware of the risks involved in stock investing, and you use the material contained herein at your own risk
The author may have historic or prospective positions in securities mentioned in the report.
The material on this website are provided for information purpose only.
Please contact Ken, (kenbaksh@btopenworld.com) for further information
Ken Baksh: July Investment Report – Bumpy ride ahead…..Hang on to your hats!
July 2018 Market Report
During the month to June 29th, 2018, major equity markets displayed a mixed trend, dropping overall and with considerable individual market and day to day variation. There was an abundance of market moving news over the period whether at corporate, economic or political level. The European Central Bank appeared to become more certain of removing QE over coming quarters but delaying any interest rate increase until 2019, while economic news was generally dull. Political events in Germany, Italy, Spain and Turkey influenced bond spreads and Forex markets. US market watchers continued to grapple with ongoing tariff discussions, Iranian nuclear/sanctions, NAFTA friction and North Korean meeting uncertainty as well as domestic issues. In the Far East, North and South Korea made faltering progress towards an agreement while China flexed its muscles in response to Trump’s trade and other demands and relaxed bank reserve requirement late in the month. The UK reported mixed economic data with satisfactory developments on the government borrowing side, inflation slightly lower than expected, but poor revised GDP first quarter figures. The data and ongoing Brexit confusion had forced the MPC to keep interest rates on hold at the previous meeting although the MPC appears to be turning more hawkish.
Aggregate world hard economic data continues to show steady expansion, excluding the UK, as confirmed by the IMF and the OECD with some forecasts of 2018 economic growth in the 3.5% to 3.9% area although recent sentiment indicators indicate some current economic softness. Fluctuating currencies continued to play an important part in asset allocation decisions, the stronger US dollar again being the major feature over June 2018, although lagging the yen year to date. Bond holders saw modest gains over the month, largely for haven reasons, although the year to date development has seen UK and US 10-year yields rise, while those in Germany and Japan have fallen. Oil was the main commodity feature both before and after the June OPEC meeting.
Interestingly, at the half year stage equity indices, gilts and sterling adjusted world equities have essentially delivered a flat performance, a buoyant first quarter almost exactly cancelled out by a weak second quarter, and the FTSE Private Investor Index Series also shows zero or slightly negative returns for the six-month period (Source FT,30/06/2018). In topical football parlance “all to play for in the second half”.
Equities
Global Equities fell over the month the FTSE ALL World Index dropping 1.61% in dollar terms and now showing a loss of -2.40% since the beginning of the year. The UK broad and narrow market indices outperformed other major markets over the month in local terms, although underperformed in sterling adjusted values from the end of 2017. Emerging markets, Germany, and Asia ex-Japan were the relative underperformers and declined in absolute terms while the S&P and NASDAQ showed absolute and relative gains. In sterling adjusted terms, Japan and America remain the outperformers on year to date performance amongst the major markets while the UK and parts of Europe remain in negative territory. The VIX index while still up about 50% from the year end, seems to have stabilised, with occasional short upward spikes. At the time of writing, the absolute VIX level stands at 15.22, far from the 9-10 level that prevailed much of last year and reflecting a level of uncertainty but far from the extreme levels experienced during major market meltdowns of the past.
UK Sectors
Sector volatility was more muted during the month, influenced by both global factors e.g. sanctions, tariffs as well as corporate activity and ex-dividend adjustments. Oil and gas and utilities led the sectors over the month, the former also one of the top sectors year to date while banks, life assurance and property all suffered monthly relative declines. The general retail area continues to experience profit warning and downgrades and is understandably one of the weaker stock market sectors so far this year.
Fixed Interest
Gilt prices fell marginally over the month and are now down 0.98% year to date in capital terms, the 10-year yield standing at 1.31% currently. Other ten-year yield closed the month at US 2.83% Japan, 0.02% and Germany 0.26% respectively. UK corporate bonds also fell marginally in price terms over the month, ending June on a yield of approximately 2.75%. Amongst the more speculative grades, emerging markets stage a bounce in prices after several weak months. Floating rate issues continue to outperform gilts year to date in both capital and total return terms. Preference shares have recovered from the Aviva U-turn and remain attractive fixed interest alternatives. See my recommendations in preference shares, convertibles, corporate bonds, floating rate bonds etc. A list of my top thirty income ideas (all yielding over 5%) from over 10 different asset classes is available.
Foreign Exchange
Amongst the major currencies, a stronger dollar was the major monthly feature rising 1.43% in trade weighted terms, largely on relative economic news The Japanese yen and the British pound both fell, the latter being very sensitive to ongoing Brexit discussion. As mentioned above, the FX moves are becoming a growing factor in asset allocations discussions. Year to date the Japanese and American equity markets are outperforming the UK and European benchmarks in sterling terms.
