Shares magazine 11 July 2024

STOCKS LEFT BEHIND IN THE AI SURGE

The names on the Nasdaq striving to play catch-up

06 Political stability in the UK is in stark contrast to uncertainty across the channel

Britvic set for stock market exit after agreeing £3.3 billion Carlsberg buyout

Paramount agrees $28 billion merger with Skydance Media

10 Can QinetiQ revive its US business and what is the outlook for defence spending in the UK?

on profitability as Netflix readies second-quarter

Markets react well to election results while US jobs figures go largely unnoticed

Three important things in this week’s magazine

1

Are there any bargains left in the Nasdaq?

As the technology-heavy index hits record high after record high, we look at some of the stocks which have been left behind including chipmakers and a former member of the ‘Magnificent Seven’.

2

Have high interest rates finally taken their toll on US consumers?

Having been the driving force behind not just the US bounceback from the pandemic but the global economy over the last four years, is consumer spending finally running out of steam?

Visit our website for more articles

Did you know that we publish daily news stories on our website as bonus content? These articles do not appear in the magazine so make sure you keep abreast of market activities by visiting our website on a regular basis.

Over the past week we’ve written a variety of news stories online that do not appear in this magazine, including:

3

Why cash ISAs are attracting record levels of savings

With no change to the personal allowance for the foreseeable future and attractive interest rates on offer it’s no wonder savers are piling into these tax-efficient products.

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Political stability in the UK is in stark contrast to uncertainty across the channel

The removal of political turbulence serves to highlight the cheapness of UK assets

Election worries have been front and centre for investors in recent weeks, from the increasing popularity of the right-wing RN (Rassemblement National) in France to the panic in the US Democratic Party after president Joe Biden’s disastrous political debate with Donald Trump.

By contrast, the UK election was a far less contentious affair with the pundits correctly forecasting a landslide Labour win.

While Labour’s circa 176 seat majority turned out to be in line with the polls, behind the headline numbers the victory appears to be more rejection of the Conservatives than outright support for Labour.

According to analysis by Berenberg, Labour’s victory was the lowest winning percentage for more than 100 years while the percentage of people voting was one of the lowest on record. Labour won 34% share of a roughly 60% turnout which means they won a landslide with around 20% of total potential votes.

From a market perspective the victory looks to be well received by investors with all the indices rising and mid-caps putting in a strong performance. A period of relative political stability should be positive for beatendown UK stocks.

Berenberg highlights potentially better relations with the EU and a reform of planning rules as positives for UK growth. Meanwhile the Bank of England is now unencumbered by politics meaning it can begin cutting interest rates as soon as August.

Domestic-slanted UK FTSE 250 index outperforms France's CAC 40 in recent months

Rebased to 100

Shares magazine • Source: LSEG

has promised to loosen planning rules and lift a ban on offshore wind in England. Berenberg is forecasting a 6% increase in housing starts every year between 2025 and the end of the decade.

Relative stability here in the UK contrasts with a complex picture on the continent after news of a hung parliament in France following the second round of voting on 7 July. French stocks reacted positively because the result was seen as a better outcome than an outright right-wing government. The fragmented political landscape means the left, right and centre parties will be seeking out common ground and potential coalitions. Economically, the picture is one of gridlock where extreme policies are likely to be watered down.

There is plenty of room for UK stocks to continue their recovery despite their modest re-rating, given how cheap UK stocks trade relative to the world. In her first speech as chancellor, Rachel Reeves

Portfolio manager Jamie Ross at Janus Henderson believes a ‘left’ coalition is more troublesome for markets given the risk of a rise in government spending and a worsening relationship with the EU.

A broad ‘grand’ coalition representing parties from the left and right is seen as the most favourable for markets. [MG]

Chart:

Britvic set for stock market exit after agreeing £3.3 billion Carlsberg buyout

UK soft drinks firm had been chased by Danish brewer all summer

UK

soft drinks maker

Britvic (BVIC) looks set to become the latest FTSE 250 mid-cap company to exit the London stock market after agreeing to an improved £3.3 billion offer tabled by Danish brewer Carlsberg (CARL-B:CPH) on 8 July.

The deal will see Britvic shareholders receive £12.90 in cash for each Britvic share, plus a 25p per share special dividend prior to the transaction going through.

The writing has been on the wall for Britvic as an independent company since confirming media speculation that Carlsberg had approached the Britvic board in June. The UK firm subsequently rejected two proposals from Carlsberg pitched at £12 and £12.50 per share, claiming that the offers ‘significantly’ undervalued Britvic ‘and its current and future prospects’.

grounds it was being significantly undervalued – but it is a fairly weighty premium to the undisturbed share price,’ said AJ Bell’s investment director Russ Mould.

At a combined £13.15 per share, the offer price represents a premium of roughly 36% to the Britvic share price before Carlsberg’s interest.

Carlsberg, known the world over for its advertising tagline, ‘Probably the best beer in the world’, had been expected to come back with a better offer after US giant PepsiCo (PEP:NASDAQ) agreed to waive the change of control clause in its bottling arrangements with Britvic, which has an exclusive licence with the US soft drinks-to-snacks giant to make and sell brands including Pepsi, 7UP and Lipton Ice Tea in the UK and Ireland.

The agreement needs 75% support from Britvic shareholders at a general meeting, with a date yet to be set.

‘It probably isn’t the best price tag in the world for Britvic – only around 3% more in headline terms than a second bid which Britvic rebuffed on the

Carlsberg’s acquisition of Britvic adds diversification to its portfolio as it reacts to a world in which younger age groups are less likely to indulge heavily in alcohol.

Carlsberg said in a separate announcement on the same day that it will buyout partner Marston’s (MARS) from the pair’s brewing joint venture. This was a significant development for Marston’s, allowing management to bring focus to a pubs estate which has struggled to fully recover in the wake of the pandemic and improve a balance sheet which was badly scarred by Covid lockdowns. The net proceeds of £202 million will allow for a significant debt paydown which accelerates the timeframe for achieving the group’s medium-term target of reducing net debt below £1 billion.

Effective net debt is reduced to around £959 million which is anticipated to save around £18 million in annual interest payments. [SF]

DISCLAIMER: Financial services company AJ Bell referenced in this article owns Shares magazine. The author of this article (Steven Frazer) and the editor (Tom Sieber) own shares in AJ Bell.

Paramount agrees $28 billion merger with Skydance Media

US media firm Paramount Global (PARA:NASDAQ) and Californianbased film and TV production company Skydance Media have finally agreed merger terms, opening a new chapter for one of Hollywood’s oldest studios.

The $28 billion Paramount-Skydance deal is the culmination of months of on-off talks which stalled on 11 June only to resume on 3 July.

Skydance is owned by David Ellison, the son of Larry Ellison who founded US technology giant Oracle (ORCL:NYSE)

Paramount shares reacted positively gaining over 2% to $11.81 in pre-market trading on 8 July.

The proposed agreed merger couldn’t have come at a better time for Paramount.

Not only did Paramount chief executive Bob Bakish leave the company in April after rumours of a merger circulated, but over the past year the shares have fallen by 27%.

Paramount’s global streaming service Paramount+ has also just announced price hikes from 20 August for new customers and 20 September for existing ones.

With just 63 million customers, Paramount+ trails behind other streaming platforms like Netflix (NFLX:NASDAQ), which has 247.2 million subscribers, and Amazon’s (AMZN:NASDAQ) Prime Video with 200 million subscribers.

The Skydance merger could improve Paramount’s chances of competing more effectively in streaming, combining the studio behind such classic films as Chinatown, The Godfather and Breakfast at Tiffany’s with its financial partner on several major recent films, including Top Gun: Maverick, Mission: Impossible-Dead Reckoning and Star Trek Into Darkness. Paramount also owns the television network CBS

and channels including MTV, Nickelodeon, and the UK’s Channel 5 with over 4.3 billion subscribers in more than 180 countries.

Under the terms of the agreement, Skydance will invest around $8 billion in Paramount including a $2.4 billion payment to National Amusements, Paramount’s controlling shareholder.

