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Ken Baksh Investment Strategy / Asset Allocation-Third Quarter 2019 

Any reference to benchmark should be tailored to individual client preference. These could, for instance, be 

  1. Absolute return based. 
  2. Cash/ LIBOR/SONIA ,or equivalent, based (0.70%). 
  3. Inflation based. (UK CPI 1.9% May 2019). 
  4. Index based (FTSE 100, FTSE All-Share, MSCI, S&P etc.). 
  5. Peer group based (Private client index, Morningstar, IMA category etc.). 
  6. Theme based e.g. Ethical. 
  7. Bespoke list…e.g. list of other funds held/monitored/local competitors. 
  8. Factor based. 

The above list is not exhaustive

Furthermore, it may be appropriate to apply differing benchmarks to differing risk categories, and or adopt internal and external benchmarks. 

Further macro details and individual investment ideas, model portfolios for varying benchmarks and risk profiles are available on request. These can be in direct, OEIC, investment trust or ETF form or a combination. As ever, portfolio construction should take full account of risk, return and degree of asset correlation appropriate to the individual client. Other client assets/liabilities should also be considered. 

Cash –Neutral, Higher than normal. 

Where appropriate, diversify some sterling cash into major overseas currencies, especially after considering the ongoing BREXIT process. The US dollar should certainly feature amongst the alternative currencies. 

UK Equities-Neutral/small overweight 

Economy 

After reporting 1.4% GDP growth for 2017, and a similar figure for 2018, growth in 2019 is also expected to be anaemic, with risks to the downside, at the time of writing. Most recent data quarterly data showed GDP contacting by 0.4% to end Apri,while the June PMI reading at a level of 48,was at the lowest since 2013. Well publicised reasons include a more uncertain domestic consumer environment, weaker business investment, slowing global trends and political uncertainty, all interrelated. There is no doubt that the “BREXIT” has and will continue to affect many areas of the economy in different ways. Recent data has been mixed with improving employment (wages +3.4%, unemployment 3.8%), slow real wage growth, mixed industrial production figures, volatile 

retail sales, very poor automotive sector and a flat housing market. The residential housing market is continuing to show slower year on year growth, especially in London and the South East, where many properties are now showing negative year on year price comparisons. The lower volume of activity and increased time to completion have been all too evident in the recent sector profit warnings and cautious guidance from estate agents, house builders, domestic construction companies. Commercial property has also been very sluggish, especially in the area of retail (see more detail below). One bright area for the economy has been the better than expected progress in government finances, possibly giving scope for some fiscal relaxation, although recent statements from Chancellor Hammond show some resistance to the idea. 

Forecasts for 2019 GDP growth span a range of 0.5% to 2.0% with an average of 1.5% (30 forecasts), although most forecaster agree that in the event of UK crashing out of the EU, the country could experience a sizeable recession. It is highly likely that quarterly GDP figures will be heavily distorted by Brexit related factors, and Q2 2019,due imminently, is widely expected to show negligible growth. 

At the mid-March “mini-budget” speech Chancellor Hammond also guided GDP forecasts towards about 1.5% and re-iterated caution over relaxing the fiscal stance despite the budget improvement referred to above. 

Inflation, currently 1.9% (May 2019), by the widely used CPI measure, appears to have stabilised and forecasts of around 1.8% seem to be the consensus is currently running at about 3% year on year. 

The Monetary Policy Committee is edging towards a more hawkish stance despite the sluggish economic growth and Brexit/political uncertainty, focussing more on the inflation target. At the December 2018 meeting the MPC left interest rates unchanged at 0.75% warning that Brexit uncertainties “had intensified considerably”. 

At the time of writing, both Prime Ministerial candidates, Boris Johnson and Jeremy Hunt, are presenting their Brexit ideas to party members before the important votes this month. However, it is far from clear how both parliament and EU members will react to some of the proposals. Many options, including no-deal, snap General election, referendum or request for an extension are possible. In addition, Chancellor Hammond has cautioned against using some of the Budget “Surplus” for some of the pre-election spending plans. 

