Wednesday, 28 January 2015

Video Clips from my appearance this morning as Guest Host on CNBC Europe Squawkbox

CNBC Europe TV:
Video Clips from my appearance this morning as Guest Host on CNBC Europe Squawkbox

Please click on the links below to view the short video clips:

TalkTalk may follow O2 and succumb to telecom takeover mania

International Business Times Article Link: Click Here to View

The airwaves have been awash of late with UK telecom takeover stories. Firstly Telefonica's UK mobile phone operator arm O2 is reportedly to be sold to Hong Kong billionaire Li Ka Shing's Hutchison Whampoa, the owner of the Three mobile phone network, for £10bn.

Figure 1a. UK Mobile Operators' Market Share: Current situation 

Source: Jeffries Investment Bank

O2 plus Three's combined UK mobile market share would rise to 40% from Three's current 12% share, easily becoming the UK's largest mobile operator (Figure 1a and b).

Figure 1b. UK Mobile Operators' Market Share: If O2 and Three are Merged 

Source: Jeffries Investment Bank

Secondly, both Deutsche Telekom and Orange are potentially ready to sell their combined UK mobile operation EE to BT, who is looking to buy its way back into the UK mobile network business some 13 years after selling its mobile arm BT Cellnet, which eventually turned into O2.

BT's potential purchase of EE fits with the predictions made by the credit ratings firm Standard & Poors, who expect to see more fixed-mobile combinations in the UK telecoms market as key players seek both revenue and cost synergies.

Vodafone the wallflower at the mobile phone party?

Looking at the four UK mobile phone incumbents, the only operator so far not mentioned in this merger and acquisition merry-go-round is the number three player ranked by customers, Vodafone.

Believe it or not, even at a total market capitalisation of nearly £64bn currently, mobile phone juggernaut Vodafone (LSE code: VOD) has been talked of as a potential acquisition target in the global telecoms sector, ever since it agreed to sell:

  • its 50% share of US mobile operator Verizon Wireless back to Verizon for £54bn
  • its 44% share in French mobile operator SFR back to majority holder Vivendi.

Who could afford to buy Vodafone? Two much larger suitors have been identified in the recent past: US telecoms giant AT&T and the leading Chinese mobile phone network, China Mobile. In terms both of market capitalisation and annual income generated, these two telecoms companies dwarf Vodafone (Figure 2a and b).

Figure 2a. Vodafone is dwarfed by China Mobile, AT&T

Source: Finviz, Stockopedia

Figure 2b. Vodafone is dwarfed by China Mobile, AT&T

Source: Finviz, Stockopedia

In fact, AT&T and China Mobile are not the only two potential suitors mentioned, as back in September last year Japanese conglomerate Softbank, the owner of Japanese mobile network Softbank Mobile (formerly Vodafone Japan) and US mobile network Sprint, was also earmarked as a potential bidder for Vodafone.

Vodafone as predator rather than prey

Given Vodafone's size, it would certainly be a huge undertaking for any acquirer to pursue. But as well as being a potential takeover target, Vodafone can also be seen as a potential acquirer itself in the rapidly consolidating UK telecoms market.

Indeed, Vodafone's CEO Vittorio Colao recently warned that were BT to move aggressively into the mobile telecoms space, then Vodafone would retaliate by moving into the consumer broadband business, where it has been thus far absent.

But how would it accomplish this strategic move, given that thus far in broadband it only serves business customers, after buying out Cable & Wireless's UK broadband network?

One potential target could be TalkTalk (LSE code TALK), one of the premier consumer broadband network operators, serving four million customers in the UK.

TalkTalk is today the fourth-largest broadband internet provider in the UK (Figure 3), achieved largely through offering very cheap combined "triple-play" offerings (broadband internet, telephone and television services).

TalkTalk CEO Dido Harding has even gone as far as to state that: 

"If [Vodafone] decides it simply has to quickly have a fixed-line asset, then I'm not naive enough to think that we're not one of the companies it would look at".

Figure 3. TalkTalk is the fourth-largest UK broadband internet provider

Source: Ofcom

Two potential takeover targets in UK telecoms to choose from

So there you have it – two ways to play ongoing consolidation in the UK telecoms sector: Vodafone and TalkTalk.