National Amusements, led by Shari Redstone, who is president and non-executive chairwoman of Paramount Global, holds nearly 80% of the voting shares in Paramount.

Common shareholders in Paramount will receive $15 a share, while those holding A shares will receive $23 a share.

The deal marks the end of an era for the Redstone family after the Paramount group was founded by Shari Redstone’s grandfather in 1936.

However, the deal is by no means done and dusted:

Paramount’s advisers have 45 days to entertain rival bids, while the tie-up is also subject to regulatory approval according to the Financial Times.

Other suitors for the business includes US private equity giant Apollo Global Management (APO:NYSE) and Japanese electronics-toentertainment firm Sony Group (6758:TYO). [SG]

Confident Supreme continues to deliver the (fast-moving consumer) goods

Year-to-date share price action shows investors growing confidence in the 88Vape brand owner’s prospects

Year-to-date, Supreme’s (SUP:AIM) shares have surged more than 60% to 173p on the back of forecast upgrades and positive strategic progress from the fast-moving consumer products supplier guided by entrepreneurial chief executive Sandy Chadha.

Record results (2 July) for the year to 31 March from the Manchesterbased vapes-to-batteries supplier met previously upgraded guidance, with adjusted pre-tax profit doubling to £30.7 million on total revenue up 42% to £221.2 million.

Growth was driven by new distribution deals, while sales were reassuringly ahead in all categories including vaping, lighting, batteries,

sports nutrition and wellness. Cash-generative Supreme, whose customers includew Tesco (TSCO), B&M European Value Retail (BME), Morrisons and Asda, recently added some fizz to its growth story through the £15 million acquisition of Clearly Drinks, the Perfectly Clear-toNorthumbria Spring owner which brings the complementary soft drinks category into the product portfolio. Despite completing seven acquisitions and returning £16 million-plus to investors over the past four years, the company is now bank debt free with the firepower for further earnings-enhancing acquisitions.

Supreme also delivered an

Victrex shares dip with second-half target under threat Supreme

Shares in high-performance plastics firm Victrex (VCT) have taken a turn for the worse over the past six months as the company struggles with high inventory levels and industry destocking in its medical business.

While secondquarter volumes have improved and full-year guidance has been maintained at low singledigit growth, achieving the firm’s target of a small increase in pre-tax profit in the second half compared with last year is looking increasingly difficult unless there is an improvement in trading.

‘At this stage, medical performance is tracking lower than our expectations for the second half year,’ said chief executive Jakob Sigurdsson in a trading update on 4 July.

Other issues for the polymer producer include the slow ramp-up of its new plant in China and a prolonged impact from lower asset utilisation, while adverse currency moves are also expected to take a bite out of second-half earnings.

Berenberg analyst Aron Ceccarelli said in a research note: ‘Although

upbeat outlook statement, with 2025 expected to be another profitable and highly cash-generative year and a positive start to the first quarter leaving the company trading ‘comfortably’ in line with consensus. Having announced numerous proactive measures to combat underage vaping, Supreme expects trading for its vaping and branded distribution divisions will be ‘largely unaffected’ by the UK government’s proposed disposable vape ban. [JC]

the recovery in some key endmarkets may have started, management’s track record of over-optimistic assumptions and questionable execution will continue to weigh on the shares for quite some time.’

Industry destocking presents challenges for plastics firm

RESULTS

16 July: Sosander

17 July: Renold FIRST-HALF RESULTS

16 July: Ocado, RM

TRADING UPDATES

16 July: Intermediate Capital Group, McBride

18 July: Dunelm, Diploma, SSE, QinetiQ

Can QinetiQ revive its US business and what is the outlook for defence spending in the UK?

Technology-focused defence outfit is all set to unveil its firstquarter update after strong full-year results

Tech-oriented defence firm QinetiQ (QQ.) is scheduled to report on its first-quarter performance on 18 July amid robust demand across the industry backed by global geopolitical tensions.

This was reflected in a strong set of results for the 12 months to 31 March – with revenue and earnings ahead of consensus, a record order intake of £1.74 billion and the company’s net debt materially lower. The

announcement was received positively by investors.

The big driver of growth is its EMEA Services business, while its Global Solutions arm has proven more of a laggard thanks to difficult market conditions in the US. These principally relate to the wrangling over the government budget in Washington.

Investors will likely be interested to note whether the passing of an $825 billion Department of Defense budget in March has already helped QinetiQ’s business across the Atlantic.

Formerly the Ministry of

Defence’s research arm, and believed to be the inspiration for James Bond's gadget-man Q, QinetiQ still earns a large chunk of its revenue from UK military spend.

It will be interesting to see in this context if management has any comment on the new Labour administration. Its manifesto pledge to conduct a strategic defence review within the first year of government and set out a path to spending 2.5% of GDP on defence is less definitive than the Conservative government’s previous commitment to get to 2.5% by 2030. [TS]

Focus on profitability as Netflix readies second-quarter earnings

Streaming service firm’s crackdown on password sharing and introduction of ad-supported tier has paid big dividends

Streaming firm Netflix (NFLX:NASDAQ) is set to announce its second-quarter earnings (18 July) with the shares having been buoyed year-to-date by continuing signs the company’s shift in strategy is working.

All the evidence to date suggests the company’s crackdown on password sharing has been a success alongside the introduction of a more affordable ad-supported tier.

It seems the hit Netflix takes on the up-front subscription fee is more than being compensated for by the incremental revenue from advertising. Thus, in the first quarter of 2024 average revenue per membership was up 1% year-onyear and around 4% adjusted for the impact of currency movements.

Given management has identified improving profitability as a key

priority, after years of spending heavily on content to establish its leading market position, margin performance is likely to be closely scrutinised by investors. Seasonal effects mean headline earnings and revenue are likely to be lower than for the first quarter.

One worry for the company and the wider industry is data suggesting there has been a deterioration in economic conditions in the US. This could hit consumers' willingness and capacity to stay signed up to streaming platforms in a key market. Eventually the growth kicker provided by the password-sharing crackdown and expansion of the adsupported subscription option will play out. This might be why Netflix is dipping its toe into other waters like live sport. [TS]

US UPDATES OVER THE NEXT 7 DAYS

QUARTERLY RESULTS

12 July: JP Morgan, Wells Fargo, Citigroup, Bank of New York Mellon 15 July: Goldman Sachs 16 July: UnitedHealth, Bank of America, Morgan Stanley, Charles Schwab, PNC Financial, State Street, Omnicom 18 July: Netflix, Abbott Labs, Marsh McLennan, Freeport-McMoran

Markets react well to election results while US jobs figures go largely unnoticed

With politics out of the way the focus shifts back to inflation and interest rates

With the UK general election playing out as expected last week the stock market responded positively, especially the more domesticallyfocused FTSE 250 mid-cap index which notched up a 2.5% gain over five days.

Interestingly, it wasn’t housebuilders which led the gains – despite much talk of Labour’s pledge to free up the planning system and build 300,000 new homes per year – but stocks which had lagged the most, in particular smaller financials such as abrdn (ABDN), Bridgepoint (BPT), Close Brothers (CBG), OSB Group (OSB) and TBC Bank (TBCG).

Macro diary 11 July to 18 July 2024

Across the Channel, investors’ fears of a hardright government were allayed as Marine Le Pen’s National Rally party came third in the polls behind the far-left New Popular Front and incumbent president Emmanuel Macron’s centre-left party.

Although the result suggests political deadlock, with no party able to form an outright majority, the positive news as far as markets are concerned is the fact the far-right vote was much lower than expected.

President Macron’s position is undoubtedly weakened, but the outcome doesn’t directly affect his role as he still has another three years of his term left which is another positive factor.

In terms of macro events, June’s US non-farm payroll report was something of a non-event for a change: although the figure came in above estimates at 206,000 jobs, given the significant downward revisions to the April and May numbers it is clear the Fed’s policy of keeping rates higher for longer is having an effect on the employment market.