The one thing that is certain is that uncertainty will continue to prevail in the short term in economic, political and corporate terms and UK asset volatility, particularly in the foreign exchange market, is likely to remain high! 

Market 

On a valuation basis, the UK equity market remains at a relatively “cheap level”, compared to its history and significant underperformance, versus world equities, since the Brexit vote in June 2016 has already taken place. Corporate profits however, especially amongst the more international companies have continued to grow, as have dividends. The prospective PE multiple for 2019 is about 12.5, falling to an estimated 11.6 in 2020, with a dividend yield of 4.9%. (Source Morgan Stanley, June 2019). However, two notes of caution. The “E” of the PE ratio, at the time of writing, is subject to more than usual variation as company earnings are likely to be adjusted, both ways, following the BREXIT effect and related uncertainties. Income seekers should also pay extra attention to 

sustainability/growth potential rather than just absolute levels of dividends. Profit warnings/dividend cuts are increasing. 

On a technical market note it should be re-emphasised that the FTSE 100 has a relatively large oil/mining weighting and that approx 2/3 of the FTSE earnings derive from overseas. The table below summarises the main differences between the three main UK indices. 

Broad Sector FTSE100 FTSE 250 FT All-Share Financial-incl property 19% 40% 18% Consumer(goods/service) 22% 16% 25% Energy 17% 0 % 14% Health 11% 4% 11% Material 10% 5% 9% Industrial 8% 19. % 8% Telco &IT 7% 8% 3% Source: i-share,Lyxor.December 7th 2018.Leading sectors only. 

In a Morgan Stanley research note, it was estimated that 41%, 26% and 18% of FTSE 100 company sales were derived in Developed Europe, Asia-Pacific and North America respectively. The corresponding figures for the FTSE 250 were 67%, 10% and 14 

At the time of writing I would recommend overweighting banks/insurance while maintaining lower than average positions in certain highly priced consumer stocks, domestic building and construction, housebuilding, tourism and airlines. I would keep neutral position in the oil majors while, Telecom stocks, pharmaceuticals and utilities(selectively) may also perform better than average on a mixture of defensive positioning, yield and value. As suggested above, in the short term I would also take some profits from the recently outperforming smaller stock sector and re- allocate towards FTSE names, either directly or through appropriate pooled vehicles. 

These factors emphasise the need to be flexible and frequently check positioning on a see-through basis

Overseas EquitiesNeutral 

Expect increased currency volatility to continue during 2019 

Japan- overweight 

US- underweight 

Europe ex UK- small overweight 

Other –neutral 

Economic 

The global recovery is set to continue in 2019, although growth estimates have been reduced in recent months. 

The IMF reduced its global forecast to near 3.3% (from 3.5%) in its recent April 2019 presentation, while the OECD, in its March 2019 statement also mentioned a figure of 3.3%, their forecast changes largely based on weaker than expected development in China and Europe. 

As well as the fading effect of US fiscal incentives, weaker indications from several European, developing, and Asian countries, including China, point to more sluggish economic development. 

Core inflation is also developing at a slower than expected pace with most leading nations experiencing price increases well below Central Bank targets. 

The two factors above, in combination with certain geo-political concerns, are behind the more dovish monetary/fiscal policies/statement currently being adopted. 

Major risks could include inappropriate Fed/Trump action e.g. further protectionism, Chinese growth/deflation/management, further commodity/forex price volatility, and reaction to many political developments (Hong Kong, Venezuela, Libya, Ukraine, Russia, Iran, Turkey, Korea being current examples). 

Christine Lagarde, IMF Managing Director, reiterated that rising protectionism and debt levels remained the biggest global risks. 

