Investment Blogs

Please see the below update posted last week by 2 of Jupiter’s Japanese Equity fund managers.

Dan Carter and Mitesh Patel discuss the increasing frictions between China and other developed nations, as Japan seeks to limit foreign influence on companies and the US rhetoric toughens. What are the implications for globalisation and supply chains, which are already showing fragility as a result of Covid-19?

In October last year we focused upon Japan’s Foreign Exchange and Free Trade Act (FEFTA), after planned revisions to this seemingly arcane piece of regulation sparked fears of a chilling of the increasingly febrile activist scene, setting back Japan’s progress to better management and a better functioning market. In late April 2020, however, the Japanese Ministry of Finance (MoF) clarified the revision to the Act and explained that almost all investors would be excluded from the most restrictive requirements such as seeking pre-authorisation for stock buying.

In its announcement, the MoF considerably assuaged concerns that the revision was a conspiracy to restrain meddlesome foreign activists, but in doing so confirmed the official narrative: that this legislation is designed to regulate state-directed investment into Japanese companies operating in strategic sectors. Whilst many investors are wiping their brows that the conspiracy theories have been (almost) put to bed, it seems to us that the implication of the official narrative is likely to be a power greater to investors in the mid to longer term.

An uncomfortable reality

The revised FEFTA flashes the spotlight on an uncomfortable reality. As it grows in size and influence, China’s aim of being global number one becomes ever more concerning for the US and its allies such as Japan. The friction caused as these national strategic ambitions grind against one another has already begun to affect the investment landscape – through curbs on FDI such as FEFTA – and will continue to do so into the longer term. But how?

One theme could be the de-globalisation of manufacturing, also known as re-shoring. In its Covid-19 recovery package the Japanese government announced that ¥244bn (c.$2.2bn) would be earmarked for companies wishing to bring production back to Japan from China. The pandemic has highlighted the fragility of global supply chains but also provided cover for a shot to be fired in this new cold war. We have previously written about the trade interdependence between China and Japan.

If cross border supply chains do begin to become untangled then clearly Japan will need to make more of its own machinery, textiles and chemicals. As investors we have sought to avoid manufacturers of basic materials and that will not change, but there may be producers of more value-added intermediate products which warrant attention. If reshoring does gather pace, Japan’s continually dwindling labour force suggests that factory automation companies, engines of efficiency such as Daifuku (which is held in the strategy), will be relied upon increasingly heavily. It is not all good news though; a repatriation of Japanese production would also mean a concentration of currency exposure once again. For too long Japanese manufacturers’ profits were tied closely (inversely) to the yen, globalisation at least allowed these bindings to be loosened and a reversal would be unwelcome.

Technology as a battleground

Perhaps the primary battleground is likely to be technology. The Huawei affair has highlighted the extent to which Chinese technology has become relied upon internationally. Similarly, China continues to need overseas companies, such as the semiconductor production equipment makers, to facilitate the build-out of its own strategically important tech industries. If Chinese ambitions continue to jar with those of the US, as well as Japan and Europe, the result could be increased technological self-sufficiency. As investors we need to carefully weigh up the opportunities and threats of this eventuality – a technological arms race will only make the possession of real technology leadership, enjoyed by companies like Lasertec and Tokyo Electron, more valuable, but a deeper fissure between geopolitical blocs could restrict addressable markets.

As investors we are hypervigilant of the temptation to overreach – we are not setting up any heroic anti-consensus positions with the above geo-strategic pondering. Rather the competing ambitions of the world’s major players create a reality in which our investee companies must operate – just as economic, social and environmental realities do – and it would be remiss of us ignore this. For so long the world order has been set, roles assumed, and relationships taken for granted. As this order shifts it will be important for investors, ourselves included, to factor these new realities into our decision making.

Jupiter is a well-established fund manager with an increasing presence in Europe and Asia. The views from fund managers provide a good insight into the current market issues.

Andrew Lloyd

15/06/2020

Please see the below market update from Brooks Macdonald received today.

BM Daily Briefing: Worst day for equity markets since March

What has happened?

Yesterday the equity markets had their worst day since March as the Federal Reserve’s (Fed) grim economic projections combined with fears over a second wave. The US index fell by almost 6% with a lot of the sell-off occurring after European markets had gone home, European indices are more range bound today with the US futures moving off their lows.              

Second wave fears ignite

The source of these second wave fears is the United States with California, Texas, Florida and Arizona all highlighted. All of these states have seen growing cases in the last fortnight and stoke fears that the rapid reopening in the United States is catalysing a resurgence of the infection. The total cases per million in theses states is similar to the levels we have seen in Italy and France which were hit hard by the pandemic so markets are wary not only of the growth rates but absolute numbers as well. Arizona has the highest case growth rate amongst US states with an average of 4.6% over the last 7 days. The resurgence raises two questions for the global economy, how fast is too fast to reopen an economy and what would these numbers look like if they did not occur in some of the warmest states in the US. The markets had little appetite to ponder either topic in detail and sold off rapidly and progressively as Thursday continued.

