4 shires investment commentary - summer 2021 by Shelleys the Printers Ltd

Investment Commentary

Summer 2021

Expert Asset Management Investments | Pensions | Financial Planning

Commentary contents Themes • • • • • • •

Inflation everywhere Shipping – bust to boom Demographics update U.K. State pension – Unlocking the Triple Lock U.K. Mergers & Acquisitions Technology Anti-trust Chinese stock clampdown

Markets and Investing

• Portfolio Activity & Investments: U.K. big dividends, Brook Global Emerging Markets, Bank of Georgia, Odyssean investment trust • Markets & Investment Outlook: Iron ore price surge, OPEC agreement and rivalry Compliance & Regulations

• Risk disclaimer

Introduction

Welcome to the 4 Shires investment commentary for the Summer of 2021. In this commentary we look at the rise of inflation across the world, particularly in areas such as commodities and shipping, and look at how long this may affect the global economy. In our regular U.K. section we look at changes to the state pension and the current frenzy of mergers and acquisitions. We also look further afield to the state of anti-trust investigation in the United States, and the clampdown by the Chinese government on the technology and education sectors.

In our markets section we look at high dividend paying stocks in the U.K. as well as other interesting investments we have for our clients. We also look at the change in the iron ore price as well as the recent OPEC production agreement.

If there are any subjects raised in the quarterly you would like to discuss, or with regards to you own finances, please do get in touch.

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tight which can be seen across the world. Part ( ( to increased ( ( demand ( of (this inflation is due (and the( inability ( to(satisfy( that demand ( due to Covid ( (restrictions, ( but( there( are( other( such (forces ( at play, ( ( as( skill shortages, & &

(Graph source: JP Morgan)

4.5% for core CPI (core consumer price short ( index eliminates ( ( term price ( ( changes ( in ( volatile( areas such ( as food and ( energy). ( The( monthly jump in inflation is the largest ( (( ( ( ( (since 2008. & (

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( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( (( ( ( ( ( ( (( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( U.S. inflation jumped for several reasons, is being exacerbated by a skill shortage, the ( ( ( ( ( (( ( ( ( ( ( ( ( ( including used car and truck prices which ‘pingdemic’ (where the Covid application is ( ( ( ( ( ( ( ( ( ( ( ( were up 11% on the month and up 45.2% telling people to isolate from being in contact ( from a year ( ago, ( partly due( to the( global ( chip ( with( a( verified ( (Covid patient) ( ( and (Brexit. ( ( ( shortage affecting the availability of new This is causing more negotiating strength for

cars. Fuel and food costs also rose. Wages employees and the advent of signing on ( 3.6% in ( June, but( this (could be (a lagging ( ( ( from employers ( ( ( to fill bonuses desperate rose ( indicator ( ( as inflation( pushes ( ( to ask & (( bonuses ( workers positions. These go as( high as ( ( ( ( ( ( ( ( ( ( ( for more remuneration. However, part of £10,000 for a night nurse in a care( home in ( the problem ( ( is that ( many ( workers ( ( Scotland. ( HGV ( ( drivers (also feature ( on the( for( wages are ((still on ( (government ( unemployment ( ( list for signing-on ( ( bonuses.( ( ( ( support ( (and are (happy ( to receive (this ( ( ( (( ( ( up ( enhanced ( ( level of ( benefit ( ( until( it ends, ( at ( ( Government ( ( ( stimulus is((also pushing ( ( inflation, and monetary policy remains which( point ( they ( will ( seek ( employment. ( ( extremely loose. These are powerful push U.K. labour markets also remain tight, with factors behind rising inflation that can be ( ( ( ( ( ( ( ( ( ( 1.1m unfilled positions being advertised as at seen in the increase in money supply (Chart ( (( ( ( ( ( ( ( ( ( ( the beginning of August (source: source: Dallas Fed). (thisismoney.co.U.K.). ( ( ( ( ( ( ( & & & ( The vacancy situation

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The increase in stimulus by governments has been exacerbated by a lack of tax ( income.

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The resulting inflation from the monetary and fiscal stimulus, coupled with( tight supply, in developed markets can be seen above.

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Supply( is to be relatively ( also ( ( a huge ( problem. (( (The markets( and ( supply ( ( ( short( expectations ( ( are (that semiconductor, ( ( or (chip, ( lived. They ( ( are continuing ( (with their( supply(( will (not meet ( demand ( ( until ( 2022, ( ( stimulus( to ( the economy ( ( and ultra-low( according to Infineon CEO, Reinhard Ploss. interest rates. However ( (( ( ( ( ( (( ( ( ( ( ( the Bank of( The is ( England’s (BoE’s) monetary policy ( knock ( on ( effect of ( the chip ( shortage ( ( ( everywhere in manufactured goods, to a committee in its minutes from the beginning ( (extent, as ( a result ( (of the ( of August( shows concern ( ( that wage ( (pressure( greater or( lesser ( of( semiconductors ( ( ( in almost( all ( remains ( ( high, (and (it has changed ( its forecast ( ( importance ( ( ( ( ( ( ( ( ( ( ( ( ( control systems from fridges to buses. for inflation, saying it could hit 4% in the ( ( ( ( ( 12 ( months. ( (The chart ( (below (source: ( ( next ( the US ( central( bank,( the Federal ( ( ( shows ( that ( markets ( ( expect( the( Bloomberg) Currently ( ( ( in labour ( ( ( BoE ( to( raise( before ( (( ( ( ( the Fed: Reserve,( expects this( tightness

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Our view government deficits in developed ( is( that inflation ( is( likely( to(remain ( ( (( ( ( economies( higher than expectations over the coming 12 alongside labour market tightness ( ( ( ( ( ( ( ( ( likely to( months, ( and then it will probably abate. persist, it is not certain that inflation ( ( ( ( ( ( ( ( ( ( ( ( (will( However, with ( ( stimulus ( (( packages and retreat as quickly as central banks would like.