United States 

After 1.6% GDP progression in 2016 US economic growth recovered to 2.3% in 2017 with 2.9% for 2018 and a figure of 2.4% provisionally pencilled in for 2019.The Federal reserve itself expects growth of about 2.3% in 2019, highlighting strong job gains and buoyant consumer spending and corporate investment. Better than expected first quarter 2019 growth of 3.2% does however include a large element of inventory build. The employment situation seems to have moderated somewhat, the most recent May figures slowing sharply and bringing the monthly average to 164000 for 2019, well below the 223,000 2018 figure. The unemployment rate is holding steady at about 3.6% 

Most recent inflation figures show May 2019 prices rising at 1.8%, and forecasts of around 2.3% for 2019 seem to be the consensus. The increase in average hourly earnings for December 2018, the fastest rate of growth since June 2009, was above expectation and prompted some observers to suggest that labour shortages could become more widespread, although more recent wage figures have shown slower growth. 

The Federal Reserve raised short term interest rates in March ,June ,September and most recently on December 19st ,taking the target rate for the Federal Funds rate to 2.25%-2.5%.However recent shorter term economic data coupled with certain current geo-political uncertainties e.g. US/China,Brexit,Europe,South America have introduced a much more dovish tone to Fed thinking. According to current projections of top officials, it now seems likely that there could be no rate increases in 2019, with rate cuts being more likely, and the Fed also announced an end to quantitative tightening for this September. As at 11th June 2019, Fed Funds futures now anticipate 

at least two Fed rate cuts before the end of this year, with the first possibly coming as early as this month. At its most recent June 19th meeting, the Federal Reserve held interest rates steady but shifted towards a more dovish stance and pointed to possible interest rate cuts in the future, citing rising “uncertainties” about the economic outlook

Europe 

European economic growth forecasts have shown a marked decline since mid-2018 levels and most forecasts for 2019 now fall in the 1.0% to 1.5% range, with the ECB itself looking for the lower end of this range. During the last quarter of 2018, Italy contracted while Germany showed negligible progress and the situation seems to have deteriorated further during the first months of 2019. Going forward, global developments in the area of trade will be particularly important for the likes of Germany while a precarious political climate (Italy, Spain) could be another source of investor uncertainty for the region. Analysts expect inflation between 1.2% and 1.8% i.e. still below the ECB target. Interestingly, wages grew at 2.4% during the first quarter, the fastest in a decade. 

Recent MEP election have continued to show an erosion of support for the traditional central parties, and while some of the more extreme political groups fared worse than expected, the Greens and Liberal Parties showed good gains. Partly as a result of these elections, there have been significant personnel/party developments in Germany, Italy and, Austria. Various ECB roles also must be filled over coming months, including the appointment of Mario Draghi’s successor. 

At recent meetings, Mario Draghi and other European leaders have stressed that economic risks were “moving to the downside”. Interest rate increases have been pushed back in the calendar (mid 2020?) At the June 18th ECB symposium in Sintra,Draghi referred to the possible expansion of the Euro2.6 trillion QE programme, if the inflation outlook failed to improve. 

Japan 

Japanese growth stalled in the first quarter of 2018 after eight consecutive quarters of improvement and then rebounded during summer months, before some recent softness largely due to natural disasters. Strong PMI figures and Tankan surveys, covering more than 10000 companies, near an 11-year high, however, confirm ongoing economic expansion. Current calendar 2019 economic forecasts are for about 1% GDP growth, the first quarter positive surprise probably being a one-off. At recent meetings the BOJ pledged to maintain the current negative interest rates, yield curve management and asset purchase programmes for the time being. 

Politics tilted in a pro-reform direction, after the October 2017 election landslide, which should help various economic and political initiatives. The political situation was strengthened further by the leadership victory late September 2018, which would make Shinzo Abe one of the longest serving Japanese PM’s since the job was created in 1885. The initiatives will include more focus on the quantitative actions, including higher care wages, pension reform, targeted infrastructure and some moves to tweaking the pacifist constitution. The re-appointment of Central Bank Governor Kuroda was helpful to the continuation of accommodative fiscal and monetary policy, a stance reinforced in the spring. 

