With the FTSE 100 dominated by overseas dollar earners, we see exposure to the UK’s smaller companies as the best way to position for a recovery in the UK economy.
The below trusts satisfy the mandate with a range of exciting UK-listed companies, many of whom flourished during the COVID-19 restriction period.
BlackRock Throgmorton Trust
The ‘high-conviction’ BlackRock Throgmorton Trust is managed by Daniel Whitestone who heads up BlackRock’s Emerging Companies team.
The Throgmorton Trust seeks out companies ‘with strong management teams, strong and dominant market positions’ as well as those that be classes as ‘disruptors’.
Top holdings include companies such Serco Group, YouGov, Dechra Pharmaceuticals, Games Workshop and Gamma Communications.
Games Workshop is a particular stand out after the model and games company announced a significant shift to online sales during the COVID-19 lockdown which is likely to help margins on the other side.
Gamma Communications is a holding that certainly satisfies the ‘disruptor’ element of the portfolio with its multi channel communications offering. Gamma enjoyed a 12% increase in revenue in the first half.
The fund interestingly notes that it uses CFDs to profit from falls in the share prices of companies. This typically higher risk activity can utilise leverage and provide protection against volatility in equity markets.
As at 30th June the trust had 3.9% of the portfolio allocated to various short positions.
This strategy appears to have paid off with BlackRock Throgmorton Trust up 95.9% over the past 5 years making it one of the best performing UK Small Companies Trusts.
JPMorgan Smaller Companies Investment Trust
The attraction to the JPMorgan Smaller Companies Investment Trust stems largely from the trusts focus on the UK consumer. However, with a backdrop of COVID-19 causing concerns about consumer confidence in the short-term, we see strength in the trusts exposure to specialist consumables.
The trust again holds Games Workshop whose inelastic demand from enthusiasts is unlikely to see any major problems in the near term.
It also holds Future plc, the specialist media company who commands loyal communities of users and readers with titles such as FourFourTwo, Horse & Hound and the official magazines for Xbox and Playstation. Specialist titles such as these provide contextual opportunities for advertisers meaning Future can see step much of the reduction in advertising spend associated with newspapers and more general publications.
Other consumer companies such as Dunelm and Pets at Home also fall into the specialist sector but retail exposure may mean the market asks questions of the shares going forward.
With a 14% discount to NAV, JPMorgan Smaller Companies Investment Trust provides an attractive exposure to growing UK companies that have taken COVID-19 in their stride.
FTSE 100 listed heating and plumbing distributor, Ferguson plc (LON:FERG), saw its shares rally almost 7% on Tuesday, on news that it had reinstated its dividend.
The news came as part of its otherwise understated full-year results for the period ended July 31. Revenues were down by 0.9% year-on-year, falling from US$22.01 million to US$21.82 million. Meanwhile, its profits took a more notable hit, down by 4.8%, from US$1.32, to US$1.26 million.
This subdued trend looked to be reflected in its shareholder’s situation, with basic earnings per share falling 11.2%, to 427.5c. However, the company announced it would be reinstating its dividend at 208.2c a share – the same level as in 2019 and 2018.
The Ferguson statement noted that the decision to reinstate the dividend had been made due to the Group’s prospects and ‘strong’ financial position.
The company added that prior to its activity being paused in March, it invested $351 million in six acquisitions.
Ferguson response
Speaking on the update, company Chief Executive, Kevin Murphy, commented:
“We have delivered a strong performance in 2020, which given the global pandemic has highlighted the resilience of our business model. Early in the crisis we moved decisively to protect the health and wellbeing of our associates while continuing to serve our customers supporting critical infrastructure. We have rapidly adjusted our ways of working to adapt to this new operating reality while taking action to lower the cost base. We have also managed working capital and capital expenditure which alongside the strong profit delivery has led to an excellent cash performance.”
And looking towards the future, he added:
“[…] It is impossible to predict the future progress of the virus, or its economic impact and we expect the current levels of uncertainty to continue for the foreseeable future. However, the fundamental aspects of our business model remain attractive and since the start of the new financial year Ferguson has generated low single digit revenue growth in the US in flat markets overall. While we remain cautious on the outlook for the year as a whole, the business is in good shape and well prepared to address any further market related disruption.”
Investor notes
Following the update, Ferguson shares rallied 6.85% or 508.00p, to 7,924.00p apiece 29/09/20 12:00 GMT. Analysts have a majority ‘Hold’ stance on the company, alongside a 6,541.00p consensus target price, and the Marketbeat community offering a 52.97% ‘Outperform’ rating on the stock.
