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UK Homebuyers Are Worried About A Property Market Crash

UK Homebuyers Are Worried About A Property Market Crashpierre9x6 / Pixabay

Why are we worried about a UK property market crash when we've only just recovered from the last one?

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According to Google, the search for "UK house price crash coming" has spiked in recent weeks, but research by estate and lettings agent, Barrows and Forrester, has revealed that while homebuyers are worried about a potential property market crash, the market has only just recovered from the previous one when accounting for inflation. Why The Term 'Value Investing' Is Redundant Warren BuffettWhat does value investing really mean?

Q1 2021 hedge fund letters, conferences and more Some investors might argue value investing means buying stocks trading at a discount to net asset value or book value. This is the sort of value investing Benjamin Graham pioneered in the early 1920s and 1930s. Other investors might argue value Read More

Barrows and Forrester analysed house price data over the last two major economic recessions in the 1990s and 2008 and while both lasted for just five quarters in terms of the impact on national GDP, the impact on the property market lasted far longer.

The 1990 Recession

In Q3, 1990 house prices started to drop from an average of GBP58,773 with the market bottoming out in the final quarter of 1992 at GBP53,213. It wasn't until the third quarter of 1996 that they recovered to their pre-recession level (GBP58,854). However, the research by Barrows and Forrester shows that when adjusting for inflation, this pre-crash house price high actually sat at GBP136,613 when the recession hit.

When allowing for inflation, their research shows that the market didn't truly recover until the third quarter of 1999 when the average house price finally climbed to GBP142,566, meaning the property market crash due to the recession actually lasted nine years, not six.

The 2008-09 Recession

When the recession hit in the second quarter of 2008, house prices had already started to cool from the highs of GBP189,503 seen in Q3 of 2007. They then plummeted from an average of GBP183,082 and continued to do so until the first quarter of 2009 when the market bottomed out at GBP155,701. It wasn't until the second quarter of 2014 that the average house price returned to its pre-recession levels (GBP185,362), exceeding the 2007 peak the following quarter (GBP191,260).

But again, when adjusting for inflation, the average UK house price when the recession hit in Q2 of 2008 actually stood at GBP249,812. This house price benchmark is one that the current market has only just returned to in Q1 of this year when the average house price hit GBP252,873 across the UK. So while the property market crash lasted for five years on paper, the inflation-adjusted recovery timeline actually spans almost 13 years.

The Next Property Market Crash

Managing Director of Barrows and Forrester, James Forrester, commented:

"With the end of the stamp duty holiday nigh, many market naysayers are starting to call the next property market crash from the comfort of their keyboards and this negativity is starting to filter through to homebuyers and sellers. However, the reality is that when looking at the actual value of the market when adjusting for inflation, we've only just recovered from the last market crash. Despite this, the market has been running red hot of late, with buyer and seller confidence at an all-time high and it goes to show just how influential market sentiment is when it comes to turning the cogs of the UK property market."

1990s Recession

Quarter Year Timeline Average UK House Price Inflation-Adjusted Timeline Inflation-Adjusted Average UK House Price
Q3 1990 Start GBP58,773 Start GBP136,613
Q3 1991 End GBP57,959 End GBP127,252
Q3 1996 Recovery GBP58,854 - GBP112,979
Q3 1999 - GBP80,443 Recovery GBP142,566

Average house prices sourced from the UK House Price Index and then adjusted for inflation to equivalent 2020 prices

2008-09 Recession

Quarter Year Timeline Average UK House Price Inflation Adjusted Timeline Inflation Adjusted Average UK House Price
Q2 2008 Start GBP183,082 Start GBP249,812
Q2 2009 End GBP157,806 End GBP216,473
Q2 2014 Recovery GBP185,362 - GBP212,230
Q1 2021 - GBP252,873 Recovery GBP252,873

Average house prices sourced from the UK House Price Index and then adjusted for inflation to equivalent 2020 prices


  • Barrows and Forrester is a multi-award winning, independent lettings and estate agent located in Birmingham.
  • James Forrester has worked within the property industry for 20 years, 10 of which have seen him apply his expertise within the Birmingham property market in particular.
  • James is also a director of StripeHomes, a company specialising in top-quality new build developments in the North East and Midlands.
  • As a result, James has an unrivalled knowledge of the sales, lettings and new build sectors, making him an accomplished, all-round property market commentator.

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European markets’ best run in two years; UK jobless rate falls; US retail sales disappoint – as it happened

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Time to wrap up

European stock markets have racked up their longest winning streak since April 2019, as optimism over the economic recovery continues to lift shares.

London's market also saw gains, with the FTSE 100 finishing at its highest close in almost 16 months. But shares in mining companies, and property companies dipped.

The pound nudged a one-month low, after the ending of lockdown restrictions was postponed by a month. Oil also pushed higher, with Brent crude hitting £74 per barrel tonight, the first time in over two years.

But investor Michael Burry gave the markets something to ponder - tweeting that we're in the biggest speculative bubble ever.

Cassandra (@michaeljburry)

People always ask me what is going on in the markets.

It is simple. Greatest Speculative Bubble of All Time in All Things. By two orders of magnitude. #FlyingPigs360

June 15, 2021

The day began with the UK's jobless rate dropping to its lowest since last summer, at 4.7%.

The number of people joining company payrolls surged by almost 200,000, as firms took on more staff to handle rising demand following the easing of lockdown rules this spring. Vacancies jumped to their highest since the pandemic, while redundancies also returned to more normal levels. But experts warned that long-term unemployment was rising, including among younger people.

A volley of US economic data painted a mixed picture, with retail sales falling faster than expected in May.

Economist cited supply chain problems, rising prices, and the move towards spending money on services rather than 'stuff' as lockdowns eased.

Confidence among homebuilders fell, as rising prices made new homes less affordable, while producer prices surged as manufacturers and service sector providers hiked prices. On the upside, US industrial production rose -- lifted by a jump in car production. And the UK and Australia agreed the broad sweep of a new trade deal....but its impact on households will be meagre.

As my colleague Richard Partington explains:

Tariffs will be cut on Australian products such as Jacob's Creek and Hardys wines, as well as on beef, lamb, swimwear and confectionary.

However, by the government's own admission, the savings add up to GBP34m a year - little more than a pound each per household. Scotch whisky, biscuits and ceramics will be cheaper to sell into Australia, aiming to help UK industries that employ 3.5 million people. Still, the government admits that its deal will only boost UK GDP by up to 0.02% after 15 years, barely a rounding error for a GBP2tn economy.

Farmers, though, fear a surge of Australian meat that will undermine their businesses.

Peter Walker (@peterwalker99)

On the Australia-UK trade deal, Labour argue the tariff-free quotas for meat imports are so high the 15-year protective period for UK farmers is essentially pointless.

Initial limit for beef imports: 35,000 tonnes. *Total* imports in 2019: 1,766 tonnes. https://t.co/YEfRBuyGJL

June 15, 2021

Bank of England Governor Andrew Bailey has warned fintech firms to expect some 'tough love', reiterating the need for stablecoins to be fully backed by assets. The UK's competition watchdog announced a review of Apple and Google's mobile ecosystems, over concerns that their dominance is hurting consumers.

Stocks are slightly lower on Wall Street, ahead of tomorrow's Federal Reserve meeting. The Dow and the S&P 500 are down around 0.15%, with the Nasdaq Composite off 0.65%.

Here are more of today's stories:

Goodnight. GW

Updated at 7.41pm BST

Burry: It's the greatest speculative bubble of all time...

Investor Michael Burry -- most famous for his role in The Big Short -- has warned that the markets are currently in the greatest speculative bubble ever.

Burry returned to Twitter this week for the first time since February, and tweeted a new warning about rampant speculation, saying:

"People always ask me what is going on in the markets.

It is simple. Greatest Speculative Bubble of All Time in All Things. By two orders of magnitude. #FlyingPigs360."