Will we see the US return to lockdown?

US Treasury Secretary Steven Mnuchin garnered a lot of headlines with his statement that “We can’t shut down the economy again. I think we’ve learned that if you shut down the economy, you’re going to create more damage.” Globally the economic impact of lockdowns has become a more important factor in decision making but this is yet to be tested with a true second wave. There is talk in Houston of reopening an emergency stadium hospital to accommodate hospital overflow. It may prove difficult for state governors to stick to the Federal reopening script if hospital capacity is under immense strain.

What does Brooks Macdonald think?

Our two big risks have been that of a second wave and US/China escalation. The data from the US certainly raises the risks of a second wave and makes progress towards a vaccine even more important. As this risk escalates expect markets to pay even closer attention to the successes in the Moderna and Oxford trials.

A good brief commentary from Brooks Macdonald on yesterdays market drops. As echoed through our recent posts, we do expect this volatility to continue. Keep checking back for regular up to date blog posts throughout this time.

Andrew Lloyd

12/06/2020

Please see the below article posted by AJ Bell on 11/06/2020.

What the pandemic meant for moving house and what could be in store

The coronavirus crisis has had an unprecedented impact on the UK property market, as viewings and sales ground to a halt and the market stalled during lockdown.

Activity is now starting to resume, but at a slow pace and with a number of big changes that househunters and sellers will have to adapt to. So what does that means if you’re trying to buy a property or sell your pad?

What Happened During Lockdown?

The property market effectively stopped during lockdown. No-one was allowed to carry out viewings of properties as it would have breached lockdown rules. Some estate agents came up with video tours of houses, but who was likely to make the biggest purchase of their life just based on a video?

What’s more, removal companies were not meant to operate, so actually moving house was tricky – although there were some exceptions if you were moving into an empty property.

What’s more, during this time mortgage companies started pulling their products. It meant that only those who had the highest loan-to-value, so the largest deposits, were able to get new mortgages.

Mortgage companies said they were overwhelmed with work and facing staff shortages so needed to reduce new customer numbers, meaning they restricted their new loans to just the highest-quality ones – so those people borrowing relatively less compared to the value of the property.

What About Now?

Viewings can happen in properties now, so long as they stick to strict guidance. Estate agents are advised to offer virtual viewings as a first step, which is either a video tour where the estate agent is live in the house, or a pre-recorded video of a walk-through of the property.

The Government advises that in-person viewings should only be carried out by buyers who are already strongly considering putting an offer in.

In-person viewings will have to follow social distancing guidelines and it’s advised that the homeowners leave the property while the viewing happens. Afterwards the house should be cleaned.

Two big changes are that open houses aren’t allowed and estate agents are not allowed to drive potential buyers to viewings – which could present some problems if you’re searching outside your home area and don’t have your own transport.

If you were ready to move before the crisis struck you can now also move, as removal companies have resumed their work. The advice is to do as much of the packing yourself as possible, and when moving day arrives make sure the movers can wash their hands and open internal doors for them so they don’t have to.

If anyone in the household has coronavirus symptoms or is self-isolating then the move should be delayed.

The mortgage market has also improved, with providers offering more products now. This means if you have a smaller deposit you’ll likely have more options now than you would have done a month or so ago.

What About House Prices?

You’d need a crystal ball to be able to tell what’s going to happen to house prices. The Government has an official measure of house prices, which tracks the direction their moving in.

However, it has suspended the measure as it says there isn’t enough reliable data to generate the figures – this is because so few house moves happened in March and April and the market hasn’t fully resumed yet, so the data would be based on a small sample size.

Nationwide, which has data of its customers (so only includes mortgaged purchases and no cash-buyers), says house prices fell 1.7% in May when compared to April – representing the largest fall in its data in 11 years. However, the sample size of this is likely to be even smaller than usual, so it’s difficult to know if it’s a reliable measure.

Stamp Duty Refund Deadline Extended

People who have paid higher stamp duty after buying a new property before selling their existing one will now have longer to sell their original home in order to claim a stamp duty refund.

Homeowners who buy their next property before offloading their current home pay additional stamp duty, as though they are buying a second property.

This means they’ll pay a three percentage point surcharge on the purchase, which can easily run into the tens of thousands of pounds. Ordinarily if they sell their original property within three years they can reclaim the additional stamp duty from HMRC.

However, the Government has now extended this three-year period if your home sale has been affected by the Covid-19 crisis.