( ( 5

Shipping

The impact of inflation can clearly be seen in one of the most deeply cyclical industries, that of shipping. For much of the last 20 years, container shipping lines have operated at low or negative profitability, which has caused multiple mergers in the industry to take out costs with the aim of restoring profits. Ever larger ships have been * launched to also improve the economics.

What the chart shows is that day rates for container vessels are circa 4-5 times their historic average. One of the reasons for this is a labour shortage due to Covid which lead to a surge in demand for shipping of goods from China, the industrial heartland for manufactured goods, when U.S. and European markets were locked down.

The recent six day blockage of the Suez ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( When there is a cyclical recovery in the Canal by the Ever Given, owned by ( ( ( (( ( ( ( ( ( ( ( ( ( ( economy, the first sign of improving Evergreen shipping of Taiwan, exacerbated ( ( ( ( ( ( ( ( ( ( ( ( ( conditions can often be seen in shipping the freight rate situation. The Suez Canal is ( ( ( ( ( ( ( ( ( ( ( (( ( ( ( rates. The chart below shows the recovery the world’s busiest shipping link, and the cost ( ( ( ( ( ( ( ( in shipping day rates for the two key routes, of the blockage in lost revenue is estimated Shanghai (‘Europort’) in( the ( to Rotterdam ( ( ( ( ( (at circa $9.6bn. ( ( ( ( ( ( Netherlands, and Shanghai to Los Angeles ( ( ( ( ( ( ( (( ( ( ( ( ( ( alongside the( 5 year ( ( average. ( ( ( ( ( ( ( ( ( ( (

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(Chart source: Bloomberg)

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(Chart source: Bloomberg, Bureau of Labor Statistics)

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Historically ( ( the response (( in( poor times ( ( for ( container shipping has been the scrapping ( ( ( ( ( (( ( ( of (vessels. The has( ( ( ( move ((to larger ships ( encouraged ( ( this ( (scrapping, ( ( but ( the ( pandemic has now lead to a surge in new ( ( ( ( ( ( ( ( ( orders at shipyards that will take many years to work through. ( ( Another ( (factor in( the rise ( in new are low ( orders ( (( the( EU’s latest ( ( carbon(

(Graph Source; Baltic Exchange/Bloomberg)

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rules(for ships ( that enter( the EU. ( When the ( ( ships are delivered freight rates ( ( ( ( ( ( ought( to ( begin ( to( fall( with( the new( supply. ( ( ( (

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Interestingly, the dry bulk freight rates have ( risen, but nothing like they did between 2005 and ( ( 2007. ( The chart ( ( below( shows ( this. (

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The remains bright capacity ( outlook ( for shipping ( ( ( ( in ( surplus ( (( may( lead ( to reduced ( ( freight ( the (short term, supporting our theory on rates, although the EU’s new low ( ( ( ( ( ( ( ( ( ( ( ( ( (carbon ( inflation being persistent over the next 12 rules will offset this as older, more ( ( ( ( ( ( ( ( ( ( ( ( ( polluting ( ( months.( When the new ship deliveries come vessels are retired from service. ( ( ( ( ( through in 2023 and 2024, it is likely this

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Demographics update

Another support to increased levels of inflation over the coming years are the combined problems of low birth rates in the ( ( countries ( ( ( and( the ( need for ( developed ( ( ( ( ( ( ( ( increased skills, exacerbated by closed door immigration policies. This could also be ( ( ( ( ( ( ( ( argued to be a source of deflation, given the ( ( ( ( ( ( ( ( lower( numbe ( of ( consumers. ( ( ( As with( all( these major changes, the ( ( ( ( reality ( ( is (more nuanced. & ( ( ( ( ( ( (

China changed its two child policy to a three child policy at the end of May. This change is a response to a fertility rate (births per ( ( in China ( to 1.3, ( a( rate far lower((than( woman) ( ( the 2.1 needed to replace the population. The number of births in 2020 was 12 ( ( ( ( ( ( ( (( ( million, ( ( down (from ( the 18 ( million ( ( ( born ( in( 2016. The below (( chart ( ( ( (source: ( ( The( Economist) shows this as well as ( ( ( (( ( ( ( other& developed( countries’ shrinking birth ( ( ( rates( rates:

