Investment Blogs

Please see below this week’s market commentary update article from Brewin Dolphin, which was received late yesterday afternoon:

Please continue to check our Blog content for advice and planning issues and the latest investment, markets and economic updates from leading investment houses.

Please keep safe and healthy.

Carl Mitchell – Dip PFS

IFA and Paraplanner

23/09/2020

Please see below weekly market commentary received from Brooks Macdonald yesterday afternoon following developments in the ongoing Covid-19 crisis.

• Equity market sentiment is rattled by rising European coronavirus cases and expected restrictions
• The nomination of a new US Supreme Court Justice ahead of the US election may create a substantial conservative skew in the court
• Flash Purchasing Managers Index figures on Wednesday will be closely watched for any change in sentiment around the economic outlook

Equity market sentiment is rattled by rising European coronavirus cases and expected restrictions

Markets in Asia and Europe are selling off this morning as coronavirus cases in Europe continue to rise, prompting expectations of further restrictions being announced in the coming days.

European governments are again stuck between desires for a change in the viral trajectory but also no further national lockdowns. An increase in hospitalisations within France and Spain, thought to be a few weeks ahead of the UK, has concerned UK policymakers who are wary of the backlash after being seen as ‘behind the curve’ in March. LBC radio reported that London Mayor Sadiq Khan may recommend tightening rules for London as soon as today with further nationwide restrictions possible over the coming days. Further afield, South Korea will be trialling a tightening of social distancing rules for a fortnight at the end of the month to reduce the level of carriers which is a similar principle to the ‘circuit breaker’ being discussed by UK Prime Minister Boris Johnson.

The nomination of a new US Supreme Court Justice ahead of the US election may create a substantial conservative skew in the court

Whilst the focus in the US has been the Presidential Race, with the death of Justice Ginsburg, the nomination of a new Justice is taking centre stage. With the Senate being aligned to the Republicans, it is highly likely that Donald Trump’s eventual nominee will have a vote on the floor of the Senate before the election. Should this be successful, the US Supreme Court will have a 6 to 3 skew towards conservative/Republican Justices. Given the Supreme Court is used, in part, to set gradations to controversial laws around abortion and gun law, any skew will have a lasting impact regardless of who wins the Presidential election in November. Whilst arguably there was a precedent set in 2016 to wait for the new President to choose a Justice, with the White House and Senate aligned in 2020 this is unlikely to be repeated.

Flash Purchasing Managers Index figures on Wednesday will be closely watched for any change in sentiment around the economic outlook

The flash Purchasing Managers Index (PMI) on Wednesday will be an important temperature check of business sentiment as economic and social restrictions mount in Europe. With restrictions ramping up over the last fortnight it may be too soon to see this feed into the data. Forward looking data such as the PMIs is particularly sensitive to shorter term changes in sentiment, therefore any uncertainty around the future of European economic growth under new restrictions will likely feed through to that dataset in the next month.

Please continue to visit our blog for the latest information on financial matters and the markets.

Please stay safe in these uncertain times.

Chloe

22/09/2020

Please see the below article received by AJ Bell late yesterday:

A report from BP suggests demand for crude has already peaked.

Oil major BP’s (BP.) latest annual World Energy Outlook, released in conjunction with a three-day presentation from chief executive Bernard Looney and team outlining the oil major’s new strategy, offers three scenarios for demand for crude oil in 2050.

They range from 89 million barrels a day, barely 10% below 2019’s peak of 98 million as nothing much changes politically or socially, all the way down to 24 million, as the world goes carbon neutral.

The possibility that oil demand could go down by three-quarters between now and 2050 means Looney’s desire to prepare BP for a zero-carbon world is perfectly understandable.

It also leaves investors with a decision to make. Those willing to select individual securities on their own must now decide whether to place their faith in Looney and the company’s ability to reinvent itself. Its plan is made all the more complicated by weak oil prices depriving BP of vital cash flow, just when it needs to invest heavily in both its new strategy and the maximisation of value from hydrocarbon assets where there are already considerable sunk costs.

Those who wish to avoid the rough and tumble of stock-specific risk and prefer to use active or passive funds must still assess their potential for exposure to BP and other oil stocks.

