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In our December investment review, Ken discusses the macro picture in the US, Europe, China and Japan before looking at the effects of inflation. We then look at moves over the past 2 months before moving to the UK economy and issues such as consumer confidence, the trade deficit and Govt deficit, insolvencies and recession expectations. Ken highlights the good job that PM Rishi Sunak has done in steadying the ship, before we look at how previous stock picks in October and November have performed. These include Legal & General #LGEN, Smith & Nephew #SN, Begbies Traynor #BEG, Greencoat UK Wind #UKW, Whitbread #WTB, Frontier IP #FIPP, Enquest Bond #ENQ2 and Georgia Capital #CGEO. Ken then picks out four more stocks for growth, These are:
Lloyds Preference Share #LLPC
Asia Dragon Trust #DGN
Legal & General Cyber Security ETF #ISPY
DECEMBER 2022 Market Report
During the one-month period to 30th November 2022, major equity markets, as measured by the
aggregate FTSE All – World Index, rose by over 5%, reducing the year-to-date loss to 18%, in $ terms.
Chinese equities, were very strong gaining over 30% and taking the broad emerging market indices
and Asia with them. The VIX index fell, finishing the period at a level of 22.22.
Government Fixed Interest stocks also rose over the month. The UK 10-year gilt ended the month on
a yield of 3.16% with corresponding yields of 3.77%, 1.94% and 0.25% in USA, Germany, and Japan
respectively. Speculative and lower quality bonds, however,fell in price terms. Currency moves
featured a weaker US dollar. Commodities were mixed.
Over the recent month, the OECD has made further downgrades to world economic growth and
anecdotal evidence from several third quarter reporting companies suggests that the slowdown is
accelerating. e.g. Maersk (“freight rates peaked….decreasing demand”).
At the same time, key data indicators (factory gate and commodity prices, shipping rates, inflation
expectations) suggest that headline price growth is set to slow in coming months, although labour
compensation developments must be watched carefully .
More volatility expected in oil prices as western countries prepare to impose a price cap on Russian
FTX,a leading crypto exchange,and a sprawling network of affiliated firms filed for bankruptcy
protection dealing another blow to the crypto sector.
Recent US Federal Reserve meetings and informal comments by Jerome Powell and other Fed
governors remain hawkish and further increases are expected though calls for 50bp rather than
75bp are increasing. The latest rise took the benchmark rate to the 3.75%/4% range.At a speech at
the Brookings Institute yesterday,the Fed Chairman sent mixed signals that the fight against
inflation “had a long way to go” while also sending a strong hint that the next rate rise,mid
December, would be 50bp rather than 75bp
would be Downward projections to economic growth, and upward moves to inflation forecasts
were also released.
Recently announced inflation indicators showed October headline CPI of 7.7%, lower than estimates,
while the core inflation rate rose by 6.3%. First quarter negative GDP growth followed by second
quarter of -0.9% signals a “technical recession”, although labour/employment trends still seem
reasonably robust. Third quarter preliminary GDP growth of 2.6%, annualised, while higher than
estimates concealed a weaker consumer component offset by a strong trade balance. Recent
consumer sentiment indicators (November composite PMI for example), retail sales, housing
activity, construction figures and the Empire States Survey back this up, showing declining trends
into recent weeks. . The Fed’s own forecasts expect GDP growth of 0.2% and 1.2%, and core PCE
growth of 4.5% and 3.1% respectively for 2022 and 2023
US midterm election results showed the Republicans narrowly taking control of the House of
Representatives while the Democrats retained the Senate, a situation which could minimise more
extreme policies, but also thwart some of Biden’s ambitions. Donald Trump has vowed to return in
2024, although the Republican Party is far from united at the current time
The European Central Bank raised interest rates by half a percentage point on July 22nd, and a further
75bp in September also pledging to support surging borrowing costs from sparking a eurozone debt
crisis. The ECB raised interest rates by another 75bp, to their highest level since 2009, on 27th
October, pledging to continue increasing borrowing costs in the coming months to tackle record
inflation, despite a looming recession. On 29th November, Christine Lagarde, the ECB president,
warned that the bank was “not done” raising interest rates, saying that inflation “still has a way to
First quarter 2022 GDP for the Eurozone showed a weaker than expected trend especially in
Sweden, Italy and Germany and more recent indicators show a continuation of this trend,
exacerbated by the Russia/Ukraine conflict, supply chain issues, and rapidly increasing costs. The
“flash” PMI figure for October, released on the24th October, fell to 47.1 the lowest since November
2020, although German quarterly GDP growth figures, just released, were marginally ahead of
Current ECB staff projections foresee economic growth of 2.8% for 2022, a sharp reduction on the
previous forecast, and further downgrades could be likely in the wake of the ongoing Ukrainian
conflict and related gas shortages.
