The FTSE 100 was lower on Wednesday as traders dumped the dollar and the strength in the pound hit London’s cohort of overseas earners.
Although many strategists have poured cold water on the ‘Sell America’ trade, moves in the foreign exchange markets overnight suggest there is some merit in the approach as confidence in the US president wanes.
London’s leading index was down 0.4% at the time of writing on Wednesday as its inverse relationship with the pound kicked in amid a sell-off of the dollar.
“The pound is now at levels not seen since September 2021, touching $1.37 before falling back slightly,” explained Susannah Streeter, Chief Investment Strategist, Wealth Club.
“The sharp moves in currencies, with sterling strengthening are acting as a dampener on the FTSE 100. It puts pressure on the overseas earnings of listed multinationals, with pharma giants GSK and AstraZeneca, chemicals company Croda, and fashion house Burberry among the fallers in early trade.”
GSK was the FTSE 100’s top faller, losing 2.6%, while AstraZeneca shed 2%. As two of the largest FTSE 100 constituents, the weakness here was more than enough to overshadow minor strength in precious metals miners and UK-centric retailers.
There were also losses for Experian, HSBC, and Airtel Africa – all of which have substantial overseas earnings.
The FTSE 100’s drop was at odds with a continuing rally for US equities, where stronger tech stocks helped the S&P 500 to within touching distance of 7,000.
A good session for US tech yesterday helped the Polar Capital Technology Trust 1.8% higher on Wednesday.
One would expect the rest of the European and US sessions to be choppy as investors prepare for the US interest rate decision later tonight. Rates are expected to be held.
A fresh record for gold helped Endeavour Mining to the top of the leaderboard once more, with gains of 3%. Fresnillo was slightly lower after releasing its Q4 production report. Silver production was higher quarter-on-quarter, but was lower than the same period a year ago. But the main story here is higher precious metals prices, and any fluctuations in production are a sideshow.
“Fresnillo can hardly be accused of exaggeration in its coy reference to a ‘supportive metals price environment’,” said Chris Beauchamp, Chief Market Analyst UK at IG.
“This is a modest way of referring to price surge not seen in over a decade, one that stands poised to deliver significant profit increases. Indeed, it was the sole reference to price in the entire update, which showed that the group’s production remains on track. While the shares stumbled yesterday, the price is still up by more than a fifth in January, with new record highs for both it and silver seemingly just a matter of time.”
British Land shares were flat after news of its offer for Life Science REIT broke. Given the depressed valuations of the UK-focused property sector, analysts are questioning whether it could be the next to enjoy a rerating.
“The big banks used to trade at discounts to net asset, or book, value per share and so did many of the leading London-listed gold miners. Their share prices have all rocketed, so it will be interesting to see if investors turn their attention to another sector where valuations look very depressed, namely real estate,” said AJ Bell investment director Russ Mould.
“Many of the leading names trade at discounts to book value and trade buyers are paying attention, as British Land’s cash-and-stock offer to take over Life Science REIT is the latest in a series of deals in the sector.”
Sancus Lending (LON: LEND) shares jumped 362.5% to 1.8p on an unexpectedly strong trading performance in 2025. The finance provider increased revenues by one-third to £22.1m and a 2025 pre-tax profit of more than £1m is estimated, although that includes gains of £2.6m from repurchasing ZDPs. New lending facilities nearly doubled to £212m and total loans were one-third higher at £317m.
Late on Tuesday, Mind Gym (LON: MIND) admitted that it is in discussions with third parties as part of a strategic review that could lead to a bid for the education and training company. The share price rebounded 20.8% to 14.5p.
Medical technology developer Inspiration Healthcare (LON: IHC) says US subsidiary Airon has secured a three-year purchasing agreement with a US healthcare provider. The initial order is 150 critical care ventilators and then there will be consumables and services revenues. This is part of a strategy to grow in the US. The share price increased 13% to 15.25p.
Spirits brands owner Distil (LON: DIS) is appointing Philip Naughton as a non-executive director at the beginning of February. He has experience in finance and compliance and believes he can help Distil to scale its business. The share price rose 8.7% to 0.125p.