Note that Vodafone offers a juicy dividend yield of 4.8%, and TalkTalk is close behind with a prospective yield of 4.7%. Not bad dividends to pick up while you are waiting for a potential takeover.

Edmund Shing is the author of The Idle Investor (Harriman House), an expert columnist and a global equity fund manager at BCS AM. He holds a PhD in Artificial Intelligence.

Wednesday, 21 January 2015

Direct Line can insure solid yields for income-hungry investors

Watch my IBTimes Video: Click Here

Direct Line's tootling red telephone television advertisements may have been annoying but they were certainly memorable. The same can also be said for another of Direct Line's insurance brands, Churchill – yes that one, with the nodding dog and the "Oh yes!" catchphrase.

A collection of top insurance and rescue brands

Aside from the main Direct Line telephone and online insurance brand, the Direct Line Group also operates the Churchill, Privilege insurance brands and the Green Flag breakdown assistance business.

All in all, Direct Line is one of the UK's biggest insurers, with a UK personal motor insurance market share of 14%, and a UK home insurance market share of 17%. Overall, this puts Direct Line third in terms of UK insurance business written after Aviva and AXA.

The Direct Line brand relaunches with Winston Wolf

Business remains solid despite continued pricing pressures in the property and casualty insurance market. Direct Line's recent brand overhaul should boost new business, with the Winston Wolf character appearing on TV adverts highlighting the improved Direct Line customer offering.

It should allow the company to compete more effectively with the proliferation of insurance price comparison websites such as Remember, Direct Line doesn't appear on any price comparison websites.

Impressive cost reduction boosts profits

The cost base is also being managed impressively, with the company's total costs down 6% over the first nine months of 2014 compared with the same period in 2013. Continued efforts to reduce costs are a prime driver for profit growth over the next two years, with earnings per share forecast to rise steadily in 2015 and 2016 and dividends following (Figure 1).

1. Direct Line Is Forecast Earnings, Dividend Growth This Year, Next 

A key feature of Direct Line's restructuring effort is the sale of its international operations to Spanish insurer Mapfre for £430m, generating a pre-tax gain for the company of £160m. Most if not all of these sale proceeds will be returned to shareholders once the deal has completed and the cash hits Direct Line's bank account, representing potentially a bumper dividend.

UK Car Insurance Premia to Go Up By Up to 10%

According to the AA,

"The cost of car insurance could rise by up to 10% in the coming year, and home insurance premiums are unlikely to go any lower.

The latest index of the cheapest deals on the market showed that the cost of annual comprehensive car insurance had risen by 0.2% to £540 in the final three months of 2014.

But the total was still £200 cheaper than the peak in 2011, the AA said.

It predicted rising motor insurance bills during 2015."

Source: BBC News

This would clearly be good news for Direct Line's profitability.

But best of all, a sustainable 7% dividend yield

We come to what is possibly Direct Line's key attraction for income-hungry investors: a 7% dividend yield (Figure 2)! This is more than double the 3.4% on offer from the FTSE 100 index as a whole, and well ahead of all other major UK insurers who offer 4.3% on average.

2. Direct Line Offers the Best Dividend Yield of the Major Insurers 

Go with the price flow

Direct Line's price trend is positive too, with its share price hitting a new one-year high at 305p (Figure 3). While most retail investors recoil with horror at the thought of buying a share at its high, professional investors like to do this, as it shows that the share has strong upwards price momentum. Academic studies tell us stocks that go up generally continue to keep going up.

3. Direct Line Share Price is Breaking Out! 

Buy into Direct Line's impressive consumer story

In short, I see the Direct Line story as a success story in consumer finance, with some of the most instantly recognisable and thus strongest brands in the form of the red telephone and the Churchill dog, and with an enviable record of high customer satisfaction, crucial for winning repeat insurance business over the long-term.

Given the choice between a buying shares in a bank or an insurance company, I would today plump for an insurance company given the attractive dividends on offer, plus a more stable regulatory environment (which is clearly not the case for the banks).

