Thursday, 23 April 2015

Bloomberg TV interview this morning - discussing China, Greece...

BCS Asset Management Global Equity Portfolio Manager Edmund Shing discusses 

  • China’s Flash PMI data, 
  • Greece’s debt deal and 
  • where he sees opportunity. 

He speaks to Bloomberg’s Mark Barton, Caroline Hyde and Manus Cranny on “Countdown.” (Source: Bloomberg)

Bloomberg TV Video Link Below:

Wednesday, 22 April 2015

CNBC Squawkbox Guest Host: Video on Chinese, Hong Kong Equities Value

Edmund Shing, global equity portfolio manager of BCS Financial Group, says he still sees value in the Hong Kong and Chinese stock markets.

Please click below to view the VIDEO Link:

Tuesday, 21 April 2015

Grexit Today, Brexit Tomorrow?

IB Times Video Link (click on link below to view):

Is the Greek government really preparing to leave the Eurozone and re-introduce the Drachma? Another week goes by, and still no deal between the Greek government and the European Union (EU), European Central Bank (ECB) and the International Monetary Fund (IMF). Time is running out for the Greeks to secure the financing from these negotiating parties that they require to avoid defaulting on their government bonds. 

But what is “Defaulting”, and why does it matter?

Defaulting simply means that the Greek government refuses to pay the contractual interest on borrowing it has previously taken out in the form of government bonds (which are simply IOUs to the eventual bond buyers). In addition, it means that the Greek government also refuses to repay the capital for loans that have arrived at maturity, meaning that the bond buyers who have previously lent their money to the Greek government will not get all of the original amount lent out back. 

This type of borrowing is quite unlike a capital repayment mortgage, where we take out a mortgage secured on a house for a fixed period of time e.g. 25 years. With such a mortgage, we are effectively repaying the lender (a bank or building society) a mixture of interest payment and capital repayment month by month, such that the entire original amount borrowed is repaid by the end of the life of the mortgage. 

And if we don’t make our monthly payments on time, the lender has the right eventually to repossess our house and resell it in order to recoup their original capital lent out plus interest payments due – i.e. “secured” lending.

Contrast this to the government bond type of borrowing, where a sovereign government issues IOUs in the form of selling bonds, promising to pay a set amount of interest every year until the end of life of the bond (e.g. 10 years), at which point they then have to repay the entire amount originally borrowed in one lump sum back to the lenders (the bond holders). 

If, however, a country defaults by not paying the agreed interest payments on time or not repaying the original capital at the end of life of a bond, there is (generally) no asset that the original lender can seize to resell to recoup their capital and interest – it is “unsecured” lending. 

By not putting forward the essential economic reforms that the EU, the ECB and IMF are demanding in return for extending further loans to the Greek government, the Greek Prime Minister Alexis Tsipras risks telling holders of Greek bonds that they will not get their interest payments and their capital lump sums back, as the Greek government coffers are already almost empty. 

This would not be the first time that a Greek government defaults on its debts – in fact, in the modern era Greece has defaulted five times (since 1826; Figure 1).

1. Five Greek Debt Defaults Already in the Modern Era
Source: Forbes

How Much Longer Can The Greeks Struggle On Before Default and Grexit?

So, the Greek government has already run out of money; it has been struggling on up to now by raiding whatever pots of cash it has been able to get its hand on in the very short-term. But as Figure 2 shows, a big set of debt repayments are due in June, and an even larger amount of repayments come due in July.

2. Upcoming Greek Government Debt Repayment Schedule
Source: IMF, Datastream

Without a reform deal acceptable to the EU, ECB and IMF, the Tsipras-led administration almost certainly has to decide either to default either by: 

  1. not repaying bond holders (the largest of which are actually other Eurozone governments, the ECB and the IMF; Figure 3) or by 
  2. not paying its own citizens their pensions and state benefits. 
3. Major Owners of Greek Debt

Source: Der Spiegel,

What Might This Mean for the European Union; What Chance of Brexit too?

