Tuesday, 19 May 2015

HSBC and Co-op Bank do battle as sub-1% mortgage wars break out

International Business Times Video Link below:

Could the first sub-1% mortgage rate be around the corner? Actually, it is already here. While the Co-op Bank recently launched a 1.09% two-year fixed-rate mortgage (which will move back to the standard variable rate (SVR) at the end of the term), HSBC has beaten this with an initial rate of 0.99% on its two-year discount special mortgage.

It is hardly surprising then that existing homeowners are thinking about remortgaging to lower their monthly mortgage payments. Surprisingly enough, the SVR on mortgages has actually risen since 2010 and now stands at 4.5%.

Figure 1. Two and five-year fixed mortgage rates still falling 

Source: Bank of England

The average two-year fixed mortgage rate has fallen to under 2%, while the average five-year fixed rate is under 3% (Figure 1). And if you shop around, you can now find sub-2% five-year fixed rates too.

Nearly one in six homeowners are thinking about remortgaging over the next six months, according to a recent Nottingham Building Society survey.

They are hoping to save on average £99 per month, or nearly £1,200 per year. This is all thanks to the ongoing mortgage price war, driving rates ever lower. Let's face it, with the Bank of England base rate at a historic 0.5% low, interest rates are likely to only go one way in the long-term – up.

So remortgaging with a multi-year fixed rate will at least insulate the homeowner against the risk of higher rates for the foreseeable future.

Average mortgage rate on outstanding mortgages

But how much is the average mortgage borrower paying at the moment? The Bank of England says "nearly 3.2%" (Figure 2).

Yes, this average rate has come down over the past five years, but it is still a long way from the current best two and five-year fixed and discount rates on offer today.

Figure 2. Average mortgage rate on outstanding mortgages still over 3%

Source: Bank of England

Let's say you are interested in remortgaging your house or flat. Where would you start and what should you watch out for?

Firstly, you can go the well-trodden route of checking out the online mortgage best buy tables at MoneySuperMarket.com, MoneySavingExpert.com or MoneyFacts.

Before going any further, it is probably a good idea to sit down with your existing mortgage provider to see what they can offer you.

Then if you're not satisfied, try the banks and building societies at the top of these tables. Or you could go to a specialist mortgage broker such as John Charcol or London & Country Mortgages.

But beware, some of these lowest interest rates come with catches: you may be hit with a high "arrangement fee" that can go as high as £1,499, or there may be penalties for early repayment. So be careful to examine the details.

Investing in the mortgage market: challenger banks, specialist lenders

There are some interesting ways to invest in a post-election pick-up in mortgage demand. Instead of looking at the Big Four UK banks, I would look to the new "challenger" banks that have recently been established, or look to specialist mortgage lenders.

Listed challenger banks that are making a splash on the savings and loans markets include Virgin Money (code VM.), Secure Trust Bank (STB), OneSavings Bank (OSB) or Aldermore Group (ALD).

Virgin, OneSavings and Aldermore have all recently listed on the London Stock Exchange and are growing their savings and mortgage businesses quickly as they take business away from the Big Four.

Otherwise, for a really focused mortgage growth play, you could look at the Paragon Group of Companies (code PAG). Paragon specialises in residential mortgages (such as buy-to-let), personal and car loans.

They are forecast to grow profits by more than 10% per year for the next two years and trade on a very reasonable valuation.

Bottom line: if you haven't remortgaged already recently, check out the current best remortgage buys and see if you can save on your monthly payments.

Thursday, 14 May 2015

CNBC TV Interview: Bonds - Expect more extreme moves

Edmund Shing, global equity portfolio manager at BCS Financial Group, says bond volatility is on the up. 

Click on link below to watch the video clip:

Wednesday, 13 May 2015

On Bloomberg TV: Discussing the Economy

BCS Asset Management’s Edmund Shing and Mizuho International’s Riccardo Barbieri discuss Greece’s ongoing talks with its creditors and an IMF payment that the country made. They speak to Bloomberg’s Jonathan Ferro on “On The Move.” (Source: Bloomberg)

Bloomberg TV link:

Tuesday, 12 May 2015

Goodbye Labour mansion tax, hello Tory post-election property bonanza at Berkeley and Foxtons

International Business Times Video link (click below):

Could property be the big gainer from David Cameron's election win? Estate agent Foxtons and house builder Berkeley Group jumped 9%+ on 8 May. But why?