In Direct Line, we have a stock that is simultaneously offering a tempting 7% yield and which is hitting new one-year share price highs – now that is a good deal.

Put your money where your mouth is and buy the mighty US dollar in 2015

International Business Times Article + Video Link

What goes up tends to keep on going up. This is a good mantra for those wondering where to focus their investments now that 2015 is upon us.  

One of the most striking trends in financial markets over the past half-year has been the stunning ascent of the US dollar against virtually all other major currencies, including sterling, the euro and Japanese yen. For a UK-based investor, a simple investment in US dollars in mid-July when £1 bought you over $1.70 would have yielded a return of over 13% to date (Figure 1), with £1 only buying just over $1.50 today.

Figure 1: US Dollar Has Gained 13% Against Sterling Since mid-July 

Source: Bloomberg

Why the US dollar should remain top-dog currency in 2015

Of course, you might look at Figure 1 and take fright: why should you buy into a currency that has already done so well?

After all, it is not every day that a major currency pair like GBP/USD (sterling against the US dollar) moves by this much in a few months.

I see several reasons for the US dollar to make further gains against sterling:

1. The forthcoming UK general election in May introduces all manner of political uncertainty into the UK economic equation, making sterling a more unattractive currency to invest in until at least after the elections are held and the composition of the new government known.

The recent rise of the Ukip vote has added a big variable into the traditional calculation of likely voting outcomes: how highly will Ukip poll come May and could it prevent either of the two traditional parties of power gaining an absolute majority?

2. If the Conservative Party is elected, then Prime Minister David Cameron is likely to proceed with an EU membership referendum. If the Labour Party is elected, financial markets could well react negatively to a less business-friendly administration. Both outcomes would introduce yet further economic uncertainty and undermine the attractiveness of the pound.

3. The UK economy continues to slide closer to deflation with an inflation rate of only 1% and falling, dragged down by the eurozone, which has already registered a negative December inflation print of -0.2%. This will prompt the Bank of England to delay yet further any interest rate hike, again making sterling less attractive versus the US dollar, where an interest rate hike is likely to happen sooner.

How much more could the Greenback gain against the pound? Well a cursory glance at the long-term chart of the US dollar against sterling would suggest there is still some way to go to hit the US dollar's highs reached back in 2009 and 2010 (Figure 2).

Figure 2: US Dollar Can Still Go Some Way to Reach 2009, 2010 Highs 

Source: Bloomberg

Two easy ways to invest in US dollar exposure

Buying US dollars: The most obvious way to take advantage of this trend is to buy US dollars with pounds, particularly if you are thinking of going on holiday to the US sometime this year, as those they could become more expensive the longer you leave it.

I recommend ordering currency online via well-established, regulated institutions such as Best, which is offering a rate of over $1.50 per pound, or the currency websites of high-street supermarket chains such as Asda and Tesco, both of which are offering over $1.48 per pound with free click-and-collect services.

Buying US shares via an ETF: The second option is to invest in exposure to US stocks via an exchange-traded fund. Both the Nasdaq and S&P 500 indices remain in long-term uptrends despite the market sell-off of the past few days (Figure 3).

Figure 3: Nasdaq, S&P 500 Indices in Uptrend 

Source: Bloomberg

My preferred US stock ETFs, which you can buy in pounds on the London Stock Exchange (via your preferred stock broker), are:

  1. The Powershares EQQQ Nasdaq-100 UCITS ETF (code: EQQQ), which carries heavy weightings to high-growth technology and biotechnology stocks
  2. The iShares S&P 500 Minimum Volatility UCITS ETF (code MVUS), which carries exposure to US large-cap stocks, focusing on those stocks with lower risk.

Both of these ETFs will give you exposure to US stocks in US dollars with your pounds, and so should benefit not only from any continued gains in US stocks but also from further gains of the US dollar against sterling.

Happy dollar investing in 2015!

2 Bloomberg TV Interviews on European Central Bank, Oil Price

Bloomberg TV Interview 1: Market Is Expecting a Lot From Mario Draghi: Shing

Bloomberg TV Interview 2: Falling Oil Is an Underplayed Risk: Shing

Monday, 5 January 2015

Can Ukip's Nigel Farage woo City of London's hedge funds?

