Weekly Newsletter No. 17 04/08/2017

Good Afternoon,

 

 

The UK

This week the FTSE 100 has rallied to its highest level in recent times and is now trading around 7500. Sentiment has been affected by several factors including FX markets, commodity prices and the Bank of England’s Monetary Policy Committee (MPC).

News from the Bank of England;

With the absence of hawkish former policymaker Kristin Forbes, the BoE’s Monetary Policy Committee voted 6-2 in favour of keeping rates unchanged. Six policymakers concluded that the UK economy is too sluggish to handle higher borrowing costs. Two, though, argued that inflation needed to be tackled.

The vote dashed speculation that the Bank might have delivered a shock interest rate rise.

The Bank also downgraded its forecast for economic and wage growth, as the uncertainty created by Brexit starts to hit the economy.

  • 2017: Growth revised down to 1.7%, from 1.9%
  • 2018: Growth revised down to 1.6%, from 1.7%

 

FX Markets

The above led to a dive in the value of GBP, dropping 0.8pc against the dollar Thursday afternoon following the Bank of England’s decision to hold interest rates at 0.25pc and downgrading of the growth forecast.

Governor Mark Carney said in his press conference that some tightening of monetary policy would be necessary in the next three years and that two hikes in that period is likely to be insufficient. However for now it appears they continue to kick the can further down the road.

As is to be expected internationally-focused FTSE 100 was buoyed by sterling’s fall, moving inversely to the FX market due to its foreign exposure. The market finished yesterday session 63.34 points higher at 7474.77, a 0.85pc rise.

 

Commodities

Last week I was lucky enough to join BlackRock’s commodity strategist, Alex Foster, to share some ideas over lunch. I discovered plenty of interesting facts as well as some sound investment opportunities which I will share with you.

Firstly Blackrock’s natural resources team believe we are still at the beginning of a cyclical recovery in the sector.

Even though a lot of the listed companies in the commodity sector are trading back around where they were prior to the rout that ensued at the end of 2015 there is still plenty of upside available. The reason for this is the simple fact that when times were tough many companies went through huge restructuring/deleveraging exercises meaning the balance sheets are now heathier than ever.

With reporting season upon us we discussed two stocks that they believe will deliver positive updates.

Rio Tinto; One of the world’s largest metal and mining companies, they hold the best quality assets and due to their scale can deliver at the lowest production cost (higher margins).

Glencore; Glencore is a copper and Zinc miner, they were one of the biggest losers little over a year ago with their share price dropping from over £4 to 60p in a matter of days. The concern was that with dropping commodity prices they would not be able to service their huge debt. The restructuring at Glencore has been quite remarkable and they have now risen back to around £3.3. With the tightening of supply in the copper and zinc in the market prices should start to reflect this.

Commodity companies are notoriously volatile so an option that comes to my mind is to use an investment trust and diversify the risk whilst still benefiting from the underlying.

Here are two options that I find attractive;

 

Blackrock Commodities Income Trust;

The funds objective is to achieve an annual dividend target and, over the long term, capital growth by investing primarily in securities of companies operating in the mining and energy sector. Dividend yield 5.7%. The funds top 10 holdings are below;

 

1 First Quantum Minerals
2 Royal Dutch Shell ‘B’
3 ExxonMobil
4 Rio Tinto
5 Glencore
6 BHP Billiton
7 BP
8 Newcrest Mining
9 ANADARKO PETROLEUM CORP
10 Enbridge Income Fund Trust

 

Blackrock World Mining Investment Trust

The funds objective is to provide a diversified investment in mining and metal assets worldwide, actively managed with the objective of maximizing total returns. While the policy is to invest principally in quoted securities, the Company’s investment policy includes investing in royalties derived from the production of metals and minerals, as well as physical metals. Up to 10% of gross assets may be held in physical metals and up to 20% may be invested in unquoted investments. Dividend yield 4.4%. The funds top 10 holdings are below;

 

1 RIO TINTO PLC
2 FIRST QUANTUM MINERALS
3 GLENCORE PLC
4 BHP BILLITON PLC
5 VALE SA
6 LUNDIN MINING CORP
7 SOCIEDAD MINERA CERRO VERDE SA
8 TECK RESOURCES LTD
9 NEWMONT MINING CORP
10 AVANCO RESOURCES LTD

 

Gold

A section of our meeting focused on gold and the changes in the market affecting today’s price. Gold has often been a saviour in dark times. It acts as an insurance policy against uncertainty whilst still having general supply/demand fluctuations in price as with anything in the markets. I think it is always worth having a small exposure to a strong gold based business for that reason.

