Figure 1 America First but for how long?

Source: Bank of America Merill Lynch

Hard times continue for ‘conventional’ global investors in 2018  The only place to make serious money has been in the famous FAAMNGS and BATs, which come under (Consumer) Discretionary in Figure 1. However, this week John Stepek, Editor of Money week, acerbically suggested this performance as arising from fund managers’ investing for the safety of their own careers by keeping up with herd rather than out of conviction. Some of us can remember a similar herd approach in the Dot.Com boom. Figure 1 shows, nevertheless, that at least some fund managers are hedging their bets by holding more cash than usual (not Gold, take note!). There are certainly plenty of things to worry about, not least politically. ‘Home sweet home’ seems to be by far the overall preference for US managers as they pull money out of Emerging Markets as well as (unlike my colleague Chris Bailey) UK and Euro Area equities. The out-of-favour pound (see Ben Stephens in Item 7) is making UK equities even cheaper but the euro still has its global fans. In fact, with the intriguing exception of Mexico, forward P/E equity valuations have been falling everywhere, even in the US where the FAAMNGs and BATs have failed to offset the rest. The biggest falls in valuations (now starting to be reflected in the year-to-date performance of the market indices) have been in 2017 favourites India, Brazil and Japan, although Figure 1 shows some support remaining for the last. Unsurprisingly, bonds are not popular even if the Fed is more or less on its own actually raising rates: for example, real 2-year yields are either negative or nugatory in most developed markets (except Singapore and South Korea, if you can get hold of any) and, of course, in Emerging Markets. A less kind description of global fund managers than ‘conventional’ might be ‘wildebeest’. The second half of 2018 could well as be disappointing as the first for the professionals. Investors who manage their own money should look beyond (but not ignore) the US and the FAAMNGs and BATs. They should sharpen their stock-picking skills, resist wildebeest stampedes and not be afraid of taking profits.

Alastair Winter Chief Economist

Figure 2 Independent Oil & Gas PLC: pigging out

Source: IG Index

Since we last wrote about International Oil and Gas (IOG.L)  the shares have surged from 20p to 52-week highs of 33.5p before some profit-taking. In June the company announced a successful ‘pigging’ programme which provided information for the proposed recommissioning of its Thames Pipeline. On Tuesday, IOG gave a further update on the Thames Pipeline:

– The cut section analysis confirms that the offshore section of the pipeline ‘can be considered practically ‘as new’’.

– Inspection of the Bacton end of the pipeline is planned in the coming weeks to inform a planned elevated pressure hydrotest which will complete integrity confirmation.

– A further intelligent pig run is now not expected to be required until shortly before ‘First Gas’.

– The Final Investment Decision is now targeted for the end of September 2018.

These developments point to both significant cost savings and an accelerated timetable towards prodution. Unsurprisingly, Tuesday’s interest has sparked renewed investor interest.

Steve Shelley Investment Hub

Figure 3 Barclays plc : boardroom dreaming

Source: Google Stock Images

Life remains interesting at Barclays (BARC) after a last year which has seen the surprise splitting-off and sale of their African business, an embarrassing ‘witch hunt’ of a whistleblower by their CEO and the entrance onto their shareholder register of an activist investor who spies an opportunity in a share which still trade well below book value. This week’s excitements include a press story that the company is thinking about expanding their US retail banking presence. The idea would be to expand in America by trying to replicate the UK footprint of a retail bank’s funding lending to corporate clients, who in turn tap the group for corporate banking and related advice. Such a model is just about working in the UK where the company has been active for a couple of hundred plus years but it is going to be much harder – and more expensive – to get a foothold in the US.  I doubt if this is any more than an excitable press story.  Watching for the next move by the activist investor is likely to be far more important and influential over the next six or twelve months. The Dynamic Opportunities Fund recently added to its holding in Barclays.

Chris Bailey Chief Investment Officer.