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However, increasing the birth rate will be means it is often hard for Chinese men to ( in China ( for( several ( reasons. ( ( ( find ( a partner, ( ( particularly ( ( in the ( poorer,(( very difficult ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( Firstly, the need to buy a flat for each child rural areas. It is hard to see birth rates rising ( ( ( ( ( ( ( ( (( ( ( ( ( is becoming very difficult apart from for the in China despite the relaxation of family size( ( wealthy.( House prices (( have surged ( ( ( ( ( ( ( ( ( very in ( limits. ( ( ( (( ( ( ( ( ( ( ( ( ( ( ( China. Secondly, the cost of childcare has ( expensive. ( ((Thirdly, ( mothers ( are Hungary ( ( ( taken ( a (different ( approach, ( ( become has ( ( ( ( ( ( ( ( ( ( (( ( ( ( ( ( ( looking to their careers and are having with increased spending to encourage ( ( ( ( ( ( ( ( ( ( ( children later in life. Fourth, there is a huge women to have more children instead of gender imbalance, with into the But( ( ( ( ( circa 45m ( more ( allowing ( immigrants ( ( country. ( males than ( ( females. ( This ( gender preselection ( ( ( the cost ( per extra child ( born ( ( is estimated (( to(

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be EUR50,000, a steep price indeed relative to migration. Despite the money for housing, subsidies for 7 seat cars and other measures, the fertility rate is still below 2.1.

The impact on global economies of falling birth rates will eventually increase pressure to have immigrant-friendly policies. Currently, politicians are frightened of admitting that these are necessary to solve declining birth rates, which will aggravate the situation.

With regards to inflation, the implication of a lack of births ought to reduce demand in the economy and put pressure on governments’ taxation revenue. Social services will be stretched, particularly for social care for the elderly, and wages will rise in that area to make it more attractive to work in the sector. So some elements of deflation will also be offset by inflationary factors such as higher wages amongst a shrinking workforce. However, the most likely result is a deep skills shortage that will change immigation policies to increase the tax base and reverse the deflationary effects of having fewer children.

U.K. Housing Removing the Stimulus

A new mortgage indemnity scheme called Deposit Unlock launched in June of this year. The scheme was created by the Home Builders Federation and is managed by global reinsurance broker Gallagher Re. The scheme will help borrowers buy a newbuild home with a value of up to £330,000, with a deposit of just 5%. So far 17 house builders have signed up to the scheme, including FTSE companies Persimmon, Taylor Wimpey and Barratt Developments.

How the scheme works is the developer pays a percentage of the purchase price of the house into an insurance policy. The policy reduces risk for the lender, protecting them from a proportion of the potential loss in the event of default. The home builders have not revealed how much the insurance premiums will cost, but they have indicated it is somewhere between 2-4% of the property value. The scheme will act as an alternative to the UK government’s 95% mortgage guarantee scheme and Help to Buy, with the latter set to close in March 2023.

Over the last 12 months the housing market has been very hot and the recently departed chief economist of the Bank of England, Andy Haldane, described the market as “on fire”. The two factors that explain the upward price trend is the so called “race for space” with many city dwellers moving out to the countryside, and the other factor being the temporary cut to

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further stimulus and, surely, after a period of severe price rises a cooling down phase ( ( The(table ( below shows would (be beneficial. ( ( house ( price ( ( a multiple ( the( average as of ( (earnings ( for( the (period ( ( to average 1845 2020 Schroders). ( (Graph ( source: ( ( (Before( the( current spike in house prices, ( ( ( (( & &the eighttimes-earnings level has only been ( ( ( ( breached ( twice previously in the past 120 years. It may # # # # ( ( ( ( ( ( ( ( # The deposit unlock scheme is the private only be of historic curiosity, but it is also # to# replace # # the # government’s # # interesting # # house # prices # were# even more sector’s effort that housing expensive # # support # measures. # # The # question this # #( in the latter half of the nineteenth raises, is why the U.K. housing market needs century.

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( ( * * * * * * U.K. State pension – ( Unlocking the Triple Lock ( ( ( ( ( ( ( ( ( ( ( ( set of circumstances brought on by the ( The triple lock is the U.K. government ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( COVID-19 pandemic, The Bank of policy that increases the state pension ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( entitlement in line with the higher of the England forecasts that those receiving the ( ( ( ( ( ( ( ( ( ( ( ( rising cost of living (measured by the state pension may be in line for a bumper ( ( ( ( ( ( ( ( ( ( ( ( (( ( consumer price index, CPI), average wage 8% increase in their entitlement, starting ( ( ( growth, ( or 2.5% each ( year.( Due to( a unique ( ((from April 2022. ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ? * ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( *

The current figures are being distorted by the comparison data a year ago, the unwinding of lockdown job losses, and furlough. This has resulted in an elevated and rising level of earnings growth, which in May 2021 was at 7.3%. Assuming similar levels of wage growth in September (when the level is locked in for the next year), the policy would cost the treasury £6.7bn in 2022/23. This is £4.4bn more than if the state pension was increased by 2.5% (in line with current CPI).

This increased cost comes at a time when the treasury is looking at ways of clawing back some of the £372bn the OECD estimates the U.K. has spent on tackling the pandemic. Despite the triple lock being part of the conservative manifesto since 2011, Chancellor Rishi Sunak indicated that the government may reassess the viability of the policy going forward. Nevertheless, with the older demographic being part of the conservative key voter group, one should not be surprised if the government sticks with the policy and looks to make savings elsewhere.

Perhaps those receiving the state pension should feel entitled to the large increase. U.K. pensioners receive a far lower percentage of their total earnings from the state pension compared to their international peers. The graph (source: OECD) shows that older people in the U.K. have to rely on their occupational pensions and private savings to a higher degree than

many other countries in the OECD. This is partly due to the growth in importance of private sector pensions.

