WPP – Why the Poor Price?

 

WPP plc had a terrible 2018, with the unexpected departure of its lodestar creator, and a stumble in the trajectory of its ever-increasing revenue and earnings. The share price was duly hammered. We feel it has been flattened into irresistible bargain levels. Here’s why…….

WPP passes our test of “will it still be around in 10 years, still paying dividends”. Much has been made of the transformation of the advertising business as the world becomes ever more digital. However, this does not mean the end for Advertisers. As WPP stated in their Investor Day last month – www.wpp.com/investors – businesses will continue to need creativity, media insight, data expertise and knowledge on the use of technology.

WPP’s famously lost the Ford account last year. Perhaps less well known is that they also won major accounts from Mars and Mondelez, both huge spenders in the marketing world. It is the nature of the business that accounts will be lost and won every year.

Since the departure of Martin Sorrell, long time insider Mark Read has been appointed CEO. With such a sprawling company, a captain with inside knowledge to steady the ship made great sense. Mr Read has not rested on his laurels however, initiating a transformation of WPP into fewer, stronger companies better able to meet the ever-changing world in which it operates.

Annual accounts are due on 1 March 2019.  Earnings for 2018 are expected to be 107p/share, a drop from 120p last year.  However, the dividend has been promised to remain at 60p until earnings are back up to the level where 50% of earnings can be paid out.

At this morning’s price of 874p, the dividend is 6.86%. Trailing P/E is 5.8, with forward P/E still at 8.2. For an on-going FTSE100 company with positive future prospects, this represents an absolute bargain of a price. We strongly recommend BUY.

The author of this piece has a very small, long-held position in WPP. No trading in the company is expected before or after publishing this article. Investors should undertake their own research before making any transactions involving WPP plc or any other company.

HARD BREXIT Here We Come

Now it seems we will be getting Hard Brexit and it is just a matter of when.

 

Theresa’s vision of open-minded discussions and compromise is that everyone else says their piece and then compromises to accept her view.  She will never be able to find a solution to the impossible challenge with which she is faced.

 

It is very difficult to see her taking No Deal off the table as demanded by Jeremy Corbyn because;

a) that leads to No Brexit, not the Soft Brexit she desires, and

b) it was Jeremy Corbyn’s idea.

 

At best, Mrs May might try to postpone Article 50 to get more time.  The EU will only agree to delay until 1 July 2019.  In the extra time, nothing will change and so still there will be no compromise.  No matter how many times the issue is discussed, there simply isn’t a third way that will gather a majority in the house.  The Tories know that if they don’t deliver Brexit in a meaningful way, they will split apart and be out of power for a generation – and Labour strategists know it too.  So Labour has no political reasons to help the May Government.

 

The Tories cannot agree to No Brexit for political reasons, having invested so much capital into delivering on the referendum vote. Similarly, nor can they arrange a Second Referendum.

 

As Sherlock Holmes observed, ‘once you eliminate the impossible, whatever remains, no matter how improbable, must be the truth.’  This points to No Deal.

 

The most likely outcomes, seen from today, appear to be No Deal on 29 March, or No Deal on 1 July 2019.  This will likely be beneficial in the short term to shares such as GSK with lots of overseas earnings, and be bad for UK-focussed companies such as the house-builders or domestic banks such as Lloyds.

UK Equities Forecast Much Higher

How will UK stocks look in 6 months’ time?  We see them radically higher.

It cannot be disputed that UK equity prices have plenty of bad news and uncertainty built in to the price right now.  However, it should be remembered that politics, and especially short-term politics are not the only influence on market prices.  Yes, difficult to focus on anything else I know!  In the medium and long term, it could be argued that politics are a side-show. Price direction over the next 6 months will be driven by;

  1. Corporate Earnings
  2. UK and global growth figures
  3. US-China tariff wars
  4. EU instability in Italy and elsewhere
  5. EU slowing growth
  6. Chinese slowing growth

All of these issues are known unknowns. (Thank you Mr Rumsfeld, did you ever think your contribution to society would be just one single quote?)  As such, they are priced in, and so leave potential for upside moves if they are resolved.