Cassandra (@michaeljburry)

People always ask me what is going on in the markets.

It is simple. Greatest Speculative Bubble of All Time in All Things. By two orders of magnitude. #FlyingPigs360

June 15, 2021

Business Insider explains what the 'flying pigs' reference means....

The hashtag was likely a reference to a famous saying in investing: "Bulls make money, bears make money, but pigs get slaughtered." Burry has repeatedly told investors that they're being too greedy, speculating wildly, shouldering too much risk, and chasing unrealistic returns.

The Scion Asset Management chief deleted his Twitter profile in early April after sounding the alarm on Tesla stock - which he's short - as well as GameStop, bitcoin, dogecoin, Robinhood, SPACs, inflation, and the broader stock market. He resumed tweeting on Monday.

European stock markets post longest winning streak in two years

Europe's stock markets have racked up their longest run of gains since April 2019 - by a whisker.

The Stoxx 600 index of European shares has closed half a point higher at 458.81 points, up just 0.11%. That's its eighth daily gain in a row, the best run since mid-April 2019, and a record closing high.

The Stoxx 600 over the last two years

The Stoxx 600 has surged by 15% so far this year, extending its recovery from last spring's crash, as the vaccine rollout has boosted confidence that Europe's economy will recover.

The European Central Bank's PEPP bond-buying programme, and massive fiscal spending from the US, has also supported the markets, with investors confident that stimulus won't end soon.

FTSE 100 closes at near 16-month high

Back in the City, the FTSE 100 has ended the day at its highest close since the pandemic hit Europe in late February 2020.

The blue-chip index finished today's session nearly 26 points higher at 7172 points.

That's its highest close since 21 February 2020, just before parts of Lombardy went into lockdown, triggering turmoil in global markets.

The FTSE 100 earlier hit a new near-16 month intraday high of 7189 points, the highest since markets started to tumble in the last week of February 2020. As this chart shows, the FTSE 100 hasn't recovered all its pandemic losses - unlike the US stock market, or Germany's DAX - but it's getting closer:

The FTSE 100 over the last two years

AB Foods (+3.3%), which owns discount clothing chain Primark, was the top riser, followed by telecoms group BT (+2.9%).

Royal Dutch Shell (+2.3%) added to yesterday's gains, as oil continued to climb. Multinationals benefitted from the weaker pound, with engineering firm Spirax-Sarco (+2%), chemicals group Johnson Matthey (+2%) and tobacco firm BAT (+1.8%) in the risers.

But... the more UK-focused FTSE 250 index fell by 0.5%.

Fallers included commercial property firm Hammerson (-6.5%), whose shopping centre tenants will be hurt by the delay to ending lockdown, and holiday operator TUI (-3.4%), as hopes of a holiday getaway this summer faded for some families.

Oil prices pushed higher today as traders anticipated stronger demand as the global economy recovers, and the prospect of an imminent increase in supply from Iran faded.

Brent crude traded as high at £73.90 per barrel, the highest since April 2019. US crude hit its highest since October 2018, touching £72 per barrel.

UBS analyst Giovanni Staunovo said demand for oil was likely to outstrip supply in the short term:

"With supply growth lagging demand growth in the near term, faster falling oil inventories are supporting oil prices,"

Ricardo Evangelista, senior analyst at ActivTrades, said traders were watching the ongoing negotiations between Washington and Tehran:

The markets have been looking with interest at the ongoing negotiations between the US and Iran, with the objective of reviving the nuclear agreement between the two countries, which could also mean the end of restrictions on Iranian oil sales. However, early losses in the price of crude were swiftly reversed following indirect negotiations between the two countries that have so far failed to bear any fruits, with observers considering that an agreement is far from imminent.

Crude Oil Today (@WtiOil)

?

Today's Crude Oil Prices:
? WTI: £71.77 (+0.87)
? Brent: £73.62 (+0.76) #supply #crudeoil #oilexploration

June 15, 2021

Ryanair boss: airlines must fly over rogue states despite Belarus 'hijacking'

Gwyn Topham

Airlines must remain free to fly over rogue states despite the "state-sponsored hijacking" of a plane by Belarus, according to the boss of Ryanair, as he told MPs of the "hostile and threatening" actions towards the flight crew in Minsk.

The captain and five crew of Ryanair flight FR4978 from Athens to Vilnius were put under armed guard in Minsk after diverting the plane for a fake bomb threat - apparently staged to allow the Belarus government to capture an opposition journalist among the 126 passengers.

Roman Protasevich and his girlfriend Sofia Sapega were arrested on landing. The Ryanair chief executive, Michael O'Leary, said the crew were pressured to provide filmed statements saying that they had diverted voluntarily, although Minsk air traffic control had told the captain that a bomb would be detonated if the plane continued to its original destination in Lithuania.

The ATC also falsely claimed to have tried to contact Ryanair's operations base, leaving the captain with no option but to heed their advice, O'Leary said.

O'Leary told the Commons transport select committee on Tuesday that the captain was:

"repeatedly seeking an open line of communication to Ryanair's operations control centre in Warsaw, various excuses came back from Minsk on why they couldn't reach us, Ryanair weren't answering the phone, all of which was completely untrue".

He said the pilot's only means of communications was through Minsk, which "confirmed it was a red alert".

Upon landing, unidentified persons boarded the aircraft carrying video cameras, O'Leary said, to "repeatedly attempt to get the crew to confirm on video that they had voluntarily diverted.

"The crew were put under significant pressure, taken under armed guard and held for a number of hours. The captain was accompanied by an armed guard ...

It was a very hostile and threatening environment."

Here's the full story:

In something of a financial morality tale, the EU has excluded 10 of the heaviest-hitting banks in the debt market from running lucrative bond sales as part of its EUR800bn recovery fund.

Why? Because historic breaches of antitrust rules - such as manipulating currency markets or taking part in a bond trading cartel - mean they have blotted their copybook with the Commission. So while these issues took place some time ago, and have been settled, these banks will miss out on some juicy fees if they're not seen as 'fit' to handle the work.

The FT has the story:

Brussels' biggest ever borrowing spree kicks off on Tuesday with the sale of a new 10-year bond to fund the NextGenerationEU programme under a so-called syndication, where a group of banks is paid to drum up demand from investors.

But 10, including big players such as JPMorgan, Citigroup, Bank of America and Barclays, have been told they cannot take part in these deals due to previous involvement in market-rigging scandals, according to people familiar with the matter.

Banks found to have breached EU competition rules "will not be invited to tender for individual syndicated transactions", said a spokesman for the European Commission, which handles debt issuance on behalf of the EU.

"The Commission implements a strict approach to ensuring that the entities with whom it works are fit to be a counterparty of the EU."

Banks found guilty of antitrust breaches will be required to show they have taken "remedial measures" to prevent them happening again before they will be allowed to bid for syndications, the spokesman added.

Tommy Stubbington (@TomStub)

EU freezes 10 banks out of bond sales over antitrust breaches https://t.co/HL2KtuTLQA via @financialtimes

June 15, 2021

US homebuilder confidence knocked by rising costs

More US data on the wires.. and this time, confidence among American homebuilders has fallen to a 10-month low.

Sentiment was knocked by rising costs and supply shortages, which may show the US housing market is cooling after a surge in prices in the last year. Here's the details, via CNBC.

  • Homebuilder sentiment dropped 2 points to 81 on the NAHB's monthly index, down from a recent record peak of 90 last November.
  • "Higher costs and declining availability for softwood lumber and other building materials pushed down builder sentiment in June," said NAHB Chairman Chuck Fowke.
  • Builder sentiment rose in the West but fell in all other regions, most sharply in the Northeast, but overall sentiment remains high in historical terms.