Some commentators, including the OECD, have called for the triple lock to be ditched. One alternative for the government might be to move to a double lock, redefining what earnings growth is, or even moving to a 3 year rolling average when measuring the indicators.

U.K. Mergers and Acquisitions

The recent flurry of foreign private equity funds buying high quality U.K. corporate businesses shows no sign of abating. Household names like Morrison supermarkets, and less well-known companies in the defense and pharmaceutical sectors, have been subject to bids. Some of these bids have seen escalating valuations as rival private equity buyers bid higher and higher prices to win the prize. But the government is considering whether to intervene in the purchase of U.K. defense companies Meggitt and Ultra Electronics. The highest profile bid for a U.K. company has been the rival bids for Morrisons Supermarkets from U.S. private equity firms Fortress and Clayton Dubilier and Rice (CD&R). The process will come to an end shortly following a ‘put-up-or-shut-up’ from the Competition and Markets Authority (CMA). The bid as at 13th

August stands at just over £10bn (including debt). Interestingly, ex-Tesco CEO Terry Leahy, is an advisor to CD&R, and the chairman of Morrisons is Andrew Higginson, who was finance director of Tesco when Terry Leahy was there. Why is Morrisons attractive? Partly due to the low valuation, partly due to the value of the property portfolio and also because of its distribution business including the Middle East as well as a relationship with Amazon grocery.

The defense sector has seen two controversial bids. The first is for Ultra Electronics by Cobham, the aerospace business recently acquired by U.S. private equity firm Advent in 2020. The acqusition price was raised from an initial bid of £28 to £35 per share, which the board supports. Cobham is hardly recognizable from its stock market listing, having disposed of its in-flight refueling technology, its training business and Cobham Aerospace connectivity. The aim of the merger is to build a significant defense electronics business which supplies governments with critical systems. However, the U.K. government is looking at the transaction, and some intervention is possible. There is concern in some circles about selling key strategic industries.

The same concern has also been expressed about the potential takeover of Meggitt by either U.S. firm Parker Hannifin or Transdigm. The latter company was founded in 1993 and has made over 80 acquisitions since inception. It has recently

announced a 900p per share bid for Meggitt, an increase of 100p on Parker Hannifin’s bid. Parker Hannifin has made certain commitments to the U.K. government to ensure Meggitt would maintain an HQ in the U.K., have a majority of British nationals on the board and keep the R&D base in the U.K..

In the pharmaceutical sector, inhalation drug delivery company Vectura was bid for by U.S. private equity firm Carlyle with a small premium of only 136p over the initial share price, much to the frustration of shareholders. We hold the stock for clients via our investment in Odyssean investment trust. Philip Morris International (PMI), the tobacco company, has stepped in to buy Vectura in surprise move. There are concerns over how a company that for years has created lung problems for consumers is now investing in a pharmaceutical company that aids lung health. However, PMI has stated that they wish to have 50% of their revenues from non-tobacco sources in the next 10 years. Following a short auction, Carlyle withdrew and PMI’s final bid of 165p was likely to be the winning approach.

What is clear is that U.S. private equity is increasingly active in purchasing world class British assets. According to the Financial Times, this is taking place at the fastest pace in two decades. Part of the reason for this is the low valuation of U.K. stocks, certainly relative to the high valuations that private equity companies would have to pay for U.S. stocks. Another reason is that Britain is relatively open to having their companies

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( ( ( ( ( ( ( ( ( ( ( ( purchased by overseas investors. Finally, ( there is (an enormous ( ( ( amount ( of( ‘firepower’ ( ( ( in(private ( equity (( following (the huge ( scale ( of fund( raisings by ( ( private( equity( funds from ( ( their needs to be ( investors. ( This money ( invested and over a fund life of circa 10

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(( ( ( ( ( ( ( ( ( ( ( ( ( ( ( years, sitting still and doing nothing is simply not ( an option. ( ( ( Whether ( the (UK ( government ( ( does nothing ( about ( this ( remains( to( be seen, but U.S. at ( private ( ( equity ( interest (

this heightened level is likely to continue for the foreseeable future.

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* * Technology Anti-trust

The ( U.S.( technology sector ( has(been( making ( super ( normal profits from their strong (( ( ( market positions. However, concerns are ( ( ( ( ( ( continuing to be raised about how the tech ( ( ( ( sector could and should be regulated. But ( ( ( ( ( ( what is certain is that the tech companies are subverting the regulatory process and have

become ( increasingly ( (adept at(perverting ( the ( judicial system in order to evade regulation ( ( ( ( ( ( ( and taxation. The question society, and (( ( ( ( ( ( ( ( particularly the U.S. government, has to ask ( ( ( ( ( is whether it is desirable to have light touch ( ( ( ( ( ( regulation.