Clearly, the stock market has heaved a huge sigh of relief at the demise of the Labour Party. Now there is no fear of a mansion tax hitting London housing.

This is good news for house buyers at the £2m ($3m, €2.7m) plus price bracket, such as foreign buyers in London, who have been holding off any purchases up until now.  

Equally well, with the risk of Labour's threatened rent controls now removed, the buy-to-let market could now see renewed activity.

Now that the Tories are in sole charge, they need to urgently tackle one of Britain's most pressing problems. London and the South East is the UK's economic heartbeat, but is desperately short of affordable housing.

House prices still on the rise – outside London

The Halifax house price index rose 1.6% between March and April, and 8.5% over the last year, for a yearly gain of nearly £20,000 on the average house (Figure 1).

Figure 1: UK house prices up by nearly £20,000 over the last year 

Source: Lloyds Bank

Last year, London properties saw the fastest-rising prices. In contrast, it is the rest of the UK that has enjoyed stronger house price momentum over these last 3 months.

According to the Royal Institute of Charted Surveyors (RICS), London is one of the very few regions where house prices have actually fallen over the last 3 months (Figure 2).

Figure 2: House prices rising fastest in Northern Ireland 

Source: Royal Institute of Chartered Surveyors

Four factors should drive a rebound in buy-to-let house purchases:
  1. Lifting of the threat of rent controls;
  2. High demand for rental properties (Figure 3);
  3. Falling mortgage interest rates: The Co-Op Bank are now offering a new 2-year fixed-rate mortgage at only 1.09%. This suggests that the first sub-1% mortgage rate could soon be here.
  4. Falling savings rates: your saved cash is worth less and less in the bank, increasing the attractions of alternative income investments. 

Figure 3: National rental demand remains very high 

Source: Royal Institute of Chartered Surveyors

All good for estate agents and house builders

What are the best ways to invest in the UK housing market? These are my two favourite housing-related industries:

Estate agents: Of course they buy and sell houses, and so make more money as house prices go up. But they also increasingly make money from the buy-to-let market, as they also act as letting agents.

House builders: who benefit from rising house prices as they can sell their newly-built homes for more, meaning higher profits.

My two favourite housing shares: Berkeley Group and LSL

I like the UK house builders as a group; they are all in general cheap, pay big dividends and are very profitable.

My favourite house builder is Berkeley Group (code BKG). It is focused on London and the South East of England, it is a generous income payer with a 6.4% dividend yield, and has been consistently very profitable over the last five years.

There are handful of listed estate agents in the UK. I like LSL Property Services (code LSL). LSL has two distinct sets of businesses:

  • 539 estate agent branches under a number of brands, such as Your Move and Reeds Rains;
  • Surveying and valuation services.

Both of these sets of businesses will make more money from a booming property market, whether from buying and selling or just from managing rented properties.

LSL is also a cheap stock and a reasonable income payer with a 3.7% yield; it is also consistently very profitable, with profits forecast to grow by 10% this year.

Post-election Friday was a good day for the estate agents and house builders; but there could be many more as the property market heats up again!

Thursday, 7 May 2015

It's Apple v Microsoft in the technology boxing match of the century

International Business Times Video Link (click below):

We have just witnessed the so-called boxing match of the century: Floyd Mayweather versus Manny Pacquiao in Las Vegas. Reputedly grossing over half a billion US dollars, this is a financial windfall of the likes never seen before in professional sport.

But the Mayweather v Pacquiao bout has its long-running mirror in the technology arena, with American technology giants Apple and Microsoft slugging it out for the crown of the most valuable company in the world since the dawn of the new millennium.

