New Covid Strain: should we be worried?

Jamie Gordon
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New Covid Strain: should we be worried?

Speaking in the Commons on Monday, Health Secretary, Matt Hancock, said that the UK government had informed the WHO about a new strain of the Covid virus spreading in southeast England.

Discovered by Porton Down Laboratory scientists, the new Covid strain is not currently viewed as more serious than previously-known variants. Mr Hancock added that it is “highly unlikely” that the new strain will add complications to the NHS vaccine roll-out programme, which commenced last week.

The Health Secretary said: “Initial analysis suggests that this variant is growing faster than the existing variance. We’ve currently identified over 1,000 cases with this variant, predominantly in the south of England, although cases have been identified in nearly 60 different local authority areas and numbers are increasing rapidly.”

Health pundits are roughly in consensus thus far – mutations are expected and natural, and not necessarily something to worry about. Indeed, virologists are already considering at least 40 variants of the Covid virus, and while this strain appears to be linked with a faster spread rate, there is no suggestion that it has increased potency.

Summing it up best, BBC Medical Editor, Fergus Walsh, commented: “So what we don’t know is whether it’s associated in any way with more serious disease. And Matt Hancock said that there was no evidence of that at the moment.”

“And also the vaccines we have (and there are three that we now know have efficacy) – there’s nothing to suggest that a variant would make the vaccine less effective.”

“Nothing to panic about now but absolutely right that the geneticists at Porton Down and elsewhere do all the due diligence and look at this.”

“It sounds immediately very scary but I don’t think there’s anything to be unduly alarmed about.”

While we shouldn’t be fear-stricken following the announcement of a new Covid strain, we, equally, cannot afford to be complacent. Indeed, the WHO said that a mutation may be the result of a virus becoming better-adapted to its environment.

Once again, though, the organisation said that; “This process of selection of successful variants is called ‘viral selection’ and this is a natural process all viruses go through.”

It’s all about the Fundamentals…Don’t Confuse the Pause Button for a Full Stop

UK Investor Magazine
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It’s all about the Fundamentals…Don’t Confuse the Pause Button for a Full Stop

COVID has pushed the pause button on global growth: but it’s a pause, not a full stop. And it’s not the first time either. Lockdowns, travel bans and closed theatres were common currency a hundred years ago as well, as were closed pubs, cancelled Christmases and even a mutton headed US movement against facemasks. But back then it wasn’t COVID, it was Spanish Flu: and back then it was the protective measures themselves (much more than any direct impact of the virus) that caused a sharp decline in economic activity…just like today.

Between 1918 and 1921, when Spanish Flu was at its virulent worst, global GDP fell by 19% annually and manufacturing output slumped by 8% year on year. And since COVID broke earlier this year, GDP in the United Kingdom has fallen by 19.5% with manufacturing output in the United States down by 6.7%. The figures are strikingly similar and offer important clues for the future, especially since after 1921, with the virus in retreat and protective measures easing, the US economy grew by 5% annually, construction went into overdrive and stock markets across the planet soared to an all time high. Of course by the end of the decade the roaring twenties had crashed spectacularly on Wall Street, but that wasn’t because of the virus: that was a bunch of investment bankers in spats who unleashed more economic harm than Spanish Flu ever could.

Thankfully we don’t have bankers like that anymore (not outside the prison system anyway), which means that based on historical data we can expect a significant (and substantially pent up) growth in GDP across international markets as COVID measures are progressively relaxed. Precisely because those measures aren’t a full stop at all…they’re just a pause: storing up and then accelerating growth, like forcing down and releasing a spring: just like equivalent measures a hundred years ago.

And when that bounce back happens (likely in the near term given new vaccines are coming on stream by the week), the economies that come fastest out of the blocks will be those with the strongest fundamentals. Think German economic expansion in the decade after the devastation of the Second World War (compared with the UK’s faltering growth over the same period); and think of the spectacular economic growth in India following the global financial crash of 2008 (rogue bankers again). Over the last decade India has been consistently ranked as the fastest growing large economy on the planet, with the turbulence of the worldwide crisis merely priming it to become an economic powerhouse.