NAHB chairman Chuck Fowke, a homebuilder from Tampa, Florida, said rising costs were making houses less affordable:

"Higher costs and declining availability for softwood lumber and other building materials pushed down builder sentiment in June,"

"These higher costs have moved some new homes beyond the budget of prospective buyers, which has slowed the strong pace of home building."

Liz Ann Sonders (@LizAnnSonders)

Unexpected downtick for June ?@NAHBhome? Homebuilder Confidence, to 81 vs.

83 est./prior month; present & future single family sales fell, along with prospective buyers traffic ... unavoidable increases for new home prices continuing to push buyers to sidelines pic.twitter.com/QnDuwqFm7y

June 15, 2021 CNBC (@CNBC)

Homebuilder sentiment drops to 10-month low, as construction costs drive prices higher https://t.co/XX0ctqmriv

June 15, 2021

Lumber prices, incidentally, have been falling steadily in the futures market since soaring dramatically earlier this year. With prices so steep, some people have been putting off new projects, while the temporary surge in demand that pushed prices up is fading.....

Dominic Chu (@TheDomino)

Yeah...I'd say Lumber futures have gotten a serious reality check...you could almost say that the sky-high prices for this commodity were "transitory" https://t.co/cCQMLnd4U8 pic.twitter.com/D057yu0gqO

June 15, 2021

Wall Street opens cautiously ahead of the Fed

After that flurry of economic data, the New York stock exchange has opened cautiously ahead of tomorrow's Federal Reserve decision.

Energy stocks are rallying, as crude oil prices hit their highest levels in over two years. But other stocks are more subdued, with retailers, and some banks and tech firms dipping.

So after opening at a record high, the S&P 500 index has slipped a little.

Investing.com (@Investingcom)

?BREAKING: *S&P 500 HITS NEW RECORD HIGH ? pic.twitter.com/muJyDKiKxT

June 15, 2021
  • Dow Jones industrial average: Down 121 points or 0.35% at 34,272 points
  • S&P 500: down 6 points or 0.15% at 4,248 points
  • Nasdaq Composite: down 27 points or 0.2% at 14,146 points

Chevron are leading the Dow risers, up 1.6%, followed by American Express (+0.6%), while JP Morgan (-1.5%) and DIY chain Home Depot (-1.1%) are leading the fallers.

US factory production has picked up, led by a recovery in car manufacturing.

Total industrial production increased 0.8% in May, new data from the Federal Reserve shows, following a downwardly revised 0.1% in April. Manufacturing production advanced 0.9 percent, led by a 6.7% gain in production of motor vehicles and parts -- after the computer chip shortage hammered output earlier this year.

The Fed says:

Overall vehicle assemblies jumped about 1 million units to 9.9 million units (annual rate); even so, they remained more than 1 million units below their average level in the second half of 2020, as production continued to be hampered by shortages of semiconductors

Liz Ann Sonders (@LizAnnSonders)

Industrial production in May stronger at +0.8% vs. +0.7% est. & +0.1% in prior month (unfortunately rev down from +0.7%); factory production +0.9% vs. -0.1% prior; utilities +0.2% vs. +1.9% prior; mining +1.2% vs. -0.4% prior pic.twitter.com/CxlyIvl4Ny

June 15, 2021

US producer price inflation jumps to 6.6%

US producers kept hiking their prices in May, in another sign that inflationary pressures are building.

Producer prices rose by 6.6% per year in May, the largest increase since the Bureau of Labor Statistics began calculating 12-month data in November 2010.

Core PPI inflation (stripping out food, energy and trade services) climbed 5.3% - the highest since data began in August 2014. On a monthly basis, the producer price index rose 0.8%.

Goods inflation drove prices higher, up 1.5% in May while services prices rose 0.6%.

Prices of goods such as non-ferrous metals, meat, fuel, and motor vehicles increased in May. On the services side, the cost of automobile retailing, freight transport, clothing and footwear retailing, portfolio management and building materials supplies retailing all rose.

Firms are raising their prices following a jump in costs -- such as raw materials, transport and wages -- and in response to higher demand.

Neil Birrell, Premier Miton Chief Investment Officer, says this may put pressure on the Federal Reserve as it starts its two-day meeting today:

"US producer prices jumped much more than expected to 6.6% in May; this could put a bit of pressure on the Fed tomorrow in how they word their comments on inflation and the outlook for rates.

Meanwhile, retail sales missed expectations, showing a big drop over April, suggesting that the consumer recovery may not be as strong as thought, but this is only one data point in a strong recovery."

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As FTSE 250 hits new highs, small and mid caps still offer value for stock pickers

London's mid-cap stock index, the FTSE 250, have this month pushed on to another all-time high having stumbled lower after blasting through the previous ceiling around 22,000 in April. While many worry about inflation and other market watchers angst about share valuations that in many places look stretched, there remain many pockets of value on the stock market, of which UK and European small caps and the mid-caps that are found on the FTSE 250 remain two sources. READ: FTSE 250 hits all time-high - what it means for markets and the UK

These two particular pockets offer an "attractive entry point" for investors, according to UBS, following the biggest underperformance by European 'Smid caps' of US stocks for a decade. The Swiss bank noted on Wednesday that European small caps are trade at around 22 times full-year expected earnings, a premium to the long run average and also at a roughly a 20% premium to large caps, while US small caps are trading at a P/E ratio nearer 30 times. Richard Penny, a fund manager at Crux Fund Management, also suggests the UK remains a cheap stock market in which to invest.

Seeing UK stock returns set for double-digit growth, he says small cap investors have a prime opportunity to uncover hidden gems before everyone else catches up, especially as most big investment funds are not looking at companies valued below GBP500mln. However, when buying growth companies, both UBS and Penny stressed that careful stock picking is key and investors should think twice about investing with their heart rather than with their head. "The UK is cheap in absolute terms and relative terms," said Penny, who runs the TM Crux Special Situations Fund, as he spoke at the Cenkos and Proactive at the Growth & Innovation Forum on Tuesday.

"In absolute terms, the UK cyclically adjusted P/E [CAAP] is not far off where it was in 2009, which was a great buying opportunity," he said. The UK's CAAP, a measure that smooths earnings by taking the last 10 years of earnings and dividing it by the current market level, is at 11.9. "The US at 31.6 has only been higher twice," Penny pointed out, taking care of the relative terms.

"Now, why this is important is that cyclically adjusted P/E is a really good predictor of future returns. "If it works, as it has in the past, it's predicting double digit returns for the UK, whereas for the US, perhaps only two to 3% returns. "Post 2016 the UK went to a 50% discount against the rest of the world equities."

In terms of looking for growth and innovative stocks, while the UK may be at a 50-year discount, Penny said that global markets are "as polarised pretty much as they ever have been - with the most expensive stocks, the growth stocks, versus the value stocks are as spread as they have ever been. "So we have to be a bit careful when buying growth companies, there's quite a bit of exuberance out there." While his special situations fund has big names such as Aviva PLCPrudential PLC, Cranswick PLC, and Melrose Industries PLC, he also shared some of his UK small cap picks.

These include companies he calls "stealth compounders - you buy it before it's on the radar of the mainstream investors" such as Inspecs Group PLC (LON:SPEC), the eyewear frames and lenses maker with high gross margins and "really good cash conversion"; as well as Kape Technologies PLC (LON:KAPE), Essensys PLC (LON:ESYS), Gresham Tech PLC (LON:GHE), Induction Healthcare Group PLC (LON:INHC), Franchise Brands PLC (LON:FRAN) and Cake Box Holdings PLC (LON:CBOX). Another theme his team likes is 'crossover tech', where names include MaxCyte Inc (LON:MXCT) where "it was very overlooked but we've seen in the last year, American investors coming in. And over my career I've seen it being quite often the case that what is really strong in the US can often be overlooked in the UK and micro cap land". 