A Happy New Year to you!

Ukip's leader will have to convince hedge fund managers Ukip is not a party of protest

Even in a representative democracy, such as we possess in the UK, the plain fact is that money talks. 

It doesn't speak on the same scale in the UK as it does in the US – where the former chairman of US investment bank Goldman Sachs, Jon Corzine, reportedly spent over $62m (£40.34m) of his own money to win a US Senate seat in 2009 – but it is still an important electoral weapon.

Ukip's leader Nigel Farage is only too aware of this fact and is thus targeting donations from hedge funds, according to a leaked internal Ukip memo from 2012.

We should not be surprised at this fact, given that Farage's career as a commodities trader was firmly rooted in the City of London. He has already garnered a number of high-profile supporters in the City and aims to add to these ranks in the run-up to this year's general election.

Source: Ipsos MORI/UKPollingReport

Surfing on an austerity-driven nationalist swing

UKIP continues to ride a Europe-wide swing towards pro-nationalist, anti-Europe parties throughout Europe, with immigration remaining a hot topic in the UK in particular, as this Ipsos MORI poll shows.

But the real question is: is this simply a protest driven by austerity measures squeezing the purchasing power of the middle classes in the Western World, or is there more to Ukip's current popularity, which is hovering at 16% in the latest polls of UK voting intentions?

Two Barriers to Wooing City Donors

We can expect Farage and Ukip to focus on disaffected Conservative Party donors rooted in the City, as this has already proved fertile ground for the party, recruiting such grandees as long-time Schroders fund manager Andy Brough and hedge fund manager Crispin Odey.

But for Farage to woo hedge fund donors, it must be demonstrated that Ukip is more than a single-issue, protest vote party, and is one that can stand the test of time to maintain its recent strong political momentum.

Doing this requires potential donors to answer two questions: the first being how many high-profile members of Ukip – apart from Farage and Ukip's Tory MP converts, Mark Reckless and Douglas Carswell – can they name ?

This is what is known in finance as the "Key Man Risk": what would happen to Ukip if Farage disappeared tomorrow? In reality, are you backing Ukip, or the personality cult of Nigel Farage?

The second question is how many of Ukip's policies can the potential investor name, apart from withdrawing the UK from the EU and limiting of immigration to the UK?

While Farage is aware of the need to publicise Ukip's other policies – for instance via LBC's "Phone Farage" radio show hosted by Nick Ferrari – it is not clear to me that Ukip's other policies are any more favourable to the City and hedge funds than the Conservative's current policy platform. After all, in the final analysis, personal interest is a key driver of polling intentions at general elections. Why should Ukip be inherently more attractive to a prospective City donor than the ruling Conservatives?

For me, these remain the two towering hurdles to Ukip garnering widespread financial support from the City, which I think Farage and Ukip have not convincingly answered up to now.

Hedge funds are global, not just British!

The final key impediment to Farage's strategy of wooing City-based hedge funds is that they are populated, in a large measure, by the best talent in the finance industry drawn from all over Europe – indeed from all over the globe.

This is hardly surprising, given London's ascent to now being the most global city of all, driven in large part by its pre-eminence as a global financial centre based in Europe and straddling both North American and Asian time zones.

Why should London-based French, Italian and American hedge fund managers give money to an anti-immigration Ukip party? Why would they bite the hand that feeds them?


Wednesday, 24 December 2014

Secret Santa's festive stock tips including SuperGroup, Close Brothers and easyJet

Festive Greetings!

Here is my article and accompanying video (3mins 20) focusing on 6 top stock tips for 2015!

With annual New ISA allowances now raised by the government to £15,000 per tax year (to 6 April), and cash savings rates no better than 1.5% on the high street, investing in stocks seems an obvious destination for any long-term ISA-bound savings.

With the potential for the traditional year-end Santa Claus rally close at hand after what has been a turbulent last couple of weeks, which stocks should you consider for your ISA?