FALLERS
Rail infrastructure inspection technology services provider Cordel (LON: CRDL) was hit by delays in the first half. Interim revenues fell from £2.28m to £1.73m and the loss increased. Cash was £1.02m at the end of 2025. Cordel has been winning contracts, but the spending did not occur in the first half. Opportunities are increasing and management believes that business will come through in the six months to June 2026. Edison still expects full year revenues to improve from £4.8m to £6.2m enabling breakeven. However, the market is cautious, and the share price dived 24% to 4.75p.
Great Western Mining (LON: GWMO) has revealed the results of the geographical survey and the assay results of a drilling programme at Rhyolite Dome, which is part of the Olympic gold project in Nevada. The survey identified a deeper untested chargeable feature at more than 300 metres in depth. The drilling found low grade gold and more significant silver mineralisation. The geological model will be refined. The share price declined 14.7% to 1.45p.
Rosslyn Data Technologies (LON: RDT) edged up interim revenues from £1.4m to £1.5m and improved gross margins. Higher overheads meant that the pre-tax loss was flat at £1.48m. The cash burn rate is being reduced from £175,000/month to £110,000/month, which should reduce the full year loss. Cash was £684,000 at the end of October 2025, which may mean more cash will be required before the software company becomes cash generative next year. There have been delays to securing contracts. The share price slipped 11.4% to 3.1p.
CT Automotive (LON: CTA) finance director Dalman Mohammed has resigned. The board expects the automotive interiors company to report revenues in line with expectations and net debt of $7.7m. The share price fell 15.5% to 24.5p.
As 2026 gets underway, there are some familiar patterns. The geopolitical noise that characterised 2025 is still very much in evidence. Diversification is a watchword, as investors discover that there is a world beyond US technology. Artificial Intelligence (AI) is still an important trend, that demands a response from investors. Yet the year ahead may also have some notable differences.
2025 was a noisy year. The new tariff regime created significant volatility, and markets could bounce around in response to a single White House tweet. 2026 has started in similar style, with the overthrow of the Venezuelan president, instability in Iran and attacks on US Federal Reserve Chair Jerome Powell.
This ‘noise’ is likely to be an inevitable feature of 2026. For investors, it can be unnerving, but the volatility it creates can be an advantage for the way we invest in Murray International Trust. Last year, the Liberation Day sell off opened up a range of opportunities, with companies that we have been watching, but deemed too expensive, coming down to more attractive valuations. Often, in these scenarios markets will sell and ask questions later. We believe these opportunities will be forthcoming in 2026 as well.
There is plenty of speculation on the likely outcome from various US policy initiatives: will they embolden or antagonise China? What is its likely impact on the bond market? Will they revive inflation? It is impossible to predict with any certainty. We choose to focus primarily on the companies in which we invest and ignore the noise.
Diversification
2025 was the year that investors finally started to look beyond US technology. A weaker dollar was a deterrent for many European investors. It is worth noting that the S&P 500 only delivered 3.9% to Euro-based investors in 2025 because of the Dollar impact. Investors spread their wings into emerging markets, Europe and even into the unloved UK.
This willingness to look at other markets has been a boost for the trust. We are agnostic on where our companies are listed, paying closer attention to where they draw their revenues. Our US weighting is less than half that of the MSCI World index. Many of our top performers over the year were from outside the US, including Samsung Electronics, TSMC, Intesa Sanpaolo, Telefonica Brasil and Vale.
We believe this diversification is likely to continue. Unpredictable policymaking from the US administration, wobbles over the AI trade and better valuations elsewhere are pushing investors to look beyond US markets. In Murray International Trust, we retain a balance of geographic exposure, while ensuring we are exposed to areas of growth in the global economy.
AI and technology
The AI theme continues to be front of mind for investors. It is possible to find those on both sides of the fence: those who believe it is over-valued and at risk of a meltdown, and those who believe it is a paradigm shift for the global economy. It is worth noting that even if it is a paradigm shift, it may not justify the inflated valuations in some parts of the US market.