Despite the significant market turbulence left in the wake of the crash, GDP on the subcontinent grew by 8% in 2015, 8.2% in 2016 and 5.2% in 2019: far ahead of every other advanced economy in the world, catapulting India to fifth place in the global GDP league table (overtaking the former mother country for the first time). And think back to that coiled spring again: COVID protective measures might have temporarily borne down on economic growth in India (as they have elsewhere), but the country’s underlying fundamentals are still strong, and likely to emerge stronger still as measures are eased.

So what exactly are these fundamentals? Well, for a start India has the fastest growing population on the planet (forecast to overtake China and become the biggest in the world within a year): the demographic is increasingly urbanised, increasingly wealthy and increasingly technology hungry, which has fuelled an unprecedented consumer boom on the subcontinent over the last decade…and it hasn’t gone away. India is also an increasingly important technology and distribution hub for international markets, benefitting not only from logistical positioning (a bridge between Asian and Western Markets), but an enhanced technical skill base in markets such as Bangalore and Chennai…and that hasn’t gone away either. Add to that a raft of measures introduced by Prime Minister Modi’s Government to improve transparency and competitiveness across capital and financial markets and it’s hard to imagine the spring being kept down much longer. 

Suchit Punnose is Founder and CEO of Red Ribbon Asset Management,which has been investing in Indian business throughout that explosive decade of growth: “Our success as a company has always been inextricably bound up with India’s emergence as a leading economy on the world stage. Seismic demographic changes on the subcontinent have opened up increased investment opportunities, driven forward in turn by an expansion in capital flows between the United Kingdom and India. I’m sure that’s a trend that will continue in the future.”

So don’t confuse that pause button for a full stop…history has clear pointers for where we’re heading, and for the future it’s all about fundamentals.

Schroder AsiaPacific cuts dividend by 17.5%

Jamie Gordon
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Schroder AsiaPacific cuts dividend by 17.5%

Setting out what has been a challenging and resilient year of trading, Schroder AsiaPacific Fund (LON:SDP) Chairman, Nicholas Smith, walked investors through the fund’s 2020 results and dividend payments.

In what will be Mr Smith’s final year at the helm, he stated that the fund’s NAV produced a positive NAV return of 17.7%, outperforming its benchmark of 12.3%.

Meanwhile, having started the financial period between 435p and 440p, the company’s share price finished the year to September 30 at 510.00p a share, up 19.7%. Likewise, having fallen as low as 348.00p in mid-March, its share price now stands at 612.00p, up by 75.9% in nine months.

Organic increases in the in the share prices of Schroder AsiaPacific’s respective holdings, and gaining permission to buyback 14.99% of its own shares, saw that company’s discount narrow from its year-under-review average of 10.7%, to its year-end level of 5.82%.

Other positive news for the Group’s shareholders included the announcement that its management fee would be cut from 1 April 2021, down to 0.75% per year for the first £600 million of net assets and 0.70% per year on net assets thereafter.

On a less positive note, the fund that several of its portfolio members cut their dividends during the pandemic, causing the Group’s net revenue after tax to fall by 20.1%, down from 9.90p to 7.92p a share. With the directors’ decision to distribute all revenue as dividends, and supplement this total with revenue reserves, Schroder AsiaPacific shareholders will receive a final dividend of 8.00p, down 17.5% from the 9.70p dividend paid at the previous year-end.

Further, the company also notes that it began the year with 2.4% net cash, and ended the year ’slightly geared’, at 0.2%. Capping off the main points of his statement, Mr Smith added that he will retire at the company’s next AGM, and will be succeeded as Chairman by current Board-member, James Williams.

Giving his thoughts on the future, Mr Smith said that: “After a very hard year for financial markets, the Company is in good shape and is ready to take advantage of the opportunities in the region over the coming years. You, as shareholders, are participating in a region with outstanding prospects and with a team that is second to none.”

“You can look forward to 2021 with some investment optimism. The latest vaccine news is very encouraging but rollout will take time. 2022 and 2023 may be the years when life in Asia returns to normalcy.”

Following the update, Schroder AsiaPacific Fund shares added up to 0.50%, up by 0.33%, to 612.00p, at the time of publication 14/12/20.