While the Greeks might be able to struggle on despite a default, and stay in theory part of the Eurozone, in practice they would be forced to exit the Eurozone in short order, the so-called “Grexit”. Frankly, this could prove chaotic for financial markets as no-one really knows how a Eurozone member can exit the single monetary union (it was never legislated for when the euro was created). 

This could also have some serious knock-on effects for British membership of the European Union, as a Grexit could prove a serious blow to the reputation of the EU in the UK, adding grist to the mill of UKIP and the Eurosceptic wing of the Conservative Party. 

A Greek exit from the Eurozone could effectively increase the chance that Britain leaves the European Union in a post-election referendum, which in turn could prove a massive problem for those UK companies doing a lot of their business with our European Union partners like Germany and France – the European Union as a block remains the UK’s largest trading partner by far at 51% of UK exports (Figure 4)

4. Who the UK Trades With
Source: HMRC (2012)

One potential consequence could be the flight of companies to set up their head offices and operations in the Republic of Ireland, which would then become even more attractive as a business destination for several reasons:

It uses the euro as its trading currency, 
It offers a low 12.5% corporate tax rate for overseas companies; and 
Good access to a (cheaper thanks to a weaker euro) skilled workforce plus easy transport access.

Conclusions: A Body Blow for the UK Economy?

Failure for the Greek government to reach a last-minute deal with the EU, ECB and IMF is becoming ever more likely day by day. This could trigger a chaotic Greek exit from the Euro, leading volatility to surge in the financial markets. 

Any subsequent post-election British exit from the European Union risks the loss of Europe-linked jobs in export-oriented sectors such as the car industry, and would potentially also be a body blow for the City of London, which a massive invisible export earner for the UK – opening the door for Frankfurt to challenge London once again for the crown of Europe’s pre-eminent financial centre.

Buy Into Irish Stocks

How can you profit from the Grexit + Brexit risks? By buying into major Irish stocks that could stand to benefit from any flight of UK companies to Dublin: I like Smurfit Kappa (code: SKG), Ryanair (code: RYA) and Hibernia REIT (code: HBRN). 


Wednesday, 15 April 2015

Oil Takeover Targets – Who’s Next?

 Has a rush to buy up oil & gas companies just started? Royal Dutch Shell is set to become by far the largest FTSE 100 member by market capitalisation at 7.6% of the index (Figure 1), worth nearly £160 billion and 35% larger than the second-largest company HSBC, once it completes the £47 billion purchase of BG later this year. 

1. Royal Dutch Shell Worth 7.6% of FTSE 100 Post BG Deal

Source: Author,

In the late 1990s, the oil price plunged to $10 per barrel and set off a wave of oil industry mega-mergers: Exxon with Mobil, Chevron with Texaco, BP with Amoco. Fast forward to April 2015, and once again the oil price has plunged, more than halving from $110 per barrel in July last year to just $50 by January this year.

Now we have a new oil & gas mega-merger, Royal Dutch Shell taking over BG (the gas-dominated exploration and production arm of the former British Gas). This is in fact the second big oil company merger announced in the past few months, following US oil services company Halliburton which announced a merger with rival Baker Hughes in November last year. 

Why is Shell Buying BG?

With this purchase of BG, which has been beset by fundamental problems for some time, Shell is buying access to oil and gas reserves in Brazil and Liquefied Natural Gas (LNG) capability. These assets allow Shell to grow their oil & gas reserve base (replacing oil and gas currently being produced) and to be a dominant player in the growing LNG market, alongside the state of Qatar. 

The basic idea is this: that the oil & gas-producing assets of BG are cheaper for Shell to buy in principle than developing new oil & gas fields and putting them into production – the so-called “replacement” cost. Why take the risk of developing new oil fields (which may not even produce as expected), when you can buy proven, producing oil & gas reserves off the shelf?

Who Else Could Be Looking To Buy Oil & Gas Assets?

While Shell has already chosen its prey, which other mega-oil companies could also be looking to buy up cheap oil & gas reserves? As the oil & gas market is global by nature, we have to look abroad for potential acquirers. 