November Eurozone inflation, just released, of 10.0% was lower than expected.with slower gains in
energy and services ,and faster growth in food prices.
ASIA excl JAPAN
The GDP figures, shown below (source: CLSA, CEIC) show that 2022 and 2023 growth
projections for the Asia excl Japan region compare favourably with those of other developed
regions. The reasons include a “better” Covid experience, selective commodity exposure,
tourism, continued FDI Investment (especially China related) and better initial fiscal
situations (compared with late 90’s for example) and limited direct connections with the
Russia/Ukraine situation. The forecasts do not assume a total easing of Chinese covid rules.
Headline inflation of around 5% (core 3%) also compares favourably.
Geo-political concerns must be taken into account, especially In Taiwan.
The 5.5% official GDP growth target for 2022 looks clearly unachievable, with some investment
banks now forecasting below 3%. Official data shows weakening trends in consumer spending, fixed
asset investment and construction activity while more recent “live” tracking data e.g., mobility,
cement production and electricity use also showed subdued economic activity. Official data for the
third quarter, just released shows growth of 3.9%. The major historic negative issues of a very
restrictive anti-Covid policy and major disruption within the property market have now been
supplemented by increasing US restrictions on the production/export of certain key electronic
At the time of writing a property “rescue” package has been implemented, while on the Covid front,
tens of thousands of people have taken to the streets protesting strict coronavirus controls and
suppression of freedom of speech, triggering clashes with police and security forces.While nothing is
certain in Xi’s approach to the Covid Pandemic, there is a growing feeling that certain measures will
be relaxed/increase in vaccination.
The Japanese economy contracted 1.2% on an annualized basis during the third quarter of 2022,
missing forecasts of 1.1% growth, and considerably weaker than the 4.6% expansion recorded during
the second quarter. This was the first down quarter of the year reflecting weak domestic
consumption, a slowdown in business investment and an acceleration in imports. Estimates for the
full year seem to fall mainly within the 1.5%-2.0% band. Inflation, while still well below international
peers, rose by 3.6% in October, the highest since 1982, driven by currency weakness.
Recently the Japanese government unveiled a $197 billion stimulus package to ease the impact on
consumers of soaring commodity prices and a falling yen, while the BoJ stuck by its ultra-loose
policy, maintaining very low interest rates and re-affirming it yield control policy.
Within the UK, live activity data (e.g November Gfk data) continues to show a weaker overall trend,
especially within the services sector. According to this survey, released late November, covering the
mid November period, consumer confidence remains very low, amid the cost-of-living crisis.The
retail sales figure for October did however show a slightly better than expected reading but this may
have been distorted by the Queen’s mourning period . Unemployment, however, is still at a very
low level, although recent official figures did show a tentative slowing in hiring intentions.
Inflation continues to rise, the October CPI and RPI readings registering hikes of 11.1% and 14.2%
respectively. Kantar and the ONS both reported food/grocery prices rising about 15% year on year as
well as turkey/egg shortages.Happy Christmas!
The PSBR was starting to deteriorate again, largely as a results of rapidly rising interest (index linked)
payments and expectations of higher public sector pay and state pensions. The most recent “official”
figure showed September PSNB at £20 billion, much larger than forecast and the second largest
since monthly records began in 1993, according to the ONS.
