Boris to Win 43 Seat Majority Says Meta-Poll

You’ve heard of meta-analyses, where academics who can’t be bothered to do their own research just nick everyone else’s hard work, crunch the numbers a bit, and come out with a super-accurate result? Well here is our META-POLL. After much reading of the papers, surfing the net, and even talking to people, we have concluded that the Tory party will win. (Bet you saw that coming eh?)

Why do we think that?

  1. Farage folded, as predicted here recently, avoided splitting the leave vote, and crowned the Tories as winners

  2. The Labour manifesto was written to appeal to hard-line left wingers – who would have voted for Jeremy anyway. Only the naïve or those too young to remember the 1970s could think that nationalisation is the answer. (See our earlier report on rail user numbers pre- and post – nationalisation). The “free” broadband idea went down well, but the practicalities are horrible. By the time it is built, at five times the original cost, technology will have made it obsolete. And the big beneficiaries will be the farmers and isolated rural communities – who will not be voting Labour under any circumstances. Meanwhile, their fence-sitting on Brexit feels a bit like “Follow Me….. I don’t know where we are going, but Follow Me!”

  3. The Liberal Democrats have shown themselves to be neither liberal nor democratic. Their reverse Article 50 campaign can only appeal to the most die-hard europhiles. Meanwhile, Jo Swinson has not done well. Her claims to be PM in waiting invite the retort that she’ll be waiting a very long time.

  4. The Tories have avoided a May-style manifesto-suicide-note. Divisive figures such as Rees-Mogg have been kept out of the limelight. Boris himself has picked his battles carefully, with more to lose than win.

So what happens now?

There are still considerable risks for Mr Johnson. Will the left-leaning students be too busy recovering from their end-of-term parties to vote?

Students preparing to oversleep and miss voting

Just how many people were too embarrassed to tell pollsters that they would vote Tory (but will anyway)? Will tactical voting have any impact? Will Mr Trump try to intervene? He is not great at keeping his thoughts to himself is he? That could hurt Boris. In this last week, we expect the Tories to try to refocus on Brexit as the major issue – and Labour to try to talk about virtually anything else!

What does it all mean for Asset Prices?

The market had a lost year in 2019, with too much uncertainty. A Tory win is about 70% baked into the market, so we expect a moderate bounce on 13 December. This will be most pronounced for the likes of BT and other nationalisation victims. Despite longer term trading arrangements still being in the air, we feel that 2020 will turn into a log bull run for equities and commercial property, as investors get back to the serious business of making money.

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FTSE Forecast; Brexit Supports, World Economy Undermines

It is that time of the month when we ritually kick ourselves for making what turned out to be a stupid forecast six months ago – and then, without learning from our mistakes – we go on to make a crazy forecast for where FTSE will be in another half year.

Will go up, will go down, but not necessarily in that order

BUT this time, we weren’t so far wrong. Back on 15 April, we had failed to leave the EU on the second deadline, and a new exit-date of 31 October had been decreed. Wisely, or perhaps by luck, we guessed that on 15 October, Brexit might not be established, or the future might be rather worrying. Quote “So we will work on the basis that Brexit is still on-going by October.

Our forecast for 15 October was 7600, quite a reduction from the 8150 we had been predicting for September. Thus, we got the direction right, and a close of 7212 is pretty accurate by our standards.

The Next Six Months

Now for the next six months. British politics are somewhat unpredictable. We think that Boris might just pull it off and squeeze Brexit through tomorrow. The country (or at least 52%) will rejoice….. so there is no way the opposition will allow an election if Brexit goes ahead. Thus our central forecast is that Brexit happens, but then the minority government struggles on for several months until the demand for an election is overwhelming. This could easily be around our forecast date of 15 April 2020. However, a Brexit Deal will create an optimism and gentle release of pent up demand to support the UK economy over the next six months.  Lack of Government interference with new laws will also help!

However, no country is an island. Okay, well some countries are islands. Malta comes to mind. But economically, the future of UK based businesses, with our new, outward looking trade policy, cannot be but affected by the world economy. We foresaw the potential of a recession by year end, and the data published since then has done nothing to change that view. The global economy, from US to China to EU (in that order) is definitely looking soft.

Where does that leave us?

The UK domestic economy should have a surge, this will be countered by weak global growth.