Apple slugs it out with Microsoft

Back in 2000, Microsoft held sway with its dominance over the PC software market thanks to the prevalence of the Windows operating system and its Office software suite, wearing the "Technology Most Valuable" belt with pride.

Figure 1. Global iPhone Volume Sales Remain Very Strong 

Source: Apple

But in 2015, it is Cupertino-based Apple that is the Floyd Mayweather of the tech world –wearing the crown for being the most valuable company in the world as it is worth over $750bn (£495.7bn, €674.2bn) and nearly twice the market size of Microsoft.

Recent Apple results have underlined the pre-dominance of the iPhone 6 and 6+ models, even taking reportedly a 25% market share of the Chinese smartphone market in the face of incredibly fierce domestic competition from handset makers Huawei, HTC and Xiaomi.

In fact, Apple sold more iPhone 6 handsets in China than in the US over the past three months. The 61.2 million iPhones sold globally over the second quarter (Figure 1) served to dish up outstanding financial results at Apple, beating the expectations of financial analysts by a wide margin.

Unlike during the technology bubble in 2000, "old" technology names such as Apple (US code: AAPL) and Microsoft (US code: MSFT) are today substantially cheaper than the overall US stock market. Adjusted for the cash on the balance sheets of tech titans Apple, Microsoft and Google, you pay an average of under 12 times earnings for these globally dominant tech names; in contrast, you pay a much more expensive 18 times earnings for the overall US stock market (Figure 2).

Figure 2. Apple, Microsoft & Google: Much Cheaper than the US Stock Market 

Source: Yahoo Finance. Note: Lower P/E ratio is cheaper

While Apple and Microsoft are cheap, they still offer solid prospective growth in both profits and dividends. The combination of cheap valuation and solid growth prospects in the technology sector could be a good reason to buy exposure. However, unless you have a stock market account that allows you to buy and sell US stocks, you may find it difficult to buy Apple or Microsoft shares directly.

Buying US tech stocks via a fund

In this case, buying a sterling-denominated exchange traded fund (ETF) or investment trust focused on US technology stocks may well be an easier option. These typically have substantial weightings in both Apple and Microsoft, given they are two of the largest stocks in the entire US stock market.

Five technology fund options are below (Figure 3), all with varying weightings in these two tech giants as well as the global internet and social media behemoths Google and Facebook.

Figure 3. UK-Listed Technology-Focused Exchange-Traded Funds,
Investment Trusts 

Source: Company Factsheets

Focus instead on UK technology stocks

Instead of buying tech giants from the other side of the Atlantic, you may instead want to focus on technology closer to home. In that case, there are a number of UK technology stocks listed on the London Stock Exchange.

Narrowing down our focus to the technology hardware space, there are few large-cap stocks left for us to buy, following the recent takeovers of UK technology stocks CSR (being acquired by US semiconductor maker Qualcomm) and Pace (being acquired by US set-top box maker Arris).

ARM Holdings (semiconductor design, code: ARM), Imagination Technologies (semiconductor chip maker eg for Apple, code: IMG) and IQE (semiconductors, code: IQE) are three that remain listed in the hardware space.

In the UK software space, there are the likes of Sage (small company software, code SGE), Micro Focus (business software, code MCRO) and Playtech (gaming software, code PTEC).

But, overall, the listed UK technology sector is getting smaller and smaller, with companies being swallowed up by larger US competitors. This trend may be a good additional reason to buy into medium-sized and smaller UK technology businesses, aside from the growth attractions in technology.

So there you have it, two ways to play the technology growth theme. You can go the US route, either buying the likes of Apple or Microsoft directly or by buying a US technology fund.

Or there is the UK route, selecting from an ever shorter list of listed UK technology stocks, but perhaps benefiting from their status as potential takeover targets in a global sector.

Wednesday, 29 April 2015

After Shell, BG, Nokia and Alcatel, ITV and Indivior could join the takeover trail

IB Times Video Link:

KPMG says the merger and acquisition boom is back in 2015. Certainly, company takeover activity has been hotting up on both sides of the Atlantic these past few months – just think of Shell swallowing up BG in oil and gas, Nokia merging with Alcatel-Lucent in technology and FedEx buying up fellow Dutch logistics group TNT Express.