Despite some relief with the recent energy price package, until April at least, (but not other utilitiessee below), shop price inflation, greater Council Tax “freedom”, upward interest/mortgage rate
pressure, stalling house prices, accelerating rents, insolvencies/evictions, legacy Brexit issues and ,
strike activity, will continue to be headwinds and the outlook for economic growth over coming
quarters is highly uncertain. Both the Bank of England as well as the OBR and now the OECD are
expecting recessionary conditions for one to two years.
Experts at consultancy EY-Parthenon reported that company profit warnings had jumped from 51 to
over 86 over the third quarter of 2022 citing increasing costs and overheads as the main reason,
especially in consumer facing businesses. Another report from Begbies Traynor, Latest Red Flag Alert
Report for Q3 2022 – 07:00:07 19 Oct 2022 – BEG News article | London Stock Exchange quoted that
over 600,000 business were already in severe financial distress.
Monetary policy has tightened from a 0.1% interest rate in December last year to the 1.25% rate set
in June and a further 50bp at the August, meeting, followed by 50bp in September, taking the
benchmark rate to 2.25%. Markets are expecting rates to be above 4.0% by mid-2023.
On 17th November, Chancellor Hunt told a sombre House of Commons that a massive fiscal
consolidation including £30 billion of spending cuts and £25 billion of tax rises was needed to restore
Britain’s credibility and tame inflation. The OBR said they expected the economy to shrink 1.4% and
not regain pre -pandemic levels until 2024.Inflation was expected to remain over 7% next year.
While many of the proposals had been leaked, and the market reaction was muted (first objective
achieved!), there were a few positive surprises (e.g help for NHS and education) and several
From an investor point of view the reduction in tax free allowances for investment income and
capital gains, was higher than expected. Make full use of ISA etc while can!
Monthly Review of Markets
Global Equities rose over November (+5.02%) extending the quarterly recovery and reducing the
year to date decline to 18.04% in dollar terms. All major indices climbed with especially large gains
registered in China, which also benefited Emerging Market and FT Asia-excl Japan bourses.
Continental European indices were also relatively strong, while the NASDAQ and Nikkei lagged in
relative terms. The VIX index fell over the month to end November at a level of 22.22. The ten –
month gain of 29.04% reflects the degree of risk aversion compared with the” relative calm” of last
December (medical, geo-political and economic!)
Sector moves were again very mixed over the month although most ended in positive territory. The
few losers included telco’s and tobacco On the other hand, miners, utilities, life companies,
financials,retailers and food were relatively strong. The FTSE100 outperformed the All-Share Index
and is about 3% ahead of the broader index since the beginning of the year. By IA sectors, UK active
unit trusts are underperforming benchmark indices, trackers etc, so far this year, with small
company funds even more so. Income based funds, by contrast, are significantly outperforming the
averages. “Balanced” funds, by IA definitions, are falling by about 8%-10% so far this year (Source:
Trustnet November 30th).
Major global government bonds rose in price terms over November, the UK 10-year yield for
instance finishing the month at a yield of 3.16%. Other ten-year government bond yields showed
closing month yields of 3.77%,1.93% and 0.25% for US, German and Japanese debt respectively. UK
corporate bonds also bounced strongly, up approximately 4% on the month in price terms.
Speculative bonds, however, bucked the trend falling in price terms.
Year to date, the composite gilt index has fallen approximately 22% underperforming UK higher
quality corporate bonds in price terms and more so in total return.
Check my recommendations in preference shares, selected corporate bonds,fixed interest ETF’s ,
zero-coupons, speculative high yield etc. A list of my top ideas from over 10 different asset classes
is also available to subscribers.
Currency moves featured a sharp fall in the US dollar, largely following the better-than-expected
inflation rate. Sterling rose against the US dollar but fell against the Japanese Yen and Euro. Currency
developments during November also included modest strength in the Chinese Yuan.