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( ( ( ( ( ( ( ( The tech (sector ( ( now has (arguably more( power than the U.S. trusts had at the end of ( ( twentieth ( century. ( the nineteenth and early ( At that point ( in( history,( Presidents Teddy ( ( Howard (Taft, ( Roosevelt( and William ( stepped in and broke up the iron and steel ( monopolies of( Andrew Carnegie, ( ( the rail( ( (empire founded( by ( Cornelius, ‘the ( and the Edison ( Commodore’, Vanderbilt (((

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( ( ( ( ( ( ( (( ( ( ( ( ( ( ( (( ( ( ( ( America ( ( has been (vigorous in breaking ( ( up the Rockefeller Standard Oil empire, ( ( monopoly (and ( were active ( ( AT&T’s phone ( ( Microsoft ( ( in preventing in bundling ( Microsoft ( Explorer ( (with their windows ( operating system. In all cases, the stifling of ( ( (( ( ( competition and innovation was the stated ( ( for breaking ( reason up (these( effective ( monopolies.

electric empire. Over the twentieth century

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(Cartoon source: youngantitrust.weebly.com)

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The last example, Microsoft, was the most contentious anti-trust investigation, started ( in 1992 and( brought to a (close only ( in( November 2001. Bill Gates and Microsoft ( fought (relentlessly ( to prevent ( the( break-up ( (

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& the judgement of the company& which was the company received in November 1999 when( Microsoft was declared to have ( ( a monopoly of the personal computer ( ( ( (( ( operating system and that it had abused its

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position vis-à-vis its competitors, including Apple, Netscape, Java, Linux and other companies. The judgement in June 2000 was that Microsoft should be broken up into two companies, one being for operating systems and the other for different software components. Judge Jackson’s judgement was overturned by the D.C. (District of Columbia, i.e. the capital) Court of Appeal. Microsoft was able to do a deal with the Department of Justice (DoJ) that enabled it to continue to bundle software but it had to allow 3rd party developers to access its operating system via sharing its Application Programming Interfaces (APIs) for the next 5 years. But 9 U.S. states did not agree with the judgement, which they said did not go far enough to break Microsoft’s monopolistic practices.

Why this judgement is interesting is that it shows that big technology companies are able to play the judicial system with unlimited legal budgets and obfuscatory arguments. This is no different to Apple, Facebook, Google and Amazon today. Indeed, these companies undermine justice in other ways, most notable being that they hire anti-trust lawyers from the relevant government departments with highly attractive salaries so that they understand what problems they may face from the DoJ.

This legal abuse has been seen recently in the case of EPIC (maker of Fortnite and the Unreal 3D graphics engine) against Apple,. EPIC has put an in-game payments system that violates Apple’s App store agreement, whereby all sales for a game downloaded from the App store pay 30% of revenues to Apple. EPIC has challenged this by saying

that is an effective monopoly, and the case is ongoing. Interestingly, Tim Cook, Apple’s CEO, when interviewed in court, said that he didn’t know how much money the App Store made nor would he discuss its margins. He is either too stupid to run Apple, which no one believes, or is lying about his knowledge of the profitability of one of the core revenue generators of his business.

The other tech companies are also monopolistic. Facebook controls the social media world via its ownership of Facebook, Instagram and Whatsapp. Amazon controls circa 40% of all U.S. online retail sales (monopoly is broadly defined as having over 25% market share in an industry). Alphabet (the renamed Google) has over 70% market share in mobile phone operating systems. All of these market shares are far beyond what can be called a competitive and open market accessible by competitors.

Amazon has recently questioned the impartiality of the DoJ’s investigator into its practices, thereby calling into question the right of the DoJ to investigate it and appoint staff that can investigate it.

With regards to taxation, one of the biggest users of international tax loopholes has been the U.S. tech companies. They have used the double Dutch with an Irish sandwich loophole with devastating effect on reducing their E.U. tax rates. This has deprived E.U. states of income. Why should this matter? Because the economic costs of the internet are to reduce prices, which are theoretically good for consumers, but cause problems elsewhere in society. The current battle to

reform the UK councils’ business rates system is because retail is not as profitable as it once was, but the tax rates only go up due to their link to inflation, while revenue goes down as people move from ‘bricks to clicks’. This emasculates local government funding as the revenue from rates funds local services. Central government should aid local authorities via the direct grant, but they have not received sufficient tax income from tech giants such as Apple and Amazon.

The conclusion of the anti-trust investigations will take many years, and the outcomes are far from certain. However, the large tech companies have proven adept at staying one step ahead of regulation. But the cost is lack of innovation, undermining the judicial system with their enormous cash resources (Alphabet had $135bn of cash in April, Microsoft in June had $130bn). This creates one rule for the big companies in the law courts and one tax rate far lower than for other companies, which in turn stifles innovation as big tech has more money available for reinvestment into R&D and acquisitions. Big tech rewards shareholders with aggressive returning of cash via buybacks, sending their share prices higher and higher. But that cash flow for shareholders is coming at a price, and at some point governments must decide how much longer they can afford to destroy their own taxation base, have their regulators employed by those companies they seek to regulate and how realistic is it for the U.S. judicial system to fight effectively against the enormous resources of the technology giants’ balance sheets.

Chinese stock clampdown

China has taken its own, more authoritarian approach to regulation of the tech sector. In the last commentary we wrote about the clampdown on Alibaba and a few other stocks, but this has been continuing.

In the education sector they have banned tutoring companies from making profits. These companies are used by Chinese families to boost their children’s chances of winning places at prestigious universities. The sector is a multi-billion dollar business, with several stocks listed on American stock markets. These shares have suffered falls as their core business is curtailed.

Other stocks that are listed on overseas exchanges include taxi hailing software business, Didi Chuxing. The company went ahead with an ill-advised U.S. listing, but immediately after listing the company was told to remove its applications in China from downloading services, which would potentially hurt profits.