Core consumer prices will be in focus this week and next week in the UK, Europe and the US, but the main area of interest looking ahead will be whether the ECB (European Central Bank) follows up on its June interest rate cut with another 0.25% reduction on 18 July. [IC]

Next Central Bank Meetings

Why Card Factory is a growth and income stock worth celebrating

The value-focused cards, gifts and calendars seller has scope for expansion and has returned to the dividend list

Card Factory (CARD) 98.9p

Market cap: £343.4 million

Seeking a cash-generative retailer with underappreciated growth prospects and a low equity valuation that suggests significant re-rating potential? Then look no further than Card Factory (CARD), the valuefocused greeting cards-to-party supplies seller with a modest share of a large TAM (total addressable market).

Given its average basket size is below a fiver and its average card price is just £1.21, Card Factory should continue to profit if cost-of-living pressures persist, while an improving consumer backdrop

Card Factory

driven by interest rate cuts should boost sales of its higher ticket gifting ranges. Having dramatically reduced debt, the £343.4 million cap can now return cash to shareholders through dividends and consider acquisitions to enhance growth.

Berenberg argues the recent reinstatement of the shareholder payout is ‘likely to broaden Card Factory’s appeal and provide a catalyst for expanded investor attention’.

CELEBRATING GROWTH

Over three years into CEO Darcy Willson-Rymer’s ‘Opening our New Future Strategy’, Wakefieldheadquartered Card Factory has become a much stronger business, both financially and operationally, and Willson-Rymer is targeting a rise in revenue to £650 million by the year to January 2027.

Card Factory is the UK’s leading specialist retailer of greetings cards, focusing on the value end of the market. Vertical integration enables the retailer to keep prices lower than peers, while expansion into gifting and celebrations has widened its TAM (total addressable market).

Management estimates there is a potential total TAM of £13.4 billion in the UK alone, which it refers to as the UK celebration occasions market,

A compelling growth and income story

Ratios based on 98.9p share price

Source: Berenberg, company accounts

comprised of a £1.4 billion greeting cards market, a £2 billion celebration essentials market and a £10 billion gift market. The growing focus on gifting and celebration essentials categories is helping to drive store like-for-like sales growth.

GREATER REACH & SCALE

Another bull point is Card Factory’s estate of 1,058 stores in the UK and Ireland, which provides greater reach and scale than that of competitors. Berenberg believes the estate is the group’s ‘deepest competitive moat’, as this network ‘creates a broader distribution platform than possessed by peers, and would be costly and difficult to replicate’.

Card Factory does have meaningful exposure to the structurally challenged UK high street, yet over 99% of its brick-and-mortar outlets are profitable, the quality of the estate is enhanced by an average lease length of just five years, and there is still white space to expand into, notably in central London and the Republic of Ireland.

The discounter also has opportunities in the under-exploited online channel through its cardfactory.co.uk and gettingpersonal.co.uk sites and is also expanding globally through its partnerships business. In the UK, Card Factory has partnered with retailers including Aldi and Matalan, whilst internationally, it has inked agreements with The Reject Shop in Australia and is also developing operations in the Middle East as well as South Africa, following its acquisition of SA Greetings last year.

CHEAPER THAN ONE OF ITS CARDS Bears will argue the decline of the UK greetings

card market poses a long-term threat to Card Factory’s growth and we acknowledge the company faces stiff competition from card specialists, online-only players and the major supermarkets and discounters.

However, we note that Pillarbox Designs, the privately owned parent of Cardzone, Hallmark UK and Clintons Cards, has conceded that Clintons stores are in a ‘worse state than expected’ with profitability not on the horizon until December 2025. This presents Card Factory with a giftwrapped opportunity to bag even more market share from one of its closest competitors.

At the full year results in April, Card Factory announced a welcome return to the dividend list, having reduced net debt by 40% to £34.4 million in the year to January 2024. For the year to January 2025, Berenberg forecasts a rise in pre-tax profit from £62 million to £69 million as sales tick up from £511 million to £552 million, ahead of taxable profits of £75 million on £591 million turnover in full year 2026.

Based on forecast earnings of 14.9p and a 4.66p dividend for this year, Card Factory’s shares trade on a single digit PE (price to earnings ratio) of just 6.6 and offer a 4.7% yield. A re-rating to just 10 times forward earnings, which seems achievable in the near term, implies a 149p share price, while Card Factory’s return to the dividend trail offers a catalyst for value and income investors to revisit the name.

Canaccord Genuity says: ‘Dividends have been reinstated and strong free cash flow generation will see leverage reduce further and the group move to net cash position, paving the way for additional shareholder returns over time.’ [JC]

Investors should buy US alcoholic drinks firm Constellation Brands

Constellation Brands (STZ:NYSE) $251

Market Cap: $45.9 billion

It’s unusual to find a high-quality company which consistently beats earnings expectations whose shares aren’t at least fairly valued if not overvalued.

It’s even more unusual when that gap between valuation and underlying performance involves a large, well-known consumer goods company.

Investors can be forgiven for missing out on small-cap opportunities, but we would expect them to be more on the ball when it comes to firms the size of Constellation Brands (STZ:NYSE).

With a market cap second only to Diageo (DGE) in the global alcoholic beverages sector, Rochester, New York-based Constellation is a producer of beer, wines and spirits and the biggest beer importer in the US.

It also has a stake in Canadian medical and recreational cannabis firm Canopy Growth, although it no longer allocates any capital to the business and is actively undoing its ties.

What we like about the company is its strong market position, the power of the brands it imports – mainly Corona, Modelo and Pacifico – and its ability to grow earnings by an average of more than 15% per year since the early 1990s, a feat which continually seems to catch the market by surprise.

Heading into last week’s first-quarter trading update, most Wall Street analysts were expecting the firm to miss earnings and guide down full-year forecasts.

Instead, the firm reported better-thananticipated beer volumes, which led to improved operational gearing, lifting operating profit and earnings per share

which came in at $3.57 against a consensus of $3.46 per share.

The company also raised its outlook for the year to the end of May 2025 rather than cuttings forecasts, sending analysts back to their cubbyholes to re-think their numbers.

‘Our beer business continued to achieve strong volume growth well above that of its category and total beverage alcohol,’ commented president and chief executive Bill Newlands.

‘This outstanding performance supported the second-largest dollar share gain within the broader beverage industry and reinforced our significant growth outperformance relative to the entire consumer packaged-goods sector.’

In the quarter to the end of May, the firm posted a 53% gross margin (sales minus cost of goods sold) and a 35% operating margin while return on invested capital was in the region of 15% on an annualised basis.

For this, investors are being asked to pay around 19 times this year’s earnings when the average valuation of the last three decades is more than 30 times and the shares have regularly traded at more than 50 times earnings. [IC]

Why you can ride the rally at Kitwave

The cash-generative food and drink wholesaler remains a compelling growth and income story

We highlighted food and drink wholesaler Kitwave (KTW:AIM) in March at 329p for its exciting market share opportunity and scope to deliver plenty of growth and income for investors in the years ahead.

Our view was the cash-generative company could sustain its positive trading momentum and serve up further earnings upgrades given its competitive advantages and robust acquisition pipeline in a highly fragmented UK grocery and foodservice wholesale market.

WHAT HAS HAPPENED SINCE WE SAID TO BUY?

After motoring to an all-time high of 406.5p at the start of May, the shares fell following a trading update (2 May) warning that operating profit for the half ended 30 April would be ‘slightly behind’ the prior year due to increased investment and after wet weather dampened demand from

hospitality customers of Kitwave’s higher margin Foodservice division.

The wholesale firm’s first-half results (2 July), which revealed a 14% adjusted pre-tax profit drop to £8.4 million as finance charges rose post acquisitions, triggered another share price dip. However, group revenue rose 8% to £297 million thanks to organic growth and recent acquisitions, cash generation proved reliably strong and management insisted the firm was on track to deliver in-line year-to-October 2024 results, albeit with an increased second-half weighting.

WHAT SHOULD INVESTORS DO NOW?