Figure 4 Bacanora Lithium PLC: testing, tested

AIM-listed mining company Bacanora Lithium (BCN, which has a current Market Cap of £87m, is seeking to raise $100M from a placing of new shares. The combination of the Placing proceeds and the initial US$25m drawdown from a previously-announced US$150m senior debt facility  will give the Company sufficient funds to begin the constructing of the Sonora Project in Mexico. The aim is for Sonora to be the world’s next major lithium producing mine with Phase 1 to be ready for commissioning in Q1 2020 in order to meet soaring demand for lithium batteries. The feasibility study was completed in February and expected output after Phase 1 is completed is 17, 500 tpa. The placing is not suitable for all investors and distribution is restricted. The new shares are expected to be listed as soon as next week. If you are interested in this offer or similar transactions please contact me.

Ed MacLaren Investment Hub

Figure 5 Telit Communications PLC: something in the air?

Source: IG Index

It’s been a busy period for Internet of Things company Telit Communications (TCM.L), whom we have previously featured in Signals. Having announced in April in the release of its 2017 results that a sale of its rapidly growing automotive division was intended,  the Group confirmed last week the completion of a deal worth $105M with China’s TUS International. Telit also said that it expects 13% growth in revenue for the 6 months to June 30th, driven by a ramp-up of new designs and strong demand for its connectivity capabilities. There has also been some director buying: Chairman Simon Duffy and NED Miriam Greenwood on Monday bought 11,657 shares at 171.30p and  11,500 shares at 171.60p respectively. Run Laing Tai Management have built up a 14% stake, which could point to a company sale and/or buy-out. The cash proceeds dwarf  debt of $25m USD as at the end of June. Telit has had a somewhat chequered recent history and these favourable developments have so far had a relatively limited impact on the share price. However, Figure 5 does at least show that the shares are again moving up from the consistent bottoming support levels of the last 10 months.

Steve Shelley Investment Hub

Figure 6 Gresham Technologies PLC: all-programmed and ready to go

Source: Company Website

Gresham own the highly-rated and award-winning Clareti financial risk control software platform that provides financial institutions with complete data processing certainty. Clareti is a highly flexible, fully scalable platform that ensures the integrity of data across the whole enterprise. It is designed to address the most challenging financial control, risk management, data governance and regulatory compliance problems. Its users now include a highly regulated Tier 1 US Bank with a £1.2m contract with the potential for additional software revenues as the use of the platform grows. These contracts generate long term reoccurring revenue and further such deals seem likely. After the latest weak Trading Statement  GHT’s shares plunged from 200p. Despite winning six new Clareti contracts, including the first project in one of the world’s largest global investment banks, revenue will be down when Interims for the six months to June are announced next Tuesday. First half-trading is likely to show a 5% reduction in revenue after last year’s 26% surge to £9.9m and was caused by delays in Clareti contracts. The impact should be limited to the first half and should leave earnings for the full year to December 2018 broadly in-line with expectations. This is for a PBT of £4.2m on £23m revenue giving a prospective P/E of 24x with a 0.3% yield. It seems likely that the Mkt Cap of £112m will recover from the recent set-back.

Jon Levinson Corporate Broking

Figure 6 Not even inflation can help friendless sterling

Source: Proquote

UK inflation failed to rise as expected last month, potentially giving the Bank of England pause for thought ahead of a widely-mooted interest rate rise next month. Economists had expected higher energy prices to push the rate up to 2.6%, but in the event this was offset by summer clothing sales and the Inflation figure remained at 2.4%   The pound dropped sharply on the news, as traders revised their bets on an August rate rise.  Political turmoil in the past few weeks over the type of Brexit we shall have to endure has not helped either. Sterling is unwanted as of late and as reaffirmed by today’s knee jerk reaction, carving lows not seen since September 2017. Today’s soft inflation reading may do little to knock the Bank of England off of their implied course, but the chances of a rate rise in August have definitely decreased.  Positive developments in Brexit might have helped to reverse Sterling’s downward trend…but it would seem that it has stalled amidst unseemly Parliamentary strife and everyone seems more interested in the holidays despite the clock ticking and time running out.  Once again, alas, the holidays just got more expensive if you are heading to Europe or the US!

Ben Stephens Head of FX

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By Alastair Winter

Cheif Economist at Daniel Stewart

alastair.winter@danielstewart.co.uk