Commodities
A generally weak month for commodities with the notable exception of oil receiving a boost from the recent OPEC meeting. Gold and other precious metals fell, as did some of the softer agricultural products after previous monthly gains. At the half year stage, oil,wheat and soya are amongst the few commodities showing absolute price gains.
Looking Forward
Over the coming months, geo-political events and Central Bank actions/statements will continue be key market drivers while early second quarter company results will likely add some additional volatility. Ongoing corporate activity will however remain at a high level, following the record deal flow reported in the first half of 2018. With medium term expectation of rising bond yields, equity valuations and fund flow dynamics will also be increasingly important areas of interest/concern.
US watchers will continue to speculate on the timing and number of interest rate hikes 2018/2019 and longer-term debt dynamics, as well as fleshing out the winners and losers from any tariff developments (steel, aluminium, EU, China,NAFTA)-a moving target! Additional discussions pertaining to North Korea, Russia (July 16th), Iran, Venezuela, and Trump’s own position could precipitate volatility in equities, commodities and currencies. In Japan market sentiment is likely to be influenced by economic policy and Abe’s political rating, the recent yen weakness being a positive factor for equity investors. Recent corporate governance initiatives e.g non-executive directors, cross holdings, dividends are also helping sentiment European investment mood will be tested by economic figures (temporary slowdown or more sustained?), EU Budget discussions, Italian, Turkish and Spanish politics, and reaction to the migrant discussions. Hard economic data and various sentiment/residential property indicators will continue to show that UK economic growth will be slower in 2018 compared to 2017, and further down grades may appear as anecdotal second quarter figures trends are closely analysed. Brexit discussion have moved to a new level, discussions on the “custom union” being currently hotly debated. The current perception of a move to a “softer” European exit will inevitably lead to pressure from many sides. Political tensions stay at elevated levels both within and across the major parties and considerable uncertainties still face individual companies and sectors. Industry, whether through trade organizations or directly e.g. Bae, BMW, Honda,Ryanair is becoming increasingly impatient, and vocal.
On a valuation basis, most, but not all, conventional government fixed interest products continue to appear expensive against current economic forecasts and supply factors, and renewed bond price declines and further relative underperformance versus equities should be expected in the medium term, in my view. Price declines are eroding any small income returns leading to negative total returns in many cases. On the supply point there are increasing estimates of US bond issuance against a background of diminished QE and overseas buying.
Equities appear more reasonably valued, apart from some PE metrics, (especially in the US), but there are wide variations, and opportunities, in both broad asset classes. Equity investors will be looking to see if superior earnings growth can compensate for higher interest rates in several areas. Corporate results from US, Europe and Japan have, on aggregate, been up to expectations over the first quarter of 2018, although EY noted that the number of UK profits warning were about 10% higher than the previous year at the nine-month stage, mostly in the home improvement, motor, government supply, restaurant and other retail areas.US earnings rising at about 22% during the first quarter, will face a slowdown once the one-off factors dissipate.
Outside pure valuation measures, sentiment indicators and the VIX index are showing significant day to day variation, after the complacency of last year.
In terms of current recommendations,
Continue to overweight equities relative to core government bonds, especially within Continental Europe and Japan. However, an increased weighting in absolute return and other vehicles may be warranted as equity returns will become increasingly lower and more volatile, and holding greater than usual cash balances may be appropriate. Among major equity markets, the USA is one of the few areas where the ten-year bond yields roughly the same as the benchmark equity index. The equity selection should be very focussed. Certain equity valuations are rather high, especially on a PE basis (see quarterly). A combination of sharper than expected interest rate increases with corporate earnings shocks would not be conducive to strong equity returns. Ongoing and fluid tariff discussions could additionally unsettle selected countries, sectors and individual stocks Harley Davidson, German car producers etc.
- UK warrants a neutral allocation after the strong relative bounce over the quarter on the back of stronger oil price, sterling weakness and corporate activity. Ongoing Brexit debate, political stalemate and economic uncertainty could cause more sterling wobbles, which in turn could affect sector/size choices. I would expect to see more profits warnings (Countryside,H&M- latest casualties) and extra due diligence in stock/fund selection is strongly advised.