Furthermore, Tencent, the owner of social media app, WeChat, which also derives a large amount of its profits from computer games, was exposed by Xinhua, the Chinese government news agency as providing games that were “spiritual opium”. This use of opium is an emotive phrase in China. CNN reported that between 26th and 27th July Tencent lost $100bn in value and that Meituan, the food delivery business’s value had dropped by $62bn after a 34% fall in the stock over the same period. It is not just China’s overseas listed tech stocks that are suffering.

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groups, and by cutting them down to size and increasing regulation, they are hoping to reduce their influence over the economy.

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Portfolio Activity & Investments

In this section we look at some of the themes and investments in the portfolio holdings for our clients.

We look at the big dividend payers in the UK market, highlighting how much income, both sustainable and one-off, is available for patient investors. We have recently invested in a new fund launch, the Brook Global Emerging Markets fund. Georgia’s second largest bank, Bank of Georgia, offers high growth and low valuation as well as good income. We also have an update on Odyssean investment trust, an activist investment trust focusing on the UK’s mid and small cap sector.

Big Dividend Payers

FTSE 100 dividend payments are expected to rise by a quarter this year to £76.9bn, meaning the UK index is set to yield 3.7% for 2021. At the same time, the FTSE’s average dividend coverage ratio, which measures the number of times a company’s dividends are covered by its earnings per share (EPS), has improved to 1.83x, its highest level since 2014. 2021 is the first year of dividend growth since 2018. According to AJ Bell’s latest dividend report, this equates to a 25% post-pandemic rebound.

Rio Tinto is the highest yielding individual stock in the FTSE 100, with an expected yield of 12%, followed by BHP at 9.2%,

Imperial Brands at 8.7% and Evraz at 8.5%.

The flow of dividends and share buy-backs is rising and could signal the long-awaited switch from so-called growth stocks to value stocks. In the past few weeks there has been a tidal wave of strong results from old corporate giants that dominate the FTSE 100 index that had either halted, cut or not grown their dividends during the last year. Lloyds resumed payment of dividends after swinging to a bumper half-year profit of nearly £4bn, announcing an interim dividend of 0.67p per share. Royal Dutch Shell increased its dividends by 40% after it made its first dividend cut since the Second World War, after reporting its highest profit in two years. Rio Tinto announced its highest interim dividend in history, saying it planned to pay shareholders $9.1bn. British American Tobacco increased its sales by 5% on the back of next generation products and has continued its tradition of increasing dividends every year since 1999.

In comparison to last year, there still remains uncertainty in the market, but the macroeconomic backdrop has completely changed course, with economies reopening, market inflows, inflation fears and the summer of the “super dividend”. The real question is whether these high dividend yields are sustainable and whether they can continue to grow. Banks look to be in a strong position capitalizing on the twin benefits of a strengthening economy and the prospect of widening lending margins. Mining companies are benefitting from a

strong demand for commodities such as iron ore and copper. Years of production and cost cuts throughout the sector have allowed Rio Tinto and BHP to be in prime position to benefit from this synchronized global infrastructure spending spree. Oil companies have benefitted from a strong and sustained rise in prices from the peak of the pandemic.

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A lot of these big UK dividend payers have structural issues and how they cope with them will decide whether they can continue ( to pay dividends or not. The oil majors have

a delicate balancing act to perform if they are to transition to integrated energy companies. Mining companies face many challenges on ESG issues as do the tobacco companies. The UK is still a relatively unloved market as it grapples with the fallout from Brexit with its main attraction being its high dividend culture in the low interest rate world. There is huge upside for these companies if they can prove that their dividends are sustainable in the form of dividend growth but also capital appreciation.

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(Graphic source: AJ Bell, as at 8/7/21)

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Robert joined form Newton Investment Management where he was lead portfolio * * * manager of the top rated BNY Mellon GEM Fund and the BNY Mellon Oriental ( The( GEM (fund ( has ( delivered (top Fund. decile ( returns over (1, 3 and 5 years ( with Robert running it since 2011. The chart ( ( ( ( ( below shows the performance of the BNY ( GEM fund ( since ( 2011. ( ( Mellon

30-40 stocks. The fund has many themes including focusing on education, renewable energy, EM healthcare, electric vehicles and online platforms (see table below, source ( Holdings ( ( always long( term ( to ( Brook). are allow for( compounding ( cashflows ( and ( maximization of returns. Some of its top ( ( ( ( ( ( holdings include Samsung, Longi Green ( and TAL( Education( Group. ( ( Energy

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This approach should yield good returns for the patient, long term investor.

Bank * of * Georgia * * *

( second ( ( bank( Bank( of (Georgia is( the largest ( ( ( ( ( ( ( (( ( Asian country. ( ( The Georgian in the central ( ( ( ( ( deregulated (( after ( the ( fall( of ( ( economy was ( ( (( ( ( ( Rose ( ( ( ( in( the ( 2003 Eduard( Schevardnadze ( ( ( ( ( ( ( revolution. We have invested in this bank ( ( ( (high growth ( and due (to its low valuation, (( ( ( ( ( ( ( ( ( solid, ( as well as( rising, ( dividends. ( ( (