Re-rating

The UK stockmarket, is at rather low multiples of income, given the interest rate environment. This morning, www.dividenddata.co.uk quotes the FTSE100 yield at 4.53%. If / When Brexit is settled, we see scope for yield compression – and hence price rises – justified by the reduced uncertainty and risk.

In summary, we think UK growth will be supportive, global economics will undermine, but an extra boost will be given by removal of the Brexit factor. From a close yesterday of 7182, we see FTSE100 at 7600 on 15 April. This is an increase from the 7200 we expected for Jan – Mar next year.

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FTSE 100 Forecast Flat Until March 2020

It is that time for us to kid ourselves that we have some insight of where FTSE is heading over the next six months. “Hurrah,” I hear you cry, “we’ve been waiting for a laugh.”

FTSE over 6 months

But first let’s have some humiliation by looking at what we foresaw back in March 2019. Back on 18 March, we confidently thought that Brexit would be resolved on 29 March. Oh how naïve we were. We thought that either a deal would be done, or no deal would be all sorted by September. Either way, we thought that resolution of Brexit would be supportive for FTSE, and so, with FTSE at 7228, we forecast 8150. The article was entitled “UK Equities About to Soar.” Wow, how confident we were. Sadly, our central assumption over Brexit was wrong, and so the out-turn of 7345 on 16 September was much lower. As we noted before, forecasting is particularly difficult when it involves the future (Ed; and as I remarked at the time, what other kind of forecasting is there? Now get on with it).

Market Screen

Looking forward to Monday 16 March 2020, what do we see? As noted last month, we see some risk of a global slow-down. And we have said this before, but surely by March, Brexit will be settled? The potential outcomes are;-

a) Deal on 31 October

b) No deal on 31 October

c) Extension to January, then Deal or No Deal

d) Revoke Article 50

Thus we feel that Brexit may well be off the scene. To some extent it will be hedged anyway, as a bad Brexit might lead to a lower GBP, which tends to support FTSE through the foreign earnings route.

Though we could have a Marxist/SNP/whatever coalition government too!

However Brexit is solved, we see it too soon to have a kick-start effect on the UK economy by March, and globally, we still see the risks on the downside. Therefore, we think the on-going global slowdown is bad for equities, but some kind of resolution of Brexit should help the UK market (dear God, any kind of closure, please, we implore you).

Thus for 16 March 2020, we forecast FTSE 100 at 7200. Yes, I know that is the same level we have forecast for December 2019, January 2020, and February 2020. At least we are consistent!

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FTSE Weak Until Christmas – Then Rebounds in the New Year

It’s that time of the month when we take out our crystal ball and forecast where FTSE 100 will be in 6 months time, February 2020.

Stock Prices green for up, but we think down

Before giving away too many of our thoughts, gut-feels and sheer guesses, let’s look at where we are now. Six months ago, in February this year, we thought FTSE would continue the upward trajectory sine the start of 2019, Brexit would have been and gone, and FTSE would be just over 8000. What’s actually happened is that Brexit was postponed and so the UK economy has been left dithering over the summer. Last night it closed at 7148. So we got the direction right. At the end of last month, when it was at 7700, we could have forgiven ourselves a little smugness.

FTSE 100 with date of forecast shown

For the last three months, as the implications of the Brexit delay became apparent, we have been forecasting FTSE up to 7500 in July, and then a retreat to 7200 by November. Well, we got to 7500 in July, but back down to 7200 a little early. Our suggestion last month that the market was riding high but vulnerable to bad news was brought to life by President Trump’s step up of the tariff war with China.

So where to now?

As we noted last month, the global economy looks weak, and the UK could be in a technical recession by Christmas. (See our article last week, A Bleak Midwinter Brexit Recession By Christmas) Our central forecast for Brexit is that it will be a soft No-Deal, in that another Withdrawal Agreement will not be reached, but enough accommodations will be made to keep things ticking over. This outcome will scare the market further.  However, FTSE tends to look 6 months ahead, and by February, it should become clear that the UK economy will be okay, and the world economy could be over its wobble.

So we think the worries of a No Deal will send FTSE down to 6800 by November, but that in the 6 month time horizon of our forecast, we think it will be back to 7200 by Friday 14 Feb 2020

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A Bleak-Midwinter Brexit Recession By Christmas

Oo-er, suddenly the UK economy ain’t looking so good!