The company has a p/e ratio of 18.45, ahead of the industrials sector average of 11.35.
Luxembourg-based general goods store B&M European Value Retail S.A. (LON:BME) saw its shares rally on Tuesday as it published results from its impressive first-half period.
The company boasted 25.3% revenue growth, led by 29.5% revenue growth in its UK stores and like-for-like growth of 23.0%. The company attributed this to elevated average spend per visit, and its variety and value of products on offer.
The company added that it expects first half EBITDA to be above the guidance range of £250 million to £270 million, at £285 million.
Other positive news included the opening of nine new B&M UK stores, which after closures brings the number up by one. Similarly, the company said it expects to open 40 to 45 new stores in the UK, most of which will be in the fourth quarter.
B&M European continued, stating that its Heron Foods convenience store chain, had enjoyed like-for-like sales growth, alongside six net new store openings.
It added that its Babou stores in France reopened on 11 May 2020, with H1 revenue standing at €156.8 million and a ‘small positive’ EBITDA outturn. Overall, it said 37 stores were trading under the B&M brand at the end of H1.
B&M response
Speaking on the results, Chief Executive, Simon Arora, comments:
“Our Group has performed well in the first half. Our business model is proving well-attuned to the evolving needs of customers, given our combination of everyday value across a broad range of product categories being sold at convenient out-of-town locations.
Our people have risen to the many challenges posed by the COVID-19 crisis, not least in serving our customers through a period of high demand, keeping our shelves filled, providing a clean and safe shopping environment, as well as sourcing higher volumes than we had planned. I thank them all for their commitment, hard work and resilience.”
Investor notes
Following the update, the company’s shares rallied 4.76% or 23.32p, to 513.72p apiece 29/09/20 11:30 BST. Analysts also have a majority ‘Buy’ rating on B&M European stock, a consensus target price of 452.62p, and with Marketbeat‘s community offering a majority ‘Outperform’ stance on the company. The Group also has a p/e ratio of 25.15.
UK mortgage approvals have hit a 13-year high.
August saw mortgage approvals hit 84,700, which is the highest rate since October 2007. Demand has boosted thanks to the record low-interest rates and suspension of stamp duty.
New figures from the Bank of England revealed the post-lockdown demand reach new highs, however, consumer borrowing and repayments remains much lower than pre-pandemic levels.
“The mortgage market continued to show more signs of recovery in August,” it said in the report.
“On net, households borrowed an additional £3.1 billion secured on their homes, following borrowing of £2.9 billion in July. Mortgage borrowing troughed at £0.5 billion in April, and is still a little below the average of £4.2 billion in the six months to February 2020. The increase on the month reflected slightly higher gross borrowing of £18.8 billion, although it is still below the pre-Covid February level of £23.7 billion.”
“The number of mortgage approvals for house purchase continued increasing sharply in August, to 84,700 from 66,300 in July. This was the highest number of approvals since October 2007 but it only partially offsets weakness seen between March and June. In total, there have been 418,000 approvals in 2020, compared with 524,000 in the same period in 2019,” added the Bank of England’s report.
Thomas Pugh from Capital Economics said: “Despite the resurgence in the housing market, consumer credit barely rose in August.”
“And the darkening clouds on the economic horizon may tempt some households to start to rein in spending in the months ahead. Those restrictions and rising unemployment will put a further dampener on consumers’ ability to spend.”
“And the prospect of a no deal Brexit is having a chilling effect on business investment. Overall, we doubt that the economy will grow by much, if anything, over the next few months,” he added.
Cairn Energy (LON: CNE) has posted a $324m (£251.8m) loss for the first six months of the financial year.
After being hit with $240m worth of fines, the Edinburgh-based company swung into a loss despite producing the top-end of its full-year guidance.
“We have successfully managed the business through a challenging external environment, always ensuring that the safety of our people is paramount,” said Simon Thomson, the group’s chief executive.
“We took early action with significant reductions and deferrals to the capital programme. Alongside the sale of interests in both Norway and Senegal, we have realigned the portfolio and demonstrated Cairn’s continued commitment to shareholder returns.
“With a strong net cash position and limited capital commitments, Cairn is well-positioned to deliver further value for shareholders,” he added.
The FTSE 250 company posted revenues of $172m (£133.64m) for the six months ended 30 June. Average oil prices fell from $67.84 a year earlier to $40.21 per barrel.
