Investment sectors in the limelight – and those waiting in the wings
The tech sector seems to dominate the media attention given to start-ups. The term ‘unicorn’, a privately owned business valued at more than a billion dollars, was born in Silicon Valley. The global superstars of the start-up world are often the tech companies for which there are few barriers to world domination.
But there are also other sectors raising cash from adventurous investors. The UK film industry has seen an increase in financial backing from independent sponsors alongside the support given by successive governments, including £200 million raised under the Enterprise Investment Scheme (EIS) in the past year. For UK-based investors who are new to the film industry, EIS helps make investment in a high risk industry more accessible. By providing 30 per cent upfront income tax relief, the investor receives 30p back for every pound that is put in. Then there are further reliefs for those with capital gains tax liabilities and if the investment is not successful there are further loss reliefs. All these tax advantages go a long way to mitigating the risks of an early stage start-up.
The film industry has been particularly popular for EIS investors as the government further supports the industry in the UK with the film production tax credit; a system that provides filmmakers with 20 per cent of costs back as a rebate. All this helps to support British films successes such as Mr Turner and Testament of Youth. Or The Kings Speech and Slum Dog Millionaire, which both gained private financial investment before scooping up Academy Awards and BAFTA’s.
Beyond the movies there are other sectors that are surprisingly popular with the early stage investors; in fact, there has been an explosion of interest in the previously staid world of mattresses.
Eve Sleep raised £375k in early 2015 (at a valuation of £891k). Then a further £22 million at progressively higher valuations over the next 2 years. They have just completed an IPO and now have a market capitalisation of £132 million. One of their main competitors has also raised £17.5 million of early stage money over the last 2 years. Is this what constitutes investors putting money under the mattress in our turbulent times?
Unfortunately, there are other sectors that are out of fashion – but where there may be good value. The less glamourous manufacturing industry is facing a six-year low in investment.
While manufacturing accounts for around 10 percent of the UK economy, Brexit has resulted in yet more uncertainty for manufacturers but a less valuable sterling makes products more affordable to an international client base, and with global sales accounting for two-thirds of manufacturing business; investing in UK manufacturing could reap rewards.
There are other sectors, such as medical devices, healthcare services and biotech, that are receiving high levels of government support, have an enviable record of UK talent and where an ageing population will continue to create demand on wider healthcare expenditure.
A hazard for would be early stage investors, particularly with tech investments, are that there are many innovative solutions that are desperately looking for a problem to solve. That is why my business focuses on consumer stuff – the products and services we buy and the way that we buy them. Whilst also thinking about the strength of team and the business model, we get excited about products or services laser targeted at a particular consumer pain or gain. We still see plenty of opportunity with real things – such as products that end up on supermarket shelves and casual dining experiences that can scale up to become well known chains.
Because these types of businesses are relatively less capital intensive, they are also well placed to take advantage of the Seed Enterprise Investment Scheme (SEIS) – established in 2012 as an extension of EIS. A company may raise their first £150k of equity investment under SEIS and investors can benefit from tax reliefs even more generous than under EIS. Income tax relief of 50% of the investment means the risk is halved as soon as an SEIS investment is made. Then there are other CGT reliefs, inheritance tax relief and loss relief should the investment fail. Gain on the investment is free from all capital gains tax after being held for three years.
The SEIS scheme makes it easier for the earliest stage businesses to raise enough cash to create the proof points for further investment and it mitigates the risks for investors for what is clearly a high risk/high return investment.
Matthew Cushen is an innovation consultant, entrepreneur and successful angel investor. He is Co-founder of Worth Capital.
The Start-Up Series SEIS Fund One, created by Worth Capital and managed by Amersham Investment Management, is a £2.1 million fund investing in 12 monthly winners of the Start-Ups Series, along with 2 other discretionary investments. The minimum investment is £10,000. Find out more here: www.worthcapital.uk
Bank of Japan keeps monetary policy steady but raises outlook on consumption
The Bank of Japan kept monetary policy steady on Friday and confirmed that its economy was picking up momentum, after several years of weak economic figures.
The Bank also upgraded its assessment of private consumption for the first time in six months, but added that its extensive stimulus programme would remain in place for the near future as inflation lags well below the Bank’s target.