This is particularly the case in the UK, where analysts’ consensus forecasts for 2021 assume that BP and Royal Dutch Shell (RDSB) will generate between them 7% of total FTSE 100 profits and 11% of the headline index’s total dividend pay-out.

WANING WEIGHTING

Whether such forecasts are reliable, too optimistic or too conservative will be especially important for investors in FTSE 100 tracker funds, as they indirectly own BP and Shell whether they like it or not.

For those investors who do not wish to embrace oil stocks, for financial or philosophical reasons (or both), it is worth considering the following:

• From a dividend perspective, the oil majors’ combined forecast pay-out represents its lowest portion of the FTSE 100 total since 2005;
• From an earnings perspective, BP and Shell’s contribution is way lower than it was in 2005, when they generated one-third of FTSE 100 profits between them.

These numbers at least explain why oil shares are doing so badly. The FTSE All-Share Oil & Gas Producers sector is now worth just 7.1% of the FTSE All-Share itself, a fraction above 1992’s modern-day low of 6.3% and almost identical to 1998’s cyclical trough of 7.0%.

Those dates are interesting because BP cut its dividend in 1992 (just as it has done this year), while crude oil prices dipped briefly below $10 a barrel in late 1998, just as they did this spring.

CRUDE CALCULATIONS

On a global basis, oil shares’ weighting in the S&P Global 1200 index and America’s S&P 500 benchmark stands at record lows of 2.9% and 2.2% respectively. The S&P 1200 Energy index’s valuation of $1.3 trillion means the industry currently carries a lower price tag than Microsoft and is worth barely four times more than Tesla, whose current car volume sales are tiny, at least for now, at around 100,000 units per quarter.

Investors with exposure to individual oil firms, specialist energy funds (be they active or passive) or geographic stock indices with a hefty exposure to oil companies (which would include the FTSE 100) must now decide if this marked bout of oil stock underperformance is merely cyclical or the result of something more structural.

If BP’s zero-carbon scenario holds true, even the most wilfully contrarian investor may struggle to make a case for exposure to oil stocks, at least until the earnings mix begins to truly slant away from hydrocarbons, as it is hard to divine what could be a catalyst for higher oil prices and thus higher earnings.

Yet if the ‘no change’ case pans out, owing to political or social inertia, the picture could be very different. Demand could recover in a post-pandemic world and do so just as oil majors cut investment, US shale output falls and global oil rig activity is down more than 50% year-on-year.

That could make for a surprise cyclical comeback from an industry that financial markets seem to be writing off – the FTSE All-Share Oil & Gas Producers index rose 50% in 2016, the year after BP and Shell last made a combined loss, just as they are forecast to do in 2020.

Whilst hard to predict, as you can see from the above article, the suggestion is that oil demand could go down by three-quarters between now and 2050 as the world strives to be ‘zero-carbon’. The lockdowns imposed by governments due to the pandemic have shifted peoples focus more than ever to a ‘green’ ‘zero-carbon’ world.

Please continue to look out for our regular blog posts.

Andrew Lloyd

21/09/2020

Please see article below from AJ Bell received 17/09/2020.

High yielding trusts: are the rewards worth the risks?

Investors hungry for income could find some opportunities once they’ve fully understand the business models of alternative investment trusts

Thursday 17 Sep 2020 Author: Hannah Smith

 Investment Trusts

Many investment trusts offer high yields which might tempt some investors in the current environment. But are they more trouble than they’re worth?

Some may be worth pursuing, while others can have complex investment models and come with underappreciated risks.

HOW MUCH CAN YOU GET?

Data from the Association of Investment Companies implies there are numerous investment trusts offering yields of 8% to 12% or even more, but the areas in which they invest are quite esoteric.

Doric Nimrod Air Two (DNA2) and Doric Nimrod Air Three (DNA3), for example, are trusts which buy aircraft and then lease them to airlines, while Tufton Oceanic Assets (SHIP) leases ships.

While investing in the Doric funds is really a binary bet on the survival of its main customer, state-owned airline Emirates, the Tufton fund has a more diversified portfolio of ships, although it has been affected by changing supply and demand and disrupted global trade due to Covid-19.

Miton fund manager Nick Greenwood owns Tufton in his portfolios, benefiting from its 8.6% yield. He says the assets have ‘residual value’ as scrap steel even if their value depreciates.