A mixed performance by commodities during November with weakness in Oil and many agricultural
commodities and strength in copper, Iron ore and the precious metals. Year to date, uranium and
the energy complex are strongly up in price terms while industrial metals copper, aluminium and
iron have all shown price declines of over 13%. Gold has also dropped in dollar terms by about 3% so
far this year.
Major central banks have remained hawkish with reducing QE/commencing QT and accelerating the
timing and extents of rate increases as the main objectives, especially where inflation control is the
sole mandate. In a growing number of smaller economies where US contagion, politics, commodity
exposure inflation/fx are also issues, several official increase rate increases have already taken
effect. Japan, however, has continued to adopt stimulative measures, up to now.
Global Government Bonds have stabilised somewhat although differing inflationary outlooks and
supply concerns could lead to continued volatility in the sector.
For equities, the two medium term key questions will be when rising interest rates eventually cause
equity derating/fund flow switches, government, corporate and household problems, and how the
rate of corporate earnings growth develops after the initial snapback. Going forward, withdrawal of
certain pandemic supports, uncertain consumer and corporate behaviour and cost pressures are
likely to lead to great variations by sector and individual company. The third quarter reporting
season produced several negative surprises e.g large American technology companies and UK
building and property companies.
As well as maintaining an overweight position in UK equities, it may be worth initiating or adding to
Japanese positions within an international portfolio. The US market has fallen about 19% so far this
year (NASDAQ -30%) but remains a relative underweight in my view. Margin pressure headwinds,
political uncertainty, prospective dollar weakness and technology sector volatility must be balanced
against the current stock market ratings. Continental European equities appear cheaply rated in
aggregate, but great selectivity is required. Within the Emerging market space I currently favour
exposure to the Far East.
Another major asset allocation decision would be to keep part of the conventional “fixed interest”
portion in alternative income plays in the infrastructure, renewables, and specialist property
areas. Many instruments in this area provide superior capital growth, income, and lower volatility
than gilts for example. Recent stock market volatility has brought several renewable stocks back to
I am also adding selected preference shares to the “fixed interest” allocation, where annual yields
of approximately 6% are currently available.
UK Equities continue to remain a relative overweight in my view, based on several
conventional investment metrics (see above), longer term underperformance since the
Brexit vote, style preference (value overgrowth) and international resource exposure
although be aware of the numerous domestic headwinds I have highlighted above.
Value should be favoured over growth, and the FTSE 100 favoured over the FT All-Share.
Apart from the style drift, remember that the non sterling element of leading FTSE 100
companies and sectors is relatively high
By sector, Oil and Mining equities continue to benefit from above average yields, strong
balance sheets, dollar exposure and secular demand e.g copper, cobalt for electronics,
construction, electric vehicles etc. Any moves regarding Chinese re-opening the economy
would be another positive for this sector.
Remain overweight in pharmaceuticals and underweight in non-renewable utility stocks
which may suffer from consumer and government pressures, and no longer trade on yield
premia, especially against the backdrop of higher gilt yields.
Construction materials, especially cement will benefit from growing
infrastructure/renewable initiatives., although rising cost pressures and falling housing
activity must also be considered.
Banks, may enjoy some relative strength from rising interest rates, but continue to
monitor the recession/loan growth and default risks.These mixed trends were very
evident in the recent third quarter figures. Preference Shares as well as ordinary shares
have attractions in this area
Housebuilders and real estate-expect depressed activity and remember that the rising
interest rates have not yet been fully factored into bricks and mortar property yields.
Industry data and anecdotal news from both housebuilders and REIT’s suggest further
weakness to come.
Retailers are in general suffering from a combination of falling sales and rising costs and
clear trends in consumers “trading down” are apparent. Certain on-line operations e.g
Asos additionally are suffering from an element of post-Covid comparison.
Domestic Breweries/pubs etc are having a hard time with stalling consumer’s
expenditure, supermarket competition and rapidly rising costs.
