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Alan Green talks inflation, BP #BP, Blue Prism #PRSM & Karelian Diamonds #KDR on UK Investor Magazine podcast

We once more welcome Alan Green back to the UK Investor Magazine Podcast for our weekly exploration of UK equities and global markets.

UK inflation was today’s topic of discussion before we drilled down into BP (LON:BP), Blue Prism (LON:PRSM) and Karelian Diamonds (LON:KDR).

UK inflation rose to 2.1% in May as fuel, recreational goods and clothing helped prices higher as the economy reopened. A reading of 2.1% is marginally above the Bank of England’s target rate of 2% but with signs prices could elevated, there may be concerns in some corners of the market that it will force the BoE to hike rates in an economy not fully recovered from the pandemic.

As a gauge of the market’s feeling around potentially higher rates in the future, GBP/USD spiked higher by 40 points to GBP/USD 1.4120 in immediate reaction, before falling back.

Fuel prices rose 17% year-on-year, the biggest jump since 2017 as oil prices continued their march higher.

Atlantic Capital Markets Month Ahead – Keep Your Shorts On In September

Alan Green and John Woolfitt, Director at Atlantic Capital Markets discuss the month ahead.

We discuss the US Fed August meeting, and indications from Fed boss Jerome Powell that the administration was prepared to ride with higher inflation around 2%. The markets seems to translate as low interest rates for years to come…John gives his view.

John discusses the resilience of mining and commodity stocks in the face of the economic turmoil and Coronavirus threat, along with some of the trading calls from Atlantic over the past month.

Finally we look at some trading ideas and upcoming corporate news in September from Halfords #HFD, Meggitt #MGGT, JD Sports #JD, Travis Perkins #TPK, Tullow Oil #TLW and Costain #COST. Given the volatility in the markets, John advises using the Atlantic Alerts system – moving after the results not before. “If the tide goes out, make sure you’ve got some shorts on”.

Vox Markets podcast – Open Orphan #ORPH, Blencowe Resources #BRES & Alan Green on #ESL, #BP & #UJO

Vox Markets podcast features Open Orphan #ORPH, Blencowe Resources #BRES & Alan Green on three stocks – Eddie Stobart #ESL, BP #BP & Union Jack Oil #UJO

Alan Green talks banks, BP #BP, Union Jack Oil #UJO & Katoro Gold #KAT on UK Investor Magazine podcast

Alan Green talks banks, BP #BP, Union Jack Oil #UJO & Katoro Gold #KAT on the UK Investor Magazine podcast

Atlantic View – The Reinvention Of BP – Is It Too Early To Buy In?

by John Woolfitt, Atlantic Capital Markets

The Reinvention Of BP – Is It Too Early To Buy In?

Fundamentals & Statement Summary

Oil giant BP (BP.L) today (Tuesday August 4th) announced a record $6.7 billion loss for Q2 2020 as the COVID crisis hit the group hard across its energy businesses and at the pumps. As result BP cut its dividend for the first time in a decade, and outlined plans to sharply reduce its oil and gas output and boost renewable power generation. The net loss was in line with analysts’ expectations and came about after the BP took the decision to wipe $6.5 billion off the value of oil and gas exploration assets and revised oil and gas price forecasts.

Net debt at the end of the quarter fell $10.5 billion to $40.9 billion, with gearing also down to 33.1% vs. 36.2% at the end of the previous quarter. A dividend of 5.25 cents per share was announced for the quarter (10.5 cents previously), aligned with BP’s new distribution policy.

The group said Global GDP is expected to contract by 4-5% this year, and consequently global oil demand is expected to be around 8-9 million barrels of oil per day lower than 2019 and gas markets are likely to remain materially oversupplied.

BP CEO Bernard Looney outlined a strategy to “reinvent” BP in line with a global transition to low-carbon energy.

“These headline results have been driven by another very challenging quarter, but also by the deliberate steps we have taken as we continue to re-imagine energy and reinvent BP.”

“In particular, our reset of long-term price assumptions and the related impairment and exploration write-off charges had a major impact.”

Within 10 years, BP aims to have increased its annual low carbon investment 10-fold to around $5 billion a year, building out an integrated portfolio of low carbon technologies, including renewables, bioenergy and early positions in hydrogen and CCUS. By 2030, bp aims to have developed around 50GW of net renewable generating capacity – a 20-fold increase from 2019 – and to have doubled its consumer interactions to 20 million a day while at the same time shrinking its oil and gas production by 40% compared with 2019.

“We believe our new strategy provides a comprehensive and coherent approach to turn our net zero ambition into action. This coming decade is critical for the world in the fight against climate change, and to drive the necessary change in global energy systems will require action from everyone.” Looney said in a statement.

“So, in the years ahead, bp is going to significantly scale-up our low-carbon energy business and transform our mobility and convenience offers. We will focus, and reduce, our oil, gas and refining portfolio. And, as we drive down emissions on our route to net zero, we are committed to continuing to deliver long-term value for our stakeholders.”

BP said in its strategy update it aimed to “reset a resilient dividend” of 5.25 cents per share per quarter and return at least 60% of future surplus cash as share buybacks.

Chart and Technicals

Source: FactSet and Hargreaves Lansdown

BP’s 233.7p multi year low hit on March 18th, on the face of it provided investors with a once in a lifetime entry point in the midst of the COVID19 crisis. The stock went on and recovered the 50-day moving average intra-day late April, holding the level before falling away in June. The yellow envelope marks the upper and lower price 44 day price ranges: while the stock trades below this level a retest of the multi-year low is likely to occur if the market falls. If BP can ‘climb back’ into the price range envelope after the results today, and in the process regain the 50-day moving average, then our next target is the ‘falling’ benchmark 200-day moving average, currently at 395p, by the end of Q3 2020.

Summary and Atlantic View

In the current climate, it might seem somewhat risky to back an oil company as a buy. However, as I have outlined in our Atlantic Month Ahead Atlantic presentation here, we are market neutral and seeking long term growth opportunities that minimise risk. The losses announced by BP today, although substantial, were in line with analyst expectations, while the strategy shift completely repositions the group’s forward investment proposition by consistently reducing the reliance on oil and increasing revenues from an integrated portfolio of low carbon technologies, including renewables, bioenergy, hydrogen and CCUS. These moves tick most of the boxes in regard to the Atlantic investment strategy, and while near term COVID risks remain, we expect any early evidence of revenue growth from BP’s low carbon portfolio to act as a catalyst for the share price. Added to this, there is still a dividend on offer: this quarterly dividend can be collected before the ex-dividend date of August 13th. Atlantic rating: Buy.

To take advantage of this trading idea, speak to a member of our dealing team on 01872 229000 or visit the Atlantic Capital Markets website here

No Points For Bravery In These Markets – John Woolfitt, Atlantic Capital Markets Month Ahead

Alan Green and John Woolfitt, Director at Atlantic Capital Markets discuss the month ahead.

John says the markets are currently ‘punch drunk’ and says investors and traders need vision to look through the chatter. Atlantic are taking a ‘market neutral’ approach at present, and clients are seeing success with pairs trades and with larger mining stocks.

Looking ahead, John is looking for news on how much we’ve been drinking from Diageo #DGO, oil consumption and fuel pump activity from #BP and clues on the property market from Rightmove #RMV.

In summary, John touches on the upcoming launch of Atlantic Alpha, a market neutral hedged trading strategy that removes volatility, and provides some key points and trading ideas to help traders and investors in August.

  • Keep your discipline, there are no points for bravery in these markets
  • Watch the data…’Look Before You Leap’.

Alan Green talks Barclays #BARC, BP #BP, Tiziana Life Sciences #TILS & Versarien #VRS on UK Investor Magazine podcast

Alan Green discusses Barclays #BARC, BP #BP, Tiziana Life Sciences #TILS & Versarien #VRS with Jonathan Roy on the UK Investor Magazine podcast.

