Current Overview
“Shocktober” is now in the rear view mirror but investors both at home and abroad have endured a difficult last trading month. The FTSE 100 index has had its worst monthly decline in 3 years and around $5 trillion has been wiped off the value of top companies trading worldwide. I alluded to an armada of risks that will have been playing on investors’ minds in my previous report. So often the autumn period has brought about volatility over the years. It is probable it will continue for a short while yet.
Portfolio valuations have naturally fallen as a de-rating of stock prices have impacted most (if not all) sectors in the market. Risk capital (shares) have been re-priced with many price charts looking almost identical, clearly illustrating swift 20-25% corrections lower. Areas that have largely escaped the slide include defensive sectors such as pharmaceuticals and tobacco. Gold has also risen – so often the port in a storm.
Over the past week, stabilisation (indeed some improvement) has crept back into markets which reinforces my current view that while we have seen an uncomfortable sharp drop in prices, it is not likely a precursor to potential (global) recession. An opportunity more likely has now presented itself to selectively acquire good quality shares and an environment to hold existing positions. Bearish market commentators refer to an exhausted bull market for shares which will reverse further over time as tighter monetary policy bites in the US impacting US (and by default global) growth.
Many have pointed the finger at the Federal Reserve before for being the catalyst that has created historic bear markets. The Fed nonetheless cannot ignore ongoing strong growth and employment data. In fact they are specifically mandated to closely monitor such metrics and set monetary policy appropriately. If they are walking a tight rope of sorts with their current actions, perhaps they are but they are not responsible for the performance of the stock market. Ideally the US economy can continue to move forward in tandem with rising interest rates and that is my prediction at least for the foreseeable future. The just concluded midterm election results should not significantly impact current economic policy which is also supportive even if US protectionism remains a risk variable to the global outlook.
A third quarter UK GDP read by the end of this week should also signal the economy at home was robust at least through the summer. The shadow of uncertainty that is Brexit remains and some form of clarity relating to a deal by the end of this month should be a positive for many stocks currently impacted by a hard Brexit or worse, no deal outcome. The financials (banks and insurers) would be top of my list for a rally as 2018 draws to a close.
The Chinese market remains over 20% lower year to date still in what is technically now a bear market. Growth of around 6.5% this year will be the slowest rate in 28 years and ongoing trade war tensions remain granted. The Chinese economy should still grow at over 6% next year and if some form of stimulus move is required, I suspect the Chinese are fully aware of their options. I wonder if this geographical area is a contrarian buy now if a longer term horizon should be taken. China’s economic health has direct influence to the EM space as a whole. Many ship product from copper to oil to China for example, especially the Latin American countries. It seems reasonable that a recovery in China will be needed to assist with the improvement of other EM regions.
Stock specific comment
I mention below some stock specific ideas of potential opportunities that have arisen as a result of the latest market falls. Investors are encouraged to do their own research and know their own capacity for risk before taking any of my comments as investment advice.
Aviva (422p) the insurance, savings and asset management group resides near 2 year share price lows. Consensus analyst forecasts place the shares on 7.3 times 2018 projected profits which falls to a multiple 6.75 times 2019 forecast profits with a well covered 7% growing dividend yield attached for new buyers of the shares. Without doubt to my mind the cloud of uncertainty around how the Brexit deal will be structured for the sector is weighing on the stock. The market awaits the appointment of a new CEO and merger and acquisition activity cannot be ruled out in a sector which has always been ripe for consolidation. The shares were near 500p at the end of September and this is also a casualty of the general market malaise of last month. I am eyeing a rebound towards 500p over the next few months.
Ashtead (1900p) the Anglo American plant hire group is also firmly in my sights for recovery. The current price is just above annual lows having fallen swiftly from highs around 2450p at the end of September. The company trades as A Plant in the UK and Sunbelt in the US (where most of the earnings are derived from). The US remains a fragmented market in plant hire and Ashtead have benefited from increased infrastructure spending for some time in America. The 2018 Price to Earnings ratio is an investable 11.6 times falling to 10.2 times consensus for 2019 for a corresponding increase in post tax profits of 13.4% between the years. More a growth share, there is a growing 2% income yield for the investor attached. Ashtead’s long term growth trajectory has been impressive over the years. Even if some suggest their markets may have cyclically peaked, I believe current levels bring an opportunity for a company regularly buying back shares in the market for holding in Treasury. A £250,000 value debut share purchase by a NED on 26/10/18 did not escape my radar.
Carnival (4230p) the UK based market leading cruise company looks interesting again for a timely investment. Brands include Costa, Cunard and Carnival Cruise Line and the group is the world’s largest travel leisure company. Current levels look like a technical support from the charts and shares recovered strongly back up to 5000p (from these levels) between July this year and the end of September. A PE multiple of around 13 for 2018 for projected growth of near 10% into 2019 looks appealing. There is a handy and growing 3.5% income yield on the stock also to bolster total returns going forward. Slippage in the oil price will also be a positive on the cost side for the business. Leverage measured by net debt to pretax profits is very manageable. A return to the 5000p level assuming no exceptional (risk) circumstances unfold does not seem unreasonable in my view over the next 3- 6 months.
This report was written by Philip Scott, Director at SI Capital on 7/11/18 when the FTSE 100 was trading at 7100.
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