In the US, ExxonMobil and ChevronTexaco are the two largest integrated oil companies with the financial muscle to do big deals. In Europe, Total of France and Statoil of Norway stand out as huge integrated oil companies that might find it easier and cheaper to buy up oil & gas reserves via acquisition of companies rather than by developing new oil & gas fields from scratch. 

Who could be next to succumb to oil merger mania? BP?

In the UK, there are both big and smaller potential acquisition targets in the Oil & Gas sector. In a previous IBT article I have highlighted the attractions of the ailing BP (hurt by the 2010 Gulf of Mexico Macondo disaster). 

BP could be an interesting target for the two US mega-oil companies Exxon and Chevron, given its huge asset base in the US/Alaska. I should note that BP has gained over 10% since I discussed it back in December last year, and BP’s market size is only 35% that of Exxon and 63% that of Chevron (Figure 2)…

2. BP Could Be a Target For US Giants Exxon, Chevron


Other Potential UK-Based Targets: Tullow, Premier Oil, EnQuest, Ithaca Energy

Otherwise, the oil exploration & production companies Tullow Oil (total company value: £5.2 billion; code TLW) and Premier Oil (total company value: £2.2 billion; code PMO) have both been cited as potential acquisition targets, and look cheap when comparing their total company value (the value of all shares + value of debt) to the number of barrels of oil they hold as Proven + Probable (2P) reserves in their developed oil fields (Figure 3). 

For instance, Premier Oil is currently valued at just $13 per barrel of 2P oil reserves following a drop of more than 50% in its share price from September 2014 to now (from 348p to 159p). Could an integrated oil giant swoop to acquire these now-cheap oil reserves?
3. Four Small/Mid-Cap Oil Targets? Valued at $10-22 Per Barrel of Oil Reserves

Source: Author, Company reports

Both Tullow Oil and Premier Oil have global oil & gas interests, spanning from West and North Africa to Pakistan and the Falkland Islands.

Closer to home, other acquisition targets could include the smaller, North Sea-focused oil exploration and production companies EnQuest (code ENQ, current share price 42p) and Ithaca Energy (code IAE; current share price 46.5p). Both of these companies also look like potentially cheap acquisitions for larger oil company predators, at values of only $6 and $14 respectively per barrel of oil held in their various North Sea oil fields, and benefit from the reduction in North Sea oil taxes in the latest UK Budget. 

There you have it: five UK-listed oil companies of varying sizes that could become tasty acquisition targets for global oil companies!


Thursday, 9 April 2015

CNBC TV: Greek reforms - The risks ahead

From my recent Guest Host spot on CNBC's Closing Bell with Louisa Bojesen:

Edmund Shing, global equity portfolio manager at BCS Financial Group, discusses Greece's reform plans and the potential risks ahead.

Video Link below:

Wednesday, 8 April 2015

Idris Elba gives Superdry the premium touch as Debenhams enjoys its sweet spot

International Business Times Video Link below:

We as a nation spent £26.5bn (€36bn, $39bn) in the shops during February, ie £6.6bn per week. The latest retail sales data reveals we bought 5.7% more stuff from shops in the second month of the year than in 2014, an impressive growth rate.

Clearly the combination of increasing employment, rising wages and lower petrol prices are driving greater consumer optimism and are all leading us to open up our wallets and spend with abandon...

A schizophrenic retail sector: Supermarkets pressured, non-food flies

Looking under the hood of retail sales statistics reveals two very different trends at work: firstly, supermarkets continue to have a tough time, with sales flat and prices under pressure (food prices on average 2% lower now than this time in 2014).

Secondly, in sharp contrast, the non-food retail sector is enjoying a boom (Figure 1), with a 5.3% increase in retail sales value over a year ago.

Figure 1. A tale of two sectors: Food retail flat, non-food booms

Source: Office for National Statistics

Digging deeper, the sectors producing the best growth at the moment are clothing, electrical appliances and household goods (furniture, lighting, Figure 2), all growing at over 6% per year.

Figure 2. Clothing, electrical and household goods in the lead

Source: Office for National Statistics. Data as of February 2015

In the UK retail space, the obvious names come to mind such as the veritable Marks & Spencer, Next and even Whitbread (the owner of Costa Coffee, Beefeater Grill and Brewers Fayre).

