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Focus on the FTSE 250 for value stocks

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New all time highs for FTSE 100

New all time highs for FTSE 100

 23rd February 2015

Last Friday the FTSE 100 closed above 6,900 for the first time in 15 years. Today it opened higher and pushed to 6,940 before falling back, but still held on to the hugely psychological level of 6,900. This is the first occasion that the all time high of 6,930 of 30th December 1999 has been breached.

Having struggled in the last year to hold 6,800, getting past and staying above that threshold has given impetus for the push onward to 6,900.

Today’s trading really needs to remain above 6,900 for confidence to push onward to remain. Falling below during the trading session won’t hurt too much, so long as it stays close and finishes above that key value at the close later today. Remaining above 6,900 may be the confidence stepping stone to move on to significant new highs.

In many ways this breakthrough was unlikely, with the uncertainty of Ukraine, Greece and China weighing against the generally upbeat UK data. And the inherent pessimism of winter in UK doesn’t help. But low interest rates, lower costs generally, and now rising wages add confidence.

The UK and US economies are without doubt the world’s strongest at the moment, and it seems that we’ll be consolidating new all time highs in major indices reflecting that success. But before the FTSE 100 soars higher it is most likely to spend some time coming to terms with these levels. A fall back to the strong support at 6,800, a 1.4 per cent fall, is to be expected before we see it moving very much higher.

But a positive and clean election outcome may see us looking at new all time highs of 7,000 rather than a retreat to 6,500.

Fingers crossed.

There is one dampener though. The last time the FTSE 100 index was at this level was on the eve of the millennium. So in real terms to match that figure we should allow for inflation. In order to better that momentous figure, the index — using the BoE inflation figures — would today have to reach 10726.

Professors Mike Staunton, Elroy Dimson and Paul Marsh of the London Business School, part of the team that designed the FTSE 100, have predicted that there is a 50 per cent chance that it will reach 10,000 by 2022.

Peter Marshall, February 2015

Playing FTSE with Mr Market

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Managing portfolio risk January 2014

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Japan could still give an upside surprise December 2013

Japan could still give an upside surprise

I have held about 5% of my porfolio in Japan for the past three years. Until last year, it was a lousy investment in terms of stockmarket performance, but the rise in the yen meant I made almost as much as I did in UK equities.

That all changed with the monster rally that followed the election of Shinzo Abe and the invention of Abenomics. Not many UK investors bought into the rally — they had seen too many such rallies fail over the past decade — and most probably think of Japan only in terms of an ageing society with far too much government debt. This is to confuse a nation and a stockmarket — world exposure means most of the FTSE 100 stocks bear no relation to the UK, and the same is true of a large proportion of Japan’s top businesses. Abenomics could start a multi-year bull market.

For two decades Japan has been an investment graveyard. Periodic bouts of optimism and market rallies have been followed by further declines. The market as measured by the Nikkei 225 Index peaked at 38,000 in December 1989 and eventually hit bottom at 7,800 in April 2003, with one more rally and a final brief lurch down to 7,500 in January 2009 in the wake of the global financial crisis.

Abenomics boost

After a period of short-lived and ineffective governments, the Liberal Democratic Party leader Shinzo Abe regained power in December 2012 on the basis of a 3-pronged recovery plan: a fiscal boost (about $100 billion of spending), a monetary boost through quantitative easing and a reform agenda to tackle a rigid employment market. His party now controls both the lower and upper houses of the legislature.

One of the reasons for being bullish on Japan is quantitative easing. Japan’s monetary expansion (known as QQE) is the most aggressive such programme yet implemented — several times as large in relation to the size of the Japanese economy as that adopted by the Federal Reserve in the US. So far, the yen has only declined about 20% against the US$, but even this has seen corporate profits rising sharply. Provided QQE continues as planned, it is likely to send the yen lower.

Though Japan’s corporate profits are rising faster than those in Europe or the US — an annual rate of nearly 30% — company valuations are low, with price-earnings ratios around 12.5 as compared with 15 in Europe and 17.5 in the US. The average dividend yield is higher than that for the US at 2.6%.

Many commentators regard the “Abenomics” plan as the last chance saloon for Japan, since its ratio of debt to GDP is already over 200%, more than double what economists consider viable in the long term. By Japanese standards, the plan is very bold and Abe has pushed through a rise in the consumption tax as a first step to eliminating the budget deficit. If the plan works,a return to economic growth will result in a steady reduction in the debt ratio.

According to analysis by investment managers Neptune, the Yen needs to decline by between 50% and 65% in  order to balance the budget. These may sound high figures but even this would only take the yen back to levels of the 1990s. A currency decline of half as much as this would have a big positive effect on the profits of Japanese companies operating overseas or exporting.

Currency question

The announcement of the Abe plan saw the stock market rise by a half to 15,627 in May 2013. It retreated to about 14,500 but in  recent weeks has risen to its highest level since 2007. There is still uncertainty about the  third arrow” of the plan — reforms to liberalise the economy — but already the government has joined the Trans Pacific Partnership, which involves the abolition of protectionist agricultural tariffs, and has struck a deal with the US to import shale gas to improve energy security and lower costs.