Oh, and there is another issue I almost forgot;

7. Brexit

The most likely outcome is that a delay to Brexit kicks the can down the road for a few months.  So the uncertainty continues.  This is not a negative effect on stocks.  We already have uncertainty built in to the price.

The less likely resolution is No Deal, which we feel has the positive of removing uncertainty, and by July it will be clear that the economy has not been decimated.  So on the whole, this would be good for equity prices.

The final outcome would be a Second Referendum. We don’t see that happening by July 2019, so this route continues the uncertainty, but with a possible option of reversing the Brexit vote.  Hence this is positive for the market.

 

On the basis that all the bad news is in the market, including on-going uncertainty, we see potential for upside pleasant surprises.  From current depressed levels, there is real opportunity for share price increases.

 

Our forecast for FTSE 100 in 6 months’ time, on 15 July, is a rise of 17% to 8050.

Labour to Lose Brexit Election!

Could there be a vote of no-confidence this week? Although we sense that Jeremy Corbyn is not keen, Labour is overwhelmingly in favour, and so JC may be forced to pull the trigger.

Could Labour win such a vote? Our view remains (oh, let’s not use the word “remain”, let’s say “continues to be”) that not enough Tory turkeys are sufficiently stupid to vote for their own potential demise, and without this support from suicidal Blues, or the DUP, the no confidence vote will not succeed.

BUT WHAT IF? What if a no confidence motion was passed, and Theresa May was unable to wriggle out of calling a general election? How would it go?

An election would require postponing or retracting Article 50. The former of these options would be most politically savvy “We had to do it to make time for the election: it doesn’t reduce our commitment to Brexit.” Postponement until July 1 is acceptable to the EU, and gives plenty of time for an election.

 

It is not credible for Labour to campaign on a message of continuing with Brexit, but trust Jeremy Corbyn to negotiate a better Withdrawal Agreement than that achieved by Theresa May.  How would he do that???

Jeremy Corbyn would have to bow to huge pressure from the Labour party, admit that they have changed their minds from the last manifesto, and push for a Second Referendum – which everyone knows is code for Remaining.  A very significant portion of the electorate would be cross that Labour have forced yet another election, appearing to be a naked power-grab at a time of national crisis. A significant proportion of Labour’s core vote will be leavers unable to bring themselves to support a second referendum. They won’t support the Tories either, but without them, Labour will not win the swing seats that they need. Labour would also find themselves being characterised as the Islington elite telling the northern oiks that they got it wrong in the Brexit referendum, and that such voters need to be less racist and try harder this time. Not appealing.

It would be a good election for the Liberals, who have had the only consistent Remain message and could win a dozen extra seats in southern metropolitan areas.

Meanwhile, the Tories are in the best situation. Mrs May would not resign on the basis that the approach to an election is no time for leadership challenges, and she cannot be forced to do so.. The Conservative campaign would be based on a ‘Brexit Means Brexit’ ticket, asking the country to let them carry on delivering the best Brexit possible, as they were instructed to do in the referendum. Mrs May and her deal are not popular among the True Blue faithful, but surely such voters would hold their noses and vote Tory rather than risk Jeremy Corbyn as PM?  With a few more centrist policies promising worker rights and benefits, the Conservatives would attract enough swing voters to gain a decent majority.

 

We believe that a Brexit Election would win a clear victory for Mrs May, who could then push through her Withdrawal Agreement despite rebels in her own party.  Wouldn’t it be ironic – lose a Vote of No Confidence but gain a decent majority in the subsequent election?  Maybe Labour should be careful what they wish for…..

 

Brexit Vote! A Small Loss is a Win

It is surely time we discussed something other than Brexit. But darn, it is just so thrilling.

So what is Mrs May’s Plan B, to be presented to Parliament by Friday? Actually, Plan B is becoming quite clear, it is Plan C that holds the attention.

Number 10 must have accepted that the vote tomorrow will be lost. Even now, they will be pulling out all of the stops to secure those last few votes – and appear to have decided that threatening the Leavers with No Brexit is more likely to produce results than threatening the rest of Parliament with No Deal.

But they must know that the vote is lost. The gameplan appears to be that with a loss by only 60-80 votes, the Prime Minister can return to Brussels and tempt them into giving a few more concessions to get her deal over the line. She can point out that only 30-40 more MPs need to be persuaded, so a few tweaks to the Withdrawal Agreement should do the trick. This is Plan B, and it appears to us as the most likely outcome.

Plan C? What else can Mrs May do if the vote tomorrow is lost by a larger margin – say 125+?  She is not a quitter, and will still see a vote of no-confidence in the government as unwinnable – and thus not a threat to her. From this, my guess is that Plan C is the same as Plan B, but with a different objective. She’ll still go back to Brussels, but without any great expectations of an improved deal. In this scenario, it will be all about playing for time, as that slowly ticking clock is her best chance to bring on board a few Remainers who still don’t have a real remedy against No-Deal Brexit, and may have their minds focussed by a delay of two or three weeks making it seem more likely to happen. The response of the house in this situation will be fascinating. On what amendments or instructions will they vote? Can any of their approaches frustrate Brexit? Keep tuned folks, for the next exciting episode of Brexit – coming to your screens all this week!

Isn’t it odd? At the last election, Jeremy Corbyn decided that losing by a smaller margin than expected counts as a win. How the Tories jeered. And now Mrs May is in the same position.

Classic Car Market Crash?

Hey, it’s Friday! Let’s tear ourselves away from the thrills of interest rates, UK shares and Brexit – and talk about something even more exciting – the Classic Car market.

For some years now, the whole Classic Car market has been accelerating strongly (pun intended, sadly). Classic Cars magazine reported in this month’s issue that a Series 1 E-Type worth £25,000 just 10 years ago is now worth £125,000.

 

It is my considered view that this has to be a bubble, driven purely by momentum, aka the bigger fool theory. Now I love E-Types, of course, but £125,000? Really?

Because the problem is, classics are a bit rubbish as cars. They are unreliable, leaky and not very pleasant to drive. In economic terms, their utility is all about pride of ownership, not about providing transport in a stylish manner. Nobody actually uses an E-Type as their daily driver. During that first blissful summer of ownership, maybe you took it for a long weekend away, or round to your friends’ dinnerparty? On the one occasion you took it to the pub for Sunday lunch, you insisted on sitting outside near the carpark to keep an eye on it. Not many people are going to leave £125,000 sat in a pub carpark for long, and that’s before we talk about parking on the side of the street or in a multi-storey. So the second year it was used half a dozen times, the third year you used it twice and the fourth year it only came out of the garage to go for its annual MoT and expensive service. (Yes, I know cars that old don’t require an MoT, but you’re not such a fool to risk your life – and your £125,000 – in a silly crash are you?)

So the pleasure of ownership diminishes over time. But the costs keep coming in. And interest rates are low, so owning a classic car can be justified by using man-maths about the money not doing anything else. But that is not strictly true. As mentioned earlier this week, the FTSE100 is averaging nearly 5% dividend yield. So a £125,000 car comes at an income foregone of £6,250 pa, plus insurance, servicing and minor repairs of say £1,000. Don’t even think about the costs of restoration coming into the equation.

Thus your E-Type needs to be going up by over £7,000 pa to break even. But at some point they will stop going up. They are not that rare, and only so many people have the desire, money and garaging to own one. Most of these people will already have one – so who is buying now? Once old cars start going down in value, then suddenly they start to look like a very expensive toy! If all you want is a stylish motor car, then a new Aston Martin Vantage costs about the same price, looks just as good, and can actually function as a usable car too!

According to the respected HAGI index, http://www.historicautogroup.com/, the most expensive classic cars continue to rise in value. Perhaps they should be considered as unique works of art? However, in the more mainstream market, as shown by auction houses such as Anglia Car Auctions in Kings Lynn, prices are softening. They have another sale coming up later this month, https://angliacarauctions.co.uk/classic/saturday-26th-january-2019/, with no less than 8 E-Types already in the catalogue. Word on the street and in the specialist press is that prices are softening – which suddenly takes away any rational reason for owning such an expensive investment. As you will all know, it only takes a 5% swing from buying to selling for prices to move horribly lower.

Not a crash yet, but maybe a scrape along a hedgerow – which might just hit a tree before too long!.

Does the US Yield Curve Forecast a Recession?

In a word NO! Last month, there was much excitable reflection among the Economic Chatterati as the US Yield Curve had become inverted, if only very slightly so. It was claimed that an inverted yield curve has been an exceptionally reliable forward indicator that a large recession is coming. This is in contrast to the UK Stock Market, which is said to have forecast 9 of the last 4 recessions. (Ha, I love that quote. Does anyone know the original source?)

So why is this inverted yield curve not indicating a recession now? Well there are two reasons. The first one is that – big breath, as I’m about to utter the 4 most expensive words in investing – THIS TIME IT’S DIFFERENT. And another big breath, as here come the second most expensive 6 words in investing. NO, REALLY THIS TIME IT’S DIFFERENT. Please note how I have managed to avoid the old joke about big breaths. This is 2019 after all.

The adjacent chart shows the US and UK yield curves as they were earlier this week (thank you yieldcurve.com).

 

An inverted yield curve – where short rates are higher than long ones – is appropriate in normal markets if a recession is coming, as in such circumstances Central Banks tend to cut overnight rates to stimulate spending. Thus investors want to lock in fixed rates now and this activity will push down long term rates.

However, the current markets are far from normal, strange as that may seem to anyone under the age of 30. Back in the pre-Great Recession days, a “normal” interest rate would have been between five and eight percent. Back in the 1970s and 1980s it was more like eight to fifteen percent. In fact, I well remember as a boy having my grandfather tell me that interest rates at anything other than 4% were an outrage. Gosh, it was fun being a kid in my family! So wherever one’s pointer to normal interest rates lies, having them at 0.5%, 0.75% or even -0.4% is not normal and produces distortions.

The present market is different because we are awash with cash and rather short of bonds in which to invest it, both as a consequence of years of QE. These two effects each tended to push up bond prices and depress long term rates. Also, having ultra-low short term rates has caused a few technical issues in terms of how much higher long term rates should be in raw percentage terms or as a proportion of short rates. For example, if UK base is 0.75% and 10 year rates are 1.3%, then the difference is only 0.55%, but related to 0.75%, then 0.55% represents a 73% increase. This is like having overnight rates at 10% and 10 year rates at 17.3%, which feels like a very steep slope. There is also an argument that we have a glut of savings at the moment, which is all the fault of the baby-bloomers, as usual.

So the overnight rates are ultra low, but expected to rise, and the long market has been distorted by Central Bank interference. I would humbly suggest that when the free-market is massively overloaded by Governments – or in this case Central Banks – in any circumstances, including bank rates, then they no longer reflect the crowd-views of all active participants that in normal times makes them so powerful.

And there is a second reason that I included above. This is that the inversion was only slight, and has unwound pretty quickly. Anyone who last month liquidated all their stock investments and sold their house, chattels and grandma to prepare for the forthcoming recession might be feeling just a little annoyed that this supposedly failsafe indicator has flipped back again to a positive slope!

Away from the political excitements of US/China trade, EU/Italy budgets and a little fuss over Brexit, economic wheels keep turning and the recession threat has receded.

The flashing red-light and klaxon alarms have been extinguished!

UK Equities: Cheap Bargains or a Falling Knife?

Doesn’t the FTSE100 look cheap? A yield of 4.73% (when I checked this morning on dividenddata.co.uk) has got my investment fingers twitching.

Long term interest rates remain ludicrously low. Who in their right mind wants to lend to the Government for 10 years and only receive 1.3%? Clearly there is something majorly wrong with the long term money market – to which I will return in a blog of the very near future. So investors need to look elsewhere for a bit of action.

Now if you are a speculator, hoping to make a quick capital return, I have no advice for you. The market – and individual shares – will go up, and will go down. But not necessarily in that order. All I know on that topic, after years of taking market positions, is that trying to pick turning points is a mug’s game.

What I see out there though, is a market with a negative head on. Equities seem to have been knocked back by the implication that the Brexit chaos is portending the end of capitalism in UK, and that the sky is already wobbling, ready to crash out (ha, see what I did there?) of the heavens, to squidge us all into the dirt very soon indeed. Whilst I am enjoying the Brexit drama as much as the next bloke – or probably even more so if the next bloke is only averagely interested – the actual real economy where we all work, travel and socialise seems to be doing pretty nicely right now. Obviously stock markets have come back globally, but few are as weak as in the UK. Economics-wise, the on/off US/China spat doesn’t seem to have damaged the real US economy, and hence the job market out there, as shown by 312,000 non-farm payrolls for December, a very strong number. In the UK, employment is strong, Christmas retail sales were OK, the economy is growing at an almost-acceptable rate.

Yet yields are above 4.5%! There doesn’t seem to be any widespread evidence that corporate earnings are generally under threat. So dividends do not appear to be especially imperilled. If you are building a portfolio for the long term, your prime interest should be companies that are paying decent dividends, and will be able to continue doing so for a very long time. In such situations, the decision to buy (or sell) is whether that yield represents a sufficiently attractive return on your money.

Obviously, the going-in price in this approach is vital, and needs to be such that the associated yield will give that long-term return you desire. For such long-term investors, I see bargains to be had!

How Much Longer Can The Brexit Fun Last?

A few less-excitable spectators may have started to wonder for just how much longer this Brexit mania can continue. Of course, that depends on future events. This is how we see things panning out, depending on where in the spectrum the poop of fate lands.

 

1. Leave with NO DEAL / WTO (depending on your viewpoint). In this scenario the Leavers will be happy, the unaligned middle accepting, and the Remainers will evolve into Returners. However, the Returners will be tainted by the Men-and-Women-of-Yesterday (step forward T. Blair and J.Major), and lack wide-spread legitimacy. After a few days/weeks/months of these Returners glorying in any difficulties, the public will tire of Brexit and it will be over.

2. Leave with MRS MAY’S DEAL. Today, it feels unlikely that parliament will vote for this deal. The arrangement seems to pull off the remarkable trick of pleasing absolutely nobody. If it does get through somehow, then the arguments go on, just slightly shifted on to the trade-deal. The Remainers will feel that their ideal of actually remaining in the EU is achievable, whilst the Leavers will be worried that their prize is being stolen by parliamentary fudge. The result will be 2, 3, 4 or 5 more years of bickering and ever more-shrill fighting.

3. The SECOND REFERENDUM. This will be seen by Leavers as the last desperate chance by the Remainers to get the decision reversed. The Leavers will picture the Remainers as a metropolitan elite telling the proles to try harder this time. In our view, a second referendum is unlikely to come to a different result, if only due to the irritation that the electorate will feel at being told to go through it all again. The timing is tricky too, with a referendum taking months to organise: imagine the fun just in agreeing the wording. It is not clear how this works with the European elections in May, nor postponing Article 50. If the second vote is “successful”, then the likely outcome is mass outrage and protests that will make the Gilet Jaune look like amateurs. Leavers will – correctly – feel that they have been robbed. The outcome will be years of protest, and potentially a recasting of the UK political landscape, with Labour and Tories being replaced by Leave and Remain parties. It really is that divisive out in the country.

4. A GENERAL ELECTION. It feels very unlikely that a general election will happen. Do turkeys vote for Christmas? Whilst the Tories have their share of turkeys, surely to goodness they can’t be that suicidal?

 

So there it is. The Tories are split over Brexit, with the parliamentary party against whilst the grassroots are in favour.  Meanwhile, Labour are split over Brexit, with the parliamentary party against Brexit but the immovable leader (secretly) in favour.

In summary, if you are fed up of Brexit and just want it over, you need to wish for a no-deal exit on 29 March. There may even be an economic silver-lining in that all of the delayed business-investment and personal big-ticket spending will suddenly be no longer pent up! And at least we would be spared bickering that could go on for the rest of our natural lives (or that of the EU, which is probably much less).

Phew, Brexit Again

THANK GOODNESS that the Brexit saga has restarted. I have been suffering withdrawal signs from my daily soap-opera whilst it has been AWOL over the Christmas period.

But now it is back, and the media (and economic commentators) can ignore the real economy for a few more blessed months whilst we focus instead on the drama and excitement of the stranger-than-fiction world of Brexit.

Bliss

 

 

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