Ken Baksh – March Market & Investment Report

March 2020 Market Report 

During one-month period to 29th February 2020, major equity markets registered large falls, rising initially and then falling sharply, mainly on growing coronavirus concerns. The FTSE ALL-World Index dropped by 9.62% over the period. The VIX index rose sharply (+160%) to end the period at 46.22, a level reflecting elevated investor concern. Fixed interest product displayed mixed performances with core government bonds receiving some “safe haven” buying, while more speculative issues fell in price terms. The yen strengthened while the pound dropped a little, the latter moving on more adverse Brexit news. The Chinese Renminbi was relatively stable as was the local equity market on the perception that the virus was contained locally. Commodities displayed a significantly weaker trend, the exceptions being part of the PGM complex. 

Aggregate world hard economic data continues to show 2020 expansion of below 3.0%, although forecasts of future growth continue to be reduced by the leading independent international organizations. The estimates of the economic damage caused by the coronavirus, vary enormously. Demand, and supply, disruptions could cut anything from 50 bp to 400bp from an already weaker global economic estimate. Related corporate profit warnings are rapidly increasing. Compared with other “shocks”, there is debate about the actual immediate effectiveness of monetary policy in easing the situation when companies and individuals can’t / won’t conduct their normal activities. 

There appears to be a growing chorus of further longer-term action on the fiscal front e.g. infrastructure spending, as other instruments e.g. interest rates, may have limited potential from current levels. Fluctuating currencies continued to play an important part in asset allocation decisions, sterling/yen being a recent example, while some emerging market currencies have been exceptionally volatile e.g. Turkey. Movements in the $/Yuan are also taking on increasing significance. 

European economic indicators continue to show very anaemic growth, even before corona virus adjustments, German 2019 GDP, for instance rising at just 0.6%, the lowest rate of growth since 2013. Political events have featured further signs of discontent in Germany and France (pension and other reforms). The backdrop for the current European Budget debate is far from encouraging. 

US market watchers focussing on more domestic issues have been watching the race for the Democratic leadership (Super Tuesday March 3rd), while Trump’s impeachment issues have disappeared, for now. US economic data indicated a somewhat softer than expected end to the year with provisional 2019 growth of 2.3%. Corporate results/forward looking statements so far have been mixed and the corona-virus effect on both demand and global supply chains, is being increasingly discussed. Official interest rates have been reduced three times to a range of 1.5% to 1.75%, much as expected, and a “pause” was indicated by Fed Chairman Powell at recent meetings, including that held in the last week of January, although recent events (softer US data and growing corona-virus concerns) are likely to reactivate more dovish rhetoric and action. 

In the Far East, China /US trade talks dominated the headlines for the first couple of weeks of January, but this was quickly followed by news of the corona virus emanating in China, and now affecting much of the region, especially South Korea at the time of writing.. 

Japanese annual economic growth slowed markedly in the fourth quarter of 2019, the autumn VAT increase, typhoons and coronavirus all contributing to the reduced activity. Recent political 

appointees, plus the fundamentals mentioned above, indicate a continuation of the dovish economic stance. 

The UK continued to report somewhat mixed economic data with stable developments on the labour front, more buoyant January retails sales but poor corporate investment, inflation higher than expected (1.9%), and public finances deteriorating again. Business and market attention, both domestic and international, is clearly focussed on ongoing BREXIT process under new Prime Minister, Boris Johnson, where at the time of writing, the UK and their EU counterparts are starting to discuss the thorny details of the UK’s departure. The Bank of England Governor has made frequent references to the unsettling effects of any unsatisfactory Brexit outcome, as have a growing number of business leaders and independent academic bodies. Political factors aside, economic and corporate figures will inevitably be distorted over coming months. GDP growth of around 1% for full year 2019 looks likely, with a similar projection for 2020.On 30th January, Mark Carney officially reduced the Bank’s estimate of annual GDP growth to 1.1% for the next three years. 