We have the luxury of not having to have positions in the highest value stocks but can take each case on its merits. We have had exposure to some of the ‘nuts and bolts’ of the AI revolution through companies such as Broadcom. To our mind, it was better to be exposed to those companies in receipt of AI spending, rather than those spending it.
However, more recently, we have been paring back our technology exposure. These companies have done very well, and continue to report significant demand. That said, their valuations are so elevated that the slightest dent in the outlook can prompt significant declines in their share prices. The market is often looking for an excuse to take profits. We believe this pattern will continue in the year ahead.
A changing world
We see a continuation of the move away from globalisation in the year ahead, as countries prioritise their own national agenda over collaboration. The open and free trade that has characterised much of the past three decades does not feel as if it is coming back. This is likely to create more cyclicality – a return to conventional inflation, interest rates and economic cycles.
For companies, that may mean profitability will ebb and flow. This is perhaps a more natural environment and for us, it is an environment that we can navigate effectively. It is important to be disciplined and not get caught up in the enthusiasm or pessimism around certain sectors that may or may not benefit from the latest White House tweet. We hold no defence companies for example. While we recognise that there may be an opportunity from increased defence spending, these companies tend to be inconsistent and lower quality.
The companies that we hold are generally optimistic about their prospects and we are comfortable with their valuations. Pharmaceuticals have been in the doldrums on worries over pricing but have started to revive. We hold companies such as AbbVie. We see a stronger capital expenditure cycle feeding through into industrials. We have increased our weighting in elevator group Kone to participate. We also see some value in certain consumer stocks, buying US home improvement group Lowe’s and Spanish clothing giant Inditex.
2026 is likely to share many of the characteristics of 2025, and there are plenty of reasons to be positive on the outlook as interest rates decline and fiscal stimulus continues. However, as always, we are highly selective on the risks we take with our investors’ capital, and we will maintain our forensic focus on the characteristics of individual companies rather than noisy geopolitics in the year ahead.
Companies selected for illustrative purposes only to demonstrate the investment management style described herein and not as an investment recommendation or indication of future performance.
Important information
Risk factors you should consider prior to investing:
The value of investments, and the income from them, can go down as well as up and investors may get back less than the amount invested.
Past performance is not a guide to future results.
Investment in the Company may not be appropriate for investors who plan to withdraw their money within 5 years.
The Company may borrow to finance further investment (gearing). The use of gearing is likely to lead to volatility in the Net Asset Value (NAV) meaning that any movement in the value of the company’s assets will result in a magnified movement in the NAV.
The Company may accumulate investment positions which represent more than normal trading volumes which may make it difficult to realise investments and may lead to volatility in the market price of the Company’s shares.
The Company may charge expenses to capital which may erode the capital value of the investment.
Movements in exchange rates will impact on both the level of income received and the capital value of your investment.
There is no guarantee that the market price of the Company’s shares will fully reflect their underlying Net Asset Value.
As with all stock exchange investments the value of the Company’s shares purchased will immediately fall by the difference between the buying and selling prices, the bid-offer spread. If trading volumes fall, the bid-offer spread can widen.
With funds investing in bonds there is a risk that interest rate fluctuations could affect the capital value of investments. Where long term interest rates rise, the capital value of shares is likely to fall, and vice versa. In addition to the interest rate risk, bond investments are also exposed to credit risk reflecting the ability of the borrower (i.e. bond issuer) to meet its obligations (i.e. pay the interest on a bond and return the capital on the redemption date). The risk of this happening is usually higher with bonds classified as ‘subinvestment grade’. These may produce a higher level of income but at a higher risk than investments in ‘investment grade’ bonds. In turn, this may have an adverse impact on funds that invest in such bonds.
Yields are estimated figures and may fluctuate, there are no guarantees that future dividends will match or exceed historic dividends and certain investors may be subject to further tax on dividends.
The Company invests in emerging markets which tend to be more volatile than mature markets and the value of your investment could move sharply up or down.