Airlines may suffer as a result of large dollar costs, uncertain foreign travel outlook and
often high debt levels
Extra due diligence at stock level more generally will be required as I expect a growing
number of profit warnings and downbeat forward looking statements. See the EY and
Begbies statements on page 7 above.
However,takeover activity is also clearly increasing with, for example, private equity
snapping up UK-listed companies at the fastest pace for more than twenty years. Foreign
takeover, stake building is also increasing, current weak sterling being a factor, with
Vodafone under scrutiny by a French (who already have BT interest!) investor. Biffa (waste
management),MicroFocus(technology),Aveva(software) and RPS(professional services)
have all succumbed to foreign takeovers in recent months, much by “strong dollar”
American or Canadian organizations.
JAPANESE EQUITIES also remain an overweight in my view, although my recent
comment re hedging may “nuanced “now following the extreme currency weakness and
surprise intervention. Unlike most other major economies, Japan is expected to continue
its easy money policy. Exporters have benefitted from the plunging Yen although higher
input costs and more “off-shoring” also must be considered. The prospective price/book
ratio of 1.19 is attracting interest of corporate and private equity buyers, while the
prospective yield of 2.6% is above the world average and compares very favourably with
USA (1.7%). Corporate governance is rapidly improving with diverse boards, reduction of
cross holding, higher dividends etc. There are clear signs that inward investment attracted
by the pro-growth, pro-deregulation agenda and relatively low costs (average Japanese
annual wage $30000 compared with $75000 USA) is increasing. Private equity stake
building interest in Toshiba and growing activity in the property sector (discount on a
discount in a cheap currency) demonstrate the search for value in Japan. Investors may
wish to adopt a partially rather than fully hedged FX position following recent
On a valuation basis (see table above) the forward PE multiple of 12.9 is at a considerable
discount to the world, and especially US average (18.0)
EMERGING MARKETS-Very difficult to adopt a “blanket” approach to the region even in
“normal times”, but especially difficult now, with so many different COVID, commodity,
sectoral mix, debt, geo-political and increasingly natural disaster variables. The IMF recently
warned that several emerging nations could disproportionately suffer from a combination of
COVID and adverse reaction to “tapering” by developed counties e.g., FX/Interest rate
pressures. Six countries have already defaulted during the pandemic, and the IMF is currently
in various stages of bail-out discussions with Pakistan,Argentina,Zambia,Sri
Lanka,Ghana,Tunisia and Egypt.
Within the emerging/frontier universe I continue to have a relatively positive view on Asia.
The economic fundamentals were discussed on page 16 above, and the forward-looking
multiples and dividend growth metrics appear relatively attractive in a global context. Any
move by China to open more fully after their severe Covid lockdown, would of course
additionally help. Exposure to the entire area can be achieved through a number of ETF’s and
also investment trusts currently on discounts
If a country-by-country approach is adopted, I have a longer term positive view on Vietnam
where, the nation is supported by positive demographics, with a population of near 100
million, an emerging middle class, and a recipient of strong foreign direct investment.
Qualconn,an Apple supplier, Intel(semi-conductors),Lego and Samsung(mobile phone plant)
have all recently invested in new capacity in the country. Other big names moving chunks of
production from China to Vietnam include Dell and HP (laptops), Google(phones)and
Microsoft (Games Consoles) The economy is expected to grow at around 6.5% this year (7.7%
Q2 2022) and current inflation is running at about 3.5%. On a relatively low prospective PE
based on forecast earnings growth over 20%, Vietnamese equities appear good value. India,
although quite highly rated and a major oil importer, warrants inclusion in a diversified
portfolio, and is currently receiving some fund flows from “overweight” Chinese portfolios.
Indonesia, the last of my current Asian ideas benefits from a commodity boom, strong
domestic market, low debt, relatively stable currency, forecast 5% GDP growth and 5%
Caution is required in many South American markets with poor COVID-19 situations,
deteriorating fiscal balances, weak investment, low productivity (see below) and
governments in a state of transitioning e.g Brazil. However, some stock market
valuations currently appear interesting in the region, which, so far, has been relatively
unaffected by events in Ukraine. Commodity exposure, deglobalization beneficiary,
valuation and recovery from a very low-level account for some year-to-date stock
market relative out- performance. Many of these countries also raised interest rates
at an earlier stage, allowing relative currency strength, compared with say the Euro,Yen or Sterling.
