This week has been memorable, for all the wrong reasons. Working in Manchester city centre and experiencing the fallout from a hideous act of terror was something I never thought/wanted to experience. From a social perspective it was devastating however from an investment viewpoint it had little impact, with markets remaining fairly stable on Tuesday. The Manchester terrorist attack is rather more serious than mere pounds, shillings and pence but the markets keep moving, below is a rundown on how the week unfolded.
So far this week the FTSE 100 has remained stable at around 7500; Sentiment has been affected by both GBP and commodities. On Thursday Opec members agreed to extend its production cuts into 2018, the oil cartel and its allies continue in their attempts to end a three-year supply glut that has hammered crude prices. Following the announcement WTI crude dropped 4% in a matter of minutes as investors hopes of deepening cuts were not met (chart beneath). Whilst the drop in oil prices would normally pull the whole market down a drop in the value of the pound acted as a balancing mechanism. GBP/USD = 1.28 GBP/EUR = 1.15. Ratings agency Moody’s downgraded China’s credit rating on Wednesday. Although the downgrade didn’t appear to be having too much of an effect on wider sentiment, it did hit FTSE 100 mining stocks, which are heavily dependent on demand from China, with Rio Tinto, BHP Billiton and Antofagasta among the fallers. More details below.
Rest of the World
Moody’s downgraded China’s credit rating one notch from Aa3 to A1, its fifth-highest rating. On the credit scale used by other agencies (Fitch Ratings and Standard and Poor’s) the move is equivalent to a downgrade from double A minus to A plus. S&P still rates China at double A minus although with a negative outlook and Fitch already had China at A plus.
China’s finance ministry chastised Moody’s after the US rating agency downgraded Beijing’s credit rating, highlighting investor concerns over rising debt and the slow pace of economic reforms intended to transform the country’s growth model.
Below are 2 graphs highlighting China’s growth in use of imported commodities. This is why China’s stability is important to the rest of the world, especially the mining sector.
The above charts show imports to China in $ millions per month.
China’s main imports are mechanical and electrical products (34 percent of total imports) and high tech goods (23 percent). The country is also one of the biggest consumers of commodities in the world. Among commodities the biggest demand is for crude oil (6 percent of total imports), iron ore (2 percent), copper and aluminium. Agricultural products account for 5 percent. China’s main import partners are: the European Union (12 percent of total imports, of which Germany accounts for 5 percent), ASEAN countries (12 percent, of which Malaysia accounts for 3 percent), South Korea (10 percent), Japan, Taiwan and the US (9 percent each) and Australia (4 percent).
After a three-year freeze, characterised by recession and political turmoil, Brazil’s markets are coming to life again, their equities were the best performing among emerging markets last year.
Below is a chart highlighting the last year’s performance on the BOVESPA (Brazil’s equivalent of the FTSE 100)
Brazil is Latin America’s largest economy and the world’s biggest exporter of beef, orange juice, sugar, coffee and iron ore. Former Brazilian President Dilma Rousseff left office almost half a year ago. Her successor Michel Temer was left to clean up the mess. Now, after two years in the red, the economy is growing again. Foreign companies are regaining the confidence to invest in Brazil.
There are several Trusts that may be of interest when investing in Latin America or Emerging Markets. I have highlighted my favorites below;
Aberdeen Latin American Income
The investment objective of the Company is to provide Ordinary Shareholders with a total return, with an above average yield, primarily through investing in Latin American securities. The trust is currently yielding 5% net.
Blackrock Latin American Investment Trust
The Company seeks to secure long-term capital growth and an attractive total return primarily through investing in quoted securities in Latin America and currently pays a 2.9% dividend.