Other companies in this theme, he suggests, are Maestrano Group PLC (LON:MNO), CyanConnode Holdings PLC (LON:CYAN), First Derivatives PLC (LON:FDP), Dianomi PLC (LON:DNM), Arecor Therapeutics PLC (LON:AREC), Oncimmune Holdings PLC (LON:ONCI), Ebiquity PLC (LON:EBQ) and Fireangel Safety Technology Group PLC (LON:FA.). Over at UBS, analysts added Stagecoach Group PLC (LON:SGC) to the bank's Small and Mic Cap Conviction List and removed easyJet PLC (LON:EZJ), though it's fair to say these FTSE 250 companies would not make the small cap definition of many private investors The conviction list also includes five other London-listed companies: Avast PLC (LON:AVST), Berkeley Group Holdings PLC (LON:BKG), Electrocomponents PLC (LON:ECM), Melrose Industries and Smurfit Kappa Group (LON:SKG).

Stretching out to include continental cousins, the full list includes, Andritz, Bawag, EFG International, Georg Fischer, Grand City, Hella, Ipsen, Krones, Schibsted, SIG Combibloc, Securitas, Scout24, Talgo and Unicaja Banco. Stagecoach was recently initiated by UBS with a 'buy' rating and 125p price target, as analysts said they view the risk of large-scale shift away from buses as "limited" and forecast a "full recovery" in revenues to 2019 levels by 2023, driven by a recovery in passenger volumes to around 93% of previous levels. "We believe a strong cash-flow profile offers scope for dividend distributions above consensus expectations and in the longer term we see Stagecoach as the most levered to a positive modal shift if increasing environmental awareness leads to a material modal shift given c50% of revenues are linked directly to passenger volumes."

EasyJet was removed from the list as it has been downgraded to 'neutral', with more upside potential in other selections. UBS also set out the reasons for its continued optimism about equities. "Much of Europe was in some form of lockdown in Q1 and into Q2.

The US exited restrictions earlier and was boosted by the £1.9trn fiscal package in Q1. But Europe is now catching up and the change in the PMI New Orders supports equity market outperformance. "We think that it is too early to shift portfolios to a more defensive stance, both from the overall market perspective and also for the strategy within the market."

The question over whether it is 'time to move away from cyclicals' is being asked by many, the analyst noted. "To us the answer is 'not yet'. Europe just printed the strongest EPS momentum of the recovery so far.

In addition, this is only month six of upgrades (post-GFC the upgrade cycle lasted 20 months). "The UBS European Strategy team expects cyclicals to continue to drive those further upgrades. In this environment cyclicals should continue to lead, at least while base effects and operating leverage last but it no longer is a 'rising tide lifting all boats' and being selective becomes progressively more important."

Penny said he was "cautiously optimistic" as the UK is cheap but stressed that investors needed to keep their wits about them due to the stretched valuations growth stocks. "You've always got to be careful what you pay for an investment. Investment is always a balance between a narrative and the delivery of companies in terms of how much profits or revenues you're getting, versus what you're paying for it.

"If you're just thinking about how you feel about the business but you're not asking about the valuation, you might be missing something.

"I think people are people are to attuned to investing with their heart and not their head."

Penny said he learned the hard way, having been investing in an internet fund in 2000, before working at Legal & General Investment Management for a decade and half ahead of joining Crux.

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As FTSE 250 hits new highs, small and mid caps still offer value for stock pickers

London's mid-cap stock index, the FTSE 250, have this month pushed on to another all-time high having stumbled lower after blasting through the previous ceiling around 22,000 in April. While many worry about inflation and other market watchers angst about share valuations that in many places look stretched, there remain many pockets of value on the stock market, of which UK and European small caps and the mid-caps that are found on the FTSE 250 remain two sources. READ: FTSE 250 hits all time-high - what it means for markets and the UK

These two particular pockets offer an "attractive entry point" for investors, according to UBS, following the biggest underperformance by European 'Smid caps' of US stocks for a decade. The Swiss bank noted on Wednesday that European small caps are trade at around 22 times full-year expected earnings, a premium to the long run average and also at a roughly a 20% premium to large caps, while US small caps are trading at a P/E ratio nearer 30 times. Richard Penny, a fund manager at Crux Fund Management, also suggests the UK remains a cheap stock market in which to invest.

Seeing UK stock returns set for double-digit growth, he says small cap investors have a prime opportunity to uncover hidden gems before everyone else catches up, especially as most big investment funds are not looking at companies valued below GBP500mln. However, when buying growth companies, both UBS and Penny stressed that careful stock picking is key and investors should think twice about investing with their heart rather than with their head. "The UK is cheap in absolute terms and relative terms," said Penny, who runs the TM Crux Special Situations Fund, as he spoke at the Cenkos and Proactive at the Growth & Innovation Forum on Tuesday.

"In absolute terms, the UK cyclically adjusted P/E [CAAP] is not far off where it was in 2009, which was a great buying opportunity," he said. The UK's CAAP, a measure that smooths earnings by taking the last 10 years of earnings and dividing it by the current market level, is at 11.9. "The US at 31.6 has only been higher twice," Penny pointed out, taking care of the relative terms.

"Now, why this is important is that cyclically adjusted P/E is a really good predictor of future returns. "If it works, as it has in the past, it's predicting double digit returns for the UK, whereas for the US, perhaps only two to 3% returns. "Post 2016 the UK went to a 50% discount against the rest of the world equities."

In terms of looking for growth and innovative stocks, while the UK may be at a 50-year discount, Penny said that global markets are "as polarised pretty much as they ever have been - with the most expensive stocks, the growth stocks, versus the value stocks are as spread as they have ever been. "So we have to be a bit careful when buying growth companies, there's quite a bit of exuberance out there." While his special situations fund has big names such as Aviva PLCPrudential PLC, Cranswick PLC, and Melrose Industries PLC, he also shared some of his UK small cap picks.

These include companies he calls "stealth compounders - you buy it before it's on the radar of the mainstream investors" such as Inspecs Group PLC (LON:SPEC), the eyewear frames and lenses maker with high gross margins and "really good cash conversion"; as well as Kape Technologies PLC (LON:KAPE), Essensys PLC (LON:ESYS), Gresham Tech PLC (LON:GHE), Induction Healthcare Group PLC (LON:INHC), Franchise Brands PLC (LON:FRAN) and Cake Box Holdings PLC (LON:CBOX). Another theme his team likes is 'crossover tech', where names include MaxCyte Inc (LON:MXCT) where "it was very overlooked but we've seen in the last year, American investors coming in. And over my career I've seen it being quite often the case that what is really strong in the US can often be overlooked in the UK and micro cap land". 

Other companies in this theme, he suggests, are Maestrano Group PLC (LON:MNO), CyanConnode Holdings PLC (LON:CYAN), First Derivatives PLC (LON:FDP), Dianomi PLC (LON:DNM), Arecor Therapeutics PLC (LON:AREC), Oncimmune Holdings PLC (LON:ONCI), Ebiquity PLC (LON:EBQ) and Fireangel Safety Technology Group PLC (LON:FA.). Over at UBS, analysts added Stagecoach Group PLC (LON:SGC) to the bank's Small and Mic Cap Conviction List and removed easyJet PLC (LON:EZJ), though it's fair to say these FTSE 250 companies would not make the small cap definition of many private investors The conviction list also includes five other London-listed companies: Avast PLC (LON:AVST), Berkeley Group Holdings PLC (LON:BKG), Electrocomponents PLC (LON:ECM), Melrose Industries and Smurfit Kappa Group (LON:SKG).