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( ( ( and ( its highly ( (( ( corruption educated ( ( ( ( ( ( ( ( ( ( have helped ( ( ( (( workforce to drive economic ( ( ( ( ( ( ( (( (growth. ( In( 2001, ( ( 54% ( of( the population (lived ( ( ( ( ( ( ( below the poverty line, in 2006( that( ( had fallen to 34% and by 2015 only 10.1% ( ( below the ( (poverty ( ( ( ( ( lived ( ( ( ( ( (( ((line. ((Georgia ( in(( ( 2019 ranked in the top( 20% of all countries( (( ( ( ( ( ( ( ( ( ( (( ( ( ( (( ( ( ( ( for (education ( ( in( ( the Human ( ( (Development ( ( (( ( (( ( ( ( (( ( ( ( ( ( ( ( ( (( ( The( deregulation Index. ( (( (of( the( (Georgian (( ( economy ( (Corporation (( ( tax (is( 5%. ( (( ( ( (( ( ( ( (( ( has resulted in low tax rates, low levels of ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( (

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Bank of Georgia has had good results, which have shown good profit growth and a high return on equity. Earnings per share ( ( ( ( ( ( ( are expected to come in at £3.19 for the full ( ( ( ( (( ( ( year, ( with ( a dividend ( ( (yield of 6.6% ( covered ( (

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Odyssean Trust * Investment * *

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over 3 times by earnings. The stock therefore trades on sub 5x earnings, and yet has a return on equity of circa 23%. Numis ( ( ( ( ( ( ( believes the stock could rise substantially ( ( ( ( ( ( ( ( ( (from the (current ( (valuation. ( ( (( (

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( ( activist ( (managers ability ( ( to seek ( ( attractive ( ( ( Odyssean (Investment Trust is( an out ( trust that looks ( ( (a highly ( ( companies. ( ( ( (bid (came ( in for( investment to build The first ( (portfolio ( ( more (( than 25 (Elementis in April ( 2021, ( ( ( followed ( ( by( concentrated of no quickly ( ( (((( companies. We first wrote about Odyssean bids for Spire Healthcare and Vectura. The in our Autumn 2020 investment trust is still small at just over £149m, but this ( ( ( ( ( ( ( ( ( ( ( ( commentary and thought it was time to has the advantage of fewer liquidity ( ( ( ( ( ( ( ( ( ( ( ( ( ( provide an update. constraints, which is particularly helpful in (( ( ( ( ( ( ( ( ( ( (( ( ( concentrated funds. ( ( ( ( ( ( ( ( ( ( ( ( ( ( The long-term performance has been ( ( ( ( ( ( ( ( ( ( ( ( ( The discount has been narrowing over the strong, with 3 year cumulative returns of ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( (( 61.5% versus the benchmark returns of last 12 months and now the shares are ( ( ( ( ( ( ( ( (( 35.5% over the same period. The trust has trading close to NAV. We have confidence enjoyed ( a flurry ( of( recent ( acquisition ( bids( (in the ( investment ( ( managers ( ( to (continue ( to( for their(holdings, ( ( which((is a testament ( ( to the (produce ( ( good results ( for our investors. ( ( ( (

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4 Shires Investment Seminar & Garden Party Thursday 9th September

5pm – Investment seminar, Army & Navy Club 6pm to 9pm – Garden party, St James’s Square

We look forward to welcoming you to our investment seminar and garden party in September. In this year’s seminar we will be looking at some of the following topics:

Will inflation’s return be temporary or more persistent? What can investors do to protect their portfolios from the effects of higher inflation Where we see the state of China/US relations What we have been investing in for our clients

How we perceive the unfurling of demographics, climate change and other trends over the coming years

The party will be preceded by our Annual Investment Seminar, which will be held in the Library of The Army & Navy Club. You are welcome to attend both or just the garden party.

Markets & Investment Outlook * * * *

In this section we are focused on the in the iron ore price and the second article ( ( ( ( (that are( affecting ( ( ( the recent ( OPEC+ ( ( agreement ( on oil ( looks at commodity changes ( ( (( ( ( ( ( ( ( ( ( ( ( ( ( ( inflation across the world. The first article production. ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( looks at what is driving the recent changes

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* price * changes * Iron* ore

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The graph above shows the one year iron who were speculating on the mineral by ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ore price chart up to 19th August 2021 hoarding in warehouses. Most recently, and & & (( ( ( ( ( ( ( ( ( ( ( ( ( (graph source: tradingeconomics.com). The more damaging for steel producers, they ( ( (( ( ( ( ( ( ( ( ( ( ( ( ( ( ( price is for 63% iron ore paid at the port of have cut targeted production levels for 2021, ( ( ( ( ( ( ( ( ( ( ( ( Tianjin in China. The squeeze in the price expecting these to be below 2020 levels. The ( ( ( ( ( ( ( ( ( ( is as a result of the closure of several main stated reason for this is to remove Brazilian Given ( (iron ore ( mines ( (following ( ( the polluting ( ( steel producers. ( ( that ( steel ( Brumadinho dam collapse that killed 270 production in China grew 12% in H1, ( ( ( ( ( ( ( ( ( ( ( (( ( ( it is ( people and spilled toxic mine sludge across unlikely that the government will achieve a (( ( ( ( ( ( ( ( ( ( ( ( a wide( area. ( ( ( ( ( drop( in production ( over( the year. ( (But what ( is happening is that prices are ( ( ( ( ( ( ( ( ( ( (( falling, ( (which ( What has caused the price fall is increasing will be important for the price negotiations ( ( ( ( ( ( ( ( (( ( ( ( ( global ( supply, ( particularly ( ( ( from ( (Brazil, ( but is( that ( (take place between ( ( producers ( ( and ( ( far more due( to the( Chinese consumers, ( ((efforts( to reduce ( ( ( ( iron ( ore (miners ( and (steel mills. ( ( prices. The government first targeted those