The news media are full of speculation about Brexit, and not many of the stories are looking forward to how wonderful the country will be once/if Brexit happens. We can expect more of the same for the next twelve weeks until Halloween.

Are we heading for No-Deal?

At the moment, both sides are digging in, trying to create a tough stance for the benefit of their populations (I hesitate to use the word electors when we are discussing the EU, but you know what I mean). Behind the scenes, it can be assumed that the diplomats and civil servants will see themselves as the grown-ups in the room, and thus be at least looking for common ground.

However, it seems unlikely that a comprehensive new Withdrawal Agreement will be crafted by October. But we can expect enough co-operation to keep the world turning.

So what’s the problem?

The problem is that investment is collapsing. The worst thing for businesses in uncertainty. Life has enough risks when it comes to business investment, without an unseeable future being only 12 weeks away. Similarly, house-buying and car buying are likely to miss out on their usual autumn surges this year.

And after Brexit day, will there suddenly be clarity and light? Nope. There will be hysteria in the media for a few weeks as every little shortage and business malady is blamed on you-know-what. And the effect of this – more hand-sitting and less spending.

What else is happening?

Leader of the Free World

The US is starting to suffer from Mr Trump’s tariffs, to the extent that Jerome Powell has cut interest rates despite full employment. Meanwhile, China is suffering a marked slowdown from the trade war. This has now spread to Europe, which is also teetering on the edge of recession.

Conclusion

The UK is heading for recession – and it is difficult to see when it could end. Domestically, we’ll probably pull out next spring…. but that depends on what the rest of the global economy does. If things keep softening elsewhere, it could be a big one!

PS. The slowdown in Q2 announced today was no surprise, given the stockpiling in Q1 for the original Brexit day, and the factory shutdowns brought forward to April in case of Brexit delays.

Theresa the Timid

PPS. The coming recession will be a direct result of Mrs May’s and Parliament’s timidity over Brexit. If they had gone ahead on 29 March, we’d be pulling out of it by now. The delay to October has just increased the uncertainty and halted the economy for 7 months, tipping us into a recession we need never have had.

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Aston Martin Still Has a Mountain to Climb*

* Which is kind of ironic given that it was named after Aston Clinton Hillclimb!

An Aston Martin – climbing a mountain

Since we yanked on the handbrake for AML shares in March, and again in May, how have things been? Initially, almost as soon as we made our most recent forecast, the pesky management went and bought a few shares for themselves, and the price rallied £2. Not the best of starts.

AML ugly price chart – and it’s down another £1 today

Since then, more teasers of the make-or-break DBX SUV have been released.

DBX on test in Sweden

Autocar are carrying a report that the order-books are to be opened next month at Pebble Beach. Despite our view that we have seen peak SUV, the DBX fits into the mould. To be fair, it’s not as ugly as a Bentley Bentayga, nor the Rolls Cullinan. To us, it looks rather like a Porsche Cayenne with an Aston-shaped grill nailed on to the front. So it should sell well initially, though we continue to fear that sales will fall off a cliff-edge in 2 or 3 years time as EV’s take over.

And the latest news?

Talking of sales falling off a cliff-edge, yesterday it was announced that deliveries to dealers in the second quarter were down 22% in UK and 28% in EMEA. Over the twenty four hours since then, the shares have collapsed from £10 to £7, which we can disclose is a 30% fall (see, we’ve always had a natural flair for numbers).

Our view remains that at some time, the shares of this iconic brand will represent good value. But it is not yet. There remains huge delivery risk on the crucial DBX project. And just too many variables in the world luxury car market.

As before, we recommend BUY THE CARS, SELL THE SHARES. Is it time for my bonus yet? (Ed. NO!)

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Vodafone plc: Still Not Time to Dial In

Back in the days of the Brexit doldrums – 6 March – we reviewed Vodafone plc (ticker VOD) and concluded that the forecast cashflow didn’t look strong enough to cover the dividend. Which was 9% at the time, and hence a clear signal that the market thought it had to be cut. We also thought that there seemed little upside in future growth plans

VOD 1 year chart, with date of our last sell recommendation shown

As the chart above shows, initially our avoid recommendation looked a bit sad (the price went up slightly!). However, we were vindicated on 14 May with the annual results including a 40% cut to the dividend provoking a fall of 11% in the share price over the next week. That shows up on the chart.