In essence, Japan’s stock market is cheap compared with those of the UK, Europe and the US, yet it includes many first-class businesses whose profits will soar if the yen declines. If you want to buy into Japan, the key issue is currency. Some fund managers now offer two share classes for their funds, hedged and unhedged. Given QQE, I would only buy the hedged share class in funds that offer the option. But most funds still leave the manager to decide whether and how much to hedge, and you may — like me — prefer to leave currency decisions to the manager. Right now, I  would want to know that the manager is fully hedging the portfolio, as with all the funds listed below.

Big potential in mid and small caps

Neptune Japan Opportunities fund is managed by Chris Taylor, Neptune’s Head of Research. He has positioned his portfolio to benefit from a fall in the currency, with large holdings in industrial companies. He is also hedging the currency so that investors benefit from any rise in the stock market without losing from a decline in the currency. Given his very specific views, I would expect the performance of this fund to be quite volatile: in the past it has done much better than its peer group over some periods and much worse over others.

GLG Core Alpha follows a value/contrarian style in Japanese large-cap stocks. This should benefit from the currency effect — large-cap exporters are big winners from a yen decline. But it will miss out on the domestic, mainly small and midcap, beneficiaries of labour market reforms.

Baillie Gifford Shin Nippon investment trust invests mainly in mid and small cap stocks. The long term record is excellent. Many of its domestic consumer stocks will be big winners if and when wage growth lifts discretionary spending. Baillie Gifford Japanese Smaller Companies OEIC is run by the same management team.

Already QQE has started to generate inflation. It will be mid-2014 before we know if wages are rising across the economy. By then, the  currency may have taken another dip. Domestic investors are just beginning to switch from bonds to equities, encouraged by a new taxsheltered plan modelled on the UK’s ISA. I can see potential for at least a 30-40% return over the next 18 months and have increased my Japan holdings to 10% of my portfolio. Who knows, in a   few years’ time Japan may even become — as it was in the 1980s — a core ingredient in global portfolios. In which case the market is going a lot higher.

Chris Gilchrist, December 2013

Bull or Bear end of year rally? December 2013

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Woodford: stay or go? November 2013

Woodford: stay or go?

The news that Neil Woodford is set to leave Invesco Perpetual next April to set up his own fund management group poses a £33 billion question for investors. That is the total amount Mr Woodford now manages using his Buffett-style, long-termist value methods that he has applied for the past 25 years. And boy, has it worked.

The teenage scribblers of the press can carp about recent results, but short-term data is meaningless in value investing. Instead check out the chart below which compares Invesco Perpetual Income with the FTSE 100 over 20 years. IP income has returned £9,000 for an initial £1,000 investment as compared with £4,260 for the  Footsie.

It’s common knowledge that Woodford achieved this by taking big contrarian positions, most notably in tobacco back in the late 1990s when he bought BAT and the like on PERs of about 6. He made more than 10 times his money. Most recently, his big call has been “big pharma”, with large stakes in GlaxoSmithKline, AstraZeneca, Roche and other giants.

Woodford has got ever more impatient with short-termism. I don’t blame him. Many of the advisers asked about his funds are lukewarm. Genuinely long-term value investing will always be an uncomfortable style and is ill suited to most financial advisers, who have little real understanding of investment and are much too trigger-happy.

So the issue is: stay or go? I have met Woodford’s successor as manager of the two big equity income funds (Income and High Income) and as Head of UK Equities, Mark Barnett. He is very different from Woodford, who is aloof and arrogant. Barnett appears more pragmatic and cautious, but is still a long-term value investor like Woodford. Over the past five years, the fund he manages (UK Strategic Income) has actually done better than Woodford’s, partly because Barnett never allows a stock to account for over 5% of his fund.

I personally own IP Income and intend to hold it to give Barnett a chance.

Chris Gilchrist, November 2013

TMR changes its mind November 2013

TMR changes its mind

My wife and I recently enjoyed taking our motorhome for a five-week trip to Sardinia and Corsica. I did take the precaution of putting in place TMR’s recommended stop-losses and gain-locks on my wife’s and my holdings, none of which were triggered while we were away. It was difficult to ignore the idiotic financial happenings in Washington during August and September, reported incessantly on BBC World each day, but I  was confident that a passive approach to my investments was best for me.

Imagine my surprise when I updated the data used by TMR on my return in late September, to find that its previous love affair with big caps, and its disdain for small caps, had been turned on its head. TMR is now showing a distinct jitteriness towards the FTSE 100 index, with a sharp downturn in the index forecast for the middle of next year. Its forecast has a horrible resemblance in its analysis to the situation in mid-2000, just before the FTSE 100 plunged from close to 7,000 to below 3,500 over the course of three truly awful years for investors. “Sell in May and go away” could well be the advice I will be giving in my next two articles.