Kitwave’s shares have rallied since their temporary bout of weakness to leave our ‘buy’ call 3.3% to the good. While the increased second-half weighing means much has to go right in the balance of the year and is a risk to weigh, we remain bullish on this progressive dividend payer with a strong balance sheet.

The company remains well placed to drive further organic growth as it consolidates a fragmented wholesale market, while construction of the new Foodservice distribution site in the South West is nearing completion and will add capacity and yield further efficiencies.

Canaccord Genuity forecasts 13% growth in full-year 2024 revenues to £678.8 million and a 5% uplift in adjusted pre-tax profit to £29 million, rising to £710.1 million and £31 million respectively for full-year 2025.

Based on the broker’s 2025 forecasts for earnings per share of 32p and a 14p dividend, the shares remain cheap on a prospective price to earnings ratio of 10.6 with an attractive 4.1% yield. [JC]

Small World: a look at some of the lesser-known stocks and stories of the last month

There have been plenty of ups and downs in the small-cap universe of late

With Raspberry Pi (RPI) trading at a healthy premium to its IPO (initial public offer) price UK technology seems to be in the ascendancy, so it was pleasing to see computer product maker Concurrent Technologies (CNC:AIM) announce its largest-ever contract last month.

The firm, which makes mission-critical solutions for customers including the military, secured a contract to provide a major US defence and aerospace contractor with computer plug-incards for a Department of Defence programme to upgrade sensing equipment on a range of aircraft.

‘We had the right products available at the right time to satisfy the needs of our customer, enabling us to participate in this important upgrading of capability for the US Air Force,’ said chief executive Miles Adcock.

Not only is it the firm’s largest ever contract, it’s also its largest ever design win, and with an anticipated lifetime value in excess of $40 million it represents ‘a significant opportunity for the company with sizeable purchase orders expected for the next seven to 10 years’ explained Adcock.

WINEMAKER SEEKS INSPIRATION

The board of Chapel Down (CDGP:AIM) announced late last month it was weighing up funding options in order to put in new vineyards, a new purpose-built winery ready for the 2026 harvest and to develop of its ‘brand home’ at Tenterden in Kent.

Options range from the usual debt or equity raise to a potential sale of the business and the firm is now an ‘offer period’.

Major shareholders include well-known businessman, philanthropist and wine connoisseur Lord Michael Spencer, or ‘Spens’, who owns 26.7% of the company, and businessman and

© Chapel

Down Vineyard

entrepreneur Nigel Wray who has a 12.4% stake.

The business itself is on track to deliver doubledigit sales growth this year, with demand for its rosé English sparkling wine no doubt set to soar after it won ‘Best in Show’ at the latest Decanter World Wine Awards.

CHECKIT CHECKS OUT

It has been a busy few weeks for business software and solutions firm Checkit (CKT:AIM), starting with another attempt to take over rival Crimson Tide (TIDE:AIM) in an all-share deal.

Checkit had tried to engage with Crimson Tide several times in recent years, and on paper a deal makes sense – combining the two firms to create a scaled workflow software company would be more attractive to investors and could potentially result in a higher valuation.

However, its offer represented just a 12% premium, and although it upped its game with a revised bid it wasn’t the only player in town as Crimson Tide revealed it had received a significantly higher offer from Nottingham-based Ideagen, leaving Checkit to check out.

There was happier news in terms of its tax situation, with HMRC ruling it was entitled to input £1.2 million of VAT recovery from late 2019 to mid2022 meaning it no longer had to take a contingent liability.

Also, the firm announced a further 32-month contract worth £250,000 per year with an energy supplier who is an existing customer, with potential for more to come as the client firm rolls out more locations.

SHAREHOLDERS vs STAKEHOLDERS

After R&Q Insurance (RQIH:AIM) revealed at the beginning of March it was exploring ‘strategic options’ for both its Program Management business, Accredited, and its Legacy Insurance business, shareholders were probably hoping for a generous payday.

R&Q had lined up funds advised by Canadian private equity firm Onex Corporation (ONEX:TSE) as buyers for Accredited, but in mid-June Onex put forward an alternative proposal to a straight sale which involved the UK firm suspending its shares, filing for liquidation in Bermuda, selling Accredited and disposing of the remaining assets.

Remarkably, the board concluded the alternative proposal represented ‘the best option to secure value’ while at the same time admitting there was ‘little if any chance of any value accruing to shareholders’.

At the end of June, R&Q announced that following the appointment of liquidators Accredited had been sold to Onex for $420 million in cash, which would be used to ‘implement the separation of the business from the company’, pay down some of its secured revolving credit facility and ‘provide limited funding to help facilitate the orderly wind-down of its remaining legacy businesses’.

The board claimed once again this process provided ‘the best possible results for the company’s stakeholders’, which begs the question what are shareholders if not stakeholders?

GOODBYE AND GOOD NIGHT

Investors in bar group Nightcap (NGHT:AIM) must be asking themselves the same question after what might be described as a series of unfortunate events.

The firm announced a capital raise of up to £3.5 million in May and confirmed last month it had raised a total of £2.25 million, with some of the shares set to be admitted to AIM on or before 25 June.

Yet on 28 June the company proposed canceling the admission of its shares to trading on AIM and re-registering as a private company with new articles of association saying it was ‘in the best interests of the company and its shareholders as a whole’.

Later that same day, the company said dealing

begin on 1 July, but subject to approval at a general meeting convened for 17 July trading on AIM would be canceled on 29 July leaving a very narrow window for investors to climb through in order to salvage any value from their investment.

Money & Markets podcast

By

Conway Deputy Editor

Ian

Dirty Martini is part of Nightcap’s portfolio

Chart: Shares magazine • Source: LSEG

STOCKS LEFT BEHIND IN THE AI SURGE

The names on the Nasdaq striving to play catch-up

As US markets wound down ahead of the 4 July Independence Day holiday, the Nasdaq Composite closed at a new alltime high. A record 18,188.30 level was hit as investors shrugged off meek economic data and fed the technology rally that has run all year.

It was the 17th time the index had broken records in 2024, according to Nasdaq itself. The Nasdaq 100 Index of the 100 largest companies, joined the rally, ending its pre-holiday session (3 July) at 20,186.63, also an all-time high. It means that this year, the Nasdaq 100 has broken the 17,000, 18,000, 19,000 and 20,000 ceilings for the first time ever.

During that pre-holiday session, a service sector activity reading had come in considerably weaker than expected and indicated economic contraction, according to the Institute for Supply Management. The numbers could have sent shivers through equity indexes, yet investors put any worries to one

By Steven Frazer News Editor

side, upping the hope ante that the Federal Reserve has seen sufficient evidence of economic tightening to begin cutting interest rates. Notably, the rate on the 10-year US treasury fell for a second day in a row on 3 July.

‘It’s still very much a tech story’ in stocks, said Paul Nolte, senior wealth advisor and market strategist for Murphy & Sylvest. ‘When you look at the broader market, you’re not seeing the participation you would like to see from a healthier market,’ he told Reuters.

There is plenty of evidence. About 40% of the Nasdaq 100 stocks have already chalked up doubledigit gains this year, a mark of a good performance by historic standards, 21% are up more than 20%, while AI (artificial intelligence) chip darling Nvidia (NVDA:NASDAQ) and UK firm Arm Holdings’ (ARM:NASDAQ) have scorched 154% and 141% higher respectively.

But if there’s some irrational exuberance sweeping across Wall Street, it hasn’t trickled far downstream, with some surprising names listed among the Nasdaq 100 laggards. Tesla (TSLA:NASDAQ) for one.

‘Everybody hated Tesla three months ago. But now, they’re having their day in the sun,’ said Larry Tentarelli, chief technical strategist at the Blue Chip Daily Trend Report. Tesla’s rally sets ‘a bullish tone for the market overall’.

Wind back to the last week of June and Elon Musk’s electric vehicles (EVs) firm was one of the indexes worst performing stocks, down more than 26%. That its second-quarter deliveries beat has since triggered a recovery of all those losses and more, says something about where expectations had drifted.