Inflation is still well below the official target (0.9% in April 2019) although oil price strength and early signs of wage and recent price growth are expected to accelerate the upward trend. Japan’s 

November jobless rate at 2.3%, is the lowest since 1994, and there are labour shortages in a growing list of sectors, including construction and elderly care. The parliament recently voted to allow more than 250000 foreign workers into the country on five-year visas, and with the improved electoral mandate, it is widely expected that the subjects of female participation and pension age changes will also be studied. 

Monetary policy will remain dependant on inflation developments, and currently no major changes are expected to short or long-term interest rates until at least end-2019.At the recent BOJ meetings, the Board have voted to keep the benchmark short term interest rate at -0.1%. One of the key economic debates for 2019 will centre of the proposed consumption tax increase currently scheduled for October 2019 

Asia excl- Japan 

Efforts to boost domestic demand, either through monetary policy, banking reform and structural issues are bearing fruit in some areas, but are also currently hindered by currency volatility, high debt ratios, disinflation, politics etc. The spectre of a tariff “war” between USA and China, could of course, impinge adversely on some of the more open economies in the area and specialist zones e.g. Taiwanese semi-conductors. Other opportunities may also arise e.g. Vietnamese textile producers. 

Overall estimates for growth in the region have slipped over recent months, (now around 6%-6.2% for 2017,2018 and 2019), but the aggregate figure masks large individual country differences. For example, Australia and Singapore are likely to register growth below 3%, while China, India Indonesia are likely to register rates around 6% this year. 

At the National People’s Congress held in early March 2018, Chinese Premier Li Keqiang outlined an economic growth target of 6.5%, with a minimum target of 6.3% p.a over the 2018-2020 period, in additional to a lower fiscal deficit goal. At the conference there was more emphasis on quality of growth, pollution control and risk control, than numerical targets. Most independent analysts feel that this growth figure remains realistic, and that rebalancing the economy, stabilising property prices and further liberalising the financial system remain major long-term objectives. Recently announced quarterly GDP growth of 6.5% reflects some of the qualitative improvements including a welcome decline in “shadow” lending, although current economic indicators (PMI’s, retail sales and factory orders) suggest risks lie to the downside. At the early March 2019 official meeting, a GDP forecast of “just” 6% was perceived as disappointing. However, at the time of writing Chinese moves to stabilise growth through a mixture of tax cuts, infrastructure spending and bank lending support, appear to be working, although the ongoing tariff discussions impose an air of uncertainty. 

In India, which has experienced a sizeable stock market and currency recovery, much is still riding on the “Mondi” reform programme where long-standing concerns in the areas of infrastructure, bureaucracy and fiscal inconsistency need resolution. Current estimates of over 6.5% growth for 2017 and 2018 are not overoptimistic (surpassing China, above!). The recent election (May 2019), won by Narendra Modi with a landslide victory, gives the leader power to forge on with building a “New India”, although detailed economic reform proposals have yet to emerge. 

Regional Equity Recommendations 

Japan remains a favoured equity market, despite the global sterling adjusted outperformance in 2017 and 2018, though relatively poor 2019 so far. Regarding the investment arithmetic, the prospective PE (12.4 falling to 11.6 in 2020 as at June 08,2019) is still lower than the world average and the price book ratio is near the lowest of all the major regions, at a level of 1.10. Corporate results for recent periods have been higher than estimated and further growth is expected over the 2019/2020 period. Analysts point to further scope for Return on Equity to converge on the average for developed markets over coming years. On a technical note, Japanese institutions are undergoing a bond/equity switch and the market tends to be under owned by overseas institutions. Regarding domestic demand, the BOJ and other buybacks amount represent a growing percentage of market cap on an annual basis (4% latest CS estimate) while public and private pension funds are steadily increasing their equity weightings. Individual households hold approximately 50% of their financial assets in cash, extremely high by international standards, another source of equity demand. Finally, corporate governance (independent directors etc), buy backs, dividend hikes and current valuations on upgraded earnings are helping sentiment. About dividends, current low pay-out ratios (around 33%), give scope for above average income gains going forward. Currency strength/weakness is of course a double-edged sword regarding Japanese portfolio strategy. I recommend that some Japanese equity exposure, currently, be hedged back to sterling and or US dollar. 