Codemasters on verge of £945m EA takeover

Jamie Gordon
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Codemasters on verge of £945m EA takeover

British videogame developer, Codemasters (AIM:CDM) watched its shares soar on Monday, as it announced it would turn down a takeover offer from Take-Two Interactive, in favour of the bid made by Electronic Arts Inc. (NASDAQ:EA).

The company statement said that “Following the announcement today of a recommended cash offer for Codemasters Group Holdings plc by Codex Games Limited, an indirect subsidiary of Electronic Arts Inc., for the entire issued and to be issued ordinary share capital of Codemasters, the board of directors of Codemasters confirms that it has withdrawn its recommendation of the offer for Codemasters made by Take-Two Interactive Software, Inc. and that it intends unanimously to recommend the EA Offer.”

EA have offered a takeover price of 604p per share, which represents a total acquisition value of £945 million, for Codemasters’ issued and to-be-issued share capital. The CDM Board said that it has taken ‘various aspects’ under consideration, and views the EA offer to represent a superior opportunity for it’s the Group’s shareholders.

The company said that it proposes to adjourn the Court Meeting and the Group General Meeting (in relation to the Take_Two offer), set to be held on 21 December 2020. It added that further announcements will be made ‘as and awhen appropriate’.

Following the announcement, Codemasters shares jumped 20.63%, up to 644.15p a share 14/12/20. This price is far-and-away the company’s all-time high, and around 36.7% ahead of analysts’ target price of 407.50p apiece.

Despite the apparent disparity between analysts’ most recent price target and its current level, analysts currently have a consensus ‘Buy’ stance on the stock, while the Marketbeat community issues an abnormally bullish 80.99% ‘Outperform’ rating on the Group’s shares.

Today’s acquisition news, though not finalised, rounds off a booming year for the gaming industry. With some big releases such as GTA VI, and Bethesda’s next Elder Scrolls instalment, not being released until 2021 and 2022, the pandemic has seen the rise of some unexpected entrants, and has caused some small competitors to become titans.

Unilever shareholders to vote on climate strategy

Jamie Gordon
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Unilever shareholders to vote on climate strategy

Consumer defensive giant, Unilever (LON:ULVR), looks to take its next step towards becoming the FTSE 100 sustainability trailblazer, as it asks its shareholders to vote on its climate transition action plan.

The company said that the move represents “the first time a major global company has voluntarily committed to put its climate transition plans before a shareholder vote”. It added that the decision has been taken on the basis that a shift to net zero emissions will require greater engagement between companies and investors on their climate transition plans.

Unilever says that it hopes the increased level of transparency and accountability will strengthen the dialogue with its shareholders and encourage other companies to follow its example. The decision also follows the company’s other, recent shifts to sustainable operations, such as; its intention to increase plant-based sales to $1.2 billion by 2025; its acquisition of non-profit-backed nutrition group, SmartyPants Vitamins; and its $1 billion investment in removing fossil fuels from its cleaning products.

The climate transition goals it will be putting to its shareholders in the vote, include net zero emissions from its own operations by 2030, a 50% reduction in average footprint of its products by 2030, and net zero emissions from sourcing to point of sale, by 2039.

The Group says that achieving these targets will require it to decarbonise its raw materials, transitioning to 100% renewable energy within its operations, eliminating deforestation from its supply chain, advocating for accelerated decarbonisation of global energy, and product reformulation “through compaction and concentration”.

Commenting on the climate transition vote, Alan Jope, Unilever CEO said: “Climate change is the most pressing issue of our time and we are determined to play a leadership role in accelerating the transition to a zero-carbon economy.”

 “We have a wide ranging and ambitious set of climate commitments – but we know they are only as good as our delivery against them. That’s why we will be sharing more detail with our shareholders who are increasingly wanting to understand more about our strategy and plans.”

“We welcome this increased transparency and in the plan we present, we will be clear both about the areas in our direct control where we have a high degree of certainty of our route to net zero, as well as more challenging areas across our value chain where systemic solutions will be required to achieve our targets.”