Focus on mid-cap gems

Figure 1: Long-Term, FTSE Mid 250 Index Beats FTSE 100 Hands Down. 

Source: Bloomberg

Over the long-term in the UK stock market, mid-caps - the FTSE Mid 250 index - (fig.1) have far outperformed the largest companies such as Vodafone, Royal Dutch Shell and HSBC (FTSE 100 index).

So I have focused on mid-cap gems of companies drawn from different industries, all with appealing value, attractive dividend yields and high profitability; all factors that have been proven to lead to outperformance over the long-term (data kindly supplied by

Figure 2. Six Mid-Cap Gems

Source: Bloomberg

(AML, 461p, Insurance)

Lloyd's insurer Amlin (code: AML)  has a very strong record of profitability over the last 10 years, consistently holding or raising its dividend each year. 

Figure 3. Amlin (AML)

Source: Bloomberg

What makes Amlin even more interesting is its dividend yield exceeding 6%, plus the fact that one of its Lloyds counterparts, Catlin has just been boosted by a takeover bid from XL Group.

With Lloyd insurers the subject of merger and acquisition activity, Amlin may also become a target in time.

Berkeley (BKG, 2501p): Building & Construction

Berkeley Group (fig. 4) is a residential house builder focusing on London and the south east, benefiting from recent strong house price inflation in and around the metropolis over the last year or so.

Figure 4. Berkeley Group (BKG, 2501p): Building & Construction. 

Source: Bloomberg

The traditional spring time UK house price pick-up should lift Berkeley next year, not to mention the benefit to housing demand from effective lowering of the stamp duty burden on house sales under £937,000. This supports a very high 7.5% dividend yield, backed by £150m of net cash on its balance sheet.

Close Brothers (CBG, 1464p): Banks

Close Brothers (fig. 5) is a UK-based merchant bank offering a range of services to both business and private clients, as well as broking services and asset management.

Figure 5. Close Brothers (CBG, 1464p): Banks

Source: Bloomberg

The current growth in new stock market listings is a very positive trend for the company, while the company's book value has grown steadily over the last six years, the mark of a strong banking business model.

Close Brothers should benefit from strong economic growth, allowing them to grow their business loan book. 


(EZJ, 1604p): Airlines

Easyjet (fig. 6) has been a prime beneficiary of the boom in low-cost airline traffic throughout Europe over the past few years.

Figure 6. Easyjet (EZJ, 1604p): Airlines. 

Source: Bloomberg

The recent collapse in oil prices represents a future boost to profitability, as fuel accounts for a large slice of any airline's costs.

Easyjet has carried increasing numbers of passengers at higher passenger yields, resulting in impressive growth in earnings since 2012, which should continue out to 2016 as it focuses increasingly on capturing more European business travellers. 

Soco(SIA, 272p): Oil & Gas. 

Soco International (fig. 7) is an oil exploration and production company with widespread interests in countries including Vietnam and the Republic of Congo.

Figure 7. Soco International (SIA, 272p): Oil & Gas. 

Source: Bloomberg

It is rare among its oil and gas peers in boasting very steady oil production volumes, a superstrong balance sheet with $284m of net cash and the ability to easily support a robust 5.3% dividend yield from its surprisingly stable earnings stream.

A crude oil price recovery would be a key catalyst for Soco, with Brent back down at $61/barrel versus a June high of $115/barrel.


(SGP, 815p): Retail.

SuperGroup (fig. 8), the retailer of the Superdry fashion brand, has seen its share price fall from a high of over £17 to less than half of that today, as like-for-like sales growth has gone into reverse (-4% as of the latest interim results).

Figure 8. SuperGroup (SGP, 815p): Retail. 

Source: Bloomberg

In spite of that, SuperGroup should achieve revenue growth of 10% of more over the next two years, with the potential to see even higher profitability as it raises gross margins.

And yet, the company's shares are only valued at 12 times next year's profits, a bargain given the expected revenue growth rate.

These six mid-cap gems offer a rare combination of attractive value, high dividend income and are all very profitable, a potent combination offering substantial upside for 2015.

Merry Christmas and a Happy new Year to you!

Edmund Shing