Europe (ex-UK) warrants a continued small overweight in my view

With the current accommodative monetary policy, stronger consumer sentiment and a more stable Euro, the market continues to deserve longer term attention. At corporate level, earnings are being helped by nominal sales growth, margin expansion, and lower tax and interest charges. There are many situations in exporters, capital goods, financials where equities appear good value on PE and Price/ Book considerations and offer reasonable dividend yields. However, at time of writing an escalation in the tariff “war” could have adverse effects on the margins and sales volumes of certain products e.g. German cars, luxury goods, and more than usual investor due diligence will be required. On the sectoral point for example it should also be remembered that the EuroStoxx 50 weighting in oil and mining is approximately half of that in the FTSE 100. On a cyclically adjusted price to earnings ratio (CAPE) often used by longer term investors the Eurozone trades at a considerable discount to the US market. The shorter-term PE ratio currently stands at about 14.3 for2019, dropping to 13 in 2020, with a prospective dividend yield of 3.6%. By historic comparison the market is fairly valued on a price earnings and price cash flow basis and good value on price/book and dividend yield considerations. 

Asia (ex Japan) is currently dominated by China and related China plays such as Hong Kong and Taiwan in MSCI index terms. Over the longer term, the Chinese weighting could increase significantly, when more local shares may be included in the major index benchmarks.JP Morgan estimate that the Chinese A-share weighting could move from just under 1% in May 2018 to nearly 14% by 2025.This is in addition to the approx. 25% to 30% of the index already represented by mainstream Chinese stocks. As discussed elsewhere, the consensus is for a Chinese economic slowdown to around 5%-6% per year, but possible risks could emerge from several directions including excessive credit expansion, shadow banking, currency volatility, tariff escalation and geo- political tensions aggravated by president Trump. Equity investing as an overseas investor also faces hurdles in the shape of government control (including the stock market itself), currency policy, corporate governance issues and sometimes less than ideal accounting. A well-diversified portfolio 

could however include some longer-term exposure to the China region, directly or indirectly (Hong Kong, overseas plays, ETF, investment trusts etc.), but shorter-term volatility is expected. Amongst other countries, India remains an investor favourite, even though valuations are becoming quite full, Korea looks reasonable value, but the competitive situation should be monitored, and Australia, whose economy and currency are closely tied to the fortunes of the commodity sector, offers some interesting yield situations. Finally, Vietnam warrants attention as a high growth economy and possible beneficiary of any US/China tariff war. In aggregate the region has a prospective PE of just over 13.4 with a dividend yield of 3.2% 

During 2018 US investors were able to enjoy above-trend earnings and economic growth. The 20% plus profits growth and near 3% GDP growth were fuelled by tax changes, government stimulus and other non-recurring items. Looking forward, 5%-10% earnings per share growth, coupled with an uncertain interest rate background and considerable geo-political noise are likely to hinder share price progress. On equity valuation, shares look slightly overbought on current metrics including shorter term price earnings ratio (17.5 times forward earnings-2019), price book ratio and yield, and longer-term Schiller PE look a little more stretched. Corporate share buybacks, one of the significant market support factors, over the 2010/2016 period, are slowing and household ownership of equities is high relative to Europe and Japan, for instance. However, equities are not priced in the bubble territory which occurred in 2000, multiples have retreated since early 2018 and sentiment indicators remain in neutral territory. Corporate earnings growth was upgraded following certain aspects of proposed Trump policy especially in corporate taxation, but dollar strength, higher interest rates and overseas supply chain disruption should also be considered. The peak in US quarterly earnings growth (20% plus) has passed, however, and 8%-10% covers the consensus range for 2019. If current tariff proposals come to fruition (a big IF), several US companies expect to be affected by disruptive volume and input pricing effects late 2018 and into 2019. 