One company I have been fond of in this space is;

Randgold Resources

On Thursday Randgold (FTSE 100 company) reported strong second-quarter results, which it said has positioned them at the top end of its 2017 production guidance. The company said pretax profit for the second quarter ended June 30 rose to $150.2 million from $80.3 million a year earlier. Revenue rose 22% to $336.8 million from $276.8 million. Numis updated their broker rating and reiterated “Buy” with a price target of £90.00 (current shares price £73)

Randgold’s exploration strategy is based on the discovery of world class orebodies within the major greenstone belts of West and Central Africa.

 

rand

 

Interesting facts about gold;

Gold has only ever underperformed the market during a recession once, which was in 1980 where gold fell 46% against a market correction of 27%. Taking an average from the data I have on 10 further market corrections gold has appreciated in value by an average of 17% vs an average fall of 26% in the S&P during a correction.

If you could collect all the “documented” gold from around the world how much would you have and what would that look like? A figure that is widely used by investors comes from Thomson Reuters GFMS, which produces an annual gold survey.

Their latest figure for all the gold in the world is 171,300 tonnes

So, what would that look like?  Well if we melted down the entire global supply it would be just enough to fill two Olympic sized swimming pools, or 3 double decker busses. I was surprised by this fact and had to check the internet to make sure this wasn’t absolute nonsense. Figures do vary slightly but I will take Reuters and BlackRock’s word for it this time.

 

Oil

Oil futures edged lower Monday with traders likely taking some profits after a solid run higher that provided oil with its biggest monthly rise of the year.

 

crude

Crude oil rose 8.6% last week, its biggest weekly jump since early December, as prices got a lift from OPEC members renewed production-curb commitments as well as the uncertainty in Venezuela ahead of last weekend’s vote, declining U.S. oil inventories, a weaker U.S. dollar and other factors, including cutbacks in capital spending by U.S. oil producers.

I’m still bullish on BP in this sector. They have had a good first half of 2017 with results this week confirming this. On Tuesday the energy giant announced it had returned to profit in the second quarter helped by firmer oil prices and lower charges linked to the Gulf of Mexico spill disaster.

Net profit stood at $144m (£109m) in the three months to June 30 compared with a loss after tax of $1.4bn in the second quarter of 2016, BP said in a results statement.

Chief executive Bob Dudley said BP would continue with a “tight focus on costs, efficiency and discipline in capital spending”.

 

bp

BP is my choice for a more defensive portfolio as it can soften any adverse moves and will compensate with a healthy dividend.

 

Company Specific news

Retailer Next soared 9.7pc after reporting a sales boost from a warmer summer. Next have been a company I have included in my recommendations quite a few times over the last couple of months but I have to admit they have been a slow burner… until this week that is.

The results revealed that strong online and catalogue Directory sales and June and July’s summer sun delivered a sales boost.

Overall, quarterly sales were up 0.7 per cent, with Directory sales climbing 11.4 per cent in the three months to 29 July, helping to mitigate a 7.4 per cent drop in retail sales.

 

Share analysis

 

A couple of weeks ago I wrote about investor phycology, this week I will look at how you can see these themes in charts.

The Elliott Wave Principle suggests that collective investor psychology, or crowd phycology, moves between optimism and pessimism in natural sequences. These mood swings create patterns of evidenced in the price movements of markets.

In Elliott’s model, market prices alternate between an impulsive, or motive phase, and a corrective phase.

elli

 

The most basic pattern is the motive wave, which is subdivided into five waves and usually labeled by technicians with numbers. Three of those waves (1, 3 and 5) move in the direction of the underlying trend, or impulse, while the two intervening waves (2 and 4) act as countertrend interruptions, or retracements, of the motive wave.

This is a part of investing/analysis that I find very interesting, it all links back to Fibonacci. Leonardo Fibonacci was a mathematician from the Pisa in Italy and is considered to be the most talented Western mathematician of the middle ages. I will go into more detail on the astounding Fibonacci numbers next week.

 

 

Recommendations  

 

ITV

 

As with Next Plc, ITV has been a slow burner thus far however I am still bullish on their prospects. Now appears the right moment to buy ITV as advertising revenue starts to improve and June should have marked the low point as year-on-year comparisons get easier. Morgan Stanley announced a few weeks ago it was upgrading ITV, giving them a buy rating and 230p target. Last Friday Goldman Sachs reiterated its ‘buy’ rating was maintained on ITV’s shares — which are also liked for their M&A potential — target price set at 228p. ITV have a dividend yield of 3.6% and a consistent history or paying special dividends ranging between 5 & 10 pence per share (altogether a yield of around 6.5%). ITV have also just announced the imminent arrival of Carolyn McCall. The current EasyJet CEO will be taking over the reins starting in January 2018.

 

 

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

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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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