Cairn Energy shares (LON: CNE) are trading -2.04% at 137,63 (1003GMT).
Card Factory (LON: CARD) has swung into a loss for the six months to July 31 as sales fell 48.6% to £100.5m.
Despite the loss, which was compared to a £22.2m in the same period a year earlier, the group has said second-half sales are looking positive.
Card Factory will not be providing a forecast for the rest of the year amid the uncertainty of new lockdown fears.
The group saw strong online sales over the holidays Valentine’s Day, Mother’s Day, and Father’s Day.
Paul Moody, Executive Chairman, commented:
“I am extremely proud of all colleagues working across every part of our business for the significant contribution they have made throughout this period of unprecedented disruption. In particular, for their unrelenting focus in driving the very successful phased store-reopening programme. The combination of our unique customer insight, vertically integrated business model and market leading position continues to ensure that we are well positioned to meet the increased online demand, supply our commercial partners and to present the optimum ranges in our stores.”
“We are pleased with both the trading performance as our stores have reopened and the positive feedback from customers who are visiting less frequently, but spending more. Recognising the uncertainty of the impact of further Covid-19 measures and changes in consumer behaviour in the short term, we are focused on a flawless execution of Christmas and the implementation of our refreshed strategy.”
Card Factory shares (LON: CARD) are trading +0.54% at 37,15 (0938GMT).
Greggs (LON: GRG) survived August, which it called a “difficult” trading month thanks to warmer weather and missing out on the government’s Eat Out to Help Out scheme.
In the 12 weeks to 26 September, the bakery chain averaged 71.2% of sales compared to the same period a year previously.
The group, however, intends to open new stores this year, which will be located away from city centres.
Reassuring investors, Greggs said: “Our immediate priority is to complete the consultation with colleagues on the proposed changes to resource levels.
“We will do this with regard to our values and the best long-term interests of the business as a whole. We will update on the expected financial impact of these changes when the consultation ends in November.”
Greggs struggled amid the pandemic and stores closed as crowds were difficult to keep socially distanced. Compared to a £40m profit in 2019, the group recorded a £60m first-half loss.
The group has reviewed the business and will be carrying out job losses and reducing working hours for many employees.
In this current financial year, Greggs has closed 11 shops to give a total of 2,039.
Shares in Greggs (LON: GRG) are trading -3.28% at 1.179,00 (0911GMT).
Cancer diagnostics developer ANGLE (LON: AGL) is getting nearer to FDA approval for its Parsortix liquid biopsy test. Angle would be the first company to receive FDA Class II clearance for a device harvesting intact circulating tumour cells CTC), making the technology highly valuable.
The specific approval would cover breast cancer. Clearance would allow Parsortix to be used in drug trials as well as the continued monitoring of patients who have been successfully treated.
Parsortix can capture circulating tumour cells, which can then be analysed.
FDA approval
It always seems to take longer tha...
US investment management blue chip, BlackRock (NYSE:BLK) posted commentary on Monday afternoon, which stated that Democratic candidate, Joe Biden, currently appears to have an edge in the race to become president.
In what the company described as a highly ‘consequential election’, Biden looks to be leading Trump by seven percentage points in the recent national polling data. This lead, as ‘stable’ as it has appeared, is set against a tumultuous backdrop of economic uncertainty and public safety concerns – and therefore anything can still happen.
BlackRock Investment Institute, with data from FiveThirtyEight.
Indeed, and likely what many predicted, his lead has narrowed in key electoral states. This could well give Trump a path to re-election, with the incumbent president timing his poor handling of the virus well, with enough time for the debate focus to be shifted onto social issues and national security.
Among BlackRock’s three plausible scenarios for the election, they predict: 1) a Democratic sweep of the White House and Congress (with Democrats winning control of the Senate); 2) a Biden win with a divided Congress; and 3) a status quo Trump win. What is interesting, though, is that they also note the challenge that record-high mail-in voting will pose to vote counting, with potential delays and legal challenges on the cards.
Blackrock identifies three policy areas to watch
As far as policy differentiations are concerned, we might see Trump and Biden as diametrically opposed, but BlackRock notes three particular divergences to take note of.
First, and crucially: fiscal policy. The company says that under a Democrat clean sweep, the likelihood would be a new round of fiscal stimulus to spend on clean energy, transport and housing, as well as tax increases for companies and the wealthy. A Biden win with a Republican Senate would see less ambitious fiscal stimulus and infrastructure spending, alongside fewer tax changes.