Stretching out to include continental cousins, the full list includes, Andritz, Bawag, EFG International, Georg Fischer, Grand City, Hella, Ipsen, Krones, Schibsted, SIG Combibloc, Securitas, Scout24, Talgo and Unicaja Banco. Stagecoach was recently initiated by UBS with a 'buy' rating and 125p price target, as analysts said they view the risk of large-scale shift away from buses as "limited" and forecast a "full recovery" in revenues to 2019 levels by 2023, driven by a recovery in passenger volumes to around 93% of previous levels. "We believe a strong cash-flow profile offers scope for dividend distributions above consensus expectations and in the longer term we see Stagecoach as the most levered to a positive modal shift if increasing environmental awareness leads to a material modal shift given c50% of revenues are linked directly to passenger volumes."

EasyJet was removed from the list as it has been downgraded to 'neutral', with more upside potential in other selections. UBS also set out the reasons for its continued optimism about equities. "Much of Europe was in some form of lockdown in Q1 and into Q2.

The US exited restrictions earlier and was boosted by the £1.9trn fiscal package in Q1. But Europe is now catching up and the change in the PMI New Orders supports equity market outperformance. "We think that it is too early to shift portfolios to a more defensive stance, both from the overall market perspective and also for the strategy within the market."

The question over whether it is 'time to move away from cyclicals' is being asked by many, the analyst noted. "To us the answer is 'not yet'. Europe just printed the strongest EPS momentum of the recovery so far.

In addition, this is only month six of upgrades (post-GFC the upgrade cycle lasted 20 months). "The UBS European Strategy team expects cyclicals to continue to drive those further upgrades. In this environment cyclicals should continue to lead, at least while base effects and operating leverage last but it no longer is a 'rising tide lifting all boats' and being selective becomes progressively more important."

Penny said he was "cautiously optimistic" as the UK is cheap but stressed that investors needed to keep their wits about them due to the stretched valuations growth stocks. "You've always got to be careful what you pay for an investment. Investment is always a balance between a narrative and the delivery of companies in terms of how much profits or revenues you're getting, versus what you're paying for it.

"If you're just thinking about how you feel about the business but you're not asking about the valuation, you might be missing something.

"I think people are people are to attuned to investing with their heart and not their head."

Penny said he learned the hard way, having been investing in an internet fund in 2000, before working at Legal & General Investment Management for a decade and half ahead of joining Crux.

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UK DB schemes end turbulent year in strong position, LCP says

FTSE100 defined benefit (DB) scheme sponsors shrugged off falling discount rates and unprecedented turmoil to post their best year yet on an accounting basis since the introduction of the IAS 19 accounting rulebook in 2005, consultancy LCP found in its latest accounting trends report. LCP partner Jonathan Griffith said: "Following a year like no other and over a decade of volatility, the pension schemes of FTSE100 companies have started 2021 from a position of strength - with improved funding levels and reduced risk." Overall, UK DB schemes ended the year with an aggregate balance sheet surplus of GBP10bn, the report found. However, the key discount rate assumption continued to drag on scheme liabilities.

According to the report, the majority of FTSE100 sponsors adopted an assumption lying in a range of 1.3% to 1.4% per annum. The figures represent a reversal on the previous year's trend when annual assumptions bunched in a range of 2.0% to 2.1%. This downward momentum has prompted a number of sponsors to investigate innovative approaches to discount-rate setting such as investigating alternative datasets or rethinking their definition of the notion of a high-quality corporate bond.

In terms of mortality assumptions, the majority of scheme sponsors in the survey have opted to make no allowance for the effect of COVID-19 on their main assumptions. LCP noted, however, that the potential impact of the pandemic could ultimately be "very material". One estimate puts the difference in balance sheet impact between flatlining mortality improvements over the coming decade or a reversion to 2000s vintage trends at GBP100bn across all UK DB schemes and GBP30bn across FTSE100 schemes.

Finally, the report also found that the UK government's announcement concerning the reform of the way the retail price index (RPI) is calculated has resulted in "greater variance in inflation assumptions" across the sponsors sampled. More than 40% of sponsors in the report disclosed an RPI assumption of between 2.9% and 3.0% per annum - suggesting an inflation risk premium of some 0.2% where breakeven inflation is at 3.0% to 3.1%. The RPI represents the risk premium demanded by investors to reflect the risk of holding fixed-interest UK government debt rather than index-linked gilts.

Other key trends identified in the LCP report include:

  • FTSE100 sponsors have paid in GBP200bn in contributions since the start of the financial crisis in 2007;
  • 60% of sponsors sampled in the report have an IAS 19 surplus;
  • schemes in deficit paid out a total of GBP30bn in dividend payments while making just GBP5bn in scheme contributions.

To read the digital edition of IPE's latest magazine click here.

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Dividends versus coupons: How to meet the income investing challenge

Investing for income has never been so challenging. Bond yields have been at record low levels for years in the wake of the global financial crisis and quantitative easing programmes. The Covid-19 pandemic saw these central bank policies resume, putting further downward pressure on interest rates.

Meanwhile, huge swings in bond prices caught many investors off guard. Prices initially spiked as lockdowns were enacted across Europe and the US and investors fled to bonds. This reversed quickly as uncertainty about the impact of the pandemic gripped markets, before volatility dropped and prices began to stabilise as central banks stepped in.

At the same time, the unprecedented impact of the pandemic on companies around the world saw dividends slashed. In the UK, the aggregate 2020 payout from listed companies collapsed to GBP61.9bn from more than GBP110bn in 2019, a drop of 44%, according to Link Group's quarterly Dividend Monitor report.

Two thirds of companies reduced or cancelled their dividends between the second and fourth quarter of the year, Link reported. UK dividends are not expected to return to previous highs until 2025 at the earliest.

With this troubled backdrop, where can income investors look for inspiration? Investment Week and SPDR ETFs from State Street Global Advisors (SSGA) hosted a roundtable on 21 April with a panel of multi-asset experts to give their views on where to look now for income as thoughts turn to the recovery: coupons, dividends, or somewhere in between?

Riding the dividend recovery

Starting the discussion and making the case for equities, Ben Jones, vice president and senior multi-asset strategist in the macro strategy team at State Street Global Markets, noted this was a timely discussion "as the yield on the S&P 500 has actually dropped below the yield on the US 10-year bond to near a record low of about 1.4%" (see page 13).   "Although those yields have really narrowed over the course of the last year, obviously a lot of that is to do with the rise in bond yields over the beginning of this year and also the cut in dividend payouts last year," he said.  "I think we need to look for where the recovery in dividends is likely to be greatest, and where the stability is likely to remain.

I think there is going to be a great deal of unevenness in the degree of payouts going forward."   He noted widespread dividend cuts had shifted the landscape in terms of where income will be generated in the equity market. In particular, Jones highlighted UK energy stocks, which traditionally have been "nice, steady income plays that make up a large weight in many income funds".

Following the widespread cuts to payouts last year, however, "there [are] question marks about those areas - and justifiably so".  "I don't think necessarily those dividends are going to recover quite as quickly as some other areas," Jones said. On the other hand, areas that are traditionally not considered reliable income payers are starting to look more attractive.

Jones explained: "One of the areas that I'm looking at very positively, not just from a capital appreciation perspective but also an income perspective now, is the technology sector.  "[Last year] has really shown that tech is becoming in some ways a defensive sector. The income streams and the quality of earnings have become far more reliable over recent years and, in some cases, recurring.

"That means you have got these very steady cash flows being generated and that in turn means that dividends are likely to remain very stable... and forecasts are for dividends to increase quite significantly." Ahmed Behdenna, senior portfolio manager at Aviva Investors, agreed, adding that the wider tech "ecosystem" could also offer up income-generating opportunities. He said: "For example as a sector, data centres in the US.

Those names are exposed to those long-term trends and do carry actually quite an interesting dividend. For us it has also been about thinking a little bit outside the box and outside what has been the norm for income for the last few years, if not decades." Accessing the technology trend also adds an element of growth to an income portfolio, he added.

