This week the FTSE 100 has rallied to 7400 and then sunk back to 7300. Sentiment has been affected by several factors including North Korea and the horrific acts of terror which occurred in Spain yesterday. With recent geopolitical tensions fading in to the background a short lived relief rally preceded what was a sharp 1% move south during Fridays early trading. Airlines led the retreat after the terror attacks in Barcelona; the rest of the market followed reflecting losses overnight on Wall Street amid renewed concerns about the Presidency.
The latest bout of pound weakness has been nurtured by the Bank of England’s meeting in August. The BoE pushed back market expectations of any rate rise. The UK’s monetary policy conundrum revolves in part around Brexit. The BoE is forecasting a “smooth” exit but the process could potentially reduce the likelihood of rate rises by generating further uncertainties.
Lower interest rates for longer in the UK is one contributing factor to sterling’s expected weakness, but it comes alongside concerns over economic data.
The above chart highlights the reality of what’s happened to the pound over the last few years, one positive to come from this however is a boost to exports as our products become more competitively priced in foreign markets. UK food and drink exports rose 8.5% to £10.2bn over the first half of 2017, whisky remained the top export, while salmon was second and beer rose to third after it overtook chocolate.
I will highlight a company that operates or can give you exposure to each of our top exports. Given the fact that the pound is likely to remain weak these companies could reap the rewards over the coming years.
UK’s top 10 foods and drink exports
1. Whisky – Diageo
2. Salmon – Marine Harvest (Oslo listed) World’s largest supplier of Atlantic and Scottish salmon
3. Beer – Marston’s
4. Chocolate – Hotel Chocolat
5. Cheese – Dairy Crest
6. Wine – Gusbourne (Very speculative) there is no other listed company producing wine in the UK.
7. Gin – Diageo
8. Beef – NWF (Cheshire based cattle feed supplier)
9. Pork – Cranswick
10. Soft drinks – Fevertree, Nichols & Britvic
Source H&M Customs and Excise
The UK’s largest Food Manufacturers include AB Foods, Unilever and Kerry Group, these are more diversified options.
Whilst on this note the weaker value of the pound has led to other benefits too. The UK is now a much cheaper destination for holiday makers than it used to be. Many European, American and Chinese people are taking advantage of this, clear from the cacophony of different languages and accents on my train home (I get the airport train).
Over the April-to-June quarter the number of visitors from overseas rose to 10.75 million, up 8% from the same period a year earlier. Tourism is a key driver of growth in the economy and this resurgence of the tourism industry can only be a good thing.
Bloomberg reported that Gulf refiners are preparing to lose one of their largest suppliers of crude: Venezuela. With sources saying that crude buyers have begun making inquiries with producers in Canada to source alternative oil shipments.
The move comes as the Trump administration has been toying with the idea of sanctions on Venezuela. This could prevent inflows of Venezuelan heavy oil which has been a staple of the Gulf Coast refining sector for decades.
At the same time, sources said that Venezuela’s exports to the U.S. are dwindling because of commitments the indebted nation has with other crude buyers abroad.
India and China particularly are owed large quantities of crude by Venezuela, due to cash-for-oil deals over the last few years meaning that supplies are increasingly being diverted to these markets from the U.S.
This would have a very bullish effect on the price of oil as Venezuela is the world’s 8th largest oil exporter, accounting for around 2,000,000 barrels per day.
In the last newsletter I took a look at the Elliott Wave principle and its use in technical analysis, this week I will scrape the surface of the Fibonacci numbers and the importance of the Golden ratio.
I’m not going to delve too deep into the mathematical properties behind the Fibonacci sequence/Golden Ratio. A few basics, however, will provide the necessary background for the most popular numbers.
Leonardo Fibonacci was a mathematician from Pisa in Italy and is considered to be the most talented Western mathematician of the middle Ages. He is credited with introducing the Fibonacci sequence to the West. It is as follows:
0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377, 610……
The sequence extends to infinity and contains many unique mathematical properties.
• After 0 and 1, each number is the sum of the two prior numbers (1+2=3, 2+3=5, 5+8=13 8+13= 21…).
• A number divided by the previous number approximates 1.618 (21/13=1.6153, 34/21=1.6190, 55/34=1.6176, 89/55=1.6181). The approximation nears 1.6180 as the numbers increase.
• A number divided by the next highest number approximates 0.6180 (13/21=.6190, 21/34=.6176, 34/55=.6181, 55/89= 0.6179….). The approximation nears .6180 as the numbers increase. This is the basis for the 61.8% retracement.
• A number divided by another two places higher approximates 0.3820 (13/34= 0.382, 21/55= 0.3818, 34/89= 0.3820, 55/144= 0.3819 ….). The approximation nears 0.3820 as the numbers increase. This is the basis for the 38.2% retracement. Also, note that 1 – .618 = .382
• A number divided by another three places higher approximates 0.2360 (13/55=.2363, 21/89= 0.2359, 34/144= 0.2361, 55/233= 0.2361….). The approximation nears 0.2360 as the numbers increase. This is the basis for the 23.6% retracement.
1.618 refers to the Golden Ratio or Golden Mean, also called Phi. The inverse of 1.618 is 0.618. These ratios can be found throughout nature, architecture, art and biology.
Phi or 0.618034 to 1 is the mathematical basis for the shape of playing cards, the Parthenon, sunflowers, snail shells, Greek vases and the spiral galaxies of outer space.
The Greeks based much of their art and architecture upon this proportion. They called it the golden mean.
Retracement levels alert traders or investors of a potential trend reversal, resistance or support levels. Retracements are based on the prior move. A bounce is expected to retrace a portion of the prior decline, while a correction is expected to retrace a portion of the prior advance. Once a pullback starts, chartists can identify specific Fibonacci retracement levels for monitoring. As the correction approaches these retracements, chartists should become more alert for a potential reversal.
Fibonacci isn’t something I would expect you to use for everyday analysis however I find it one of the most fascinating areas of analysis due to the universal connection between its numbers.
Don’t worry about company names, brands will often change as the grow and with that comes new names. Here are a few examples of famous brands and their original trading names :-
Google was called Backrub
Pepsi was called Brad’s Drink
eBay was called AuctionWeb
And my personal favorite……… Subway was called Pete’s Super Submarines
This is a real estate investment trust that specialises in converting properties to convenience store formats for a number of the leading groups, including the Co-op. This is a strong growing area, as reflected in the recent bid by Tesco for Booker, and Sainsbury’s interest in Nisa. I believe the shares will give a good return, both in respect of growth, and also they offer an attractive yield, currently paying 5.7%. As a real estate investment trust they are obliged to distribute 90% of their rental income to shareholders.
Fulcrum Utility Services
I would also recommend a new smaller company, Fulcrum Utility Services, which was spun off from National Grid some time ago. It provides utility infrastructure services for gas pipeline networks and other assets. Over the last year the company has been broadening its areas of operation, in particular to move more into the electric sector in addition to its historic focus which has been the gas market. They see this as a good bracket to move into, but also expect it to increase their gas customers as many operators who cover both sectors favour suppliers such as Fulcrum who can do both. It is also attractive on yield grounds with forecast dividends suggesting a yield of above 4%.
Thank you for taking the time to read my newsletter!
Enjoy your weekend.
Karl Townsend ACSI
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Arnold Stansby & Co. Limited
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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.
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