There continue to be wide divergence between the economies of the emerging universe with, for example, Russia, Brazil and South Africa experiencing much slower growth, the latter also recently experiencing a credit downgrade and new political era, and many countries suffering from disproportionate commodity exposure (Russia), unstable/changing political situations (Venezuela, Turkey, Mexico, Brazil) and or/ high dollar debt levels. The changing US political regime clearly adds more uncertainties deriving from a volatile dollar, and selective protectionist policies. India is currently one of the rare outliers with minimal commodity or deflation worries but other issues that need addressing and hopes that the recently appointed Finance Minister continues to adopt the discipline imposed by her predecessor. However, on balance, developing economies which had been detracting from global growth for several quarters are now starting to stabilise. 

Investors could consider some selective exposure to the region, which currently trades on a prospective 12.2 multiple on 2019 earnings, a considerable discount to other zones. Foreign Exchange could be an important issue from both currencies of investment and individual corporate effects. However, investors should also be aware the considerable risks that are plaguing the asset class, whether commodity pricing, debt, political change etc. In terms of industry sector, earnings are expected to be strongest in consumer discretionary, healthcare and information technology, although several analysts detect more “value” in the oversold financial sector. According to recent Morgan Stanley research, aggregate 2019/20 emerging market earnings growth currently stands at a level of around 10% p.a. It should be noted that many emerging 

market companies are also rapidly increasing dividends, from a low level and there are some interesting pooled vehicles to exploit this. Morgan Stanley estimate dividend growth of 7% and 11% for the region over 2019and 2020 respectively. By contrast, developed markets are estimated to have dividend growth of approx. 7% p.a over the same periods. Despite the current volatility, Russia remains worthy of speculative attention on the basis of low valuation, well above average dividend yield, better commodity price trends, but clearly a higher risk/return play, while Vietnam is likely to remain an Asian favourite despite the rating and recent performance, and emerging Europe may receive more attention going forward. Weightings in China and India still seem appropriate and South Korea has also moved back to the attractive zone. South American politics are playing an increasing role in investor sentiment, e.g. Venezuela, Mexico and most recently, Brazil. 

Fixed Interest 

Government Conventional Fixed interest-The medium-term fundamental prospects for core government bond yields (UK, USA, Japan, and Germany) continue to depend primarily on inflation and Central bank policy outlooks. External “shocks” also introduce spikes in volatility from time to time and related hunt for perceived safe havens. At the time of writing, conventional government bonds have staged a large rally (see graph), largely on declining growth/inflation expectations taking large swathes of the European and Japanese 10 year government bond yields into negative territory. 

On the first point, current inflation, as measured by the year on year rates in USA, Continental Europe, Japan and several emerging markets has started to drift down again after a period of 

stabilisation and is now further away from Central Bank “targets”. The Federal Reserve quantitative tightening programme seems likely to end this autumn while ECB is maintaining current policy on bond purchases, and the Bank of Japan pressure is very unlikely to change it’s QE in the short term. 

Region Updated 10-year Govt yield Spread versus T- 

Bond Germany 28/06/2019 -0.40% -2.39 Japan 28/06/2019 -0.15% -2.14 UK 28/06/2019 0.79% -1.20 USA 28/06/2019 1.99% 0.0 

Other Fixed interest 

It is forecast that the total returns from certain fixed interest outside the conventional core government bond space will yield further relative outperformance of the government sector, but allowance should be made for higher volatility liquidity, credit quality, dealing spreads etc. Some yield spreads still provide enough “cushion” versus conventional government bonds and may additionally have part equity drivers e.g. Preference shares, convertibles or be sector specific e.g. energy related. 