Figure 1. What factor will drive deal activity in 2015? 

Source: KPMG 2015 M&A Outlook Survey Report

One of the main reasons for expecting more takeovers is the very high level of cash that large companies are holding, and the very low interest cost on company debt (Figure 1). With money burning a hole in corporate pockets, top executives want to go shopping for growth.

In trying to predict who could become the next takeover targets, we need to know the profiles of existing targets: which industries are seeing the greatest number of takeovers and takeover rumours, and what size of company is most likely to be susceptible to a takeover approach?

Technology, healthcare, media, insurance and oil and gas are ripe for consolidation

I see four industries as prime hunting grounds to search for potential takeover targets, given recent takeover and merger activity in recent months:

  1. Technology: Nokia is merging with Alcatel-Lucent in telecoms equipment, while US set-top box maker Arris is buying UK set-top-box maker Pace for $2.1bn.
  2. Healthcare: In generic drug making, Israeli global leader Teva has bid some $40bn in cash and shares for US generic drug rival Mylan. Novartis, the Swiss drug maker, has revealed recently that it is hunting for healthcare acquisition targets in the $2bn to $5bn range.
  3. Media: AT&T's acquisition of DirectTV in the US and Liberty Global's purchase of Belgian media company De Vijver Media NV highlight the consolidation occurring in the US-dominated broadcast media industry, with media content becoming increasingly valuable to cable and TV distributors.
  4. Insurance: Lloyd's of London insurers has been the focus for acquisition of late, with both Catlin and Brit Insurance bought up by larger North American insurers. We can also add the merger of close-end life assurer Friends Life with Aviva, highlighting the consolidation wave under way in insurance.

Interestingly, these same industries came top in the KPMG M&A survey too (Figure 2).

Figure 2. What factor will drive deal activity in 2015? 

Source: KPMG 2015 M&A Outlook  Survey Report

What size of company could be preferred for acquisition?

While the Shell-BG deal is huge buying up huge, mid-cap companies are generally more likely to become tasty bite-sized morsels for cash-rich mega cap rivals to buy up growth prospects, relatively easy to finance and without all the complications of combining two huge companies with wide-ranging and complicated operations.

Three potential UK mid-cap takeover targets

1 Indivior (Healthcare)

Indivior (UK code: INDV) is the former pharmaceutical division of cleaning products and food maker Reckitt Benckiser, spun off from Reckitt as an independent, UK-listed company at the end of 2014. Its principal focus is on medicines to treat drug dependency, most notably alcohol, heroin and cocaine addiction.

At a market capitalisation of £1.5bn, it is relatively small versus the UK industry giants GlaxoSmithKline, AstraZeneca and Shire. Furthermore, it remains substantially cheaper on a number of valuation ratios such as price/earnings than any of these larger drug companies. Potential acquirers could be larger US-based drug makers who already produce opioid addiction treatments – Actavis, Endo Health and Janssen Pharmaceuticals.

2 ITV (Media)

There has been a battle for broadcast media content globally in recent months, with persistent takeover rumours surrounding £11bn market capitalisation ITV (UK code: ITV). It has most recently popped up as a potential target for the likes of US cable operator giant Comcast, the largest company in the world by broadcasting and cable revenues.

These rumours have sent the TV share price, and thus valuation, rising substantially since November 2014, with ITV's jewel in the crown being its production arm ITV Studios, responsible for drama series such as Poldark.

3 Lancashire (Insurance)

Lancashire (UK code: LRE) provides "global specialty insurance", operating as a Lloyd's of London insurer like acquired competitors Catlin and Brit Insurance. Attractions include a low valuation, high profitability levels and a juicy dividend yield projected to be as high as 9.5% in the future.

Just like Catlin and Brit Insurance, Lancashire could be the next to fall prey to a US-based reinsurer looking to expand globally.

So these are three UK mid-cap gems that I like the look of from a fundamental basis, which could also become the subject of a share-price boosting takeover in the next few months.

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: