The coronavirus outbreak in China has developed from a humanitarian catastrophe to a stock market panic. While the short-term economic impact of the virus could well be severe, there are still fundamental reasons to be invested in developing Asia for long-term investors. Historically one reason investors have been encouraged to invest in emerging Asian markets is to benefit from the region’s greater GDP growth. The OECD forecasts that UK real GDP, that is adjusted for inflation, will grow by 2.2% a year between 2020 and 2060, and the USA by 1.9%, whereas China is projected to grow by 2.4% and India by as much as 4.5%.1 Thanks to the power of compounding, this increase amounts to growing 1.1 and 1.3 times larger in the case of the US and UK, 1.5 times in the case of China and 4.5 times in the case of India. Economic theory posits that the long-run return from a stock market should be equal to the long-run growth in corporate earnings, which is determined by long-run GDP growth. On that basis China and India should see much greater stock market gains. This theory has a poor record in practice, and it is now common knowledge that GDP growth and stock market returns are generally not correlated. Indeed, it is possible that the correlation is weakening over time, given the propensity for companies to list in countries outside of their main areas of business. This doesn’t mean that GDP growth potential in emerging markets is irrelevant, however. We would argue that the underlying drivers of GDP growth are very relevant to the earnings potential in individual companies, which means that GDP growth can be valuable information for a stock-picking manager. In fact, we would argue that understanding the reasons behind GDP growth gives a better comprehension of how to invest in developing countries – such as those in Asia – and the advantages they really have. We consider why you might add to your Asia exposure in your ISA this year, despite the short-term issues, and look at some stock-picking trusts set up to generate alpha from the region’s advantages.
Companies: SST AIE ANII DGN
Aberdeen New India Investment Trust (ANII) aims to identify Indian companies with high and sustainable earnings, strong balance sheets and good corporate governance and buy them when they are on attractive valuations. The process leans on the bottom-up research of the Aberdeen Standard Asian equities team, particularly Kristy Fong and James Thom, who have managerial responsibilities for ANII. Their successful stock-picking has led the trust to outperform considerably over the last five years. As we discuss in the Performance section, the trust is the top-performing Indian closed-ended fund over that period, with the lowest volatility and the best performance in down markets. The team view strong corporate governance as an important characteristic of a quality company, and it is a key issue determining whether they invest or not. Kristy and James believe that giving up these principles for short-term gain could lead to worse losses in the future. India’s stock market has been weak over the past six months as the economy has absorbed a mini-financial crisis and the impact of government reforms. The quality tilt of ANII has been advantageous, and the managers have been taking the opportunity to top up their highest-conviction picks on cheaper valuations. With these India-specific reasons and the ongoing coronavirus scare, discounts in the region have drifted out and ANII’s shares trade on a 13.1% discount to NAV.
Companies: Aberdeen New India Investment Trust
It is something of a truism to say that emerging markets are not a homogenous blob, but a range of highly differentiated economies and stock markets. Yet as investors, we often categorise them as one and the same, especially from an asset allocation and risk management perspective.
Companies: FCSS BRFI ANII BEE BRLA
Quality as an investing style has outperformed significantly in recent years, and over the past 12 months especially so. After this kind of outperformance, it is natural to ask whether a trend is over-done and profits should be taken – and that is what we have done. When analysing the typical quality benchmarks, it quickly becomes apparent that these indices have significant industry and sector exposures, which could affect how they perform in the future and put them at risk of a down period. But the picture is also complicated by the fact “quality” is a hard factor to define, making it crucial to understand the investment process of a manager thoroughly. In our view, there are good reasons to think that quality, properly defined, could continue to do well. In particular, we think that the strong performance of quality in down markets could appeal given the weakening sentiment towards equity markets this summer. However, the issues of index composition and the shifting definition of “quality” means that an active approach is preferable to a passive we argue. In this article, we take an in-depth look at the outlook for quality, and consider a selection of trusts taking varied approaches to achieving a strong quality tilt.
Companies: FGT FEET JUSC SST ANII DGN
Aberdeen New India owns a concentrated portfolio of stocks in India which are selected for the high quality of their financials and corporate governance. The trust draws on the research of a team of Asia-based managers led by Kristy Fong and James Thom with deep knowledge of the market and a differentiated approach developed over many decades of Aberdeen’s presence in the region. Their analysis aims to uncover those companies which can sustainably grow their earnings and which should beat the market over the course of an investment cycle, with the focus on quality and repeatable earnings rather than cyclical winners having led to particularly strong performance in down years. The trust offers exposure to the huge domestic market in India which is growing thanks to favourable demographics, with significant exposures to consumer staples companies and financial services companies which are rolling out services to the growing middle class. The trust has outperformed the market handsomely over the past five years, with NAV total returns of 94.5% compared to the MSCI India’s returns of 70.3%. The vast majority of this is due to stock selection rather than industry allocation; a validation of the bottom-up approach the team takes. In mid-2018 the managers took out a gearing facility which allowed them to take advantage of the cheap valuations in India in the second-half sell-off. They remain modestly geared at 4%, but in line with their cautious approach are unlikely to gear up further unless significant value emerges, such as another market sell-off. The discount is at 12.3%, having come in substantially since Modi won re-election in May. However, it still remains wider than the average emerging markets trust, which trades on a discount of 8.4%. The trust hasn’t paid a dividend since 2005, and is unlikely to do so this year, with the managers focused entirely on capital growth.
Aberdeen New India invests in high quality growth stocks in the Indian stock market with the aim of generating long-term capital returns. The trust has outperformed the market handsomely over the past five years thanks to good stock selection, although the past few months have been more difficult. As the market has sold off, the managers have extended use of the trust’s gearing facility to take advantage of cheaper valuations on offer in stocks that have fallen. The trust offers exposure to the huge domestic market in India, which is growing thanks to favourable demographics, with significant allocations to consumer staples companies and financial services companies that are rolling out services to the growing middle class. The discount is at 15%, near to the cheapest end of its five-year range, having widened from the under 10% it reached during 2017’s bull market. The trust hasn’t paid a dividend since 2005, and is unlikely to do so this year, with the managers focused entirely on capital growth.
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Ramsdens has reported a strong set of trading results in the last twelve months to March 2020. COVID lockdown has led to store closures, which will lead to weaker trading over the following months. However, Ramsdens has a very solid balance sheet, is diversified and is well positioned to re-open stores and continue its growth. We use an 8x multiple on last 12 months to March 2020 earnings as a reflection of a normalised earnings base which reduces our target price to 162p from 180p. At this target price Ramsdens would trade on a CY20 P/B of 1.5x. This target price offers 15% upside and we re-iterate BUY.
Premier Miton have reported their H1’20 results, which have shown delivery of key operational milestones during the period and strong performance despite the COVID-19 fears. Since the end of March, markets have recovered and net flows have been positive in April, meaning AUM has reached £9.9bn. We believe this shows the resilience of the business and that the benefits of the merger are coming through. As delivery continues we believe Premier Miton will see a significant re-rating as the shares currently trade on just 9.7x CY20 P/E, a significant discount to peers and historic levels of 12.5x. We reiterate our BUY rating and DCF based target price of 152p, implying 52% upside.
Companies: Premier Miton Group
The Renewables Infrastructure Group - £120m capital raise
Marwyn Value Investors - Proposed share acquisition by manager and crystallisation of carried interest
DP Aircraft I - 5% ownership stake in Norwegian
Companies: Renewables Infrastructure Group Marwyn Value Investors
The Merchants Trust (MRCH) is managed by Simon Gergel at Allianz Global Investors (AllianzGI). Aiming to continue to provide a high and growing level of income, he is adjusting the trust's portfolio in the wake of dividend cuts sparked by the negative economic effects of COVID-19. If there is an income shortfall in this financial year, MRCH is well positioned to maintain its dividend, with revenue reserves of more than 1x the last annual payment. It has not been an easy period for value managers over the last decade as growth stocks have led the charge; however, Gergel has outperformed the UK market over this period in both NAV and share price terms. The board reduced MRCH's gearing in late January 2020, which was opportune timing ahead of the recent significant stock market weakness.
Companies: Merchants Trust
Companies: AVO AGY ARBB ARIX BUR CMH CLIG DNL GDR HAYD PCA PIN PHP RE/ RECI RMDL STX SHED VTA
The covid-19 pandemic has had a devastating effect on the share price of property companies, with 31% wiped off the value of their total market capitalisation during the first quarter of 2020.
Companies: AEWU CREI CSH BOOT INL HLCL THRL SUPR RESI RGL DIGS GR1T SOHO PHP BOXE ASLI UTG AGR UAI BLND UANC CAL SHED CWD WHR EPIC WKP GRI YEW HMSO PCA INTU NRR
The COVID-19-related crisis further increases the top-line pressure. However, the quarter showed ongoing efficiency gains and, above all, management’s cost of risk guidance stood significantly below our stress test based projections.
Companies: Lloyds Banking Group
In this note, we analyze the indebtedness of 35 international E&Ps publicly listed in the UK, Canada, Norway, Sweden and the USA. For each company, we look at (1) cash position, (2) level and nature of debt (including covenants), (3) debt service and principal repayment framework and (4) Brent price required from April to YE20 to meet all the obligations and keep cash positions intact. We also estimate YE20 cash if Brent were to average US$20/bbl from April to YE20. While the oil demand and oil price collapse are of unprecedented historical proportions and the opportunities to cut costs much more limited than in 2014, most companies (with a few exceptions) entered the crisis in much better position than six years ago, with stronger balance sheets and often already extended debt maturities. In addition, this time around, many E&Ps have already been deleveraging for 1-2 years and are not caught in the middle of large developments that cannot be halted. The previous crisis also showed that debt providers could relax debt covenants for a certain period as long as interest and principal repayment obligations were met. This implies that as long as operations are not interrupted and counterparties keep paying their bills (Kurdistan), the storm can be weathered by most for a few quarters.
With (1) Brent price of about US$50/bbl in 1Q20, (2) reduced capex programmes, (3) material hedging programmes covering a large proportion of FY20 production at higher prices and (4) limited principal repayments in 2020, we find that most companies can meet all their costs and obligations in 2020 at Brent prices below US$40/bbl and often below US$35/bbl) from April until YE20 and keep their cash intact, allowing them to remain solvent at much lower prices for some time. In particular, Maha Energy and SDX Energy are cash neutral at about US$20/bbl. When factoring the divestment of Uganda, Tullow needs only US$9/bbl to maintain its YE20 cash equal to YE19. Canacol Energy, Diversified Gas and Oil, Independent Oil & Gas, Orca Exploration, Serica Energy and Wentworth Resources are gas stories not really exposed to oil prices and Africa Oil has hedged 95% of its FY20 production at over US$65/bbl.
Companies: AKERBP AOI CNE CNE DGOC EGY ENOG ENQ GENL GKP GPRK GTE HUR IOG JSE KOS LUPE MAHAA OKEA ORC.B PEN PHAR PMO PTAL PXT RRE SDX SEPL TETY TGL TLW TXP WRL
A number of REITs have the ability to thrive in current market conditions and thereafter. Not only do they hold assets that will remain in strong demand, but they have focus and transparency. The leases and underlying rents are structured in a manner to provide long visibility, growth and security. Hardman & Co defined an investment universe of REITs that we considered provided security and “safer harbours”. We introduced this universe with our report published in March 2019: “Secure income” REITs – Safe Harbour Available. Here, we take forward the investment case and story. We point to six REITs, in particular, where we believe the risk/reward is the most attractive.
Companies: AGR CSH ESP DIGS IHR LXI PHP RESI SIR SUPR THRL SOHO BBOX SHED WHR
AFH Financial released an AGM statement suggesting that trading for FY20 remains in line with expectations. In the first four months of FY20 AFH has continued to see inflows at Q4’19 levels. The company also expects to see continued consolidation and a growing need for financial planning. Although the current market uncertainty has hit the industry, we believe that AFH is less affected than others by market movements due to its protection broking revenues and initial advice fees totalling 40% of revenues. We leave our forecasts and TP unchanged. These show AFH trading on 10.8x FY20 P/E falling to 9.7x in FY21, and yielding 2.8% rising to 3.1%. BUY.
Companies: AFH Financial Group
In the past month the group has made significant progress in pivoting its business away from its traditional face-to-face model. Although lending levels remain appropriately subdued, it has achieved an impressive collections performance, with its largest business running at about 90% of pre-lockdown levels. This, combined with the group’s high risk-adjusted margins has enabled it to generate £3m of FCF in the first three weeks of April, taking its net cash position to £38.7m as of 21 April. This strong financial position, combined with the group’s innovative approach to product development puts it in an extremely strong position to serve its clients and win share when the current government restrictions are eventually lifted. Reflecting this positive outlook we reiterate our BUY rating.
Companies: Non-Standard Finance
There has been much comment on the fact that equity markets in the US and Europe have been shrinking for some years now, certainly in terms of the number of quoted companies, if not in total market capitalisation (MCap). This paper has been written with the assistance of the Quoted Companies Alliance (QCA) and focuses on the evidence for such in the London market and, in particular, that for smaller and midcap companies. It assesses that evidence and considers explanations. Finally, we ask why it matters, and assuming that it does, what practical steps can be taken to reverse the trend. Successful public markets have been a key part of the United Kingdom’s economic success for generations, even centuries, and we should not allow them to wither on the vine.
Companies: AVO AGY ARBB ARIX ASAI DNL GDR HAYD NSF PCA PIN PXC PHP RE/ RECI RMDL STX SCE TRX TON SHED VTA
TruFin is an operating company with holdings in four FinTech businesses that operate in underserved niches. The businesses have established market positions, proven routes to market and are growing fast. With this growth requiring no additional equity, and the realistic prospect of all four being profitable within our forecast horizon, we believe that executional delivery, and a resolution of the current shareholder uncertainty will result in the current discount to fair value unwinding. We initiate with a BUY rating and a 29.3p target price, implying 83% upside.
Smaller companies are usually a problematic area to invest in during significant downturns or recessions; and the sharp fall in 2020 hasn’t been an exception. In this article we assess the performance of smaller companies trusts throughout the pandemic, while identifying the factors that have differentiated the winners from the losers. This includes the impact that cash, market cap exposure, sector allocation, revenue exposure and growth or value biases have had, with some surprising results. We also ask whether now is an attractive time to invest in smaller companies, highlighting the trusts which stand out to us…
Companies: THRG GHE MINI RMMC ASIT ASL MTE TRG BRSC DSM
Despite the disruption caused by COVID, Harworth has continued to make good progress across each business area. Liquidity has also been enhanced with an increase in the RCF announced at the end of April.
Companies: Harworth Group