A note from the portfolio manager Will Landers on the funds positioning;
We enter the second quarter of the year maintaining overweight positions in Brazil, Peru and off-benchmark Argentina, while maintaining underweight positions in Chile, Colombia and Mexico. Short-term drivers for Brazilian equities should be: a) the continued aggressive easing cycle by the Central Bank which should help to bring forward the needed economic recovery; and b) progress on the reform agenda, especially pension reform, which should help to bring stability to government accounts in the medium term. Meanwhile, despite a more conciliatory tone from the US government on the trade front, we maintain our cautious view on Mexican growth, and therefore our underweight. Despite slower than expected progress on the infrastructure front, we continue to favour Peru among its Andean neighbours, and see improving economic activity in Argentina as a positive for that country’s stock market.
In the last newsletter I mentioned the new Burford Capital 5% 2026 bond and the fact it looked attractive compared to a lot of the bonds in issue. The offer for this bond closed a week early due to such high levels of demand. However there are still a few bonds I would suggest selling and then swapping into the Burford Capital 5% 2026 (which is trading around 102 in pre-market transactions) to achieve a pickup in yield.
Interest will be payable semi-annually, in arrears, in equal instalments.
|Coupon Dates||1 June, 1 December|
Below is a list of bonds you may want to consider switching;
ALPHA PLUS HOLDINGS PLC 5.750% 18/12/2019 3.498%
CLS HOLDINGS PLC 5.500% 31/12/2019 3.435%
PROVIDENT FINANCIAL PLC 7.000% 14/04/2020 1.828%
TESCO PERSONAL FINANCE 5.000% 21/11/2020 3.057%
TESCO PERSONAL FINANCE 5.200% 24/08/2018 1.884%
WORKSPACE GROUP PLC 6.000% 09/10/2019 2.829%
Above is a list of bonds to consider switching based on yield to maturity. I would also like to add that any new money looking for bond income then it is an attractive proposition.
The specialist engineer works in markets that require high skillsets; this is a hindrance for anyone wanting to entre that market and leads to Renew being a leader in its field. The company has long term contracts in place with the likes of network rail and several utility companies which provides good visibility of earnings and a foundation for future opportunities.
Business Model (quoted from website) http://www.renewholdings.com/
Through effective controls and management of our operating subsidiaries, we seek to deliver value to shareholders in the form of reliable capital growth and a progressive dividend policy. Growth is delivered through both organic and acquisitive strategies.
I recommended Next Plc in my last newsletter, they have since moved slightly higher but I still remain bullish on their long term potential. The high street retailer we all know has had a hard time of late but now looks to have turned a corner. With a current share price of 4380p and a yield of 3.65% Next plc looks an attractive opportunity for both income and potential share price growth.
Whitbread is another of my recent recommendations; they have moved up a little of late but remain on my buy list. Earlier this week they announced the arrival of Adam Crozier (soon departing CEO of ITV) as their new senior independent director. Currently trading at around 4245p, the Costa Coffee and Premier Inn owner is trading well below its 5300p all time high and looks good value.
Enjoy your bank holiday weekend, thanks for taking the time to read my newsletter.
Karl Townsend ACSI
For and on behalf of
Arnold Stansby & Co. Limited
Telephone: 0161 832 8554 Fax: 0161 834 7710
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A word about some risks: Investing in the bond market is subject to certain risks that fixed income securities will decline in value because of changes in interest rates, and the risk that the manager’s investment decisions might not produce the desired results. Bonds with longer durations tend to be more sensitive and more volatile than securities with shorter durations; bond prices generally fall as interest rates rise. Investing in foreign denominated and/or domiciled securities may involve heightened risk due to currency fluctuations, and economic and political risks, which may be enhanced in emerging markets. Derivatives may involve certain costs and risks such as liquidity, interest rates, market, credit, management and the risk that a position could not be closed when most advantageous. Investing in derivatives could lose more than the amount invested. Equities may decline in value due to both real and perceived general market, economic, and industry conditions. Diversification does not ensure against loss.
There is no guarantee that these investment strategies will work under all market conditions or are suitable for all investors, and each investor should evaluate their ability to invest long-term, especially during periods of downturn in the market.
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