Other important information:
The details contained here are for information purposes only and should not be considered as an offer, investment recommendation, or solicitation to deal in any investments or funds and does not constitute investment research, investment recommendation or investment advice in any jurisdiction. Any data contained herein which is attributed to a third party (“Third Party Data”) is the property of (a) third party supplier(s) (the “Owner”) and is licensed for use with Aberdeen. Third Party Data may not be copied or distributed. Third Party Data is provided “as is” and is not warranted to be accurate, complete or timely. To the extent permitted by applicable law, none of the Owner, Aberdeen, or any other third party (including any third party involved in providing and/or compiling Third Party Data) shall have any liability for Third Party Data or for any use made of Third Party Data. Neither the Owner nor any other third party sponsors, endorses or promotes the fund or product to which Third Party Data relates.
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British Land has agreed to acquire Life Science REIT for approximately £150 million, marking a strategic push into the Science & Technology sector as it expands its campus portfolio.
Under the recommended offer, Life Science REIT shareholders will receive 14.1p in cash plus 0.07 British Land shares for each share held, valuing each share at 42.8p – a 21% premium to the previous day’s closing price but a 26% discount to net asset value.
The deal comes after Life Science REIT entered managed wind-down in November 2025, following persistent share price weakness and difficulties raising capital amid cooling demand for laboratory space.
The Life Science REIT portfolio will add five well-located assets in the “Golden Triangle” to British Land – two prime Central London properties in the Knowledge Quarter, a 24-acre Oxford technology park, and two Cambridge campuses. Notably, only 6% of the portfolio is dedicated to laboratory space, giving British Land flexibility to attract a wider range of innovation occupiers.
The FTSE 100 landlord believes it can unlock further value by broadening the tenant base beyond pure life sciences to the wider Science & Technology sector.
Life Science REIT shares have traded poorly and have been stuck in a persistent downtrend despite providing investors with a relatively unique proposition. The share price discount to NAV before the announcement was around 46%, offering British Land a substantial opportunity to realise value in the portfolio.
Debenhams Group, the owner of brands including boohoo, Debenhams, and PrettyLittleThing, has upgraded its full-year earnings guidance after trading above expectations, with adjusted EBITDA now forecast to reach £50 million for the year ending 28 February 2026.
The online platform operator attributed the improved performance to sustained momentum in its flagship Debenhams brand, a notable upturn in its Youth Brands division, and accelerated delivery of its transformation programme. All brands within the group continue to trade profitably.
Shares Debenhams Group, which still trades under the name boohoo Group, jumped over 6% on Wednesday.
The turnaround at PrettyLittleThing has proved to be key driving force in the group’s turnaround. The pace and scale of PLT’s recovery has prompted the board to reverse its previous decision to classify the brand as an asset for sale. Given the substantial opportunity ahead as a fashion-led marketplace, PLT will now be retained and reported within continuing operations for the current year, contributing materially to improved profitability.
“Progress is being driven by continued momentum in its Debenhams brand, but importantly, all of its brands are trading profitably,” explained Aarin Chiekrie, equity analyst, Hargreaves Lansdown.
“That includes the once-struggling PLT (PrettyLittleThing), which the group had been looking to offload. But there’s been a step-change in performance since shifting PLT to a marketplace model. This model involves allowing third-party brands to sell their goods on its online platform, with PLT taking a cut of any third-party sales made, and banking just that cut as revenue.”
Beyond operational improvements, Debenhams is pursuing value-realisation initiatives through licensing opportunities and the disposal of non-core assets. The company expects these asset sales to materially reduce net debt within the next 12 months.
Card Factory has confirmed trading remains in line with revised guidance, despite a challenging UK retail environment, as the greeting cards specialist continues to make progress on its strategic objectives.
The UK’s leading greetings cards and gifts retailer posted total group revenue of £541.6 million for the eleven months ended 31 December 2025, up 7.3% year-on-year. The growth was primarily driven by contributions from recent acquisitions, particularly businesses in North America and the Republic of Ireland, as well as the Funky Pigeon digital platform.