It means anyone who bought their home from 1 January 2017 onwards will have longer than three years to sell it and get the refund, assuming they can prove the coronavirus crisis was the reason for the delay in the sale. Find out more information here. 

The logic behind house prices falls is that fewer people might move as their income is more precarious and fears about the wider economy mean people are less likely to pay top whack for a property.

In contrast, the property search portal RightMove (RMV) said it had its busiest ever day towards the end of May, with 6m visits to the site – up 18% on the same time the previous year. The site also said there was an increase in calls and emails to estate agents – showing that at least some of the demand isn’t just bored people on lockdown browsing property listings.

There’s some expectation that with people having spent more time in their homes they’ve realised they need to upsize or get a bigger garden, for example, or they want to live in a new area. There may also be some pent-up demand from the market having halted for seven weeks in lockdown.

The Pandemic ground the housing market to an unprecedented halt causing issues for the industry and people looking to buy or sell their property! As the article explains, activity is starting to resume now, albeit socially distant activity. 

If you are looking to move, make sure you keep up to date with developments in the housing market and continue to follow government guidelines.

Andrew Lloyd

12/06/2020

Brewin Dolphin emailed a market update on Tuesday evening (09/06/2020) as below:

As a Discretionary Fund Manager Brewin Dolphin offer a range of Managed Portfolio Services in the UK.  We really believe the best way to get a handle on the fast-changing markets at this time, is by taking on a variety of commentary and consensus views from a good variety of different high-quality fund managers.

This has always been our approach even pre-Pandemic. Whilst the themes are all generally similar, its useful to get a wide range of views.

Andrew Lloyd

10/06/2020

Please see the below update received by AJ Bell yesterday afternoon (04/05/2020).

Are we through the worst of the crisis?

May’s industrial surveys show a recovery from April’s record lows.

While it’s too early to say the economic recovery is under way, it’s possible we have seen the worst readings in terms of industrial confidence in Europe and Asia.

This week analytics and information firm IHS Markit published its widely-followed industrial purchasing managers index (PMI) surveys for China, Japan, the UK and several European companies, as well as the composite index for the Eurozone.

Mostly Rising

The reading for China, which entered the coronavirus crisis first and after locking down its economy almost overnight has been able to re-start activity faster than most, showed the quickest rate of recovery in manufacturing for nine years.

After a record fall to 40 in February, the manufacturing PMI rose to 50.7 in May, signalling that the sector is once again expanding (a reading above 50 means expansion, below 50 means contraction).

The UK PMI survey registered a rebound from April’s record low of 32.6 to 40.7, still below the key 50 level and the seventh lowest level in the survey’s history, but as IHS Markit Director Ron Dobson observed, ‘the rate of contraction has eased considerably since April, meaning the worst of the production downturn may be behind us’.

Surveys in France and Germany showed a similar recovery, from 31.5 and 34.5 in April to 40.6 and 36.8 respectively, although in France demand continued to decline in May while in Germany employment levels fell further, impacting the overall reading.

Japan was the only major economy to see a continued decline, with May’s reading of 38.4 the lowest since the end of the global financial crisis in March 2009. Meanwhile the preliminary US reading for May was 39.8 against 36.1 in April, although with concerns resurfacing over a trade war with China the reading could struggle in coming months.

An Uphill Battle

As far as the UK goes, while there is scope for optimism we need to be realistic. Output, new orders and employment fall at some of the fastest rates in the survey’s 28 year history. New orders and export orders for consumer, intermediate and investment goods were particularly weak.

Some companies expect output to rise over the next 12 months, and some have seen new orders since clients started to reopen their businesses, but it is patchy. Also inflation is rising due to supply chain disruptions, although part of this was passed on.

Finally the threat of a ‘no deal’ Brexit can’t be dismissed. We may have seen the worst of the indicators for the time being, but it could be a very long, drawn-out recovery.

As you can see from this blog and our other recent posts, the signs are pointing to a recovery, but this recovery may take time, and we are not in the clear yet, the volatility will continue.

Keep your eye out here for our regular market commentary and updates.

Andrew Lloyd

05/06/2020

Please see below an investment article from Russ Mould – Investment Director at AJ Bell. This was posted on Friday, 29^th May 2020.

What to do as companies dash for cash

April gave equity markets a taste of corporates’ need for cash, as listed firms tapped shareholders for £3.3 billion in March – according to London Stock Exchange data – but Compass and Whitbread moving to raise £3 billion between them in the space of a few days in late May takes the figures to a different level, as firms continue to adjust to what the viral outbreak and lockdown mean for their business. The question now is whether the likely rash of fund raisings is a threat, an opportunity or something in between for the fund managers to whom advisers and clients have entrusted their own money and UK equity exposure.