So which companies should be making hay? Debenhams and SuperGroup

But I would focus right now on two other retail names: department store chain Debenhams and the owners of the popular Superdry fashion brand, SuperGroup.

I like Debenhams (code: DEB) for a number of reasons:

  1. It sits in the current sweet spot of retailing, offering clothing, footwear and household goods in its department stores.
  2. Current trading is strong, following the strong key Christmas period with 4.9% like-for-like sales growth. Online was strong too with its website growing sales by 29% over the four-week period, helped by the success of its click-and-collect service.
  3. Gross profit margins continue to improve, highlighting the better cost control and fewer discounted items sold.
  4. Valuation remains cheap at only 10x P/E (thus far cheaper than Next, Marks & Spencer or Associated British Foods – owner of Primark; Figure 3), while income lovers will like the 4.6% dividend yield paid out. 

Figure 3. Debenhams, SuperGroup cheaper than other UK retailers

Source: Note: SuperGroup P/E adjusted for net cash

The stock has been on a strong run of late, rising from under 60p in October 2014 to touch a peak at the end of February of over 80p, before settling back to 76p now. I think there could be plenty more upside left in Debenhams, given the following winds from the UK economy.

SuperGroup: Buying into the new strategy

SuperGroup (code SGP), the retailer behind Superdry, has decided to buy back the distribution rights for its fashion brand in the US, so as to sell Superdry clothing Stateside rather than through a partner. At the moment, Superdry is not making money in the US, but this strategic move highlights the new management's confidence in its US growth potential.

Secondly, it has recruited actor Idris Elba (The Wire, Luther, Prometheus, Pacific Rim, Thor) for a collaboration on a new premium range of Superdry clothing, which should deliver a boost to UK sales.

Thirdly, it is initiating a dividend for the first time, which will allow part of the £66m of cash on its balance sheet to be progressively returned to shareholders.

Top-line growth for Superdry is still estimated to beat 10% per year going forwards, generating 12-14% earnings growth. For this, an investor is paying just over 13x P/E on an ex-cash basis, which seems a remarkably good deal for this recovering branded goods growth story. So shop till you drop with Debenhams and SuperGroup.

Pension reforms - freedom, stealth tax or a scandal-in-waiting?

International Business Times Video Link below:

Does anyone fully understand the UK's new pension rules? I have tried, and let me tell you, it is not at all easy! For a start, thanks to the Government's haste in pulling this pre-election rabbit out of its budget hat, the venerable HM Revenue & Customs is still releasing guidance notes on the details of the taxation and rules governing private pensions.

So there is hardly any surprise to see that the over-55s are having such a hard time trying to figure out what they should do with their private pension pots, and with any annuities that they may already have been bought. At the best of times, the subject of pensions is poorly understood by the vast majority of people, and the radical changes to pension legislation enacted over the last two tax years have only served to increase the confusion.

Risk 1: Another Mis-Selling Scandal in the Making? Get Proper Advice!

In my view, the combination of (a) radical changes in pension rules, combined with (b) the difficulty of the subject for most people, could open the floodgates for mis-selling of new pension products. One obvious danger: the over-charging of pensioners and would-be pensioners for dealing with pensions, e.g. the cashing in of annuities, resulting in pensioners getting very poor value for money.

Whoever said that giving people more choice was always a good thing? I would remind you that the last time a radical change was made to the pension system back in 1988, allowing the contracting-out of the State Second Pension, six million people opted out of SERPS, of which 2.4 million were later found to have been poorly advised and were potentially worse off as a result.

Even a body as august as the Financial Conduct Authority (FCA), the UK financial services watchdog, has flagged up the risk of poor advice and mis-selling surrounding these pension reforms. So far, the FCA has contented itself with warning the pensions and insurance industry that it must behave itself and treat clients fairly. But it has quite clearly flagged up this mis-selling risk.

My Pensions Tip #1: Take your time, get professional advice (without overpaying for it!) and if in doubt, do nothing!