BlackRock’s commentary adds that: “The net difference in fiscal spending between the two scenarios could be several percentage points of GDP over each of the next few years, we estimate. Fiscal spending under a second Trump term would be somewhere in the middle between those two scenarios.”
On the second policy issue, geopolitics, BlackRock states that under either scenario, a Biden win would likely mark a return back to ‘predictable’ trade and foreign policy, which would support emerging market assets and broader risk sentiment in the short-term. The company also believe that a Biden victory would not greatly impact US-China relations, as there is now bi-partisan support for a competitive stance on China in regard to tech, trade and investment. However, one big change would involve the US spear-heading the green stimulus effort.
BlackRock states that: “The U.S. would likely immediately rejoin the Paris Agreement and increase its emissions reduction goals. Its fiscal plans could help supercharge a globally coordinated green stimulus effort, adding to recent efforts by the European Union. A Trump win, by contrast, would likely lead to a doubling-down of the “America First” stance on trade and immigration.”
Finally, the company disregards the ‘tax-centric’ election logic, which states that a Democratic clean sweep would be seen as a market negative. Instead, in such an instance, BlackRock believes that investors would have to deal with higher taxes and tighter regulation, but that this would be balanced out by predictable foreign policy and greater fiscal support. The main implications, they say, will be in fixed income and leadership in equity markets, with long-term rates being pushed high and leading to a ‘modest steepening’ of the Treasury yield curve.
Also, while additional tax and regulations might pressure high cap companies, domestically-oriented small cap firms might benefit the most. Blackrock finishes by saying that:
“This scenario would add to reasons to prepare for a higher inflation regime and reinforces our strategic underweight of developed market nominal government bonds. The tectonic shift to sustainable investing will likely persist regardless of the result, but could be supercharged under a Democratic sweep scenario.”
With the Governor of the Bank of England, Andrew Bailey, making it clear that negative interest rates could be a real possibility, it is time for investors, savers and entrepreneurs to start factoring in what these controversial measures could mean.
Bank of England will have little interest in savers
Aside from being the mainstay of financial prudence, saving will be at the bottom of the agenda for the UK’s central bank. Instead, as is the way with most economic recoveries, the preferred route is to encourage people to spend the economy out of a slump.
And, while this may sound like a cheerier alternative to the fiscal retrenchment focus the UK took following the 2008 crash, it certainly isn’t something to celebrate as a saver. In the process of trying to increase liquidity, banks will be told to encourage their customers to go out and use their money, rather than save it. As stated by IW Capital CEO, Luke Davis:
“A policy maker at the Bank of England has defended the potential use of negative interest rates, calling results from other countries ‘encouraging’. The move could effectively mean that savers pay to have their money with banks and are incentivised to borrow money and increase their spending.”
And it isn’t just your average saver’s account that will see consumers lose rather than gain money. Indeed, other vehicles which typically offer income for putting your money aside, such as bonds, will likely see participants lose, rather than gain money.
“Many government bonds and investments are already offering investors what are effectively negative returns on their capital once inflation and other factors have been taken into account.” says Mr Davis.
Andrew Bailey’s words in favour of negative interest rates, having previously been opposed to them, has seen ‘record numbers’ of investors turn towards equities and alternative assets such as gold.
Negative interest rates positive for new beginnings
While certainly true that negative interest rates are harmful for all those currently trying to save for a house, holiday or other costly venture, they are good news for anyone willing to roll the dice and borrow money to get a new project started.
Mr Davis believes that part of the paradigm shift that could be witnesses, will be the move in focus from what were previously thought of as ‘safe’ assets, to illiquid assets.
The main thing to note, however, is that negative rates mean that it is the opportune moment to borrow money. One way people could capitalise on this is to take advantage of both the stamp duty holiday and negative rates simultaneously (assuming such a situation comes to pass). On the other hand, banks are being increasingly stingy with mortgage application approvals – in some cases requiring a 20% deposit for properties where they would traditionally only ask for half that level of commitment.
Another way to take advantage of cheap borrowing would be to either expand or start up a business. This, Mr Davis states, is the perfect time for start-ups and SMEs to continue adapting, and take advantage of the opportunities offered by an economic rebound:
“There are a huge number of SMEs that have adapted quickly to the pandemic and the changes it has ushered in. Many are now primed to grow, create jobs and increase value for investors. There is huge volatility in markets at moment which is putting some investors off – but thinking long-term can offer a refreshing change of perspective.”
