Newsletter No. 14 07/07/2017

Good Afternoon,

The UK

This week the FTSE 100 has lurched lower and is now trading at around 7300. Sentiment has been affected by commodity prices, potential stimulus tapering and uncertainty surrounding interest rates.

Well ladies and gentlemen it looks like summer has arrived for the stock market, volumes have been lower and company news somewhat lacking. The markets are moving out of kilter at the moment, government bonds trading lower would normally suggest a risk on situation where investors flood into a bull market and drop the “safe haven” investments. That’s not what’s happening. I will try and explain the current situation and impact on the markets below;

The Bank of England: Tightening monetary policy.

Market reaction – Bond prices move lower thus increasing yields to compensate investors. The pound moves higher as it becomes more attractive to foreign investment and in turn send the FTSE 100 lower as our mega cap companies keep their accounts in dollars (they instantly make less profit due to currency headwinds).

The Government: Fumbling their way through Brexit negotiations.

Market reaction – Uncertainty is the markets least favourite modus operandi. This leads to a drop in UK centric companies share prices as investors make a flight to safety and buy “safe haven” investments. The pound drops on political uncertainty. Share prices of mega cap companies rise due to improved earnings. The FTSE 250/350 and small cap will be sluggish.

My View: The Bank of England raising rates is a good thing, but potentially signals problems ahead. Raising the lending rate will stave off inflation which is currently above the target of 2%. General household goods have become more expensive, noticeably so when you visit a supermarket, due to the weak pound. This has led to the 1st quarters UK household savings ratio being at its lowest since 1963. The figure suggests that people are using “savings” to bolster everyday life and continue with a set standard of living. Which is fine if it’s a short term blip however if Brexit goes badly we could end up with a central bank trying to alleviate the pain inflation causes by means of raising rates further. All well and good I hear the savers cry. However if the savings ratio continues to decline while inflation continues to rise then we could end up with a situation whereby credit is too expensive and people can’t afford cover their liabilities. A chart highlighting the savings ratio is below.

In Summary: Now is a time for stock picking and not for market tracking as the economy as a whole is oscillating to a cautionary stance whilst awaiting news on negotiations from Brussels.

 

 

uk save

 

I have highlighted some other bits of news from throughout the week below;

 

UK Manufacturing

A fall in manufacturing activity led to UK industrial production unexpectedly declining, according to official figures released this morning that imply a further drag on national economic growth for the previous quarter. The Office for National Statistics figures revealed UK industrial production dropped 0.1% in May, when a 0.4% rise had been expected after the 0.2% fall in April.

 

Retail

High street sales at small and medium sized retailers enjoyed their best June for six years, with the warm weather helping clothing and fashion to strut its stuff for the first time this year. Overall, like-for-like retail sales were up 1.3% in June, according to BDO’s sales tracker, though this was compared to a negative base of -3.6% for the same month last year, the worst June in more than a decade due to Brexit vote uncertainty. By sector, clothing and fashion stores performed the best, with like for like sales outperforming other sub-sectors for the first time since January 2016.

Oil

20% Upside?

Yes, the unloved commodity is poised for a rally in the second half of the year, as the market finally starts to make a dent in supplies, according to UBS commodity analyst Giovanni Staunovo.

This is by no means a certainty however it’s nice to see a positive slant put on things after a good 6 months of falling prices and pessimism. The view of UBS is that the inventories are going to be eaten away at quite a pace in the second half of this year. The other main factor in pricing in such upside is that they believe the figures people are working off are “aggressive forecast estimates” when it comes to calculating the US production figures (9.31 million barrels per day for 2017).

As I mentioned last week this could provide an opportunity for profit however with oils volatility I would be tending to move away from the small cap oil companies and into the likes of BP. If you are looking for something a little different in this sector then WEIR is my choice. Weir’s largest operations serve the unconventional oil and gas markets in North America. These have grown substantially using techniques such as hydraulic fracturing (fracking) to access reserves of shale gas and tight oil. Although relatively new, through continued innovation and increased efficiency, these unconventional markets have become globally competitive sources of oil and gas supply.

 

 oil

 

Whilst on this note I am going for lunch with some natural resources fund managers later this month so if anyone has any specific question they would like me to ask then feel free to forward them.

 

USA

US Federal Reserve policymakers are ready to press ahead with the unwinding of its crisis-era economic stimulus programme within months, as they gear up to shrink the central bank’s swollen balance sheet in spite of a spate of weak inflation readings. Minutes of their June rate-setting meeting showed the Fed was divided over the exact timing of the move, with a number of officials suggesting they did not want to act any sooner than September. But several officials warned that allowing unemployment to fall too low could lead to the US economy overheating or the emergence of financial excesses.

 

Recommendations 

 

ITV 

ITV has been trending lower since its special ex dividend of 9.8p per share in April; this has been due to several factors, namely CEO Adam Crozier’s departure and a slowdown in advertising revenue (which is industry wide). Now appears the right moment to buy TV stocks as advertising revenue starts to improve and June should mark the low point as year-on-year comparisons get easier.

 

BP

BP is well positioned to take advantage of any rise in the oil price whilst being able to better absorb shock than the smaller capitalised oil companies. Paying a dividend currently around the 6.5% level I believe it to represent good value.

 

 

Enjoy your weekend, thanks for taking the time to read my newsletter!

 

 

Karl Townsend ACSI

Stockbroker

For and on behalf of

Arnold Stansby & Co. Limited

Telephone: 0161 832 8554   Fax: 0161 834 7710

Members of the Stock Exchange

Authorised & Regulated by the Financial Conduct Authority

 

 

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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