Equities 

Global Equities showed very large moves over February 2020, a month of two distinct halves. The FTSE ALL World Index registered a fall of 9.62% over February to a level of 338.41 and now down 8.65% since the year end. The UK broad and narrow market indices, both fell by over 9% during February, underperforming the sterling adjusted world index by over 7.5% since the beginning of the year. Ironically, Chinese equities were one of the few areas to show a positive return over February. The VIX, now at a value of 46.22, is at a level considerable above that prevailing in recent years though down on the extreme levels see at the time of the 2008/2009 market meltdown. 

UK Sectors 

A very mixed month for UK sectors with oil and mining bearing the brunt of the falls on global growth concerns while utilities were relatively stable and in fact are one of the few sectors still showing a year to date positive return. 

Fixed Interest 

Gilt prices rose 0.8% over the month, the 10-year UK yield standing at 0.44% currently. Other ten-year yields closed the month at US, 1.16%, Japan, -0.16%, and Germany, -0.61%. UK corporate bond prices fell over the month, as did more speculative and emerging market debt prices. Interestingly, emerging market debt now yields LESS than an ETF of UK high yielding shares See my recommendations in preference shares, convertibles, corporate bonds, floating rate bonds, speculative high yield etc. A list of my top thirty income ideas (many yielding around 7%) from over 10 different asset classes is also available to subscribers. 

Foreign Exchange 

FX moves during February featured a weaker pound (partly on re-emerging Brexit concerns) and a stronger Yen(safe haven?),the cross rate moving 3.6%.In sterling adjusted terms both the Nikkei and the S&P,the better performing major regions, are off about 6.5% year to date versus the FTSE 100 down 12.8% 

Commodities 

A generally poor month for commodities on corona virus, global growth concerns. Gold, silver and palladium bucked the trend, the latter now up over 40% so far this year! Have you checked under your car recently? 

Looking Forward 

Over the coming quarter, health concerns, geo-political events and Central Bank actions/statements meeting, will continue to dominate news headlines while the brunt of the corporate reporting season will also add stock specific catalysts, both positive and negative. Calls for more fiscal response on the part of governments opposed to limited Central Bank monetary fire power will intensify, in some cases allied to environmental issues. 

US watchers will continue to speculate on the timing and number of further interest rate moves during the 2020/2021 period while longer term Federal debt dynamics, Iran ,corona virus effects, election debate and trade” war” winners/losers (a moving target) will increasingly affect sentiment. Corporate earnings growth will be subject to even greater analysis, amidst a growing list of obstacles and over 20% of US companies have already made coronavirus “adjustments”. 

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. More equity specific issues e.g share buy-backs, ETF developments, TOPIX constituent changes, should also be monitored. 

There is increasing speculation that China may announce more even stimulative measures, as the coronavirus effect,though moderating now, struck an economy that was already weakening, and key $/Yuan exchange rate levels are being watched closely. 

European investment mood will be tested by generally sluggish economic figures, corona virus arrival, and an increasingly unstable political backdrop, now encompassing France and Germany, Spain and Italy. 

Hard economic data (especially final GDP, corporate investment, exports) and various sentiment/residential property indicators are expected to show that UK economic growth continues to be lack-lustre (1% ish) and recent coronavirus concerns have soon dampened any post Brexit/election enthusiasm. It is highly likely that near term quarterly figures (economic and corporate) will be distorted (both ways), and general asset price moves will be confused, in my view, by a mixture of currency development, political machinations, international perception and interest rate expectations. 

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 (asset class, individual investment and currency). 

An increased weighting in absolute return (but watch costs, underlying holdings and history very carefully), alternative income and other vehicles may be warranted as equity/gilt returns will become increasingly lower and more volatile and holding greater than usual cash balances may also be appropriate, including some outside sterling. Both equity and fixed interest selection should be very focussed. Apart from global equity drivers e.g. Corona virus, slowing economic and corporate growth, tariff wars and limited monetary response levers, there are many localised events e.g. UK trade re-negotiation, US elections, European political uncertainty that could upset markets. 