SPECIALITY FINANCE

Many high-yielding trusts borrow money to increase the pool of cash available to invest (known as ‘gearing’) and then use that money to invest in other people’s or companies’ debt. This web of involvement in the debt space may not appeal to risk-averse investors.

Volta Finance (VTA) is involved in corporate credit, mortgages, and auto and student loans, while Honeycomb (HONY) focuses on asset-backed consumer, property and small business loans.

Blackstone/GSO Loan Financing (BGLP) and Volta are among those trusts investing in collateralised loan obligations (CLOs), a single security backed by a pool of debt. Investors get geared exposure to leveraged loans which amplifies the risks.

Packaged loans played a key role in the events that caused the global financial crisis, so they will sound unpalatably risky for a lot of investors. But Sachin Saggar, an analyst at Stifel, says CLOs held up quite well throughout past crises.

‘If you look at how CLOs behaved in 2008, they actually came through quite well. They ultimately recovered all their losses plus more. But what you get with them is more volatility and risk.’

Greenwood at Miton says he is ‘nervous’ about some alternative lenders which have relatively new and untested business models. ‘Some of them seem to have run into problems lending money to people that decided they didn’t want to pay it back in benign conditions, so I wonder what’s going to happen in tougher conditions,’ he comments.

FURTHER USES OF GEARING

More mainstream trusts that offer high yields are Aberdeen Standard Equity Income (ASEI), Merchants Trust (MRCH) and Chelverton UK Dividend (SDV), in the UK Equity Income sector; and Acorn Income (AIF), in the UK Equity & Bond Income sector.

These trusts can pay high yields because of their use of gearing. Greenwood comments: ‘If a trust draws draw down some debt, they can actually pay out a much higher yield using the investment trust capital structure, but obviously that speeds up the rise or fall in the net asset value. You should always look at the leverage.’

HIGH YIELDS FROM PROPERTY

There are also property funds in the list of high-yielding trusts, such as Regional REIT (RGL), which was, until recently, yielding more than 11% through investing in commercial property such as offices and industrial building outside the M25.

Unfortunately, last month it reduced its quarterly dividend by 21% after adopting a more conservative approach during the pandemic. That still leaves it on an 8.9% yield based on guidance for dividends for the rest of the year and the ones already declared.

Real Estate Credit Investments (RECI), Starwood European Real Estate Finance (SWEF), and ICG-Longbow Senior Secured UK Property Debt Investments (LBOW) also feature among the highest-yielding trusts. They provide loans to commercial and residential assets at low loan-to-values.

Saggar notes it is currently hard to value property assets, so these trusts have traded down, however, he thinks their yields ‘seem relatively robust at this point’.

‘NOT A FREE LUNCH’

So how reliable have these funds been in terms of the track record of their yields, and how sustainable are these sky-high payouts?

Some trusts suspended or reduced their dividend payments in Q1 but have since restarted them, explains Saggar.

In a recent note on CLO funds, Stifel said there were ‘good reasons’ for funds to amend their dividend policies, namely the impact of coronavirus, but that many were trying to sustain payouts. ‘We highlight Blackstone and Volta as being the most cognisant of shareholders’ desire to continue to receive an income,’ it said.

In July, Stifel said Doric Nimrod should be able to keep up 20%+ yields on its funds for longer than expected, despite an uncertain environment.

Payouts overall have been relatively stable across the sector, says Saggar, although discounts to net asset value have widened on some trusts.

‘There are some bargains to be had because people have got rather nervous about some of these very high-yielding trusts, so there are some discounts around,’ notes Greenwood. However, the reason for wider discounts is that investors perceive rising risk, and this is something to bear in mind when looking for high yields.

‘If something’s yielding 8%-plus, there’s a reason why and it’s not without risk. It’s not like it’s a free lunch,’ adds Saggar.

So does holding a high-yielding trust mean investors are signing up for a wild ride? Not necessarily.

‘There is an argument that the high yield will actually smooth the volatility in the share price,’ says Greenwood. ‘But when you get events like the global financial crisis and the Covid-19 crisis, you’re reminded that anything can happen in the short term.’

Please continue to check back for our latest updates and blog posts.

Charlotte Ennis

18/09/2020