Wayne Nutland, Premier Miton Investors' head of managed index solutions and manager of the Premier Miton Managed Index Balanced fund, supported the idea of the technology sector as an emerging income play.  "I think looking in other areas for income is very important if only to balance out the factor exposure of the portfolio. I think being able to access income from those growthier parts of the market is really important for a balanced portfolio, particularly if this long-run, sub-trend growth dynamic returns in the major economies in the next ten years."  

State Street Global Markets' Jones also cited corporate cash levels as an important indicator of potential income sources. "If we look across the whole of corporate America for example, cash levels increased by about one-third last year; in Europe cash levels increased by about 20% last year," he said.  "That represents a lot of cash sitting in corporate pockets and really burning a hole there.

I think as confidence returns in 2021 and growth forecasts start to rise, companies will be much more confident in then returning that capital to shareholders in the form of both dividends and buybacks. We are already seeing in some sectors and some markets those dividend payouts starting to increase." Innovation is now needed to give more ways of returning capital to investors, some panellists said.

"Obviously buybacks have been a big way of returning capital to shareholders and traditional income structures don't enable investors to get that capital," Nutland said.  "So if the industry can devise a way of doing that, I think that would be really useful innovation."  Matt Brennan, head of passive portfolios at AJ Bell, also highlighted a discussion recently started by HM Treasury regarding income distribution from capital. With more people entering retirement and seeking alternatives to annuities, this kind of innovation could help managers meet demand by finding new ways of building income portfolios and products.

A 'new normal' for bonds?

On the fixed income side, the role of bonds in portfolios had undoubtedly changed, said Stephen Yeats, global head of fixed income beta solutions and UK head of investments at State Street Global Advisors.

"I think we have to recognise that we are in a hugely compressed yield environment globally," Yeats said. "That creates significant challenges and it does challenge some of the roles that fixed income has traditionally played in portfolios; specifically yield being an obvious one, but also diversification. "This means investors need to be more selective, in terms of which currencies, countries and regions they choose to invest in."

Fidelity Multi-Asset Income portfolio manager George Efstathopoulos supported Yeats' assessment, highlighting the way in which the investment grade and high yield markets have changed in the past decade. "If you look at the composition of investment grade today, it looks significantly worse on a duration basis," he explained. "Durations have been extended at a time when yields are at very low levels...

We have seen a massive ratings downgrade in the investment grade space.

"Ironically, high yield has had a bump up in ratings because of the fallen angels, [while] investment grade has got worse and we have seen more volatility in that space." Remi Olu-Pitan, multi-asset fund manager and co-portfolio manager of the Schroder Life Diversified Growth fund at Schroders, said she and her colleagues had been "trying to find a replacement for bonds" as a defensive asset within a portfolio. She contended that such an asset did not exist in the same way.

She continued: "Rather than having that barbell strategy of risky versus defensive, we think that to avoid that disappointment in terms of your hedges, we are looking more at... a sensible core [of] a wide range of assets that are not necessarily negatively correlated, they have different characteristics." Within this, investors must recognise that the "pursuit of income is becoming slightly more risky", Olu-Pitan said. This means accepting a lower income if investors also want hedging characteristics, or expanding their universe of diversifying assets.

She gave the example of hybrid securities as an asset class that can "help to cushion but not necessarily hedge". The hybrid sector is an example of areas of "niche" fixed income that should be considered by income seekers, according to Duncan Blyth, senior investment manager at Seven Investment Management.  "It's less binary now and you have to do a bit more work [to get] exposure to different return drivers, and I think that's where you can still get attractive opportunities with income," he said.

He added: "I think we are in an environment where investment returns are going to be lower and I think we have to just accept lower yields in many cases.  "If it is coming from areas like technology, again that is long-term growing dividend streams, then they are also going to be lower.  "I think we are so anchored to historically higher yields, we have to be wary of that and an acceptance of lower returns and potentially lower yields is something we just have to accept."  

Kleinwort Hambros senior fund analyst Paul Hookway urged investors to "be very pragmatic" and think "outside the box" when allocating to fixed income. Buyers need to "understand which part of the curve you are playing and what the structure is", he added. "So we have invested in Financial Credit, which has done very well for us."  Investment grade corporate bonds "play a much smaller role than they have done in the past" in multi-asset portfolios, noted Efstathopoulos.

His team had "turned a bit more constructive on equities" in the wake of the November US election result as well as announcements on Covid-19 vaccines, which Efstathopoulos said allowed investors to "look through some of the more short-term issues and... project with more reliability forward earnings". "A headline would suggest that fixed income is challenged as an asset class, but I would argue that the world is not consistent," said State Street Global Advisors' Yeats. "There are areas where this is more acute, particularly in euros.

But also, I think the yield environment we are in is reflective of the economic environment as well. There has been a huge amount of progress made with the virus but ultimately there are significant risks still out there for investors." For those looking for defensive assets in this new environment, Emiel van den Heiligenberg, head of asset allocation at Legal & General Investment Management (LGIM), said there was no single answer and he highlighted the changing role of bonds in portfolios.

"Five years ago, people had bonds in their portfolio partly as a recession hedge when equities would tank and bonds would do really well. This has been the benefit of balanced and multi-asset portfolios for a very long time, but this becomes a bit more difficult with yields on the floor. "So in a way, the rise in yields we have seen recently is pretty healthy for the long-term future of multi-asset investors."  

There were still bond markets that could offer "steep curves and higher yields", such as Korea, Australia, and New Zealand, he said. However, these markets are not as large as their European or US counterparts so cannot be a solution in isolation. Nevertheless, "they are definitely interesting markets and would provide some downside protection", van den Heiligenberg asserted.

Some currencies can also offer defensive qualities to a portfolio, he added: "There's obviously probably negative carry when the carry trade does really well, but it would provide some defensive characteristics that you normally would expect from bonds." State Street Global Advisors' Yeats agreed that the US dollar could be a risk hedge "at some level" given the shape of the US treasury bond yield curve, which is starting to look steep by historical standards, while Efstathopoulos suggested the Japanese yen as a cheap defensive option.

Expanding income horizons

For multi-asset investors, searching for income should involve serious consideration of the vehicles through which assets are bought and held, according to AJ Bell's Brennan. "When you buy a bond fund, it can carry on paying the coupon at a higher rate because it's usually based on the purchase yield, which was obviously historically higher," Brennan explained. "On the other hand, equities as we saw adjusted immediately.

But if you bought an investment trust, you can use reserves and you can make overpayments." Investment trusts, and in particular real estate investment trusts (REITs) including healthcare specialists, have been of interest to the Kleinwort Hambros team as good, defensive, dividend-paying options, according to Hookway.  He added: "I think in the recovery you also have to look at those areas that can be out of favour with investors for any reason, principally in this case because they have cut or suspended their dividends.

This is where you have to do your due diligence to assess whether or not they are going to start paying again."  Hookway said there were lots of opportunities to look at diversifiers, moving away from bonds and towards asset classes and sectors with bond-like returns.   "Infrastructure has been mentioned, but also playing some of the secular trends coming out of the Covid recovery, like supermarkets and digital infrastructure companies."

AJ Bell's Brennan also highlighted jurisdictional differences: Luxembourg-domiciled funds, for example, "may be able to distribute yield in a different way to an Irish listed fund". "I think as multi-asset investors, you have to be much cleverer to try and get that smoother profile," Brennan said. "The danger is you switch to just the equities or high-income dividend sectors and then you end up with an unbalanced fund."

Playing the recovery

James Hawkes, a senior multi-asset portfolio manager at Coutts, added that despite the challenges posed to equities and bonds by the events of 2020, "the current economic environment is quite supportive of income investors". He added: "Because of the strong dynamic in play, the vaccine rollout, a lot of support from governments and central banks and then a huge amount of pent-up demand with consumers, I think it does allow you to lean into risk assets and to markets that are actually generating a higher income."