Long-run Tesla backer Gary Black, who runs the US-based Future Fund, sees scope for Tesla to outstrip third-quarter deliveries estimates of 435,000, reversing the two-quarter downtrend, and he’s also been playing with some, albeit speculative Tesla assumptions around the launch of a $25,000 Tesla and fully automated driving technology. His conclusion; an expanded Tesla target market worth up to $5 trillion.

Then there’s Globalfoundries (GFS:NASDAQ)

and Intel (INTC:NASDAQ), two chip plays that have stubbornly resisted market optimism, down 35% and 8% this year. We know Intel has found it a long-run challenge to break out of its PCs backyard, although it has carved out market share in the cloud computing server space, just not at the most exciting end, unlike Super Micro Computer (SMCI:NASDAQ), say, with its liquid-cooled super servers.

As for Globalfoundries, it remains one of the world’s largest contract chip manufacturers, and as designers like Nvidia, Advanced Micro Devices (AMD:NASDAQ) and others seek to de-risk production, it should be able to pick up more than a few crumbs off TSMC’s (TSM:NYSE) table.

Walgreens Boots Alliance (WBA:NASDAQ) is another name that deserves a mention. Not a tech business at all, but it is still stuck at the foot of the Nasdaq 100 loser board, collapsing 55% this year.

This is odd. In theory, retail pharmacy should be a super-resilient business so why has been such an abysmal performer whose stock has lost 80% of their value over five years? Successive changes at the top have simply failed to revive its fortunes, and having been a vaccine winner during the pandemic, it has struggled to replace Covid vaccines demand and lower spending on personal care and beauty

Seven stocks make up nearly 46% of the index

Nasdaq Composite annual returns over the past two decades

*Market close 3 July 2024

Source: Statista, Google Finance

products as consumers wrestle with cost-of-living pressures.

A decision to cut the dividend by 48% alongside first quarter numbers at the start of the year (4 January) to conserve cash did little for sentiment. On 27 June, the company cut its full year 2024 earnings guidance alongside downbeat thirdquarter results in which new CEO Tim Wentworth warned of a ‘difficult operating environment, including persistent pressures on the US consumer and the impact of recent marketplace dynamics which have eroded pharmacy margins’. In yet another blow, Boots CEO Sebastian James is also quitting after Walgreens Boots Alliance shelved its plan to sell or float the robustly performing chain for the second time in two years.

IS THERE A BUBBLE?

To the bubble hunters, signs of excess aren’t hard to find. Nvidia’s surge comes after a near-240% 2023 rally, 17% of the best-performing S&P 500 companies can be classified as tech, emphasising a rally that seems driven by a narrow set of stocks. The S&P 500 provides interesting data points given its membership are drawn from all walks of stock market life. The S&P Equal Weighted Index

is up less than 4% in 2024 versus 17.4% for the weighted equivalent. Throw in the AI everything up trade, that cryptocurrencies have roared back, inflation monsters could be stirring again, and US consumers showing signs of exhaustion, there’s plenty for the Cassandra’s to decry.

If tech goes pop, where does that leave markets, globally? The S&P 500 Shiller CAPE (cyclically adjusted price to earnings) stands at 35 right now.

Nasdaq 100 winners versus losers 2024

Triple-digit gains (2%)

Single-digit gains (20%) Double-digit losses (24%) Single-digit losses (17%)

It’s only been this high twice before, during the pandemic recovery rally in 2021, and in the teeth of the dot com bubble in 1999/2000.

Yet, talk of bubbles seem premature and there is a sense that even the fastest sprinting AI stock stories are backed by real earnings and cash flows that may be getting stronger. ‘I’ve seen a lot of technology hype in my 20-plus years,’ says Mike Seidenberg, who runs the Allianz Technology Trust (ATT), a popular technology specialist fund among UK retail investors.

He believes that AI is not hype, but a ‘secular’ theme capable of creating ‘budgetary dollars for the beneficiaries’, even if revenue and profits is likely to ‘zig and zag’ depending on the varied pace of implementation cycles. Jean Boivin, head of the BlackRock Investment Institute, agrees. ‘The AI rally is supported by earnings and has more room to run, in our view,’ he says. ‘We don’t see an AI bubble.’

CONTINUED RALLY AND RECOVERY?

No one knows if or for how long this year’s market rally will continue, but as early hints from the upcoming second-quarter earnings season begin to emerge, indications point to a robust performance for S&P 500 and many Nasdaq companies.

Projections data from Investing.com for the second quarter of 2024 suggest earnings increase of 8.6% compared to the same period in last year, with revenues also expected to rise by an average 4.7%. ‘This anticipated growth rate is the most significant

Double-digit gains (37%)

HOW TO PLAY CATCH-UP CANDIDATES IN THE NASDAQ 100

INVESTORS EXPECTING GAINS from the Nasdaq 100 to be more broad-based in the future and looking to maintain exposure while not being too tied to a handful of stocks which have already enjoyed stonking gains could consider buying a vehicle which tracks an equal-weight version of the Nasdaq 100 index. As a reminder this means the movements of individual constituents are all equally weighted rather than those with the largest market caps having the biggest influence on the direction of the index. Exchange-traded fund Invesco Nasdaq 100 (EWQX) provides the ability to do this for an ongoing charge of 0.2%.

Nasdaq 100 – selected laggards

since the 9.9% uptick observed in the first quarter of 2022’, the report says.

‘The positive revisions trend leading up to this earnings cycle has set the stage for what appears to be a period of continued corporate resilience and an improving financial outlook’, the report goes on. The forecast earnings growth for the S&P 500 not only reflects a solid recovery but also marks a potential shift in momentum for the market, one that may include stocks that have so far failed to benefit from the fair winds this year.

That would be encouraging. But more important for retail investors is to remember to invest across

the cycle rather than trying to time the market, something most of us fail at most of the time. Second-quarter earnings kick-off, as ever, with the banks on 12 July, when JPMorgan Chase (JPM:NYSE), Wells Fargo (WFC:NYSE), and Citigroup (C:NYSE) are scheduled to report. Big tech reports start the following week, with Nasdaq 100 mega caps including Microsoft (MSFT:NASDAQ), Alphabet (GOOG:NASDAQ), Amazon (AMZN:NASDAQ), Apple (AAPL:NASDAQ) and Tesla the week beginning 22 July.

Disclaimer: The author of this article Steven Frazer has a holding in Allianz Technology Trust.

Table: Shares magazine • Source: SharePad, data to 3 July 2024

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Is the US consumer finally tapped out?

The long-feared deceleration in consumer spending across the pond looks to have arrived

Consumer confidence in the US eased in June as shoppers stateside fretted over the economic outlook, with The Conference Board’s consumer confidence index dipping to 100.4 from a downwardly revised 101.3 in May.

This downbeat reading (25 June) came hot on the heels of news retail sales (18 June) across the pond barely rose in May, creeping 0.1% higher month-on-month to $703.1 billion.

That was below the 0.2% increase the market was looking for and confirmed that the American consumer, and the low-income shopper in particular, is finally buckling under the strain of sticky inflation and high interest rates.

WHY THE US CONSUMER MATTERS

This spending fatigue is worrying given the importance of the US consumer to the world’s biggest economy and its ability to move markets. The American consumer has proved surprisingly resilient in recent years, powering GDP (gross domestic spending) higher in the world’s biggest economy with the staying power of its spending confounding predictions that households would be squeezed by inflation.

But with inflation proving sticky, Covid stimulus

cheques spent and pandemic savings run down, an array of household name companies ranging from burgers-and-shakes seller McDonald’s (MCD:NYSE) to extreme discounter Five Below (FIVE:NASDAQ) have warned customers are now closing their wallets.

Price hikes from global restaurant chains have tested the loyalty of customers and recently, coffeehouse colossus Starbucks (SBUX:NASDAQ) joined McDonald’s and other chains in pushing promotional deals to win back inflation-weary customers.