However, TMR is fairly sanguine about FTSE 250 midcap companies, with a mild correction shown for October 2014 lasting less than a month. And there is no sign of a downturn in the forecasts for the Small Caps, Fledgling and AIM 100 indices, all of which look to be harbouring profitable opportunities.

New smallcap selections

I have therefore looked at smaller companies that TMR says are worth investigating and the following AIM 100 companies popped out: Numis Corporation, OPG Power Ventures, Prezzo, RWS Holdings, M&C SaatchiTelford Homes and Young & Co Brewery ‘A’. Unusually, all seven are fulfilling the second of my criteria that  they should not have had more than one loss-making year in the past five. In fact none of the seven has had a  negative year in this period and all are forecast to be profitable in the next twelve months. So which to choose?

Numis (NUM; 240p; stop-loss 188p) is already a constituent of the TMR portfolio and showing a good start of 62% profit since being recommended six months ago.

OPG Power Ventures (OPG; 60.25p; stop-loss 52.5p) is a power generating company in the chaotic Indian sub-continent. The finances of power companies in India have been in a parlous state for some time. Recent across-the board rises in tariffs were a welcome shot in the  arm for all the companies: the average 13% increase in prices led to many enjoying record earnings in the past twelve months. OPG has also recently increased generating capacity so underlying pre-tax profits soared by 50% in the same period. The Indian industrial scene is not for the faint-hearted but I shall take a small tranche of the shares and hope for the present promise to be translated into solid performance.

Quality bite

Prezzo (PRZ; 117p; stop-loss 88.25p) has been a successful recommendation in the past. This popular restaurant  chain of some 211 outlets has been one of the few expanding refreshment groups during the economic down-turn. Despite a lull in footfall during the Olympics, recent expansion has led to the underlying pre-tax profits improving by some 11%. High profile outlets, such as the newlyopened one on the wonderful Kings Cross concourse, will continue according to Chairman Michael Carlton, with 25 new sites due to open in the current financial year. A lot of this success is already in the price and I don’t expect it to soar as it did when I invested first time round, but this is a solid company with good prospects. I see it as well worth adding to the TMR portfolio once more.

RWS Holdings (RWS; 761p; stop-loss 574p) is very much a niche company, albeit one  that is a leader in its field. Its core activity is commercial translating, with a particular focus on the translation of  patent applications, representing over 70% of group sales. The economic downturn led to a reduction in the  amount of R&D work worldwide, and this hit sales. However, research tends to precede recovery and the recent rising number of patent filings led to an improvement in that part of the company’s finances of some 11%. Commercial translation lagged behind at about 4% but, even so, the company appears to be on an upward trajectory. One fly in the ointment is the European Union Patent (EUP) scheme, arriving late in 2014, which will reduce the number of languages into which patents will have to be translated to just three: English, French and German. Early fears that this would affect turnover seem to have been wrong and the general feeling is that the company remains well-poised to continue increasing turnover and profit.

Ad spend rising

M&C Saatchi (SAA; 308.5p; stop-loss 232p), the advertising agency, is as famous in its own right as many of its clients. Large companies are once more shelling out for advertising space and communications budgets are on the increase. Invoiced sales and profits were up 6% in the company’s most recent report, about double the sector’s average. Performance in the UK was good with an 8% improvement, with German and Italian sales also very strong. This is very much a cyclical story with profits lagging those of their clients. At the moment those   are strongly on the up, but, as always with cyclical sectors, a close eye needs to be kept on the data, and when those data turn sour, a quick exit needs to be made.

Telford Homes (TEF; 365p; stop-loss 272p) looks to be a pretty boring success story, with the London focused residential developer showing solid success with targeted sales. Even the predicted creation of apartments in central London for 2016 is already 55% sold. It is hardly surprising that the company was able to say that forthcoming results were likely to be well ahead of market  expectation, leading to a jump of 6% in the price of shares. Not an exciting investment but a potentially solid one.

Young & Company’s Brewery ‘A’ (YNGA; 992.5p; stop-loss 745p) is another company that has been previously in the TMR portfolio, though not as profitably as Prezzo was. Breweries generally had a good summer and Young’s was no exception, turning in excellent results for early 2013. I’m going to add all six new companies to the TMR portfolio and to my own or my wife’s portfolios. This will lead us being fully invested  with little spare cash in our broker’s accounts to cover rights issues and so on, which I see becoming more widespread as the economy recovers fully.

Cruise loser

The uncertainties of the American economy put the jitters into Carnival shares and the shares fell below their stop-loss. Carnival is hugely dependent on the American love of cruising and the relative lack of forward bookings has made the shares too speculative for TMR. They have been sold for a small loss of 5%.

TMR has also recommended that I sell my holdings in Travis Perkins, one of the most successful holdings in my present portfolio. I’m a little puzzled at this advice for a profitable share, which usually only comes because the share price has stagnated and better investment is available elsewhere. I cannot see this myself, and I shall ignore TMR’s grumpy analysis. I will, however, keep a close watch on this share and, while I won’t sell, I will tighten the stop-loss a little; this is shown in the TMR holdings table.

Roy Tipping November 2013

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