Store performance proved more subdued, with total store sales rising just 1.1% whilst like-for-like store revenue remained flat.
Christmas trading reflected the difficult consumer backdrop, with total store sales down 0.8% and like-for-like revenue declining 1.2% across November and December.
After suffering a big hit to shares in early December following a profit downgrade, investors may be marginally optimistic on the back of today’s results.
The company’s acquisitions strategy has been central to offsetting weaker high street footfall. Funky Pigeon’s integration has accelerated Card Factory’s digital capabilities, whilst partnerships business expansion and international operations have diversified revenue streams. Management’s ‘Simplify and Scale’ programme has largely offset persistent cost inflation.
Importantly, the firm has maintained its profit guidance. Card Factory expects to deliver adjusted profit before tax of between £55 million and £60 million for FY26.
MicroSalt has formalised a joint development agreement with one of the world’s largest food and beverage manufacturers to develop new low-sodium products.
The AIM-listed salt producer, which manufactures natural salt containing approximately 50% less sodium, announced the four-year collaboration, which builds on a non-binding term sheet signed between the parties in November 2025.
Under the terms, neither party will exchange compensation unless specifically agreed for individual projects. Each will bear its own development costs.
MicroSalt has not named any of its major clients, but volume forecasts released last year confirm that it is working with companies that produce mass-market products at scale.
MicroSalt issued a projected 2027 sales volume of $11m last year. Investors will hope this new agreement leads to additional demand for their low-sodium salt.
“This further agreement with Customer 3 is a validation of MicroSalt’s unique offering to the global food and beverage industry,” said Rick Guiney, Chief Executive Officer of MicroSalt.
“Collaborating with one of the world’s largest food, soft drink and snack manufacturers underlines the strength and versatility of our technology that addresses one of the food industry’s most pressing challenges. We look forward to working evermore closely with Customer 3 to deliver healthier food products to consumers worldwide in the coming years.”
The FTSE 100 gained on Tuesday as banks helped lift the index ahead of the Federal Reserve’s interest rate decision tomorrow.
London’s flagship index shook off the latest threats of tariffs to briefly rise above 10,200 before easing back to trade 0.4% higher at 10,189 at the time of writing.
“The FTSE 100 moved higher after gains in the US last night and across much of Asia,” said Dan Coatsworth, head of markets at AJ Bell.
“The exception to the positivity in Asian markets was South Korea after the Trump administration announced it was raising tariffs on imports from the country to 25% after accusing Seoul of not living up to a deal agreed last year.
“The potential threat of 100% tariffs on Canada if it strikes a trade deal with China also lingers in the air, after the possibility of import taxes on European goods was floated in the spat over Greenland.”
The impact of tariff threats on markets is diminishing, and the latest outburst by Donald Trump was largely ignored by equity investors, who were happy to take the S&P 500 0.5% higher overnight.
UK markets also took the risk of another US government shutdown in their stride, preferring to focus on the Fed’s decision and a raft of US tech earnings later this week.
Sage shareholders will be disappointed to see the group’s lacklustre reaction to its trading statement for the three months ended 31 December 2025. Sage’s total revenue rose 10% during the period, while its cloud business revenue increased 15%. Investors may have liked to see an upgrade to guidance, but they’re certainly heading in the right direction.
“Tech isn’t a huge feature of the London markets but the FTSE’s only software pureplay Sage has put its best foot forward today, with a strong first quarter trading update,” explained Derren Nathan, head of equity research, Hargreaves Lansdown.
“The provider of accounting and business applications grew revenue by 10% with cloud revenues leading the way, up 15%, and positive growth seen in all regions. Its next-generation solution, Sage Intacct, which offers increased levels of automation for financial reporting is building scale.”
Sage shares were flat at the time of writing.
Banks HSBC, NatWest, and Barclays were among the top risers as investors looked to tomorrow’s Fed interest rate decision and the likelihood of rates remaining on hold. Banks enjoy higher interest rates, and hints that rates could stay where they are will be taken as a win for FTSE 100 bank investors.
Profit takers sent Fresnillo 3% lower and to the bottom of the leaderboard as precious metals’ rip-roaring rally paused for breath.