The London market has been relatively quiet so far in 2020. London Stock Exchange data shows that new flotations had raised barely £500 million by the end of April, the slowest start to a year since 2009, while secondary deals by firms that were already listed had generated some £5.6 billion.

2020 has been very quiet for new listings in the UK

Famous five

“Compass and Whitbread’s fund raisings made them the fourth and fifth FTSE 100 firms respectively to raise fresh equity this year, after Auto Trader, Carnival and Informa, and the scale of their deals suggests that the pace is about to pick up markedly across the UK equity market as a whole.”

Compass and Whitbread’s fund raisings made them the fourth and fifth FTSE 100 firms respectively to raise fresh equity this year, after Auto Trader, Carnival and Informa, and the scale of their deals suggests that the pace is about to pick up markedly across the UK equity market as a whole.

The experiences of the London market after the 2000–03 and 2007–09 recessions and bear markets would suggest that new listing activity may stay quiet, as reduced risk appetite and lower equity valuations deter would-be buyers and would-be sellers alike. The historic data does, however, show much greater activity among firms that were already listed in the wake of the bear markets and recessions, as they focused upon balance sheet repair or raising capital so they could take advantage of investment or acquisitive opportunities that arose during the downturns and emerge all the stronger – financially and strategically.

Secondary listings proliferated during the last economic and market downturn

“Outside the Big Five banks, FTSE 100 total net debt (excluding pension deficits and lease liabilities) has soared by three quarters since the Global Financial Crisis ended.”

It therefore seems logical to expect that Carnival, Informa, Auto Trader, Compass and Whitbread will be followed by others, especially if the world emerges from lockdown only slowly and the economic upturn proves gradual. Outside the Big Five banks, FTSE 100 total net debt (excluding pension deficits and lease liabilities) has soared by three quarters since the Global Financial Crisis ended.

FTSE 100 aggregate debt has soared since 2009

Dash for cash

Cutting dividend payments by some £24.8 billion for 2019 and 2020 – so far at least – is preserving some cash and cost cuts, and Government support schemes will also be helping, but many firms may be reluctant to take on fresh debt in their attempts to manage their way through the viral outbreak. Even allowing for record-low interest rates and central banks’ efforts to manipulate bond yields and compress credit spreads to make it cheaper for companies to borrow, many management teams may already feel they have enough borrowing on their balance sheet, especially given the uncertainty over future revenues, let alone profits and cash flow.

“The trend toward de-equitisation, as companies worship at the altar of the cash-light, ‘efficient’ balance sheet and buybacks outpace fund raisings, could therefore come to an end.”

The trend toward de-equitisation, as companies worship at the altar of the cash-light, ‘efficient’ balance sheet and buybacks outpace fund raisings, could therefore come to an end. Data from Bloomberg shows how the current crop of FTSE 100 firms has returned more cash to shareholders via buybacks than it has raised from them on eight occasions in the ten years since the end of the financial crises and cash-raising boom of 2009. Firms may therefore begin to favour cash buffers instead.

Buybacks have consistently outpaced fund raisings in the past decade

UK equity fund managers can therefore expect more calls upon them, especially as Compass and Whitbread may well open the floodgates, just as more firms were emboldened to cut their dividends as growing numbers of boards offered the unkindest cut of all.

Selective approach

“Whether any switch from net buybacks to net issuance actually holds back share prices and headline indices is harder to divine but substantial equity issuance did not hold back the FTSE during the economic upturn and bull market of 2003–07 or the early stages of the recovery from the financial crisis.”

Whether any switch from net buybacks to net issuance actually holds back share prices and headline indices is harder to divine. In theory, buybacks have been a big source of support for share valuations over the past few years, especially as companies have frequently been gormlessly price-insensitive buyers.

However, substantial equity issuance did not hold back the FTSE during the economic upturn and bull market of 2003–07 or during the early stages of the recovery from the financial crisis. As central banks pump out Quantitative Easing and interest rates remain anchored near zero, cash is still looking for a home and investors are still seeking out the best risk-adjusted returns that they can find.

As a result, fund managers may view rights issues or placings as a good chance to average down and top-up holdings or build new positions in firms – providing they have some liquidity to hand themselves. Those firms that are blessed with a strong competitive position and management acumen, and which have simply been blindsided by an impossible-to-predict plunge in revenues thanks to the outbreak, may well merit support from money managers. Those trying to patch-fix prior strategic or financial errors may not. But, if nothing else, lower debt means less risk and less risk can mean higher equity valuations over time, all other things being equal.

Russ has a different view on markets given his former experience as Technology Correspondent and Editor of Shares Magazine.

Please continue referring to our blog content for the latest market updates.

Carl Mitchell – Dip PFS

IFA & Paraplanner

01/06/2020