InterestingLeigh, April 2014 – Be grateful for small mercies
Leigh Himsworth, head of UK equities at City Financial and manager of the City Financial UK Opportunities Fund, provides commentary for May
The title refers to a relatively new colleague that has made me realise I don’t have it too bad – he’s a Tranmere Rovers fan – I can almost see you nod gently and accept he has really had it tough.
There are some interesting issues to discuss this month that revolve around the battle between corporate investment and the market rating. Corporate investment, a key part in the recovery jigsaw that we seem to have been waiting an age for, is finally showing some signs of life. Recent years have relied on government expenditure, followed by improving consumer confidence. Up to this stage, businesses have been reluctant to invest up to this stage in the recovery, a phenomenon I believe results from their focusing, instead, on deleveraging their balance sheets.
The chart below may show that we are beginning to see a change in outlook, with businesses now showing a greater willingness to invest.
NFIB Small Business Expenditure Plans
Source: Liberum, Bloomberg NFIB – National Federation of Independent Business
Recent statistics also show that the Alternative Investment Market has had its best year since 2007/08, with 76 companies floated.1 This smaller company bullishness appears to be matched by their larger peers, with 80% of a recent Deloitte’s survey saying that they intended to increase their capital spend. Clearly we must tread carefully, as it was only recently that surveys were showing the opposite. Confidence is the key element in this and can change rapidly, which in turn is the key element in recovery.
The bids we have seen for Astra Zeneca, Alstom, Heritage Oil and Wofson Microelectronics have been of huge significance in April. Their scale and the fact that they each represent a different sector, offers a suggestion that Boards are now beginning to back their improving confidence with cash. As the IPO excitement wears off, perhaps corporate activity will boom as brokers look for greater market consolidation - a feature that, in my opinion, is long overdue.
If this information is to be believed, then the next issue is, how much of this is priced into markets and how should the fund be structured? As I have mentioned previously, ratings are full and many investors have clearly anticipated this recovery. A forward price to earnings multiple of 13.5x2 next years’ earnings, and a prospective yield of 3.7%, leaves little room for disappointment. Clearly the question goes deeper. In my opinion, the sectors that are most exposed include the consumer, house builders and so on - effectively, those that have government related stimulus or consumer confidence. In my view, this implies our next step should be to raise exposure to industrials and more overseas exposed stocks, perhaps in contrast to other commentators, who may have suggested a more domestic exposure.
If this is a ‘full-on’ recovery, then there may be a need for the UK to begin tightening ahead of others. This in turn may cause problems politically in the run up to an election year, and ahead of the Scottish vote on Independence, which, incidentally, I think they will vote for.
As I am sure many of you are aware, the outlook remains bleak for Tranmere Rovers but for the rest of us the worst may well be over.
1) Times 7/4/14
2) Peel Hunt UK Market Valuations & weekly market moves: 31 March 2014