Chart 1: United Technologies Corporation: Breaking up is…good to do?

Source: Company Website

Can one-third plus one-third plus one-third equal more than one?  A conventional grasp of mathematics would suggest not but do not tell this to US conglomerate United Technologies (UTX in the US) who announced last week a plan to split themselves into three independent aerospace, industrial and elevator related companies.  Company splits have become a bit of a rage in recent months but remarkably – as with the relatively imminent three-way split of DowDuPont (DWSP) – often this follows largescale merger and acquisition activity.  It is somewhat ironic that United Technologies have only in recent weeks completed the large Johnson Controls acquisition, for example.  Expect to see more of this as companies try to find ways to boost returns to shareholders in times of broader macroeconomic uncertainty by rediscovering focus and the entrepreneurial managerial opportunities.  Not that DowDuPont or United Technologies are creating three teeny tiny corporate concerns.  All six could plausibly be members of the S&P 500! Disclosure: the Global Dynamic Opportunities Fund holds shares in DowDuPont.

Chris Bailey Chief Investment Officer

Figure 2: Bilby PLC:  Building a Re-Rating

Source: Company Website

Bilby PLC (BILB.L) provides building, maintenance and utilities services to local authorities, housing associations and corporate clients. Last week the acquisition of R Dunham, an electrical services specialist, was announced, bringing additional business clients in the prime London and the South East areas together with potential cross-selling opportunities. Founder Phil Copolo and his son resigned in September after selling a 31% holding to an interesting group of institutional shareholders including Miton, Thornbridge and Ruffer. The price was 100p per share, which is about where it is today and making the market cap £40m. In the year ending in March 2018 revenues grew by 23% to £78.8m and the interim results, which are due out shortly, are expected to reflect demand’s remaining strong enough for the Company to turn down low margin business. The dividend is likely to be increased from 2.5p a share to 2.75p a share, which would put the shares on a prospective PER (price earnings ratio) of less than eight times and a yield of 2.8%. A new finance director and Nomad were recently appointed, and the past problems seem behind them. The interims may help stimulate a re-rating.

Jon Levinson Corporate Broking

Chart 3: GBP/USD and GBP/EUR: Defeat for May priced in?

Source: Proquote

Sterling is wallowing at present while all eyes are on Brexit.  The above charts show that since Mrs May brought her deal to the table and the EU team agreed not much has changed.   I suspect it will remain so until the vote on the 11th Dec and the waxing and waning of opinions on what alternatives might there be should Mrs May be defeated in the Commons.  Early yesterday sterling recovered from weekly lows vs Euro and the dollar on the news that the UK can abandon Brexit and simply withdraw article 50 before the 29th March 2019 deadline.  I am, however, sceptical that any strength in Sterling is sustainable and subsequent movement later yesterday bear me out.  The scale of the defeat of the government’s Brexit deal in next week’s Parliamentary vote is likely to be the key driver of Sterling into year-end; a heavy defeat could be negative for the currency as it would draw into question May’s ability to cling to power, a narrow defeat could suggest the deal could slip through on a second or third attempt. Yesterday’s narrow but humiliating vote that the Government is in contempt by refusing to release legal advice on Brexit is yet another unhappy incident. Sterling is stuck in a morass of political intrigue and speculation!

Ben Stephens Head of DS FX

Chart 4: Deutsches Angst

Source: Breakout Point

Monday’s euphoria on the Trump-Xi trade truce seems to have subsided very quickly in Tokyo and New York but, at the time of writing, not yet in China, where apparently investors as well as government officials await instructions from Mr Xi. German equities are also suffering withdrawal symptoms as the DAX yesterday gave back  more than half of its 2.5% gains on Monday. As one might expect, the biggest movers were the German car manufacturers (BMW, Daimler and Volkswagon), which are indeed suffering from a slowdown in China’s economy and official ‘encouragement’ of Chinese car companies. The DAX closed nearly 12% down year-to-date, which is even worse a performance than the more obviously beleaguered Milan or London equity markets. Moreover, unlike other major indices the DAX is measured in total returns,: i.e. including dividends. It has only 30 constituents and Figure 4 shows that at least 8 of them are currently being shorted. The Deutsche Bank saga is well known (4.6% of its shares are sold short) but it is not clear why the others have fallen from grace. Most of them do have international operations but not all are major exporters and exposed to trade disputes or even Brexit. The common factor seems to be that they are German at a time when all is not well in the Bundesrepublik. GDP fell by 0.2% in Q3 and leading indicators such as ZEW (economists), IFO (businesses) and PMI (Manufacturing and Services) are not encouraging. Only consumers seem happy enough but even they are not out spending consistently. The curtain is coming down on Merkeldämmerung but no redemption leitmotif is sounding. Shorted stocks should not be automatically avoided but it is wise to tread especially warily.

Alastair Winter Chief Economist

Chart 5: Where cash is king?

Source: @Charliebilello

As a rather dispiriting year for investors (and everybody else?) draws to a close, it is becoming increasingly fashionable in the US to recommend holding cash. The most frequently-aired argument is that global growth is slowing because neither Mr Trump nor Mr Xi understand how economies flourish (which does appear to be at least partly true) and that a slump is inevitable followed or preceded (delete as appropriate) a stock market crash. A pseudo-technical argument is that because asset prices rose in response to central banks’ (Fed) largesse then they must fall when the ‘punchbowl’ is being removed. More convincing evidence of a looming recession are flattening yield curves and even some (still fairly obscure) inverted ones. Regular readers will recall that I have for much of 2018 been signaling a cyclical economic slowdown, mainly because of China and despite the tax-cut sugar rush in the US. It is reasonable to conclude as a consequence that growth in collective global corporate revenues and  profits will also slow but that is not the same thing as the shares every company in every sector in every economy taking a hit. Many companies will continue to generate strong free cash flows and maintain dividend payments that compare rather favourably with cash returns. The best reason for holding cash is uncertainty and there is…er…certainly plenty of that about! However, it is worth noting that in many countries there is attached a cost aka inflation. Switching to cash looks somewhat easier in the US where equities still fetch fancy prices than on this side of the Atlantic.

Alastair Winter Chief Economist



To be added to the mailing list for the FULL article, please fill out the below form.


By Alastair Winter

Cheif Economist at Daniel Stewart