The search for above average regular income continues, with several participants forced to move up the risk curve. 

In general, a word of caution that using the ETF route for obtaining fixed interest exposure currently requires an extra level of due diligence regarding liquidity, spreads, degree of physical cover, tracking experience and of course full understanding of the underlying index. 

Corporate Debt-Although many investment grade issues appear fully priced there may be opportunities in other grades if the risk/return/maturity/liquidity criteria suit. These may also be available in pooled form through ETF or OEIC or investment trusts. Selected US high yield (5.46 on 28/06/2019) may offer FX as well as bond spread and income gains, and it must not be forgotten that with corporate dynamics improving and a more favourable supply demand balance there is good scope for outperformance over the government sector. 

ETF Yield p.a TER Dividend 

payments 

Physical cover 

UK corporates 2.52% 0.2% Quarterly Yes US High yield 5.46% 0.5% Six monthly Yes Emerging local 5.50% 0.5% Six monthly Yes 

Emerging market Debt-higher risk but also potentially higher return but remember to analyse currency as well as income and capital. Also, available in ETF form, I-share SEML, holds over 200 securities with above 8% weightings in Polish, South African, Mexican, Brazilian, and Indonesian debt. Currently over 90% of the fund’s assets are rated A,BBB or BB and the fund yields 5.5%. 

Preference Shares-Above average yields are still available, despite the large total return outperformance over the gilt sector over recent periods and remember the more favourable tax treatment for basic rate payers. Some of the UK bank issues look particularly interesting in this sector after recent/ongoing capital strengthening exercises and the results of the “stress tests”. Depending on risk appetite, annual yields around 6% to 6.5% are currently available on selected financial issues suitable for balanced accounts while, like corporate bonds, some higher yields can be found in more speculative issues. 

Floating rate-provide an element of hedging against rate increases. Available in direct or investment trust structures and currently offering about 5% annual yield and priced at discount to assets. These instruments outperformed conventional government stocks last year as short-term rates were increased, particularly in the USA, but have had a more cautious start to 2019, partly due to more dovish Central Bank rhetoric. 

Index Linked– These instruments continue to attract interest from both longer-term institutions with asset/liability issues and, more recently, from some shorter-term tactical funds. Linkers do offer some investment advantages such as low volatility and low correlation with several other asset classes and they are in relatively short supply. However, they currently do not look particularly good value either domestically or by international comparison on most reasonable inflation assumptions or by comparison with other alternatives. In my view, there are other instruments that offer some degree of inflation protection/diversification at more reasonable price levels. The real yield on the UK FTSE All Index Linked Gilts is currently -1.88% 

Zero-Coupons-Capital only, yields of over 2.6% p.a (annual equivalent) to November 2020, or 3.7% p.a. to November 2022 or 4.2% to November 2024 on recommended issues at time of writing. May suit event planning/higher income tax situations. 

Convertibles-UK market relatively small but some funds are available. A few issues at relatively low yields and high conversion premium have been made recently. My favoured pooled play currently trades at a discount (currently 7.0%) with an annual yield over 5%. The fund recently (end May 2017) announced a tighter discount control range which has successfully reduced volatility even further and, at the time of writing, the company is buying its own shares. 

Corporate Bonds, UK order book-Selected issues may warrant attention. In the expanding London retail bond market, running yields between 5 % and 6.0% on LSE quoted companies with between 4 and 7-year maturities are available on more stable underlying businesses, while much higher flat(e.g. 10%) and redemption yields apply to certain more speculative issues, especially in the energy area. A growing number of ultra-long issues are becoming available. 