While I normally shudder at the thought of getting professional advice regarding investment and taxation, in this case the sheer complexity of the subject of pensions and the huge number of new choices available make good advice essential.

Good first steps in getting unbiased pensions advice include reading the Government-sponsored Money Advice Service's web page on Options for using your pension pot, and calling the official Government-pension advice service,The Pension Advisory Service on 0300 123 1047.

Risk 2: The Government's tax trap – a big tax bill CAN be avoided

Even if you manage to avoid this mis-selling trap, there are other potential pension bear traps lying in wait for you. One of the choices open to you as an over-55 with one or more private pensions is cashing out more than the 25% of your private pension pot that you can take out tax-free as a lump sum. Now, you can theoretically take out your entire pension pot to spend as you like – the so-called "Lamborghini pension".

However, this withdrawal from your pension is subject to the balance over 25% of the pot being subject to income tax at your marginal tax rate, which could then be as much as 40% of the total amount "liberated" if the sum withdrawn takes your annual income over the 409% tax threshold.

According to the HMRC's own calculations, they estimate that 130,000 of the 400,000 people that are eligible to access their pensions each year in this way to do so, with the HMRC to potentially receive £320m in extra income tax for 2015/16, rising to £1.2bn by 2018/19, for a total over 5 years of £3.8bn (Figure 1).

1. HMRC Due to Get £3.8bn Over 5 Years from Extra Pension Tax 

Source: HM Revenue & Customs

My Pensions Tip #2: Now there are a number of ways to liberate your private pensions without paying an inordinate amount of extra tax to HMRC.

But the way to accomplish this will depend on your particular situation and your goals, and is thus beyond the scope of this short article – and that is why you need proper professional advice!

Risk 3: A Rush to Buy Overvalued Buy-to-Let Properties

After the sharp rise in UK house prices (+21%) since the depths of the 2008-09 Financial Crisis, using your pension pot to buy an income via a buy-to-let property given average 5.0% gross rental yields could be very enticing. But beware: this is not necessarily as easy as it may seem.

Firstly, house prices can go down as well as up! So your capital is not free of risk – an obvious statement perhaps, but one which bears repeating. Secondly, a monthly income from the rent is not guaranteed either; houses and flats can lie unlet for months on end, even costing the owner money as the Council Tax must still be paid on the property.

And of course, there is always the cost of maintenance and potentially the cost of a letting agent to consider too. All in all, the net (i.e. after-cost) buy-to-let rental yield (the annual rental income after all costs, as a proportion of the initial total cost of the property including stamp duty, conveyancing and solicitor's fees) may be nothing like as attractive as you may at first think.

My Pensions Tip #3: Think hard and do realistic net rental income calculations before going to the effort of taking a large cash lump sum out of your private pension to plunge into the buy-to-let property market!

Annuities are probably still a good choice for most people

Remember, despite all the bad press about annuities, they are not necessarily a bad thing!

First of all, what is an annuity exactly? It is simply a form of income guarantee: in return for a lump sum paid up front, an annuity provider (typically an insurance company) promises to pay you a regular monthly income for the rest of your life, however long you live.

There are many different types of annuities to consider, for which once again, advice will be required in order to choose between the various options. But the idea of a guaranteed income for life is no bad thing, as it removes the risk for most people that they exhaust their pension pot at some point, and then be forced to suffer a big drop in income as a result.

Right now, while annuity rates may have dropped over the last few years, a non-smoking male aged 65 today can guarantee an income of over £5,600 per year for life in return for a £100,000 lump sum payment from his pension pot (Figure 2).

2. 65-Year Old Non-Smoking Male Can Get a 5.6% Annuity Rate Today 


My Pensions Tip #4: So at the very least, buying an annuity with at least part of your private pension pot to ensure a minimum guaranteed level of income over and above the State Pension is probably a good choice for most people.

Overall, then, I don't want to sound like a complete party pooper – there are a number of very positive features of George Osborne's pension freedom changes for current and prospective pensioners; but at the same time, Caveat Pensioner!

In future articles, I will examine other potential investment options for your private pension cash, including the attractions of owning a portfolio of shares in solid dividend-paying companies...