Certain areas within Central Europe are starting to receive more attention, mainly on
valuation grounds, but the lingering Covid effects and indir
ect effects of the Russia/Ukraine invasion should be borne into account. Regarding the
latter, a reduction/termination of Russian gas supply could have a serious recessionary
impact in certain countries. Large refugee influxes e.g Poland are also starting to
create budgetary/social issues.
Comments re great selectivity above also apply to emerging market debt. For the
more adventurous fixed interest investor combinations of well above average yields
(sometimes caused by pre-emptive moves last year), stable fiscal and FX situations
and, diversified economic models could provide outperformance from carefully
• COMMODITIES– Gold spiked to over $2000 in March, a recent high, when Russia invaded
Ukraine, but has since fallen about 12%, although of course, remaining reasonably stable in
many local currency terms . The longer-term prospects for more cyclical plays continue to
look brighter. Increased renewable initiatives, greater infrastructure spending as well as
general growth, especially from Asia, are likely to keep selected commodities in demand at
the same time as certain supply constraints (weather, labour and equipment shortages,
Covid, transport) are biting. Anecdotal evidence from reporting companies RTZ, BHP and
Anglo American appear to suggest that the industry is enjoying a bumper time, and with
disciplined capex programmes, extra dividends and share buy-backs are commonplace!
Current rumours of a cautious relaxation of the Chinese Covid policy, may provide a boost to
• Wheat and other grain prices have fallen from the levels reached following the Russian
invasion of Ukraine, but the current grain shipment complications, planting/harvesting
schedules within the region and extreme global meteorological conditions are expected to
lead to further price volatility. If the conflict is prolonged it will affect millions of people
living in such places as Egypt, Libya, Lebanon Tunisia, Morocco, Pakistan and Indonesia that
could have political consequences. There has been renewed interest in agricultural funds as
well as the soft commodities themselves.
GLOBAL CLIMATE CHANGE remains a longer-term theme, and will be built into
the many infrastructure initiatives, being pursued by Europe, USA, and Asia. The
Russia/Ukraine conflict is accelerating the debate, and hopefully the action. There are
several infrastructure/renewable investment vehicles which still appear attractive, in
my view, combining well above average yields and low market correlation with low
premium to asset value. The recent volatility in natural gas prices has highlighted both
risks and opportunities in the production and storage of energy from alternative
sources. However, increasing levels of due diligence are required, in committing new
money to the area overall. Financial watchdogs across the world are sharpening their
scrutiny of potential “greenwashing” in the investment industry on rising concerns that
capital is being deployed on misleading claims.
• However, in the shorter term, the Russian invasion of Ukraine has precipitated a global
energy crisis, that has forced countries, especially in Europe to look for ways to quickly
wean themselves off Russian oil and gas, and reconsider timelines of commitments to
cut the use of fossil fuels. At the time of writing, it seems highly likely that USA will
increase oil and gas output, UK North Sea may see further investment and EU coal
consumption could increase.
• Another area currently in the ESG purist cross hairs is “nuclear”. Ignoring the fact that
nuclear weapons have not been used in anger since 1945, and the fact that some deterrent is
needed, (now?), where should the confused investor stand when it comes to nuclear power
substituting coal power? Japan, UK and Germany are all studying proposals to revive their
nuclear power capacities. I have some interesting “uranium play” ideas for those interested.
• ALTERNATIVE ASSETS-this group, encompassing private equity, private debt, hedge
funds, real estate, infrastructure, and natural resources is expected to continue growing both
in actual and relative terms over coming years.
Traditional asset management groups are racing to expand offerings in alternative
investments as they seek to boost profitability and head off competition from private
equity groups (see graph below).