WHAT ARE RETAILERS SAYING?

While this long-anticipated consumer spending slowdown raises the likelihood the Federal Reserve will cut interest rates, it suggests the near-term outlook for US retailers is anything but rosy. Retailers are cutting prices in order to hang on to cost-conscious shoppers, which is impacting their margins, and if this subdued consumer demand persists, it will depress sales and could leave them with bloated inventories.

US consumer bellwether Walmart’s (WMT:NYSE) first-quarter figures (16 May) beat on both the top and bottom lines, underscoring the resilience of the Arkanas-based retail giant, which looks better placed than most to weather the storm. Of great

US retail sales and food services

‘positive comparable sales from our higher income customers; however, the macro environment disproportionately impacted our core lower income customers, resulting in overall comparable sales declines.’

The squeeze on spending is also revealing itself in other sub-sectors of retail. On 27 June, Walgreens Boots Alliance (WBA:NASDAQ) CEO Tim Wentworth said his charge continues to face ‘a difficult operating environment, including persistent pressures on the US consumer and the impact of recent marketplace dynamics which have eroded pharmacy margins’, while consumers are

significance was the fact the discounter called out market share gains with high-income shoppers who are now flocking to Walmart for its convenience and everyday low prices. In contrast Brian Cornell, CEO of discounter Target (TGT:NYSE) recently bemoaned ‘continued soft trends in discretionary categories’ as low-income shoppers, who are disproportionately impacted by inflation, hunker down and prioritise spending on essentials such as groceries.

Walmart’s smaller competitor Kroger’s (KR:NYSE) forecast-beating first quarter earnings (20 June) were supported by robust demand for the Cincinnati-based retailer’s cut-price groceries as cash-strapped consumers grappled with sticky inflation. Kroger CEO Rodney McMullen stressed his charge is ‘delivering exceptional value at a time when many customers need it more than ever, by providing affordable prices with personalized promotions’.

Discounters should be mopping up market share in this environment as inflation-weary shoppers trade down in their quest for value, but high inflation, elevated interest rates and high prices at the pumps are taking their toll on a low-end consumer who is pulling back in the face of higher costs.

This trend was starkly illustrated by a disappointing first-quarter update (5 June) from value stores operator Five Below (FIVE:NASDAQ), whose comparable sales were down 2.3% yearon-year for the quarter ended 4 May 2024. CEO Joel Anderson explained that Five Below saw

WALMART HAS MANY WAYS TO WIN Walmart (WMT:NYSE) $68.07 Market cap: $547.5 billion

Investors seeking a market share momentum stock should stump up for Walmart (WMT:NYSE), whose forward price-to-earnings ratio approaching 30 times discounts the strong sales gains anticipated in the years ahead. The world’s largest retailer’s value offering resonates with price-conscious shoppers, while upper income consumers are also trading down to Walmart, warming to its competitively priced groceries and the convenience of the one-stop shopping the $547.5 billion cap offers. Walmart beat top and bottom line estimates with its first quarter results (16 May), which showed 3.8% same-store sales growth and 22% e-commerce growth in the US business. Chief financial officer John Rainey called out ‘higher engagement across income cohorts with upper-income households continuing to account for the majority of the share gains’, although with inflation proving sticky, customers are prioritising spending on essential groceries over discretionary general merchandise.

even cutting back on athletic apparel and musthave sneakers, with fourth quarter revenues in North America, Nike’s (NKE:NYSE) biggest market, coming in shy of market expectations at $5.28 billion.

The sportswear giant’s slowing growth and warning (27 June) on the outlook for the current financial year reinforced investors’ concerns about the sneaker giant, whose shares are down 30% year-to-date. Meanwhile, shares in joggers-to-tank tops seller Lululemon (LULU:NASDAQ) have slid 40% lower year-to-date reflecting worries that demand for its pricey leggings is plateauing across the pond.

WHAT THE RESTAURANTS ARE SAYING

Investors looking for signs that the US consumer is buckling after two years of high inflation need look no further than fast food giant McDonald’s, which missed first quarter earnings (30 April) for the first time in two years.

CEO Chris Kempczinski described consumers as ‘even more discriminating’ as they faced elevated prices in day-to-day spending, forcing them to cut back on going out for dinner.

Finance chief Ian Borden reinforced the idea that everybody is fighting for fewer customers who are visiting the stores less frequently. McDonald’s same store sales in the US were flat in the quarter, while the company’s international markets were even weaker.

In response the company is pulling out all the stops by reintroducing its value meal to lure penny-pinched customers back to the Golden

THE FUND MANAGER’S VIEW

Jon Brachle, one of three managers on investment trust JPMorgan US Smaller Companies (JUSC), tells Shares: ‘When it comes to US consumer spending, we’ve observed that high-income individuals have remained more resilient, while those in low to middle-income wage brackets have cut back, especially on discretionary items. For instance, burger chains in the US have reported a drop in consumption from customers earning less than $75,000 a year. Generally, we’ve seen that more expensive non-essential spending, like leisure goods and cosmetic dental procedures, have decreased, particularly among those who need credit or financing to support such purchases.’

However, Brachle sees some positive signs.

‘Despite the slowdown, job growth has been solid, and real wages have increased over the past year. Looking ahead, we expect spending among low to middle-income consumers to remain under pressure in the short-term, while high-income spending may also soften slightly.’

Arches. President of the US business Joe Erlinger told Bloomberg, ‘We are committed to winning the value war’. The new $5 meal deal consists of a cheeseburger, small fries, four-piece chicken nuggets, and a small soft drink.

News of the promotion provoked an immediate response from competitors with arch rival Burger King, part of the Restaurant Brands International (QSR:NYSE) group, pledging to roll out its own $5 meal deal before McDonald’s.

Wendy’s (WEN:NASDAQ) has launched a $3 breakfast as the firm took to social media to mock competitors’ ‘copycat’ ideas. Even relatively pricey Starbucks (SBUX;NASDAQ) couldn’t resist getting in on the action and launched its own $6 combo coffee and sandwich deal.

McDonald’s argues its sheer scale means the incremental cost of adding fries and a drink is minimal. Not all franchisees agree, with one independent group telling its members there isn’t enough profit in the meal deal to make it sustainable. Franchisees operate around 95% of US stores.

A new name to emerge in the casual dining space is Mediterranean restaurant chain Cava (CAVA:NYSE) which listed on the New York Stock Exchange in June 2023 at $22 per share.

It has become one of the hottest IPOs (initial public offerings) in the last year with the shares soaring to around $92 equating a three-fold return for investors. The valuation of the business has gone stratospheric. A market capitalisation of $10.4 billion implies a $33 million value on each of the firm’s 323 restaurants, equivalent to around 10-times revenue.

(WING:NASDAQ) is valued at around $6 million per restaurant.

The company reported first quarter revenue up 30.3% to $256.3 million driven by 86 new store openings and same stores growth of 2.3%.

For comparison, the popular Chipotle Mexican Gill (CMG:NYSE) is valued at $3 million per restaurant and fast growing Wingstop

The meal deal initiative is as much about reestablishing McDonald’s hard-earned reputation for affordability as it is about luring back consumers. Its reputation has taken a hit in the last couple of years as franchisees hiked prices by an average of 40% to offset higher costs.

Consumers have taken to social media to express concern over the high cost of fast food. Images of a $18 Big Mac combo meal in Connecticut went viral amid claims the cost of a burger has doubled in recent times.

Erlinger insists the example is an anomaly found at just one of its more than 13,700 nationwide locations. Although he concedes the brand has lost some of its relative superiority on affordability. That McDonald’s has an image problem on price affordability speaks volumes about the state of the US consumer.

Rival burger joint Burger King is undergoing a multi-year turnaround and remodelling of its US estate which saw three major Burger King operators filing for bankruptcy in 2023 and several underperforming locations closed.

The company has invested $400 million on marketing to revive the brand in a campaign called ‘Reclaim the Flame’ and is in the process of buying out Carrols Restaurant Group which runs around one in seven of the chain’s 6,800 US sites.