- Within UK sectors, some of the higher yielding defensive plays e.g. Pharma, telco’s and utilities have attractions relative to certain cyclicals and many financials are showing confidence by dividend hikes and buy-backs etc. Oil and gas majors may be worth holding despite the outperformance to date. Remember that the larger cap names such as Royal Dutch and BP will be better placed than some of the purer exploration plays in the event of a softer oil price. Mining stocks remain a strong hold, in my view (see my recent note for favoured large cap pooled play). Corporate activity, already apparent in the engineering (GKN), property (Hammerson), pharmaceutical (Glaxo, Shire?), packaging (Smurfit), retail (Sainsbury/Asda) is likely to increase in my view.
- Continental European equities continue to be preferred to those of USA, for reasons of valuation, and Central bank policy, although political developments in Italy, Spain and Turkey should be monitored closely. Improving economic data adds to my enthusiasm for selected European names, although European investors may be advised to focus more on domestic, rather than export related themes. Look at underlying exposure of your funds carefully. Remember that certain European and Japanese companies provide US exposure, without paying US prices. I have recently written on Japan, and I would continue to overweight this market, despite the large 2017, and 2018 to date outperformance. Smaller cap/ domestic focussed funds may out perform broader index averages e.g. JP Morgan Japanese Smaller Companies and Legg Mason.
- Alternative fixed interest vehicles, which continue to perform relatively well against conventional government bonds, have attractions e.g. floating rate funds, preference shares, convertibles, for balanced, cautious accounts and energy/ emerging/speculative grade for higher risk. These remain my favoured plays within the fixed interest space. See recent note
- UK bank preference shares still look particularly attractive and could be considered as alternatives to the ordinary shares in some cases. If anything, recent sector “news” has highlighted the attractions of the sector.
- Alternative income, private equity and renewable funds have exhibited their defensive characteristics during recent equity market wobbles and are still recommended as part of a balanced portfolio. Many of these are already providing superior total returns to both gilts and equities so far this year. Reference could be made to the renewable funds (see my recent solar and wind power recommendations). Results from Greencoat on February 26nd and Bluefield Solar the following day reinforce my optimism for the sector. Selected infrastructure funds are also recommended for purchase after the recent Corbyn / Carillion inspired weakness (see note).
- Any new commitments to the commercial property sector should be more focussed on direct equities and investment trusts than unit trusts (see my recent note comparing open ended and closed ended funds), thus exploiting the discount and double discount features respectively as well as having liquidity and trading advantages. However, in general I would not overweight the sector, as along with residential property, I expect further price stagnation especially in London offices and retail developments. The outlook for some specialist sub sectors and property outside London/South-East, however, is currently more favourable. Investors should also consider some continental European property See my recent company note, after management update last week.
- I suggest a selective approach to emerging equities and would currently avoid bonds. Although the overall valuation for emerging market equities is relatively modest, there are large differences between individual countries. A mixture of high growth/high valuation e.g. India, Vietnam and value e.g. Russia could yield rewards and there are signs of funds moving back to South Africa on political change. Turkish assets seem likely to remain highly volatile in the short term. As highlighted in the quarterly, Chinese index weightings are expected to increase quite significantly over coming years and Saudi Arabia, is just being allowed into certain indices.
Full third quarter report will soon be available to clients/subscribers and suggested portfolio strategy/individual recommendations are available. Ideas for a ten stock FTSE portfolio, model pooled fund portfolios (cautious, balanced adventurous, income), 30 stock income lists, hedging ideas and a list of shorter term low risk/ high risk ideas can also be purchased, as well as bespoke portfolio construction/restructuring.
Good luck with performance! Ken Baksh 02/07/2018
Ken has over 35 years of investment management experience, working for two major City institutions between 1976 and 2002.
Since then he has been engaged as a self-employed investment consultant. He has worked with investment trusts, unit trusts, pension funds, charities, Life Fund,hedge fund and private clients. Individual asset managed have included direct equities and bonds pooled vehicles currencies, derivatives and commodities.
Projects undertaken in a number of areas including asset allocation, risk control, performance measurement, marketing, individual company research, legacy portfolios and portfolio construction. He has a BSc(Mathematics/Statistics) and is a Fellow Member of the UK Society of Investment Professionals.
Phone 07747 114 691
Disclaimer
All stock recommendations and comments are the opinion of writer.
Investors should be cautious about all stock recommendations and should consider the source of any advice on stock selection. Various factors, including personal ownership, may influence or factor into a stock analysis or opinion.
All investors are advised to conduct their own independent research into individual stocks before making a purchase decision. In addition, investors are advised that past stock performance is not indicative of future price action.
You should be aware of the risks involved in stock investing, and you use the material contained herein at your own risk
The author may have historic or prospective positions in securities mentioned in the report.