Property-Neutral 

Following the historic decision on June 23,2016 to leave the EU, property markets, especially in London felt the aftershocks. Volume of activity and pricing were immediately affected and within days, property funds holding £15 billion of assets had closed the gate to redemptions. Three years later, the markets have not settled, although some of the more drastic revisions and rumours have been softened. Amongst the main sectors, shopping centres are struggling with stalling consumer confidence and on-line competitors while the office sector, especially in London, is experiencing varying trends. The mergers recently announced between Hammerson and Intu,and Unibail/Westfield and recent Land Securities/British Land figures highlight the need to reduce costs in a troubled shopping centre sector. Interestingly, figures and statements from quoted company Segro PLC, by direct contrast, show the growth in logistics centres, warehousing as online shopping accelerates. 

Over 2018, the MSCI IPD UK Index showed a total return of 7.5%, although this growth slowed to just 1% in the last quarter. Of the 7.5%,5.2% was attributable to income and included rental growth of 2.7%. By sub sector industrial values rose faster than retail values every single month. Over the first four months of 2019 the Index has continued to show sluggish total return progress (income rather than capital gain) and further relative weakness in the retail related sector. The Index shows total return growth of just 0.74% for the first 4 months of 2019, or 2.3% annualised. 

The IPF current estimates are for total return growth of about 3% for 2019, income offsetting a small decline in capital values. Industrial is expected to be the strongest sub-sector

In the post BREXIT environment, investors in commercial property funds should be increasingly aware of “value adjustments” suddenly imposed on their unit holdings, large unproductive cash holdings, as well as perhaps a tightening of redemption procedures (see recent FCA paper), which is improving the relative attractiveness of closed end funds and direct equities. As ever however, watch location, management and balance sheets carefully! In major commercial property sectors,” tech” friendly features are increasingly demanded, while retailors juggle with the physical/online balance. In the specialist areas of student, logistics, medical, retirement accommodation and self- storage there is still good demand and in the medium term these sub-sectors are expected to become more “mainstream”. Many international investors have switched their attention away from UK towards Continental Europe, where rental levels, capital values and prospects are deemed more attractive. Remember also that property corporate bonds may suit some client objectives. 

Alternative Income/Other-Overweight 

This “catch all” sector is taking on increasing significance during this current phase of volatile bond and equity performance. It is noticeable that during the weaker equity periods, many renewable/private equity/infrastructure plays held their ground, and in some cases showed absolute returns. Funds which may fit the characteristic of better capital protection and above average yields and low correlation with other asset classes include 

  • Infrastructure, including recent issues in the renewable sector, offering income yields around 5%- 6% p.a. Corporate activity e.g. John Laing, is an additional positive factor. 
  • By way of comparison, certain listed vehicles in the areas of private equity and specialised lending currently offer yields of 6%-8%, but careful due diligence and extra considerations of transparency, holding period and liquidity in differing market conditions should be considered. 
  • Certain liquid transparent structured products, although special client permission may be required, and full understanding of the maths and counterparty risk are essential. These can be useful for hedging e.g. infinite turbo puts/covered warrants against a fully invested equity portfolio. 
  • A mixed 2018 for various absolute return funds and hedge funds. The higher volatility experienced in recent months will be welcomed by several Funds. Going forward extra due diligence will be needed to fully understand fund benchmarks, and take full account of charges, liquidity, transparency. 

GOOD LUCK FOR THE BALANCE OF 2019! – 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 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 and markets 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 any securities mentioned in the report. 

The material is provided for information purpose only 

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 !

Independent Investment Research

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.

https://www.hl.co.uk/shares/shares-search-results/b/blackrock-commodities-income-it-ordinary-1p/share-charts

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

Independent Investment Research

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

kenbaksh@btopenworld.com

 

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

Independent Investment Research

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

kenbaksh@btopenworld.com

 

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

Independent Investment Research

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

kenbaksh@btopenworld.com

 

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

Independent Investment Research

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

kenbaksh@btopenworld.com

 

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)

Independent Investment Research

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

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