An independent professional's take on the latest news and trends in global financial markets

Archive for the ‘Artemis’ Category

Mixed messages from the markets

Two contrasting views today that neatly sum up the current rather feverish market dynamics. This link summarises Deutsche Bank’s view that the worst case outcome the Eurozone crisis could be a 35% fall in global stock markets. And here, on the other hand, is the latest weekly view from fund managers Artemis, citing six reasons to be cheerful.

Of course the whole world could still go to blazes in debt’s handcart. It might well. But on balance, we prefer to remember that the FTSE 100 is (just) above its level as 2011 began. And that’s despite, it’s worth remembering, Japan’s tsunami, war in Libya, Arabian unrest, nemesis in Greece and the end of American QE.

Corporate health. Sure, there’s more bad news to come, we reckon, for most UK retailers. But there’s still much less credit risk in most companies than there is in governments. Take a stock like Hunting (oilfield services). It has cash of £300 million, a third of its market cap. Or publisher Reed. It’s priced at 11.5x, has a 4% yield, diversified earnings and improving margins. Japan’s NTT Docomo (mobile telecoms, 3.8% yield) has more cash than it knows what to do with.

M&A. Weaker sterling makes UK assets even more attractive to foreign (war) chests. Negative real interest rates in the west. These force investors, reluctantly or otherwise, into (high yielding) equities. Pessimism. It’s pronounced. If history has any predictive power, the gloom suggests this is a ‘buying signal’. Emerging markets. China seems to be Goldilockian. The prospects are patent, and the growth is good. The best western companies will continue to make their money there, not here. QE2. Its positive effects will take time, but will benefit the US economy.

What all this confirms to me is that the market, as always, has great difficulty in finding a level when there is a wide range of potential outcomes, some of them extreme. The Eurozone crisis is a good case in point.  The way the crisis has evolved is as much an indictment of the inadequate way that Europe’s political class have responded to the new threat of sovereign debt default as it is about the underlying gravity of the potential problem.

Meanwhile, the interesting part about Mr Bernanke’s recent testimony, to my mind, is the reaffirmation that his whole approach to running the Federal Reserve is rooted in his paramount desire to avoid deflation at any cost.  if he does restart a further round of printing money (quantitative easing), it will be because the Fed sees a real risk of deflation once more.

The odds are still against a worst case outcome at this point, but there is no denying that it is a possibility, and that is what sends risk-averse investors scuttling for protection. In these circumstances remember all those stories about a big turn in sentiment towards gold and other commodities in the early part of the year? Gold’s continued ascent to new highs tells a different story.

Written by Jonathan Davis

July 15, 2011 at 2:00 PM

An Unequivocal Bet On The Markets

William Littlewood, the manager of Artemis Strategic Assets Fund, is the latest  fund manager to come out today and say unequivocally that they  are now betting that equities are a better place to be than bonds. This is his view  (I am an admirer and an investor in his fund):

Our net equity position increased from 77% to 80% as we increased the long position and slightly cut back the shorts. I continue to believe that equities are easily the most attractive asset class, and offer compelling value relative to government bonds.

It is noticeable that in recent months there has been increasing take-over activity, indicating that companies are finding it cheaper to acquire than to build. In the UK two mid-cap companies, SSL and Tomkins, have been taken over and on the global stage Sanofi is actively pursuing Genzyme while Billiton wants to buy Potash. These deals suggest to me that the equity market is attractively priced.

In regards to currencies, we have added to our positions in Norway and Sweden so that these two Scandinavian countries amount to 15% of the portfolio. Both these countries have current account surpluses and sound public finances. The oil-rich Norwegians have a substantial government surplus and the Swedes have one of the lowest government deficits in the mature world. Our view is that strong countries will eventually have strong currencies and so we are optimistic for both the Krona and the Krone. Read the rest of this entry »

Written by Jonathan Davis

September 29, 2010 at 10:54 AM

Adrian Frost: Are UK Dividends Secure?

No question is more topical today than how sutainable the dividend yield on the market might be. If there is a case for holding equities, it rests on the impressive-looking yields that are currently available on a number of well-financed UK companies. These are the views of Adrian Frost, the highly regarded income fund manager at Artemis, as reported on the Hargreaves Lansdown website. (In the interests of full disclosure: I am a non-executive director and client of Hargreaves Lansdown).

“One thing is sure. 2009 will see more dividend cuts. We saw just short of 100 such cuts in the FTSE All-Share in 2008. More will follow. For the moment they are confined to banks and economically sensitive areas – but this may spread. Yet at the moment, despite the FTSE All-Share Index indicating a dividend for 2009 some 7% below last year (source:DKB), we believe that the dividend on prudent equity income funds will be flat at worst”.

“Looking ahead, the ‘big question’ is: are (enough) dividends sustainable? Consider five salient facts:

  • 37% of all dividends are paid in US$. So unless you think the dollar will die, these seem okay.
  • 25% of UK dividends come from oil companies. To us, BP, Shell and so on look cash-rich and healthy, and say that they could maintain dividends for a year even at $35/barrel.
  • The top 25 London-listed companies generate 74% of UK dividends.
  • The top eight companies – HSBC, BP, Shell, Vodafone, Glaxo, Astra, BAT and BT – generate 50% of UK dividends. We own them all, except (for very good reasons, in our view) BT.
  • “Four years ago, 43% of our fund was in FTSE 100 companies. That percentage is now 76%.

“Our fund’s yield is 6%*. Do we think that, without undue risk, we can maintain that? Yes. Our view is to hasten slowly in the months ahead. Stick to the basics, cash flow and dividend, and all should be (relatively) well”.

My comment: nobody can doubt that the first two months of the year have been brutal for the equity markets, but dividends are the key to long term equity returns. The recent LBS/Credit Suisse Global Investment Returns Yearbook showed that at the end of 2008 the long run capital return on equities since its authors’s data series began (in 1900) was less than half of one per cent, with all the return coming from reinvested dividends.

A 6% market yield, if it does indeed prove to be sustainable, has historically never failed to produce strong equity returns over five years – something to cling on to as the value of your equity portfolio is slashed further by the current wave of violent downward lurches in the leading indices.

Written by Jonathan Davis

March 3, 2009 at 7:23 PM

Posted in Adrian Frost, Artemis