Tiger Alpha (LON: TIR) has raised £1.55m at 0.375p each, but to issue the shares the par value has to be reduced from 1p to 0.1p. The divestment of legacy resource investments is almost complete and has raised £175,000. The focus is AI investments. The share price jumped 17.7% to 0.5p.
Construction and facilities management software provider Eleco (LON: ELCO) increased annualised recurring revenues by 29% to £34.3m and net cash ended 2025 23% higher at £16.3m. Pre-tax profit is on course to improve from £4.2m to £5.4m. The share price rebounded 15.5% to 152.5p.
Builders merchant Lords Group Trading (LON: LORD) traded in line with downgraded expectations last year. Revenues were slightly higher than expected, but pre-tax profit is equal to the forecast of £2.7m. The heating and plumbing division is being reviewed after a disappointing performance. The CMO business acquired last year was profitable in the second half. A recovery in pre-tax profit to £4.2m is still expected in 2026. The share price increased 14.4% to 26.3p.
Roebuck Food Group (LON: RFG) says GlasPort Bio, which has developed technology to mitigate greenhouse gases in agriculture, including a manure management additive and a feed additive, is generating recurring revenues. There are pilot installations on large-scale farms in three countries. The plant-based ingredients division had a tough 2025, although a stronger second half cut the full year reduction in sales to 11%. Overheads have been reduced. The share price is 10% higher at 22p.
FALLERS
Phoenix Copper (LON: PXC) says that Riverfort Global Opportunities argues that the recent repayment of the short-term loan facility it provided should be classed as a prepayment. Phoenix Copper is trying to determine whether there is a further financial obligation. The share price dipped 4.08% to 2.35p, having been 2.1p earlier in the morning.
Life sciences services provider EKF Diagnostics (LON: EKF) traded broadly in line with expectations in 2025. Revenues of £51.6m are slightly below consensus forecasts, but EBITDA is in line at £12.4m – 10% higher helped by the focus on higher margin products. Both point of care and life sciences divisions grew revenues. A new fermentation development contract has been signed in the US. Cash was £15.8m at the end of 2025. The share price slipped 6.25% to 25.5p.
Aerospace component kits supplier Velocity Composites (LON: VEL) continues to be hit by delays and lower than anticipated Airbus A350 production rates. Lower overheads have offset the lower revenues in 2025, and the pre-tax loss was reduced from £1.3m to £1.1m. A major aerospace components programme in the US will not be transferred until later in 2026. New European business is being sought to offset the loss of a contract. The share price declined 2.63% to 18.5p.
Laundry technology developer Xeros Technology (LON: XSG) says that 2025 revenues will be lower than expected. Cavendish has halved its forecast to £300,000, which increases the loss to £3.4m. The 2026 forecasts are unchanged and there should still be £4m in cash at the end of 2026. Longer-term, there is positive feedback concerning demand from a global OEM launching a product in 2027. The share price fell 1.56% to 1.575p.
Every time I visit my mother, she asks me why the stock market is doing so well when the current government appears determined to hamper the economy by raising taxes, increasing the cost of employing staff, driving up energy prices or just generally getting in the way of business by adding layers of bureaucracy and regulation.
I suspect she is not alone in wondering this. Many Temple Bar shareholders may feel the same unease, with political and economic headlines remaining relentlessly gloomy. The purpose of this letter, therefore, is to explain why such headlines can often be a poor guide to long-term investment outcomes – and explore why periods of widespread pessimism can, in fact, create opportunity rather than destroy it.
Macroeconomic forecasting is not a reliable investment strategy
Very few investors can predict with confidence when recessions will occur, how severe they will become or how long they will last. The same is true of monetary policy. Accurately forecasting changes in central bank behaviour, and then successfully judging how markets will respond to them, is extraordinarily difficult.
If perfect foresight were reliably achievable, macroeconomic forecasting would be a powerful investment tool. In practice, this is rarely possible. Warren Buffett famously advised against it as an investment strategy and advocated exploiting the over-reaction of others to the swings of the economic cycle.