VOD over 5 years still looks sad

Viewed over a more reasonable investment horizon of 5 years, the share price still looks sad, currently at just 50% of its peak back in 2015.

In our last report, we commented that this is often our kind of buying opportunity. But not here. What goes down doesn’t necessarily go back up.

The future strategy continues to include investment in 5G spectrum and trying to share the network building. Other cost savings are promised, but the reality is a commodity market, fewer handset upgrades and brutal price competition. Users will be happy to have 5G, but only a few early adopters will be prepared to pay extra for it. Who actually needs to download all of Game of Thrones in 5 seconds? It can’t be watched at that speed.

The dividend was cut to 9 euro-cents per share – but even the adjusted (adjusted up, just to be clear) EPS fell from 11.59 to 5.26 cents. Thus, the new, reduced-fat dividend still isn’t covered. The market’s faith in this pay-out is demonstrated by the shares being down-rated to give a yield of over 6%.

The market doesn’t see any growth in the shareprice – and we don’t either. Revenue is stagnant, investment will be never-ending and we can’t see VOD growing rich from reducing costs. So profits might hold steady, at best.  Really, there is only downside for the earnings.  Right now, VOD is looking like a utility share, but without the pricing power that would entail normally.

One day, VOD shareprice/PE/growth will be attractive, but that time is not now.  Let’s see what the first quarter results look like next Friday.

For now, for buying, there is NO SIGNAL!  AVOID.

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FTSE Forecast for January is…….. LOWER!

We’ve been forecasting FTSE100 with a six month timeframe for six months. Which means, oo-er, that we have just reached the outcome of our first prognostication.

Stock Prices green for up, but we think down

The best traditions of economic forecasting is to make the call, try to write some eye-catching blurb – and then MOVE ON, and never re-visit. After all, what is to be gained by checking on whether the forecasts were correct? Sooner or later, the call will be just ridiculously incorrect, which will make the author look stupid. And at other times, it will be spot on, so the writer then starts making hubristic comments about their skill (even though everyone knows it was only luck), and so still looks stupid.

However, one of our many maxims is “You can’t tell stupid”.

FTSE over the last year, with date of forecast shown

And so here goes with our review of January 2019’s forecast. At the time, FTSE was in the doldrums, having fallen for six months. When we made our forecast, it was 6855. We foresaw a reversal, and a strong climb to 8050. Well, we got the change of direction correct. Last night it closed at 7532. So it didn’t climb quite as far as we expected. Blame Brexit for that. The whole world seems to be using Brexit as the catch-all excuse for any under performance, so there is no reason LondonMarketComment can’t do the same! We thought that one way or another, it would be resolved by now and we could all get on with the more interesting parts of our lives. Anyway, we award ourselves 7 out of ten for that call.

The New Forecast.

We’ve been saying for a couple of months that we saw FTSE100 up to 7500 in July, and then a fall to 7200 by November. We got the 7500 right. We now say that the 7200 of November continues into January.

Why do we say this? Right now, the stockmarket has it’s positive head on. Bad Non-Farm Payrolls for May were taken positively. We understand the logic of a weak economy making interest rate rises less likely….. but, er, doesn’t that same weak economy make it harder for companies to make money? Subsequently, the June NFP came in much stronger – but that didn’t dent market sentiment either. So the market is a bit blinkered.

Meanwhile, we can all see risks to the global economy. Nobody knows where the US/China tariffs-that-are-really-strategic-politics will end. Trump and Xi Jinping both need to win this battle of wills. Meanwhile, Europe is catching a cold from Chinese hesitancy. The middle east could blow up (though we don’t foresee that). Oh, and last – and probably least – there is Brexit.

In conclusion, the market is in happy mode, but there are plenty of potential threats over the next six months. A downside surprise feels likely. So we see FTSE struggling to go higher, with a dip due by year end and no climb in January. Doom doom doom!

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US Economy Does Well – So Stocks Are Down?

Regular readers (Hi Mum) will recall our excitement over US Non-Farm Payroll numbers, and how we await them every first Friday with breath so bated that we’ve turned blue. And this month’s release was a blinder!