Demand is likely to remain strong as the world economy continues to recover from the Covid epidemic, with demand coming from infrastructure projects in the developed world. The funding for these projects will come from government stimulus packages,

OPEC agreement and rivalry

On the 14th July 2021 OPEC and its allies agreed to gradually add more oil supplies to the market, ending a two-week spat between Saudi Arabia and the United Arab Emirates (U.A.E.). The members agreed to raise output by 400,000 barrels per day (bpd) until all its halted output since the pandemic begun has been revived. A compromise was reached with the UAE whose quota was increased to 3.5m bpd, below the 3.8m it initially demanded but above the previous baseline of 3.17m. The rift between the UAE and Saudi Arabia came as a shock to many in the region and to those watching abroad. Although a compromise was reached, this was not the first time the two biggest economies in the region have clashed, and could be a sign of further trouble ahead.

The dispute came about several weeks prior to announcement being reached regarding the increase in supply. While OPEC had been gradually increasing production since May, the UAE had quibbled at the Saudi proposal to extend the reduced output through the end of 2022. In an unusual challenge, the UAE slammed the proposed

none more so than the U.S. $1trillion stimulus package recently approved by Congress. We anticipate that this demand will stabilise iron ore prices above $100 per tonne.

deal, leading to an impasse that roiled the markets. The public spat appeared to underscore an emerging rivalry between the two Gulf allies as both seek to diversify their economies away from the petroleum industry. Both countries have indicated desires of becoming the de facto business hub of the region. The Saudis were cautioning that too large an increase in output could put downward pressure on prices.

The dispute over oil production levels between the two countries temporarily froze OPECs ability to lay out its plans for the markets, which resulted in crude oil prices reaching 2-year highs of $76 per barrel. The question is that if a two-week spat between the two countries can have such a profound effect on OPEC and their ability to make a decision on output, what will happen when there is a more prolonged disagreement between the two. The strategic alignment between the two countries, both of which have become increasingly active on the world stage, is evident in many areas. It is said there is a very strong relationship between the Saudi Crown Prince and his

Emirati counterpart. However, in the months preceding the OPEC rift, conflicting interests have begun to crop up. In February, Saudi announced that’s its government would cease doing business with any international companies whose regional headquarters were not based within the Kingdom by 2024. The move was widely seen as targeting Dubai, the Middle East’s current headquarters tab. Last year the U.A.E. announced a normalization deal with Israel, becoming the first Gulf country to do so, while Saudi meanwhile have so far publicly refused to do the same. According to Abdukhaleq Abdulla, a political science professor in the UAE, “Competition between the two biggest Arab economies is, I think, just starting, and it is bound to intensify in the years to come.”

Despite an agreement being reached within OPEC in July, economic competition between the two countries seems likely only to intensify. With both countries seemingly desperate to generate revenues from other sources other than oil, the impact on OPEC and crude oil prices will be volatile. With both countries seemingly wanting the same objective but with different strategies, the likeliness of further spats when it comes to OPEC production is very high. Furthermore, the economic consequences of both countries competing with each other, as seen when Saudi ended preferential tariffs for goods made in free zones or affiliated with Israeli manufacturers in July, seen as a direct shot at the UAE, could create further tension in an already very volatile region.

Investment Outlook

Stock markets rose over the traditionally calm summer months. The European and U.S. markets rose strongly, although U.K. markets were generally flat up to the middle of August.

We continue to see equities as offering considerable value versus bonds, which was highlighted recently by the Federal Reserve Bank’s (Fed) comments about potentially removing the bond buying in the markets. This central bank stimulus has led to explosive liquidity since the Covid-19 crisis broke, in addition to the stimulus that still remains from the Global Financial crisis. As inflation pressures build, the pain from removing the monetary stimulus should return economies to a more normal trajectory.

4 Shires investment performance

Graph to 5th August 2021 showing the average performance of all of the portfolios on each risk scale. 30

Notes: Performance is measured to 05/08/2021. All 4 Shires performance figures are net of management fees, VAT, stamp duty and commissions. Total return measures include dividends and income received. Time weighted return measures consider deposits and withdrawals to/from the portfolio. The performance for each risk scale includes every portfolio in that risk scale at that time. Disclaimer: The value of investments and the income you get from them may fall as well as rise, and there is no certainty that you will get back the amount of your original investment. You should also be aware that past performance may not be a reliable guide to future performance. 31

Important

Compliance Section In this section of the commentary, we would like to remind our clients and prospective clients of the following regulatory topics: Risk Disclaimer The value of investments and the income you get from them may fall as well as rise, and there is no certainty that you will get back the amount of your original investment. You should also be aware that past performance may not be a reliable guide to future performance. This document is not intended as investment advice.

Any security mentioned in this commentary is for information purposes only and is not a recommendation to buy. 4 Shires, its clients and its staff may own some of the investments that we mention in this report.

4 Shires Asset Management 01747 824600 info@4-shires.com www.4-shires.com

4 Shires Asset Management Limited is authorised and regulated by the Financial Conduct Authority (FR3N number 557959). Company number 7657527