  • I have kept the UK at an overweight position on valuation grounds and full details are available in the recent quarterly review. However, extra due diligence in stock/fund selection is strongly advised, due to ongoing health, macro-economic and political uncertainty. Sterling volatility should also be factored into the decision, making process. Be aware that global demand shocks could impact certain large FTSE sectors e.g corona virus, while domestic plays more be more correlated with Brexit statements. 
  • Within UK sectors, some of the traditionally defensive, and often high yielding sectors such as utilities have shown resilience during the recent market wobble and this could continue. Many financials are also showing confidence by dividend hikes and buy-backs etc. Oil and gas majors will be worth holding after the flat 2019 performance, remembering 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. Indiscriminate selling for environmental/virus reasons does seem an overreaction, in my view. Small/mid- cap domestic stocks and funds received some post-election Brexit support.
  • Continental European equities are preferred to those of USA, for reasons of valuation, and Central bank policy, although political developments, coronavirus and slowing economic growth need to be monitored closely. I suggest moving the European exposure to “neutral “from overweight after the 2019 outperformance. 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 within a diversified portfolio(remember FX as well as local market movement), despite the recent under-performance. 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, have attractions e.g. preference shares, convertibles, for balanced, cautious accounts and energy/ emerging/speculative grade for higher risk e.g. EnQuest,Eros. 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. Bank balance sheets are in much better shape and yields of 6%-7% are currently available on related issues while a yield of 9.1% p.a., paid quarterly, is my favoured more speculative idea. 
  • Alternative income and private equity names have exhibited their defensive characteristics and are still favoured as part of a balanced portfolio. Reference could also be made to selected renewable funds including recent issues. Selected infrastructure funds are also recommended for purchase especially now that the political risk has been reduced somewhat and that the theme is likely to be re-iterated at the time of the imminent UK Budget. 
  • 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. The sector is starting to see more support, and corporate activity from both domestic and international sources seems bound to increase. 
  • I suggest a very selective approach to emerging equities and would continue to avoid bonds. The current 5.44% yield on emerging market debt still seems mean to me, compared with 6.52% on a pooled UK equity ETF. Although the overall valuation for emerging market equities is relatively modest, there are large differences between individual countries. It is worth noting that several emerging economies in both Asia and Latin America showed first quarter 2019 GDP weakness even before the onset of any possible tariff/virus effects. 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 e.g. Venezuela, Argentina or embarking on new political era e.g. Mexico and Brazil (economic recovery?). As highlighted in the quarterly, Chinese index weightings are expected to increase quite significantly over coming years, and there are currently large inflows into this area following the price weakness of 2018. One additional factor to consider when benchmarking emerging markets is the large percentage now attributable to technology. A longer-term index argument is also being made in favour of Gulf States, although governance issues remain a concern. 

Full quarter report available to clients/subscribers and suggested portfolio strategy/individual recommendations will be available soon. Ideas for a ten stock FTSE portfolio, model pooled fund portfolios (cautious, balanced adventurous, income), 30 stock income lists, defensive list, hedging ideas, and a list of shorter-term low risk/ high risk ideas can also be purchased, as well as bespoke portfolio construction/restructuring. 

Holders of pooled funds should continue to switch the balance away from unit trusts to a mixture of investment trusts and ETF’s.I have written on this many times over recent years. The Woodford example and, in general, the conflicts between certain short-term fund flows and long term assets, will only increase in my view. I have regularly updated model portfolios comprising some direct investments, investment trusts and ETF’s, across different risk categories, for those interested. 

Feel free to contact regarding any investment project. 

Good luck with performance! 

Ken Baksh Bsc,Fellow (UK Society of Investment Professionals) 

kenbaksh@btopenworld.com 

1st March 2020 

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 – 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

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