I have, for a while, recommended some exposure to this area maybe as part of the
former “gilt allocation”. With strong caveats re liquidity, transparency, dealing
process, I still adopt this stance, continuing to use the investment trust route. So far
this year, gilts have declined approximately 24% while my favoured UK renewable
closed-end funds have appreciated by around 6% in capital terms and delivered about
6% in annual income. Please contact me directly for specific ideas
COMMERCIAL PROPERTY The MSCI/IPD Property Index showed a sharp fall in the total return across all
properties in October, the decline of 6.4% (-6.8% capital values, +0.4% income),taking
the year to date return to -1.6% (capital -5.2%,Income +3.8%).The monthly decline
accelerated the downward trend started in July this year, especially in Industrial
Properties. Rental growth however was positive at +2.4% in October..or 4.4%
annualised for the ten month period
Several analysts are down grading their estimates for the sector following the rapid move
in UK longer and shorter-term interest rates. Property asset valuations take time to
materialise where there is a lag between balance sheet date and results publication in
the listed area. Live traded property corporate bonds, however, have already moved
Quoted property giants British Land and Land Securities both reported deteriorating
conditions witing their third quarter statements, expecting further valuation declines
following rising yields.
Full asset allocation and stock selection ideas if needed for ISA/dealing accounts, pensions.
Ideas for a ten stock FTSE portfolio. Stock/pooled fund lists for income, cautious or growth
portfolios are available. Hedging ideas, and a list of shorter-term low risk/ high risk ideas
can also be purchased.
I also undertake bespoke portfolio construction/restructuring and analysis of legacy
Independence from any product provider and transparent charging structure
Feel free to contact regarding any investment project.
Good luck with performance!
Ken Baksh Bsc,Fellow (UK Society of Investment Professionals)
1st December ,2022
Important Note: This article is not an investment recommendation and should
not be relied upon when making investment decisions – investors should conduct
their own comprehensive research. Please read the disclaimer.
Disclaimer: Opinions expressed herein by the author are not an investment
recommendation and are not meant to be relied upon in investment decisions.
The author is not acting in an investment, tax, legal or any other advisory
capacity. This is not an investment research report. The author’s opinions
expressed herein address only select aspects of potential investment in
securities of the companies mentioned and cannot be a substitute for
comprehensive investment analysis. Any analysis presented herein is illustrative
in nature, limited in scope, based on an incomplete set of information, and has
limitations to its accuracy. The author recommends that potential and existing
investors conduct thorough investment research of their own, including detailed
review of the companies’ regulatory filings, and consult a qualified investment
advisor. The information upon which this material is based was obtained from
sources believed to be reliable but has not been independently verified.
Therefore, the author cannot guarantee its accuracy. Any opinions or estimates
constitute the author’s best judgment as of the date of publication and are
subject to change without notice.The author may hold positions in any of the
The author explicitly disclaims any liability that may arise from the use of this
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.
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.
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.
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.
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%
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?
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)
1st March 2020
Brand CEO Alan Green talks Tertiary Minerals #TYM, Grand Vision #GVMH & Enquest Bonds #ENQ1 on Vox Markets podcast
Brand CEO Alan Green talks Tertiary Minerals #TYM, Grand Vision Media Holdings #GVMH & Enquest Corporate Bonds #ENQ1 with Justin Waite on the Vox Markets podcast. Interview is 27 minutes 39 seconds in.
ENQUEST 7% 15/04/22 Bond-ENQ1-ISIN-XS0880578728
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
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.
The next “Cash payment conditional determination date” as explained in the bond notes will be around 15th January 2019 i.e. a few days time.This will officially confirm that the next coupon will be paid in cash
The next “record date” will be end January with the appropriate payment being made to bond holders on 15th February according to the company bond prospectus
At the current bond price of £80% ,this one coupon will be worth 3.5/80=4.4%, not a bad income return for one month. However the real value lies in the longer term maths!
As ever, normal health warnings apply !
Ken 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.
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.
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Please contact Ken, (email@example.com) for further information