The company said that it will share its full climate transition action plan in Q1 2021, ahead of its AGM on May 5. It added that it will report on annual progress against the plan from 2022, and it will seek an advisory vote every three years on any material changes made or proposed to the plan. The Group continued, saying that to achieve its net zero by 2039 target, it will require high quality carbon removal credits “to balance any residual emissions from sourcing to point of scale”.

Following the update, Unilever shares dipped by 0.66%, to 4,390.82p a share 14/12/20. This price is around 9.30% short of analysts’ target price of 4799.09p, but is fairly consistent with where it has spent most of the year-to-date.

Its p/e ratio of 17.33 is fairly reasonable versus some of its consumer defensive peers, while its dividend yield of 3.44% remains fairly inviting. Happily, the company’s share price appears to have already priced in some of the costs of the Group’s sustainable transition, though analysts’ consensus ‘Hold’ rating would suggest that some feel there is potential for the company’s price to fall further still.

AstraZeneca shares drop on Alexion acquisition

Jamie Gordon
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AstraZeneca shares drop on Alexion acquisition

British pharma blue chip, AstraZeneca (LON:AZN), announced on Monday that it had entered into a definitive agreement to acquire Alexion Pharmaceuticals.

The company said that Alexion shareholders will each receive $60 in cash, and 2.1243 AstraZeneca American Depositary Shares for each Alexion share. Based on AZN’s reference average ADR price of $54.14, this implies a total consideration per share of $175, or $39 billion in total.

Subject to regulatory approval, the deal is expected to be completed by Q3 2021, at which point Alexion shareholders will own roughly 15% of the combined company.

Pascal Soriot, AstraZeneca CEO, commenting on the acquisition, saying: “Alexion has established itself as a leader in complement biology, bringing life-changing benefits to patients with rare diseases.”

“This acquisition allows us to enhance our presence in immunology. We look forward to welcoming our new colleagues at Alexion so that we can together build on our combined expertise in immunology and precision medicines to drive innovation that delivers life-changing medicines for more patients,” he added.

Combining the two companies will bolster their collective immunology, iologics, genomics and oligonucleotides capabilities. The Group added that, “AstraZeneca, with Alexion’s R&D team, will work to build on Alexion’s pipeline of 11 molecules across more than 20 clinical-development programmes across the spectrum of indications, in rare diseases and beyond.”

Following the in-part shares-based acquisition, AstraZeneca shares shed 6.13%, down to 7,660p a share 14/12/20. While a short-term knock for those looking to quickly capitalise on potential COVID vaccine price gains, the acquisition increases AZN’s presence in the rare diseases space, and it will use its global presence to leverage Alexion’s portfolio, which already boasted $5.0 billion in revenues in 2019.

Analysts currently have a Hold stance on the stock, and a consensus target price of 8,491.76p, 10.85% ahead of its current level. The Group also have a dividend yield of 2.65%, and a p/e ratio of 40.42.

Pound rises as Brexit talks continue

Safiya Bashir
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Pound rises as Brexit talks continue

Following Boris Johnson and Ursula von der Leyen’s UK-EU trade talks on Sunday, the pound has risen nearly one and a half cents against the US dollar at $1.336 and nearly one eurocent at €1.1.

As trade talks continue, there is relief that a deal could be in the progress od being made over the next couple of weeks grows.

“The pound is enjoying a bit of a relief rally at the start of this week. Relief, it seems, at not suffering a horrific plunge as the two sides call it quits on the talks and proceed on WTO terms,” said Craig Erlam from OANDA.

“That may still come to pass. But as long as the two sides are talking, there remains the belief that common sense will prevail and a deal will be reached that avoids the cliff edge on January 1st. I expect volatility will remain rather heightened in the coming days.”

Despite the Brexit deadline for talks passing over the weekend, both parties have agreed to continue talking.

“In reality the only deadline that matters now is 31 December, as the procrastination continues between EU and UK negotiators, with rules around the so-called level playing field and governance, still at the heart of the disagreements between the two sides,” said Michael Hewson, chief market analyst at CMC Markets UK.

“It defies belief that the EU can agree a deal with the likes of Hungary and Poland over threats to the rule of law, and yet are unable to come to some form of agreement with the UK, an ally of longstanding, on a trade agreement.”

The pound this morning is at its highest since last Wednesday.

Tirupati Graphite set to join standard list

Andrew Hore
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Tirupati Graphite set to join standard list

Tirupati Graphite (LON: TGR) is joining the standard list this week and it offers investors exposure to an integrated graphite mining and processing business. The cash raised will help to finance increasing production.
Tirupati raised £6m at 45p a share and that gives the company a market capitalisation of £33.4m. There will be £5.4m left after expenses. The largest invest will be in the India processing facility, where £2.4m will go towards quadrupling capacity. There will be £1.3m invested in the mine and £1.2m in a new graphene centre. Management has decades of experience in the graphite in...

No-deal fears cause UK equity fund exodus

Bronte Carvalho
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No-deal fears cause UK equity fund exodus

Mounting fears of a no-deal Brexit scenario have caused UK equity funds to shed more than $2bn in the past two months, as investors opt to put their money elsewhere amid doubts over a sustained FTSE recovery.

Data from financial intelligence agency EPFR Global revealed that $2.4bn has been withdrawn from funds exposed to the UK stock market since the beginning of October, taking the net total of equity fund outflows since the Brexit referendum to $42bn – almost 17% of the assets recorded in June 2016.

Continued uncertainty about the outcome of UK-EU negotiations has also dealt a blow to the appeal of UK stocks, with portfolio managers opting to invest their funds in sturdier markets. The average level of UK exposure in global equity funds slid to an all-time low of 5.8% in 2020, compared to almost 9% at the start of 2016, according to fund performance analyst Copley Fund Research.

Chief executive at Copley, Steven Holden, attributed the decline in appeal to “the uncertainty surrounding a post-Brexit trade deal and ongoing Covid-19 concerns”.

Ongoing talks between the European Union and the UK government have so far failed to produce a post-Brexit trade deal, with the UK set to leave the EU on the 31 December – regardless of whether a plan has been put in place or not. Both sides have warned that a no-deal scenario has become increasingly likely in recent weeks.

Ahead of meetings on Sunday, Prime Minister Boris Johnson warned of a “strong possibility” of a no-deal Brexit.

This weekend was initially proposed as the “final deadline” to reach an agreement, but the PM and European Commission President Ursula von der Leyen released a joint statement on Sunday evening confirming that talks will continue as both leaders butt heads over “major unresolved topics”.

A fatal combination of Brexit uncertainty and Covid-19 anxiety has seen the FTSE All-share index down 12% since the beginning of 2020, and although some hedge fund managers – including Marshall Wace – have begun betting on an imminent rebound, global equity managers have still noticeably cut back their exposure to the UK stock market across a number of sectors.

Just 28% of the funds recorded by Copley’s survey currently have exposure to UK energy companies, down from 46% at the start of 2019. Similarly, 51% of funds are invested in UK financial stocks, compared to 64% in 2018.

Portfolio managers are increasingly turning to tech and consumer goods stocks, such as Chinese e-commerce tycoon Alibaba and JD Sports.

Despite the overarching anxiety surrounding Brexit negotiations, the EPFR recorded a slight surge in investments at the start of the week, with about $100m pumped into UK equity funds in the lead up to Wednesday.

Brexit Deal blocked by ‘dynamic’ standards issue

Jamie Gordon
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Brexit Deal blocked by ‘dynamic’ standards issue

Likely not much of a surprise to many readers, but the Brexit posturing continued from both sides this week – meaning any possible Deal will now be struck at the ‘eleventh hour’. With the prospect of a blockbuster end to the year, a lot of discussion is being had about fishing rights and state aid, but not enough is being said about the ‘dynamic’ standards impasse.

Alan Farkas, Partner at Dorsey & Whitney – a law firm specialised in advising companies on the Brexit transition – spoke to the UK Investor Magazine about the sense of “deep gloom” that now presides over the issue of standards alignment, despite potential for compromise on the fishing and state aid issues.

Fishing rights and ‘value of catch’ proposition

Speaking back in October, a French source told the Express that President Macron occupies an unenviable position, with fisherman in Northern France likely to blame him for a loss of business incurred either by concessions being made or a No-Deal scenario. The source said that: “If there is no deal, he will be made responsible – and it’s even worse for French fishermen.”

European affairs minister, Clement Beaune, added that: “Our fishermen will not be a bargaining chip for Brexit, they will not have to pay the price for Britain’s choices.”

“A bad deal would be the worst outcome. And so we are ready for a no-deal scenario, and we will not accept a bad compromise.” He continued.

The seeming intractability of the fishing rights stalemate seems to have been reinforced by a lack of progress during this week’s talks, and the UK’s decision to send four naval vessels out to defend its fishing waters. However, Mr Farkas notes that the situation is ‘potentially soluble’ with a 5-7-year transition period, and quotas based on ‘value of catch’ and allocated between individual fish stocks.

“Britain is believed to be prepared to allow European trawlers to retain up to 47% of the value of certain fish stocks from 1 January,” Farkas says. 

State Aid and the COVID bail-out

In short, the EU’s definition of state aid covers all spending which potentially distorts trade between countries, such as tax advantages offered to only a small subset or sector of business. While initially broad-reaching, the practical restrictions on state aid feature a lot of exemptions.

For instance, the General Block Exemption Regulation means that spending on regional aid, training, SME subsidies, R&D, environmental aid and public infrastructure aid are all permissible. Further, the ‘de minimus’ rule means subsidies under €200,000, over three consecutive years and to one company, do not require sign-off by the European Commission.

While these considerations may take some of the initial sting out of the state aid impasse, any worthwhile Brexit deal would shoot down the EU’s current demand. That being: the EU wants the UK to agree to limits on its ability to directly subsidise British industries, while exempting the EC from all state aid provisions. In essence, this framework would allow the EU to subsidise industries at its leisure, while the UK doing the same thing would mean it breaches international law.

This issue is particularly important given our current context, which finds many sectors of the UK economy disproportionately impacted by the COVID-Brexit double-edged sword – and thus in acute need of public support. Issuing a glimmer of hope, Mr Farkas continues: “Possible compromises have been discussed, allowing the UK Government to provide State subsidies of an equivalent proportion to the amount of the [EU Coronavirus] recovery fund.”

Dynamic regulation and intractable Brexit philosophies

The most intractable issue, and one that has not received enough coverage, is the discussion over forward-looking changes to trading, work and goods standards. The debate over the ‘dynamic’ alignment of standards centres around the EU position that any future adjustments to EU regulations ought to be mirrored by UK regulations.

For proponents of the UK sovereignty argument, and those alive long enough to remember the series of Factortame cases, the upshot of ‘dynamic’ standards is rather predictable. Under such as system, the UK would either have to comply with EU policy, or find itself back in a European court, once again scolded by EU lawmakers, and with the possibility of further tariffs being imposed for non-compliance.

Farkas said that: “In an effort to make progress, the UK have conceded that there should be no reduction in existing rules and regulations. These “non-regression clauses” on standards will be part of any trade deal and should there be future disputes between the UK and EU, procedures to adjudicate such disputes will be included in any treaty based on objective measures of actual disruption to trade. This is however as far as the UK Government are prepared to compromise.”

“The latest EU request for dynamic alignment impinges on what the UK Government sees as the fundamental reason for leaving the EU, allowing the UK sovereignty over its own laws.”

He continued by saying that it seems “almost unconscionable” that an agreement reportedly so close to completion, should collapse on disagreements over regulations – on which the UK currently remains a “leading force”. Unfortunately, both sides have deep-seated and valid philosophical justifications for their positions. On one side, we have the Brexit raison d’être – UK sovereignty – and on the other – granting access to the world’s largest, high-standards single market.

Unfortunately, Farkas says that while small compromises might occur between Christmas and New Year, he believes we are now in the “blame game” territory – with neither side wanting to be seen as walking away from what might in hindsight be seen as the basis for a potential deal. Should a No-Deal transpire, the recent exodus from UK equity funds would suggest that the near-term prognosis for FTSE blue chips is not positive, while private investors remain positive about the prospects of domestically-focused SMEs in the New Year.

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