“We will continue to ignore political and economic forecasts which are an expensive distraction for many investors and businessmen. Thirty years ago, no one could have foreseen the huge expansion of the Vietnam War, wage and price controls, two oil shocks, the resignation of a president, the dissolution of the Soviet Union, a one-day drop in the Dow of 508 points, or treasury bill yields fluctuating between 2.8% and 17.4%. But surprise: None of these blockbuster events made even the slightest dent in Ben Graham’s investment principles. Nor did they render unsound the negotiated purchases of fine businesses at sensible prices. Imagine the cost to us, if we had let a fear of unknowns cause us to defer or alter the deployment of capital. Indeed, we have usually made our best purchases when apprehensions about some macro events were at a peak. Fear is the foe of the faddist, but the friend of the fundamentalist.” Source: Warren Buffett, Berkshire Hathaway Letter to Shareholders, March 1995
Economic events impact share prices more than fundamentals
We believe that our ability to add value as investors comes from focusing on where a company’s profits are likely to be over the long term (five or more years), rather than the short-term earnings momentum that most other investors prioritise (often just the next quarter). When we buy equity in a business, we are buying a share of a very long-term stream of future cashflows. From that perspective, a temporary reduction in profits over a year or two does very little to alter the long-run intrinsic value of that business.
As we explored in our January 2022 newsletter, this can be illustrated using a simple net present value (NPV) analysis, which shows how different earnings outcomes affect a company’s intrinsic value. As shown in charts one and two below, the key point is that temporary earnings declines typically have a surprisingly modest impact on long-term value, provided the underlying earnings power of the business remains intact.
Even in a severe recession scenario, where profits are sharply reduced for a period, the impact on intrinsic value is limited. It is only when earnings suffer permanent impairment, and fail to recover to prior levels, that long-term value is significantly affected.
Despite this, many investors have a tendency towards extrapolation and over-reaction to short-term news flow and earnings trends. In doing so, they can create the very mis-pricings that longer-term investors like us are seeking to identify and capture.
The difference between investment and speculation
In essence, this distinction explains the difference between investment and speculation. An investor recognises that buying equity means owning a share of a long stream of future cashflows and seeks to take advantage of situations where share prices fall well below a conservative estimate of intrinsic value. From this perspective, a period of weaker earnings does not normally alter the long-term value of a business materially.
A speculator, by contrast, is trying to guess where share prices are going over the next few weeks and, hence, is playing John Maynard Keynes’s famous ‘beauty contest’ – seeking to anticipate how others will feel about these stocks in a few weeks’ time. The problem with this approach is that sentiment can be a fickle mistress and can change quickly and unpredictably.
“The most realistic distinction between the investor and speculator is found in their attitude toward stock-market movements. The speculator’s primary interest lies in anticipating and profiting from market fluctuations. The investor’s primary interest lies in acquiring and holding suitable securities at suitable prices.” Source: Benjamin Graham, The Intelligent Investor, 1949
Valuation, mispricing and where opportunity may lie
Periods of heightened economic uncertainty often lead investors to favour perceived stability and short-term predictability over longer-term value. When headlines are gloomy, many market participants gravitate towards companies whose earnings appear more resilient, even if that resilience is already fully reflected in valuations.
At the same time, businesses whose profits are more sensitive to the economic cycle are frequently marked down aggressively, regardless of their long-term prospects. This explains why several stocks in the portfolio, including media businesses WPP and ITV, are trading on 4-7% dividend yields and low price-to-earnings ratios (P/E). These valuations reflect the fact that most investors would currently rather sell these stocks than buy them.
We also include below a measure of price-to-normalised-earnings (P/NE), which reflects our assessment of a company’s underlying earnings power in a more typical year. This is important because, as explained earlier, near-term earnings can be depressed in a downturn, making conventional P/E ratios appear misleadingly high. Looking through this allows us to identify businesses whose long-term value – unaffected by the shorter-term earnings impact – is being under-appreciated by the market.