“There’s some distance to achieving 2 percent inflation, so it’s inappropriate to say now specifically how we will exit our ultra-loose monetary policy, and how that could affect the BOJ’s financial health,” the Bank’s governor Haruhiko Kuroda told a news conference.
“We will debate an exit strategy only after 2 percent inflation is achieved and price growth stays there stably.”
The Japanese economy has been flagging for several years, falling into recession three times since the financial crisis. Last year the Bank of Japan announced a dramatic stimulus programme designed to boost economic growth, with recent figures showing that it may be beginning to pay off.
Rolls-Royce shares up after CEO maintains current outlook
Troubled aero-engineer Rolls-Royce (LON:RR) maintained its underlying outlook for the year on Friday, confirming that all businesses were performing in line with expectations.
Chief Executive Warren East commented on the group’s performance on Friday, saying that whilst he was pleased with the start of the year, there was still more to do to deliver.
“As expected, near term cash flow performance remains challenging as we continue to invest in transforming and growing the business to benefit future years,” he said.
The aircraft engine maker, who have issued several profit warnings over the last couple of years and enrolled in a strict cost-cutting programme, warned back in February that 2017 earnings will only be modestly better than a year earlier.
Underlying free cash flow, which was £100 million last year, is expected to be around the same for 2017.
Rolls-Royce (LON:RR) shares are trading higher on the announcement, currently up 1.96 percent at 912.00 (1043GMT).
Oil prices recover slightly but remain near 2017 lows
Oil prices moved up from their recent lows on Friday, but excess supply continues to put downward pressure on the market.
The price of oil has risen towards the end of the week, from 2017 lows achieved at the beginning of June after soaring US output negated the effects of an OPEC agreement.
WTI Crude is currently up 0.65 percent at $44.75 per barrel, with Brent Crude up 0.92 percent at $47.35.
Tamas Varga, analyst at brokerage PVM Oil Associates, commented:
“The market took a breather yesterday and is trying to recover somewhat this morning. It is by no means bullish.”
Both oil benchmarks are around 13 percent lower than where they were trading in late May, when producers led by the Organization of the Petroleum Exporting Countries (OPEC) extended a pledge to cut production by 1.8 million barrels per day (bpd) by an extra nine months.
Since then, however, rising US output has had a negative effect on prices, dampening the investor optimism that pushed up prices in the wake of the OPEC meeting.
Major retailers see shares fall after DFS profit warning
Shares in FTSE 100 retailers had a difficult morning on Thursday, after investors were spooked by a profit warning from furniture giant DFS (LON:DFS).
In a trading statement, DFS adjusted their EBITDA forecast for the full year downwards, to a range of between £82 million – £87 million. The new estimates, well below previous forecasts by analysts, were attributed to a decline in footfall as a result of UK economic uncertainty.
Shares in other major retailers also fell on the back of the news, with Next, Marks & Spencer, Kingfisher and Tesco some of the FTSE 100’s biggest fallers.
FTSE 250 retailers, including Dunelm, AO, Card Factory and Ocado are also down, with fello furniture retailer Dunelm trading 6.2 percent lower.
In a trading update, DFS said: “The trading environment has however recently weakened beyond our expectation, with significant declines in store footfall leading to a material reduction in customer orders”
“We believe these demand effects are market-wide, in line with industry indicators, and are linked to customer uncertainty regarding the general election and the uncertain macroeconomic environment.”
DFS are currently trading down 20.85 percent at 199.47 (1125GMT).
Fashion retailer Quiz announces flotation on AIM market
‘Fast fashion’ retailer Quiz announced plans to float on the AIM market on Thursday, in an IPO expected to be worth around £200 million.
Scottish-based Quiz, who recently signed JD Sports chief executive Peter Cowgill as chairman, are hoping to list on London’s junior market in order to boost expansion and allow its founders to cash out part of their stake in the company.
Should the company IPO at its expected £200 million, chief executive and founder Tarak Ramzan is likely to take home around £100 million.
Quiz currently has 73 stores in the UK as well as 167 concessions in department stores such as Debenhams and House of Fraser. Last year the retailer made an operating profit of £10.3 million, with revenues jumping by 21 percent to £89.8 million.