Balanced appropriately within a portfolio, Hawkes said "leaning in" to value-orientated and cyclical sectors could help "offset a more structural reduction in yield". He also highlighted the long-term megatrend of the global transition to a low-carbon economy could produce income-generating assets within areas such as infrastructure. Hawkes said: "It's important to balance off cyclical opportunities and some of the structural opportunities - climate change transition is a pretty interesting one.

Especially for income investors, there are a lot of assets tied into that transition that do generate quite attractive yields.  "[Infrastructure is] historically a great asset for income and a lot of those infrastructure products are tied into the transition. In traditional sectors like utilities, for example, a large number of those companies will lead the way in terms of transitioning, so you can generate quite attractive income there. 

"For us, it's very much about balancing that cyclical opportunity now but also having some of these structural winners in the portfolio that can enhance income." Aviva Investors' Behdenna added: "I think this recovery does provide interesting opportunities for income investors as it is going to be about structural trends, climate change, environmental issues, which are at the forefront of what we do. "Given our exposure to these themes, I think an area like electric vehicles is a very interesting trend for the future, given the investments from the European Union.

"While some of the big names that we all know in the US do not pay dividends, the car makers do pay dividends in Europe in particular. So that is one way to get exposure to what is going to be a green recovery."  Commenting on the recovery environment for investors, Schroders' Remi Olu-Pitan said: "The reason why the narrative is different this time round is that the winners are going to be different from the previous cycle.  I think for investors and asset allocators, we just have to deal with and embrace that there are new winners. 

"It is not necessarily a style but I think we have to look at the market differently from growth and value. I think there is an underappreciated middle of good, stable companies with okay valuations that can deliver.   "I think in an environment where you have cyclical growth and rates rising, whatever happens to inflation, it requires a different way of investing."

Dividends versus coupons

Equity income investors are in a strong position as 2021 develops given strong cash positions and growing positive sentiment as vaccines are rolled out and economies reopen - provided the companies they allocate to have come through 2020 relatively well.

State Street Global Markets' Jones underlined the inflation outlook as positive for equities. State Street Global Markets expects US inflation to tick upwards above 2% but to be kept in check by central bank policy, according to its second-quarter capital markets outlook report. He said: "Given the outlook for inflation [and] the outlook for where I think fixed income yields are probably going, and the degree of cash that is sitting in investors' and households' pockets, that means the capital appreciation properties of equities look a lot more attractive than in the fixed income space at the moment."

Yeats added that the longer-term outlook for global debt levels was "quite concerning" given the amount that governments had been forced to borrow to combat the economic and social effects of the pandemic, such as business closures and restrictions on movement. "Ultimately that at some level has to be paid back," he said.  However, the knock-on effects will not just be felt in the bond markets, Yeats emphasised. Corporate taxes were likely to increase, he said, which would have an impact across company balance sheets. "It's worth remembering that bonds are higher up the capital structure for a reason," he added.

"The whole debate around where I'm going to get my income [is about] understanding that just going up the risk spectrum is not necessarily the right answer," Yeats stated.  "Just remember where you are in the capital structure." While income investing is likely to remain challenging for some time, for those willing to innovate and 'think outside the box', there appear to be many options available.

Whether you're dedicated to dividends or convinced by the coupon, the next few years are going to be an interesting journey.

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City Snapshot: Pepco offers share at a discount in upcoming €5bn IPO

Poundland Worthing Top story Poundland owner Pepco is has set its price in the upcoming Polish IPO at a discount, valuing the budget retail chain at £5bn (GBP4.3bn).

Steinhoff, the South African parent company of Pepco, set the price of shares in the flotation at 40 zlotys a piece (EUR8.82). It puts the offer at the lower end of the range of 38 zlotys (EUR8.32) and 46 zlotys (EUR10.08), guided by the group earlier this month. Pepco will look to raise about EUR700m from the sale of more than 80 million existing shares in the IPO, but has room to sell up to 92.5 million if demand allows.

The discounter also sold a further 23 million shares to its lenders to raise additional funds of EUR200m. The free float will total 20.1% on admission to public markets, which is expected to be on 26 May. Pepco revealed last month it had opted to list on the Warsaw Stock Exchange rather than in London given its exposure to the Polish market.

The group, which operates as Pepco, Poundland and Dealz, has more then 3,200 stores located across 16 countries. Pepco CEO Andy Bond said: "We are proud to be joining the Warsaw Stock Exchange in what will be its biggest IPO to date in 2021 and to become one of the largest listed companies in Warsaw. Our group operates in the attractive European discount retail sector, and with our three market-leading brands - Pepco, Dealz and Poundland - we are extremely well positioned to take advantage of the enormous growth opportunities in front of us.

"We are pleased to have received strong interest and support from a broad range of high-quality international and Polish investors, including substantial retail demand, who have all recognised the quality of our financial track record and the substantial, long-term store growth opportunity that we can readily finance through our internally generated cash-flow." Morning update Elsewhere on The Grocer this morning, there are two stories about upcoming M&A in the industry.

Fresh from completing a EUR1.7bn buyout of Valeo, Bain Capital is leading the chase for Wagon Wheels and Jammie Dodgers maker Burton's Biscuits. The Boston-based private equity firm is among the final group of interested parties in the auction led by Stamford Partners, along with Biscuit International and Fox's owner Ferrero. Read the full story on thegrocer.co.uk here.

The auction for Gu Puds is also drawing to a conclusion, with PE firm Exponent close to completing a GBP150m deal. Former Quorn owner Exponent has a long history in the consumer space and currently holds dairy supplier Meadow Foods, East Asian food platform Vibrant Foods and snacks brands Proper and Eat Real. The PE firm has been a strong contender since the Gu auction, handled by corporate finance firm Spayne Lindsay, kicked off late last year.

Read the story here. The FTSE 100 has mounted a recovery once again to climb back above 7,000pts this morning. It is currently up 0.8% to 7,019.22pts.

Shares on the up this morning include, Greencore, rising 2.8% to 167.5p, Kerry Group, up 2.4% to EUR109.30, SSP Group, climbing 2.1% to 315.2p, and Pepco owner Steinhoff, which was up 2.1%. Earlier fallers include Delivery Hero, Bakkavor Group, Hellfresh and Danone. Yesterday in the City

The FTSE 100 suffered a 0.6% loss down to 6,963.33pts as inflation fears continued to stalk the market. There was little in the way of company news to influence food and drink shares yesterday, but many in the industry escaped the general negative investor sentiment. Kerry Group, CC&C Group, Deliveroo and M&S, led the fallers, down 2.3% to EUR106.70, 2.3% to 285p, 2.2% to 238.4p and 0.8% to 151.3p respectively.

The risers included McColl's Retail Group, up 3.2% to 36p, Stock Spirits Group, up 2.8% to 275.5p, AG Barr, up 1.4% to 522p, and Bakkavor, up 1.6% to 131.4p.

Ocado, Pets at Home, Premier Foods, Reckitt Benckiser, Unilever, Greggs, Hotel Chocolat, Hilton Food Group and Fevertree also escaped the gloom.

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Global markets are expensive, but the UK is much cheaper

Mercantile (MRC) investment trust fund manager Guy Anderson responds to investors' concerns that stock markets look frothy after the remarkable rebound since the pandemic crash over a year ago. This is the third excerpt from Anderson's 'Great British Companies - from Crisis to Recovery' presentation at a Citywire virtual event last week. Previous excerpts covered why Anderson is bullish about the UK's consumer and manufacturing recovery and the 'mid cap' stocks he believes will benefit.

If these whet your appetite, you can watch the entire 54-minute recording here

Can't watch now? Read the transcript

Jeremy Gordon:

Andrew Moffatt asks: 'How worried are you in the recent rise in bond yields and as well as that, the high valuations in equity markets, globally, by any number of metrics?' And we've got other people referring to frothy markets and whether you think they're running ahead of earnings. How worried are you that we're due a pullback? Guy Anderson:

That's an excellent question because it's a very valid thing for us to be concerned about. Before I give my answer, I think it's worth saying first of all, there will be a pullback at some point because markets do not go up in a linear manner, forever.