This valuation gap is not a coincidence. It reflects the behavioural tendencies described earlier – extrapolating short-term weakness, over-reacting to uncertainty and paying a premium for perceived stability. As Keynes observed nearly a century ago, it is precisely these fluctuations that create opportunities for patient, disciplined investors willing to look beyond the prevailing mood.
“It is largely the fluctuations which throw up the bargains and the uncertainty due to the fluctuations which prevents other people from taking advantage of them.” Source: John Maynard Keynes, General Theory of Employment, Interest and Money, 1936
Conclusion: discomfort, discipline and continued opportunity
Periods of heightened uncertainty tend to magnify short-term share price movements far more than they alter the long-term prospects of businesses. When investors allow media headlines and market sentiment to dominate their thinking, valuations can become disconnected from underlying fundamentals. We believe that for those willing to remain focused on long-term value, this divergence is not a threat – it’s an opportunity.
We understand that owning or buying cyclically-exposed businesses today may feel uncomfortable. Yet it has been our experience that it is precisely this discomfort that creates the conditions for long-term outperformance. As another very talented investor once said to me, “Some of my greatest investments made me feel physically sick at the time I put them on”.
In one of his regular investment memos, Howard Marks, co-founder and now co-chairman of Oaktree Capital, makes the same point:
“Most great investments begin in discomfort. The things most people feel good about – investments where the underlying premise is widely accepted, the recent performance has been positive, and the outlook is rosy – are unlikely to be available at bargain prices. Rather, bargains are usually found among things that are controversial, that people are pessimistic about, and that have been performing badly of late.” Source: Oaktree Capital, April 2014
Despite the headlines, recent performance has been rewarding for Temple Bar shareholders, but this has not removed the opportunity set that our disciplined, valuation-led investment approach seeks to capture. Indeed, if anything, today’s pervasive economic pessimism may be helping to lay the foundations for the next leg of performance for patient UK investors to enjoy, as short-term anxiety once again creates long-term opportunity.
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Past performance is not a guide to the future. The price of investments and the income from them may fall as well as rise and investors may not get back the full amount invested. Forecasts and estimates are based upon subjective assumptions about circumstances and events that may not yet have taken place and may never do so.
No investment strategy or risk management technique can guarantee returns or eliminate risks in any market environment. Nothing in this document should be construed as advice and is therefore not a recommendation to buy or sell shares. Information contained in this document should not be viewed as indicative of future results. The value of investments can go down as well as up.
This article is issued by RWC Asset Management LLP (Redwheel), in its capacity as the appointed portfolio manager to the Temple Bar Investment Trust Plc. Redwheel is authorised and regulated by the UK Financial Conduct Authority and the US Securities and Exchange Commission.
The statements and opinions expressed in this article are those of the author as of the date of publication.
Redwheel may act as investment manager or adviser, or otherwise provide services, to more than one product pursuing a similar investment strategy or focus to the product detailed in this document. Redwheel seeks to minimise any conflicts of interest, and endeavours to act at all times in accordance with its legal and regulatory obligations as well as its own policies and codes of conduct.
This document is directed only at professional, institutional, wholesale or qualified investors. The services provided by Redwheel are available only to such persons. It is not intended for distribution to and should not be relied on by any person who would qualify as a retail or individual investor in any jurisdiction or for distribution to, or use by, any person or entity in any jurisdiction where such distribution or use would be contrary to local law or regulation.
The information contained herein does not constitute: (i) a binding legal agreement; (ii) legal, regulatory, tax, accounting or other advice; (iii) an offer, recommendation or solicitation to buy or sell shares in any fund, security, commodity, financial instrument or derivative linked to, or otherwise included in a portfolio managed or advised by Redwheel; or (iv) an offer to enter into any other transaction whatsoever (each a Transaction). No representations and/or warranties are made that the information contained herein is either up to date and/or accurate and is not intended to be used or relied upon by any counterparty, investor or any other third party. Redwheel bears no responsibility for your investment research and/or investment decisions and you should consult your own lawyer, accountant, tax adviser or other professional adviser before entering into any Transaction.