Last month, the May number, reviewed here, was shockingly low at 75,000, far below our neutral level of 180,000-200,000. Since then, the consensus market view has been that the US economy has started to look (in technical terms) “a bit iffy”.

Market Screen

So June’s number of 224,000 was great news right? (Click here for the Bloomberg report) Well, not for Wall Street. After the data were released on Friday lunchtime (8.30am in NY), share prices went down! Normally, the market likes the economy to be doing well (which this figure implied) ……. but there is a twist.

Everyone is excited about whether the Fed will cut rates at the end of July. This year has seen quite a turn-around in expectations for interest rates. In January we expected three or four hikes in 2019. However, weaker data in US and around the world, plus all this talk about tariffs and trade wars, had turned things so far that markets were forecasting the Fed to ride to the rescue and cut this month.

US Fed has an impressive gaff

So now things aren’t so bad, maybe we won’t get the cut after all? And higher rates (or non-arriving lower rates) are bad for companies because of higher borrowing costs, customers having less spending cash and higher discount rates when looking at future profits. So we get the bizarre outcome that a strong economic figure pushes the market lower.

The reality is that in the scheme of things, 25bp (a quarter of 1.00%) is neither here nor there when rates are so low already, but the market loves to have something to chew on!

Our house view is that the tariffs-thing will start to have a minor effect in the rest of the year, but US growth will survive.

Roll on 2 August for the next exciting episode of Non-Farm-Payrolls!

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OEICs and Unit Trusts are the Next Financial Mis-selling Scandal

We have Neil Woodford to thank for highlighting the dangers of Open-Ended Investment Companies (OEICs). Though it is only three years since the small ripple in property prices last illuminated the topic.

Offering daily liquidity to retail investors when the underlying assets can take months to sell can obviously end badly. If a fund invests £50mio in a huge office complex, but suddenly all the notoriously-flighty retail investors want out – such as after the surprise Brexit referendum result – the office can’t be sold within 24 hours to return the money. It’s not a hard concept to grasp is it???

But there is an alternative – Investment Trusts. In fact, there is a whole subset called REITs (Real Estate Investment Trusts) which have tax advantages too.

What is the Difference?

Investment Trusts are companies in their own right, whose shares can be traded without the underlying assets being bought or sold. So if there is a marked rush to sell, the price will go down, but a sale can still take place. OEIC are a fund that buys assets, so if money is withdrawn on a net basis, assets have to be sold before the cash can be returned to its owners.

So Why Would Anyone Buy a OEIC?

Ahhh, now that is the nub of the scandal. OEICs (and Unit Trusts) pay kickbacks to IFAs of up to 5% of money introduced. Whereas advisers get nothing if they encourage clients to buy investment trust shares – even though investment trusts are almost certainly a better investment. For a start, with investment trusts, 100% of the money goes into the asset, not as little as 95%, but also there is that crucial liquidity, the ability to pull money out under pretty much all circumstances. With investment trusts, there is the possibility of the share price being at a discount or premium to the Net Asset Value – which can work in favour or against the shareholder depending on which one it is and whether the shareholder wants to buy or sell at that time. Buying at a discount is good, selling at a premium is good too! But not vice versa, obviously……

I was amazed to learn yesterday that Hargreaves Lansdown received £41m over the last 5 years for bringing money to Neil Woodfords’ Equity Income Fund…… £41 million pounds in introduction fees! This money originated as investor’s money, paid to Hargreaves Lansdown instead of ending up in the fund. The same investors now find themselves locked into the fund until such time as Mr Woodford has sold enough assets to pay them out. One can’t help but feel that in nearly all cases, the investors were given a bum deal.

Was the FCA asleep at the switch?

After the debacle of gated funds (where withdrawals are banned) in 2016, why hasn’t the FCA (Financial Conduct Authority) stopped the sale of OEICs? The introduction payments are immoral, and especially for the funds with illiquid assets, OEICs are just the wrong vehicle for retail investors.

It appears that the only reason such OEICs and Unit Trusts exist is because the kickbacks to advisors are so lucrative.

 

PS. Apologies for using the “asleep at the switch” phrase. I think it refers to American railway signalmen not paying attention!

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