The plan appears to be having the desired

The group turned a net profit of $14 million compared with a $2.1 million loss in the same period in 2023.

At the restaurant level net profit was $64.6 million, equivalent to a margin on sales of 25.2%. The fastgrowing group expects to open 50 to 54 new stores in fiscal 2024, generate same store growth of 4.5% to 6.5% and achieve restaurant level margins between 23.7% and 24.3%. Management has a long-term goal of operating 1,000 restaurants by 2032.

effect with the company reporting 4.6% first quarter same store sales growth, ahead of Wall Street expectations as the revival in demand was accompanied by strength as its Tim Hortons coffee outlets.

Pizza franchiser Domino’s Pizza (DPZ:NYSE) also topped analyst estimates for same store sales which increased 5.6% in the quarter. The company is reaping the rewards from changes it made to its loyalty programme which now enables members to earn points from lower-priced orders and redeem them earlier.

CEO Russell Weiner says: ‘Reducing the purchase from $10 to $5, well, all of a sudden, it’s a more compelling program for carryout customers and just customers who don’t want to spend a lot of money’.

The chain has started selling pizzas through Uber Eats with 1.4% of sales coming though that third party channel. Another casualty of low-income consumers cutting back is Yum Brands (YUM:NYSE) which operates the KFC, Pizza Hut and Taco Bell brands. Same store sales declined 2% at KFC while Pizza Hut saw a 7% decline in first-quarter sales.

By James Crux and Martin Gamble

MARKET GOES CAVA CRAZY

How do ISAs stack up against pensions as investment vehicles

Both offer tax efficiency, but one might be better than the other depending on your financial goals

There are two main vehicles for protecting returns from your investments and savings from HMRC: ISAs and pensions.

In this article we go back to basics and discuss how these two, sometimes referred to as tax wrappers, can be used by savers and investors and consider the advantages and disadvantages of having an ISA and pension.

WHAT IS AN ISA?

An ISA or individual savings account allows you to save and invest in money in a tax efficient way.

There are four main types of ISAs:

1. Cash ISA

This is a cash only savings account based on a fixed or variable rate.

2. Investment ISA

This is also known as a stocks and shares ISA.

An investor can hold a wide range of assets in this account from funds, shares, cash, gilts, bonds, ETFs (exchange traded funds) and ETCs (exchange traded commodities).

3. Innovative Finance ISA

This type of ISA allows an investor to lend their

tax-free ISA allowance to borrowers through P2P (peer-to-peer) lending platforms.

4. Lifetime ISA

A Lifetime ISA benefits from a 25% bonus from the government.

It is designed specifically for people aged (18-39) who are saving for their first home or retirement.

If you withdraw money before the age of 60 (unless it is to fund the purchase of a first home or you are terminally ill with less than 12 months to live) you’ll pay a government withdrawal charge of 25%. You can no longer pay into a Lifetime ISA once you reach 50.

WHAT ABOUT PENSIONS?

A pension is one of the most tax efficient ways to save for your retirement as you can get tax relief on the cash you put in.

You can pay money into a pension and receive tax relief up to the value of your earnings, capped at £60,000 every tax year.

There are several types of pensions from the state pension (which is provided by the government and is based on your national insurance contributions and paid to you once you reach state pension age) to a workplace

pension which is established by an employer for its employees.

There are two main types of workplace pension:

1. Defined benefit

The amount you receive at retirement in a defined benefit scheme is determined by the final salary you received from your employer and the length of service.

2. Defined contribution

The income at retirement depends on the amount of money generated by contributions, both from employer and employee, tax relief and investment returns.

3. SIPP (self-invested personal pension)

A SIPP is a personal pension where you can choose the investments you invest in for example, shares, investment trusts, funds and exchange-traded funds.

WHAT ARE THE MAIN DIFFERENCES?

The main difference between an ISA and a pension is one of access. The money you put into a pension is locked away until you turn 55 – this age increases to 57 from 2028.

In contrast a person can access the cash in an ISA whenever they want and not wait until 55. Another difference is how they are taxed. A pension has a more generous tax benefit on contributions – you don’t pay tax on the cash you put into a pension; however, you pay tax on what you withdraw when you retire; an ISA has the advantage of providing tax-free access to your cash.

Both pensions and ISAs are, however, free from CGT (capital gains tax) and tax on UK dividends.

OTHER CONSIDERATIONS

One of the main advantages of an ISA is that you have tax-free access to your cash sooner than if it was in a pension.

However, if you are saving your cash through a Lifetime ISA for buying your first home, or fixedterm cash ISA you won’t be able to have access until the fixed time-limit expires. It might be five years for a five-year fixed rate ISA and in the case of a Lifetime ISA if you withdraw the money for any other purpose then buying your first home or for retirement after the age of 60, you’ll face a 25% penalty on the amount withdrawn.

There is also an annual limit of £4,000 on contributions to a Lifetime ISA, savers might find the cap restrictive if they want to save more than this amount.

One of the main benefits of having a personal pension is the tax relief and IHT (inheritance tax) friendly nature (a pension typically sits outside of a person’s estate for IHT purposes). If you use a SIPP. you are also in control of where your money is being invested.

You can look after your SIPP online and transfer other pensions (depending on their type) into your SIPP to consolidate your retirement fund. Some (but not all) employers may contribute to your SIPP instead of a workplace pension.

LIMITS AND ALLOWANCES

The total amount you can save in ISAs within the current tax year is £20,000. This encompasses the amount you can allocate across all types of ISAs, including stocks and shares ISA, cash ISA, Lifetime ISA (up to £4,000 which counts towards the £20,000 limit) and innovative finance ISA.

You can also take advantage of the £9,000 limit when you save for child using a Junior ISA.

ISA SIPP

Contribution limits

£20,000

Tax relief on contributions No

Allowable investments

Can capital be withdrawn at any time?

In general: shares, bonds, funds, investment trusts, ETFs (exchange traded funds), overseas stocks

Yes (except Lifetime ISA)

Is income taken from the plan taxed? No

Account transferable between providers?

Tax treatment on death

Yes

Subject to inheritance tax

Table: Shares magazine • Source: HMRC

£3,600 or 100% of earnings, whichever is greater, up to maximum £60,000 a year

You receive basic rate tax relief of 20% for all SIPP contributions up to your annual allowance (the lower of your annual income of £60,000). If you're a higher rate taxpayer you can claim an extra 20% on your tax return, and additional rate taxpayers an extra 25%.

In general: shares, bonds, funds, investment trusts, ETFs (exchange traded funds), overseas stocks

No – maximum 25% lump sum, from age 55 (this is due to rise to 57 from 2028)

Yes

Yes

A SIPP is not subject to inheritance tax (IHT), but your beneficiaries may have to pay income tax when withdrawing an inherited SIPP if you die after the age of 75.

If you die before the age of 75, they can withdraw it taxfree.

Features Stocks & Shares ISA SIPP

As discussed, an annual allowance limits the amount someone can pay into pension schemes and still be eligible for tax relief. It is £60,000 in 2024/25. You cannot usually receive tax relief on pension contributions of more than 100% of your earnings unless the contributions amount to £3,600 or less.

The annual allowance is reduced for higher earners. It is reduced by £1 for every £2 someone earns over £260,000 (including pension contributions). Tapering stops when the annual allowance reaches £10,000.

A person cannot usually receive tax relief on

Using a Lifetime ISA to get on the property ladder

James and Clare are 23 and 24 years old and recently married. They want to get on the property ladder in London after renting for several years. They have decided Clare will save the maximum amount of cash she can per month within the Lifetime ISA limit of £4,000 a year, while James takes care of other outgoings. This works out at £333 per month which they plan to invest over a 10-year timeframe.

They have begun their decade long journey by opening a Lifetime ISA account with an investment platform, initially investing in one-stop-shop fund which invests in a range of asset classes to achieve a relatively conservative 5% return.

If they save the £333 per month over their designated 10-year horizon, rough calculations suggest they would be sitting on a healthy deposit total of more than £50,000 assuming they achieved the 5% return and not including charges.