The challenge, of course, is knowing when the pullback will come and how significant the pullback will be. Of course, as we don't have perfect foresight, we cannot possibly answer that, but it is inevitable. It is worth putting that out there and I think the rise in bond yields is absolutely-, and the threat of inflation is something that's been occupying the market's mind a bit more recently, absolutely, bring that front and centre to everyone's attention.

In terms of valuation, I don't usually rely on a cyclically-adjusted P/E [CAPE], but I am going to refer to it today. The reason that I'm going to refer to it is actually, usually, I think about what is the valuation of the market for this year, on a straightforward P/E [price-earnings] basis because it's the easiest for everyone to understand, but actually, we're at a point where current year earnings, it's not that they're meaningless, but given some of the restrictions, they are a less relevant datapoint than would often be the case. Actually, if we look at a cyclically adjusted P/E, which is really just taking the earnings over the last ten years, the UK is still on around 12 times and is at a quite substantial discount to Europe, a 20%-plus discount or 20%-ish discount and those are markets that usually trade quite closely in line.

Of course, there's different sectoral mixes, but actually, they have pretty similar growth and quality characteristics over the long-term. So, I think the UK is at a discount to other markets. When looking at the US, the US is clearly much higher-, on a much higher rating than both Europe and the UK and that is something that potentially, might give pause for thought, but I'm not the US expert so, I'm not going to profess to be.

When I think about the UK, I actually don't think the valuations are that extended, particularly given I think it's important to note that we're at a point where we are seeing improving expectations. So, by that I mean, we're seeing upgrades to economic growth expectations and at a micro level, at a company level, we are seeing a far higher number of upgrades to expectations than we are seeing downgrades. In other words, I believe that expectations in the market, today, are actually more conservative than the eventual outcome.

So, valuations as seen on the screen today, are actually, more expensive-, the valuations on the screen are more expensive than they are in reality.

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Global markets are expensive, but the UK is much cheaper

Mercantile (MRC) investment trust fund manager Guy Anderson responds to investors' concerns that stock markets look frothy after the remarkable rebound since the pandemic crash over a year ago. This is the third excerpt from Anderson's 'Great British Companies - from Crisis to Recovery' presentation at a Citywire virtual event last week. Previous excerpts covered why Anderson is bullish about the UK's consumer and manufacturing recovery and the 'mid cap' stocks he believes will benefit.

If these whet your appetite, you can watch the entire 54-minute recording here

Can't watch now? Read the transcript

Jeremy Gordon:

Andrew Moffatt asks: 'How worried are you in the recent rise in bond yields and as well as that, the high valuations in equity markets, globally, by any number of metrics?' And we've got other people referring to frothy markets and whether you think they're running ahead of earnings. How worried are you that we're due a pullback? Guy Anderson:

That's an excellent question because it's a very valid thing for us to be concerned about. Before I give my answer, I think it's worth saying first of all, there will be a pullback at some point because markets do not go up in a linear manner, forever.

The challenge, of course, is knowing when the pullback will come and how significant the pullback will be. Of course, as we don't have perfect foresight, we cannot possibly answer that, but it is inevitable. It is worth putting that out there and I think the rise in bond yields is absolutely-, and the threat of inflation is something that's been occupying the market's mind a bit more recently, absolutely, bring that front and centre to everyone's attention.

In terms of valuation, I don't usually rely on a cyclically-adjusted P/E [CAPE], but I am going to refer to it today. The reason that I'm going to refer to it is actually, usually, I think about what is the valuation of the market for this year, on a straightforward P/E [price-earnings] basis because it's the easiest for everyone to understand, but actually, we're at a point where current year earnings, it's not that they're meaningless, but given some of the restrictions, they are a less relevant datapoint than would often be the case. Actually, if we look at a cyclically adjusted P/E, which is really just taking the earnings over the last ten years, the UK is still on around 12 times and is at a quite substantial discount to Europe, a 20%-plus discount or 20%-ish discount and those are markets that usually trade quite closely in line.

Of course, there's different sectoral mixes, but actually, they have pretty similar growth and quality characteristics over the long-term. So, I think the UK is at a discount to other markets. When looking at the US, the US is clearly much higher-, on a much higher rating than both Europe and the UK and that is something that potentially, might give pause for thought, but I'm not the US expert so, I'm not going to profess to be.

When I think about the UK, I actually don't think the valuations are that extended, particularly given I think it's important to note that we're at a point where we are seeing improving expectations. So, by that I mean, we're seeing upgrades to economic growth expectations and at a micro level, at a company level, we are seeing a far higher number of upgrades to expectations than we are seeing downgrades. In other words, I believe that expectations in the market, today, are actually more conservative than the eventual outcome.

So, valuations as seen on the screen today, are actually, more expensive-, the valuations on the screen are more expensive than they are in reality.

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Global markets are expensive, but the UK is much cheaper

Mercantile (MRC) investment trust fund manager Guy Anderson responds to investors' concerns that stock markets look frothy after the remarkable rebound since the pandemic crash over a year ago. This is the third excerpt from Anderson's 'Great British Companies - from Crisis to Recovery' presentation at a Citywire virtual event last week. Previous excerpts covered why Anderson is bullish about the UK's consumer and manufacturing recovery and the 'mid cap' stocks he believes will benefit.

If these whet your appetite, you can watch the entire 54-minute recording here

Can't watch now? Read the transcript

Jeremy Gordon:

Andrew Moffatt asks: 'How worried are you in the recent rise in bond yields and as well as that, the high valuations in equity markets, globally, by any number of metrics?' And we've got other people referring to frothy markets and whether you think they're running ahead of earnings. How worried are you that we're due a pullback? Guy Anderson:

That's an excellent question because it's a very valid thing for us to be concerned about. Before I give my answer, I think it's worth saying first of all, there will be a pullback at some point because markets do not go up in a linear manner, forever.

The challenge, of course, is knowing when the pullback will come and how significant the pullback will be. Of course, as we don't have perfect foresight, we cannot possibly answer that, but it is inevitable. It is worth putting that out there and I think the rise in bond yields is absolutely-, and the threat of inflation is something that's been occupying the market's mind a bit more recently, absolutely, bring that front and centre to everyone's attention.

In terms of valuation, I don't usually rely on a cyclically-adjusted P/E [CAPE], but I am going to refer to it today. The reason that I'm going to refer to it is actually, usually, I think about what is the valuation of the market for this year, on a straightforward P/E [price-earnings] basis because it's the easiest for everyone to understand, but actually, we're at a point where current year earnings, it's not that they're meaningless, but given some of the restrictions, they are a less relevant datapoint than would often be the case. Actually, if we look at a cyclically adjusted P/E, which is really just taking the earnings over the last ten years, the UK is still on around 12 times and is at a quite substantial discount to Europe, a 20%-plus discount or 20%-ish discount and those are markets that usually trade quite closely in line.

Of course, there's different sectoral mixes, but actually, they have pretty similar growth and quality characteristics over the long-term. So, I think the UK is at a discount to other markets. When looking at the US, the US is clearly much higher-, on a much higher rating than both Europe and the UK and that is something that potentially, might give pause for thought, but I'm not the US expert so, I'm not going to profess to be.

When I think about the UK, I actually don't think the valuations are that extended, particularly given I think it's important to note that we're at a point where we are seeing improving expectations. So, by that I mean, we're seeing upgrades to economic growth expectations and at a micro level, at a company level, we are seeing a far higher number of upgrades to expectations than we are seeing downgrades. In other words, I believe that expectations in the market, today, are actually more conservative than the eventual outcome.

So, valuations as seen on the screen today, are actually, more expensive-, the valuations on the screen are more expensive than they are in reality.