The material on this website are provided for information purpose only.
Please contact Ken, (kenbaksh@btopenworld.com) for further information
Ken Baksh – Could England win?……and Russia?
JP Morgan Russian Securities PLC –GB0032164732
Never a market or currency for the faint-hearted, but could possibly all the current news re volatile oil price,sanctions, questionable corporate governance and uncertain international political relations be in the RUSSIAN price? I believe that some of the more positive factors, itemised below, have been ignored and that some exposure, perhaps through the fund mentioned below could be added at this stage as part of the emerging market allocation.
- Recent macro statistics have been more stable with steady increases in retail sales, industrial production, construction and corporate lending. GDP growth forecasts are in the 1.5-2.0% area for 2018
- The CBR is expected to continue cutting interest rates this year and next. Inflation is retreating, from a high level, and surpluses in both current account and Budget are in stark contrast to several other “emerging markets”.
- Within the banking sector, credit growth is recovering, and non-performing loans appear to have peaked.
- Recent OPEC/Russia “agreement” seems likely to keep the oil price at a level highly beneficial to major oil companies and State coffers. Energy companies make up more than half of those in the MSCI Russia Index.
- Earnings per share growth is exceeding expectations.
- Depending on index sample chosen, a P/E ratio between 6 and 7 and Price Book ratio at approximately 0.7 puts investment ratios are at a considerable discount to the emerging market universe, let alone the global market average. Recent Bestinvest research puts the global equity PE at about 18.5, roughly three times as much as Russia
- The total Russian market offers a yield of about 5.7%(2.6% global average, source:Bestinvest) as earnings and pay-out ratios continue to rise. According to VTB Bank projections in January 2018, dividends expressed as a percentage of State government revenues are expected to rise from 1% to about 3% between 2016 and 2019.
- Institutional investors of Emerging markets funds are starting to carry much higher weightings In Russia, by comparison with markets which may be much more highly rated e.g. India, or in political turmoil e.g. Turkey, or have serious economic problems e.g. Venezuela.
- Current emerging market volatility is being exacerbated by withdrawal of dollar liquidity, rising U.S interest rates and a resurgent dollar with Turkey, Brazil,Indonesia,South Africa and Venezuela often being cited as more “fragile”.
- Prospective investors could look at individual stocks such as Sberbank and Lukoil or JPM Russian Investment Trust (detailed below). Income seekers may additionally look at the Raven Russia preference share, currently on an 8.1% annual yield, paid quarterly in sterling.
The instrument described below is speculative and can be highly volatile
- The investment trust JP Morgan Russian Securities plc is a UK listed investment trust, which provides pure exposure to the Russian economy and, as at May 31st May, held over 99% of it’s assets in Russian equities.
- JP Morgan was an early investor in Emerging Europe and the Middle East, and the Russian team is led by Oleg Biryulyov who has over 20 years’ industry experience.
- As at the same date, the Fund’s major holdings were Gazprom (15.3%), Sberbank (12.3%), Lukoil (10.3%), Norilsk (7.1%) and Novatek (6.5%)
- Apart from some of the national champions mentioned above, the fund also holds some promising smaller cap ideas including, in the top ten,Ros Agro,a vertically integrated Russian food producer and the second largest player in the domestic pork and sugar markets.
- As at 18th June,the fund had a relatively low gearing of 2.6%.
- The trust itself currently trades at 15.6% discount, close to it’s five year low and offers a yield of 4.2%, with the prospect of above average dividend growth.
- Clearly the trust will be highly sensitive to ongoing geo-political developments and the oil price but might suit a more adventurous portfolio on the current rating.
http://www.hl.co.uk/shares/shares-search-results/j/jpmorgan-russian-securities-ordinary-1p
https://www.trustnet.com/factsheets/t/hx56/jp-morgan-russian-securities-plc
Ken Baksh
Ken has over 35 years of investment management experience, working for two major City institutions between 1976 and 2002.
Since then he has been engaged as a self-employed investment consultant. He has worked with investment trusts, unit trusts, pension funds, charities, Life Fund,hedge fund and private clients. Individual asset managed have included direct equities and bonds pooled vehicles currencies, derivatives and commodities.
Projects undertaken in a number of areas including asset allocation, risk control, performance measurement, marketing, individual company research, legacy portfolios and portfolio construction. He has a BSc(Mathematics/Statistics) and is a Fellow Member of the UK Society of Investment Professionals.
Disclaimer
All stock recommendations and comments are the opinion of writer.
Investors should be cautious about all stock recommendations and should consider the source of any advice on stock selection. Various factors, including personal ownership, may influence or factor into a stock analysis or opinion.
All investors are advised to conduct their own independent research into individual stocks before making a purchase decision. In addition, investors are advised that past stock performance is not indicative of future price action.
You should be aware of the risks involved in stock investing, and you use the material contained herein at your own risk
The author may have historic or prospective positions in securities mentioned in the report.
The material on this website are provided for information purpose only.
Please contact Ken, (kenbaksh@btopenworld.com) for further information
Ken Baksh – Brexit worries?…Think instead about European Property play,on a discount with dividend yield over 5%..payable quarterly in Euros,if desired
Schroder European Real Estate Investment Trust-ISIN- Gb00By7R8K77
Launched in December 2015, the Schroder European Real Estate Investment Trust targets growth regions in Continental Europe and aims to provide a regular and attractive level of income together with the potential for long term income and capital growth.
With a certain degree of uncertainty surrounding the UK commercial property market (slowing economic growth, BREXIT) increasing number of investors are looking to continental Europe for their real estate exposure, and the SERE would seem to tick many boxes.
Ideal for an investor seeking above average income, with predominant exposure to European economies, and exhibiting low correlation with several other asset classes.May suit more cautious investor looking for income,paid quarterly, with lower correlation with mainstream bond and equity markets.
Following recent Interim figures published on June 12th-Hot from Press!
Results released on Tuesday 12th June, show Net Asset Value increasing 6.1% over the last six months to March 31st,2018 to Euro 1.39(£1.22), and dividend pay-out moving towards the company target of 5.5% on issue price. The current LTV ratio is 28%, and the company’s weighted interest cost is around 1.3% with a duration of over 6 years. The fund is fully invested in a portfolio with a value more than Euros 237 million and is currently 97% occupied. At current price of 113.5p, the stock trades on a discount to NAV of approximately 7% with a prospective annual yield of 5.4% payable in Euros or Sterling.
- Eurozone economic data continues to remain positive, growing faster than the UK over recent quarters and this relative outperformance is expected to continue. Private business surveys point to further growth and property and investment activity remains robust. A recent sample of German companies, for instance, showed rents rising between 4% and 6% over the last twelve months.
- SERE invests in cities/regions characterised by large liquid real estate markets such as Amsterdam, Berlin, Hamburg, Munich and Paris where local GDP are outperforming the national averages.
- The Trust is managed by Jeff O Dwyer, an experienced real estate investment manager, who is supported by nearly 100 property specialists located in key European hubs. The team see over Euro 2 billion of introductions each month, with the near-term pipeline comprising over Euros 115 million yielding between 5.8% and 7.5%.
- The process/risk control involves holding the bulk of the portfolio in stable income producing developments (approx. 70%) while adding a greater capital return component to the other 30% via refurbishments, change of use, lease extensions etc. A large portion of the rents are index linked.
- The purchase of a data/mixed user investment in Apeldoorn in February this year, on a very attractive 10% income yield leaves the fund fully invested.
- Geographical weighting is currently Germany (22.7%), France (50%), Holland and Spain (27%) by value. Approximately 45% of the property portfolio is represented by offices and 40.3% by retail, the latter predominantly in logistics centres, smaller supermarkets and convenience stores. These figures were effective on March 31, 2018.
- The top five properties were in Paris, Seville, Berlin and Biarritz.
- Portfolio is almost 100% occupied with a 6.8 years average lease time and net property income yield of 6%
SERE targets a fully covered Euro yield of 5.5%(7.5 Eurocents on a Euro equivalent issue price of Euro1.37). Dividends are declared in Euros, and paid quarterly, with UK shareholders being given the option of sterling or Euro pay-outs. Lease structures vary across Europe, but most typically have some form of inflation linkage, providing support for the target dividend.
Current discount to NAV (Euros 1.347-December 31st, 2017) represents a good level to be obtaining exposure to mainstream European property.
- The portfolio seeks to enhance property returns with a relatively modest level of gearing currently 28% LTV, (35% target LTV). The blended all in debt cost is 1.3% with an average maturity of around 6.5 years.
- Closed end fund structure with daily liquidity via a listing on the main market of the London Stock Exchange.
www.londonstockexchange.com/exchange/news/market-news/market-news-detail/SERE/13675397.html
Sources (LSE,company management and Numis Securities)
Ken Baksh
Ken has over 35 years of investment management experience, working for two major City institutions between 1976 and 2002.
Since then he has been engaged as a self-employed investment consultant. He has worked with investment trusts, unit trusts, pension funds, charities, Life Fund,hedge fund and private clients. Individual asset managed have included direct equities and bonds pooled vehicles currencies, derivatives and commodities.
Projects undertaken in a number of areas including asset allocation, risk control, performance measurement, marketing, individual company research, legacy portfolios and portfolio construction. He has a BSc(Mathematics/Statistics) and is a Fellow Member of the UK Society of Investment Professionals.
Disclaimer
All stock recommendations and comments are the opinion of writer.
Investors should be cautious about all stock recommendations and should consider the source of any advice on stock selection. Various factors, including personal ownership, may influence or factor into a stock analysis or opinion.
All investors are advised to conduct their own independent research into individual stocks before making a purchase decision. In addition, investors are advised that past stock performance is not indicative of future price action.
You should be aware of the risks involved in stock investing, and you use the material contained herein at your own risk
The author may have historic or prospective positions in securities mentioned in the report.
The material on this website are provided for information purpose only.
Please contact Ken, (kenbaksh@btopenworld.com) for further information
Ken Baksh: June Investment Report….never a dull moment!
June 2018 Market Report
During the month to May 31st, 2018, major equity markets displayed mixed performance trends overall, and trading remained volatile on a daily basis against a background of significant geo-political, economic and corporate events. The European Central Bank appeared to become more “dovish” following some lower than expected consumer confidence indicators, affecting both equity and currency markets while political developments adversely affected investor sentiment in Italy, Turkey and Spain. US market watchers had an especially busy month with ongoing tariff discussions, Iranian nuclear/sanction friction, North Korean meeting uncertainty as well as domestic issues. In the Far East, North and South Korea made faltering progress towards a meeting while China flexed its muscles in response to Trump’s trade and other demands. The UK reported mixed economic data with satisfactory developments on the government borrowing side, inflation slightly lower than expected, but very poor GDP first quarter figures. The data and ongoing Brexit confusion forced the MPC to keep interest rates on hold. Aggregate world hard economic data continues to show steady expansion, excluding the UK, as confirmed by the IMF and the OECD with some forecasts of 2018 economic growth in the 3.5% to 3.9% area although recent sentiment indicators indicate some current economic softness. Fluctuating currencies continue to play an important part in asset allocation decisions, the stronger US dollar being the major feature over May,2018, largely on relative economic developments. Bond watchers saw US 10-year yield break 3% before backing off towards the end of the period. Greater fluctuations in bond yields are likely to lead to higher equity volatility going forward. Oil continued to be a strong feature, although at the time of writing, it appears that OPEC and Russian additional supply may be used to bridge the Venezuelan and potentially Iranian shortfall.
Equities
Global Equities fell marginally over the month the FTSE ALL World Index dropping 0.37% in dollar terms and now showing a move of -0.80% since the beginning of the year. The UK broad and narrow market indices outperformed other major markets over the month in local terms. Emerging markets, Asia and Europe were the relative underperformers and declined in absolute terms. In sterling adjusted terms, Japan remains the outperformer on year to date performance amongst the major markets rising by 2.93% in sterling adjusted terms. The VIX index while still up about 50% from the year end levels, fell about 3% in May. At the time of writing, the absolute VIX level stands at 15.4, far from the 9-10 level that prevailed much of last year and reflecting a level of uncertainty but far from the extreme levels experienced during major market meltdowns of the past.
UK Sectors
Sector volatility remained high during the month, influenced by both global factors e.g. sanctions, tariffs as well as corporate activity and first quarter results. Mining was the stand-out sector in May on the positive side, while telecommunication stocks showed sharp declines. Corporate activity and profit warnings e.g. Dixons, continue.
Fixed Interest
Gilt prices rose over the month but are down 0.43% year to date in capital terms, the 10-year yield standing at 1.28% currently. Other ten-year yield closed the month at US 2.86% Japan, 0.01% and Germany 0.0.28% respectively, the latter receiving buying interest in the face of Italian and Spanish political uncertainty. UK corporate bonds rose marginally in price terms over the month. Amongst the more speculative grades, there continue to be mixed trends, with emerging market bonds, in local currency terms, showing price falls in absolute terms and yet the US lower grade bonds were moving in the opposite direction. Floating rate issues continue to outperform gilts year to date in both capital and total return terms. Preference shares have recovered from the Aviva U-turn and remain attractive fixed interest alternatives. See my recommendations in preference shares, convertibles, corporate bonds, floating rate bonds etc. A list of my top thirty income ideas (all yielding over 5%) from over 10 different asset classes is available.
Foreign Exchange
Amongst the major currencies, a stronger dollar was the major monthly feature rising 1.65% in trade weighted terms, largely on relative economic news The Euro was the major faller on the other hand, on largely political developments as well as some softer economic data. As mentioned above, the FX moves are becoming a growing factor in asset allocations discussions. Equity markets in sterling adjusted terms are showing marginal absolute gains year to date, apart from the FTSE 100.
Commodities
A very mixed and volatile month for commodities with significant impact from geo-political events. Oil, for example reacted positively to certain shut downs as well as impending Iranian sanction discussions and increasing US/Venezuela tensions. Gold fell slightly during May, as well as the other precious metals. Most of the major global mining groups have just reported figures and rising commodity prices, capital discipline, balance sheet transformations and higher shareholder pay-outs have been a common theme. Soft commodities have also enjoyed strong price gains since the start of the year, wheat, corn and soya for example showing price gains of around 22.95%,12.95% and 19.93% respectively.
Looking Forward
Over the coming months, geo-political events and Central Bank actions/statements will continue be key market drivers while first quarter company results will fade in the memory. Ongoing corporate activity will however remain at a high level. With rising bond yields, equity valuations and fund flow dynamics will also be increasingly important areas of interest/concern. Two areas of current debate are the level at which certain more cautious US investors switch form equities to bonds and whether value stocks will outperform cyclicals from these levels.
US watchers will continue to speculate on the timing and number of interest rate hikes 2018/2019 and longer-term debt dynamics, as well as fleshing out the winners and losers from any tariff developments (steel, aluminium, EU, China, NAFTA)-a moving target! Additional discussions pertaining to North Korea (June 12th), Iran, Venezuela, and Trump’s own position could precipitate volatility in equities, commodities and currencies. In Japan market sentiment is likely to be influenced by economic policy and Abe’s political rating, the recent yen weakness being a positive factor for equity investors. European sentiment will be tested by economic figures (temporary slowdown or more sustained?), EU Budget discussions, Italian, Turkish and Spanish politics, and positioning ahead of Greek rescue package deadlines. Hard economic data (as opposed to sentiment surveys) will continue to show that UK economic growth will be slower in 2018 compared to 2017, and further down grades may appear as anecdotal second quarter figures trends are closely analysed. Brexit discussion have moved to a new level, discussions on the “custom union” being currently hotly debated. Political tensions stay at elevated levels both within and across the major parties and considerable uncertainties still face individual companies and sectors.
On a valuation basis, most, but not all, conventional government fixed interest products continue to appear expensive against current economic forecasts and supply factors, and renewed bond price declines and further relative underperformance versus equities should be expected in the medium term, in my view. On the supply point there are increasing estimates of US bond issuance against a background of diminished QE and overseas buying.
Equities appear more reasonably valued, apart from some PE metrics, (especially in the US), but there are wide variations, and opportunities, in both broad asset classes. Equity investors will be looking to see if superior earnings growth can compensate for higher interest rates in several areas. Corporate results from US, Europe and Japan have, on aggregate, been up to expectations over the first quarter of 2018, although EY noted that the number of UK profits warning were about 10% higher than the previous year at the nine-month stage, mostly in the home improvement, motor, government supply, restaurant and other retail areas.US earnings rising at about 22% during the first quarter, will face a slowdown once the one-off factors dissipate.
Outside pure valuation measures, sentiment indicators and the VIX index are showing significant day to day variation, after the complacency of last year.
In terms of current recommendations,
Continue to overweight equities relative to core government bonds, especially within Continental Europe and Japan. Interestingly, among major markets, the USA is one of the few areas where the ten-year bond yields more than the benchmark equity index. However, the equity selection should be very focussed. Certain equity valuations are rather high, especially on a PE basis (see quarterly). A combination of sharper than expected interest rate increases with corporate earnings shocks would not be conducive to strong equity returns.
- UK warrants a neutral allocation after the strong relative bounce experienced in May on the back of stronger oil price, sterling weakness and corporate activity. Within the UK equity space, I suggest moving the balance of small/large cap stocks now back to neutral following both the outperformance of the former and the volatility in the currency (part post-election, part BREXIT). Ongoing Brexit debate, political stalemate and economic uncertainty could cause more sterling wobbles, which in turn could affect sector/size choices. I would expect to see more profits warnings (Carphone Warehouse- latest casualty) and extra due diligence in stock/fund selection is strongly advised.
- Within UK sectors, some of the higher yielding defensive plays e.g. Pharma, telco’s and utilities have attractions relative to certain cyclicals and many financials are showing confidence by dividend hikes and buy-backs etc. Oil and gas majors may be worth holding despite the outperformance to date. Remember that the larger cap names such as Royal Dutch and BP will be better placed than some of the purer exploration plays in the event of a softer oil price. Mining stocks remain a strong hold, in my view (see my recent note for favoured large cap pooled play). Corporate activity, already apparent in the engineering (GKN), property (Hammerson), pharmaceutical (Glaxo, Shire?), packaging(Smurfit), retail(Sainsbury/Asda) is likely to increase in my view.
- Continental European equities continue to be preferred to those of USA, for reasons of valuation, and Central bank policy, although political developments in Italy, Spain and Turkey should be monitored closely. Improving economic data adds to my enthusiasm for selected European names, although European investors may be advised to focus more on domestic, rather than export related themes. Look at underlying exposure of your funds carefully. Remember that certain European and Japanese companies provide US exposure, without paying US prices. I have recently written on Japan, and I would continue to overweight this market, despite the large 2017, and 2018 to date outperformance. Smaller cap/ domestic focussed funds may out perform broader index averages e.g. JP Morgan Japanese Smaller Companies and Legg Mason.
- Alternative fixed interest vehicles, which continue to perform relatively well against conventional government bonds, have attractions e.g. floating rate funds, preference shares, convertibles, for balanced, cautious accounts and energy/ emerging/speculative grade for higher risk. These remain my favoured plays within the fixed interest space. See recent note
- UK bank preference shares still look particularly attractive and could be considered as alternatives to the ordinary shares in some cases. If anything, recent sector “news” has highlighted the attractions of the sector.
- Alternative income, private equity and renewable funds have exhibited their defensive characteristics during recent equity market wobbles and are still recommended as part of a balanced portfolio. Reference could be made to the renewable funds (see my recent solar and wind power recommendations). Results from Greencoat on February 26nd and Bluefield Solar the following day reinforce my optimism for the sector. Selected infrastructure funds are also recommended for purchase after the recent Corbyn/Carillion inspired weakness (see note).
- Any new commitments to the commercial property sector should be more focussed on direct equities and investment trusts than unit trusts (see my recent note comparing open ended and closed ended funds), thus exploiting the discount and double discount features respectively. However, in general I would not overweight the sector, as along with residential property, I expect further price stagnation especially in London offices and retail developments. The outlook for some specialist sub sectors and property outside London/South-East, however, is currently more favourable. Investors should also consider some continental European property See my recent company note, after management update last week.
- I suggest a selective approach to emerging equities and would currently avoid bonds. Although the overall valuation for emerging market equities is relatively modest, there are large differences between individual countries. A mixture of high growth/high valuation e.g. India, Vietnam and value e.g. Russia could yield rewards and there are signs of funds moving back to South Africa on political change. Turkish assets seem likely to remain highly volatile in the short term. As highlighted in the quarterly, Chinese index weightings are expected to increase quite significantly over coming years and Saudi Arabia, is just being allowed into certain indices.
Full second quarter is available clients/subscribers and suggested portfolio strategy/individual recommendations are available. Ideas for a ten stock FTSE portfolio, model pooled fund portfolios (cautious, balanced adventurous, income), 30 stock income lists, hedging ideas and a list of shorter term low risk/ high risk ideas can also be purchased, as well as bespoke portfolio construction/restructuring.
Good luck with performance! Ken Baksh 02/06/2018
Ken has over 35 years of investment management experience, working for two major City institutions between 1976 and 2002.
Since then he has been engaged as a self-employed investment consultant. He has worked with investment trusts, unit trusts, pension funds, charities, Life Fund,hedge fund and private clients. Individual asset managed have included direct equities and bonds pooled vehicles currencies, derivatives and commodities.
Projects undertaken in a number of areas including asset allocation, risk control, performance measurement, marketing, individual company research, legacy portfolios and portfolio construction. He has a BSc(Mathematics/Statistics) and is a Fellow Member of the UK Society of Investment Professionals.
Phone 07747 114 691
Disclaimer
All stock recommendations and comments are the opinion of writer.
Investors should be cautious about all stock recommendations and should consider the source of any advice on stock selection. Various factors, including personal ownership, may influence or factor into a stock analysis or opinion.
All investors are advised to conduct their own independent research into individual stocks before making a purchase decision. In addition, investors are advised that past stock performance is not indicative of future price action.
You should be aware of the risks involved in stock investing, and you use the material contained herein at your own risk
The author may have historic or prospective positions in securities mentioned in the report.
The material on this website are provided for information purpose only.
Please contact Ken, (kenbaksh@btopenworld.com) for further information