Ramzan said: “Quiz is a strong and distinctive omni-channel fashion brand with a clear customer and product focus.
“Fast fashion is in Quiz’s DNA and our ‘just in time’ model ensures that we are always responding in real time to new trends as they emerge.
“I am very confident that we have a well-invested infrastructure, a fantastic team and a clear strategy to accelerate further the growth of the Quiz brand across all channels and markets.”
Gold falls as markets prepare for US Fed to hike rates
The US Federal Reserve is expected to raise interest rates at its meeting on Wednesday, despite weaker than expected inflation rates.
The Federal Open Market Committee is expected to raise the fed funds target rate by a quarter of a point, from 1 to 1.25 percent.
The move is to come despite inflation still coming in under the Fed’s preferred rate, with the PCE deflator falling to 1.5 percent from 1.8 percent earlier in 2017. The Fed began their policy tightening programme in December 2015, after more than a decade of flat rates, but investors are growing increasingly doubtful policymakers will be able to stick to their anticipated pace of tightening of three interest rate rises this year and next as the economy begins to flag.
“I don’t think inflation coming off is going to alter the current upward trajectory for rates right now,” said Chris Rupkey, chief financial economist at MUFG Union Bank.
“I don’t think we’re going to take one or two rate hikes off the table for the next one or two years. I think they’re going to stick with the game plan.”
Gold prices fell for the fifth day straight on Tuesday as investors anticipate the hike, marking its longest string of losses since the nine-session period ended March 10 according to FactSet data.
Bellway shares rise as “robust” market props up demand
Shares in housebuilder Bellway (LON:BWY) rose on Wednesday, after reporting a larger-than-expected growth in home sales for the 2017 fiscal year.
According to the group, a “robust” property market added 10 percent growth to their home sales over the year. For the four months to June demand remained strong, with a 13 percent increase in reservation rates.
Looking forward Bellway expect trading to remain strong, despite uncertainty in the wake of the general election and heading into Brexit negotiations. Chief executive Ted Ayres said:
“Robust market conditions, together with a clear operational focus, is enabling Bellway to continue increasing its contribution to the supply of much-needed new homes.
“We have made a significant investment in land and work in progress over a number of years and this, together with a strong balance sheet and substantial operational capacity for expansion, should ensure that Bellway is well positioned to deliver further volume growth, this year and beyond.”
The average price for its homes remained at £260,000 and the value of its forward order book of homes stands at £900 million, up from £846 million in the same period last year.
Bellway shares are currently trading up 4.07 percent at 2,966.00 (0941GMT).
Moody’s warns of negative impact on credit rating after UK election
Ratings agency Moody’s has warned of a negative impact on the UK economy in the wake of the inconclusive election result, adding that it is likely to complicate and delay impending Brexit negotiations.
In a report published on Monday, Moody’s said the result was also bad for the country’s credit rating.
“In our view, the budget deficit will increase this year and next as the Government reacts to the economic slowdown under way,” said Kathrin Muehlbronner, Moody’s senior vice president.
However, the agency added that the result had made a hard Brexit less likely, weakening Theresa May’s mandate to walk away from the EU with no deal as previously threatened.
The comments echo those of other rating agency Standard & Poor’s, who also commented on a negative impact on the UK’s credit rating.
“In terms of the outlook for growth, it’s clear that things are not going in the right direction,” S&P European chief economist Jean-Michel Six told the AJEF association of financial journalists in Paris.
“This latest bit of instability can only weaken the business environment and consumer confidence,” Six said, according to Reuters.
UK Inflation hits five year high of 2.9pc
The UK inflation rate rose to 2.9 percent in May, up 0.2 percent from the previous month and well above the Bank of England’s target.
The rate has jumped to its highest level since April 2012, after increasing at a slower than expected rate over the past couple of year. According to the figures from the Office for National Statistics, rising prices for recreational and cultural goods and services – particularly games, toys and hobbies – was the main contributor to the increase in the rate. Other upward contributions came from increased electricity and food prices. The figure is now well above the Bank of England’s 2 percent target, and higher than the average wage growth figure of 2.1 percent.