Education: ISAs versus pensions

pension contributions worth more than 100% of their annual earnings. However, people can still contribute £3,600 a year into a pension with tax relief even if they earn less than this.

You can usually take up to 25% of the amount built up in any pension as a tax-free lump sum from the age of 55 onwards (increasing to 57 from 6 April 2028). The most you can take is £268,275.

By Sabuhi Gard Investment Writer

Employing a SIPP to boost retirement income

Beryl is in her early 50s and is keen to maximise her pension contributions to fund a comfortable retirement.

Beryl already has several small workplace pensions she has accrued in her career in marketing totalling £100,000. She is looking to transfer this sum to a SIPP and make ongoing contributions of £750 per month.

She is confident in making her own investment decisions, hence her decision to go down the SIPP route. Given she doesn’t plan to retire for more than 10 years she invests in several exchange-traded funds which offer exposure to a mix of stocks, bonds, property and infrastructure.

ISAS AND PENSIONS IN ACTION

What do Biden’s blunders mean for US bonds?

Do current treasury yields offer an attractive risk-adjusted return?

The debate over the mental acuity of Joseph R. Biden and his physical readiness to take on a second, four-year term as American’s forty-sixth president at the age of 82 (as he will be this November) is unlikely to abate any time soon.

The Democratic Party has until its convention in Chicago, scheduled for 19-22 August, to decide what it wants to do, if anything. However, US financial markets are not waiting to find out. Investors are drawing their own conclusions, assessing opinion polls and pricing in an increased chance of a return to office for Donald J. Trump, matching the achievement of Grover Cleveland, a Democrat and the only US president to lose office (in 1888) and then win it back (in 1892).

This can be seen most clearly in how the US 10year treasury yield responded to the presidential debate hosted by CNN on 27 June. The benchmark US government bond saw prices fall and yields rise sharply in response to the broadcast as fixed income investors began to anticipate a Trump win and the inflation they feared that would bring.

This leaves investors with a predilection for US sovereign bonds with a dilemma. On one hand, they may want to lock in the positive real yields on offer, especially if they think the US Federal Reserve

US 10-year treasury yield jumped after the first Presidential debate

Source:

will start to cut interest rates in the autumn of this year – the 10-year yield currently exceeds the prevailing rate of US consumer price inflation by one full percentage point.

On the other, they will be wary of a reignition of inflation which could erode the value of their carefully-harvested coupons or even erase it altogether if it moves above the 10-year yield on a sustained basis.

TRUMPIAN TREBLE

Bond markets are looking at the race to the White House with added concern, given how three of Trump’s key policy thrusts, as outlined in the first presidential debate, all feel inflationary:

• An extension of 2017’s tax cuts, and promises of more to come (thus boosting consumer spending).

US 10-year treasuries currently offer a positive real (post-inflation) yield

Immigration has helped boost the US labour force and cool wage growth

• More tariffs on imported goods, not just from China (thus making imports more expensive).

• Cutting immigration (thus limiting the growth in the pool of workers which has helped keep US wage inflation below the levels seen in the UK, for example).

The tax cuts have a further knockon effect on the yield on US treasuries. America is already running an annual deficit equal to around 6% of GDP (gross domestic product) and an aggregate deficit which exceeds 100% of GDP (numbers that, until recently, would have made any tin-pot republic blush with shame).

YIELD TO PRESSURE

All of this begs the question of what an appropriate level for US 10-year yields might be. The base case is the 2% inflation target. An investor may then wish to add some term premium to that, since the headline rate is stuck near 3%, thanks to strong services inflation, and is no lower than a year ago, suggesting it may take time to return to target.

Then there remains the incipient inflation risk offered by both presidential candidates.

Then there is America’s massive deficit, which could both pressure the Fed to cut rates to keep the Federal interest bill manageable (since it is now running at $1 trillion a year) and oblige the US to offer tempting yields so it can find buyers for its newlyissued debt.

None of that suggests a benchmark yield on 10-year treasuries of anything lower than 4%, which is not much below the 4.43% on offer at the time of writing. Capital upside may therefore be limited, so investors have to decide whether the coupon is enough to compensate for inflation risk if US treasuries are to form a part of a balanced, diversified portfolio.

Trump’s proposed tax cuts would take both higher, and that assumes a benign economic environment – remember, America is racking up this enormous annual deficit when unemployment is barely 4% and the economy is growing.

Heaven knows what would happen if a soft (or hard) landing were to transpire and tax income receded just as welfare payments started to rise, although it seems fair to assume the annual deficit would balloon.

America would need to issue more debt (treasuries) to fund itself and it seems logical to assume it would need to offer plump yields to tempt in buyers.

This is not to say the Biden is promising hairshirt austerity. His first term will see America rack up an additional $7 trillion or so in borrowing (and it took from 1776 to 2003 for the US to run up an aggregate $7 trillion deficit, to give some perspective on the current rate of overspend).

America’s federal deficit is already rising rapidly

Source: LSEG Datastream data, FRED- US Federal Reserve database, Congressional Budget Office

By Russ Mould AJ Bell Investment Director

Source: FRED – St. Louis Federal Reserve database

Why people are flocking to ISAs

The factors behind the increased popularity of the tax-efficient savings and investment vehicle

Tax-efficient ISAs have never been more popular, with £4.2 billion being saved in cash ISAs in May – a record for the month. We saw £12.3 billion saved into cash ISAs in April, at the end of the tax-year end, as people rushed to use their annual limit before it was refreshed on April 6th. But this early-bird ISA activity continued in May, with people moving money into a cash ISA at the biggest scale on record.

data, but now it averages 2.72%. This means that more people will be hitting their Personal Savings Allowance.

But why are people using ISAs and why has there been such an uptick? We’ll look at a few reasons.

UK Bank of England base rate

HIGHER INTEREST RATES

People are now getting more interest on their savings than they have for years, thanks to an increase in the Bank of England Base Rate. For example, two years ago the average easy-access cash ISA rate was just 0.68%, according to BoE

The personal savings allowance gives most people a tax-free limit for the interest they can earn on their savings before they’re taxed. It currently stands at £1,000 for basic-rate taxpayers and £500 for higherrate taxpayers. Additional rate taxpayers get no taxfree allowance. Once you earn more interest than the limit you’ll pay tax on it at your income tax rate. The introduction of the personal savings allowance meant that the majority of people didn’t need to use an ISA as their savings were protected from tax, because interest rates were so low. Because rates are higher people are now breaching their personal savings allowance, meaning they are shifting to an ISA to protect the money from tax.

FROZEN TAX BANDS

The Conservative government froze tax bands in 2021/22 and that freeze looks set to remain in place until 2028. It means that as people get pay rises their wages are pushed into the next tax bracket. At the same time the additional rate threshold has been cut from £150,000 to £125,140 dragging more people into the highest rate of tax.

While this has an impact on people’s tax bills, it also has an impact on their personal savings allowance. Once someone moves into the higher rate bracket, they see their personal savings allowance cut from £1,000 to £500, and once they hit the additional rate threshold, they lose it

Average savings rates

Averages based on £10,000 gross rate. Average rates shown are as at the first available day of the month, unless stated otherwise. Chart: Shares magazine • Source: Source: Moneyfacts

altogether. More people are moving up tax brackets and so seeing a cut to their tax-free limits, meaning they are shifting their savings to an ISA to protect it from tax.

CUTS TO DIVIDEND AND CAPITAL GAINS TAX

While the Bank of England figures focus on cash ISAs, we know that people have also been moving their money into investment ISAs to protect it from tax. The dividend tax allowance has been slashed in recent years from £2,000 to £500, while the capital gains tax allowance has been cut from £12,300 down to £3,000. It means that people who breach these limits face a higher tax bill – and gives a bigger incentive to move money into an ISA.

Many investors do this through a Bed and ISA transaction, which is the process of an investment being sold in a dealing account and then purchased in an ISA so it’s protected from future tax. On AJ Bell last March and April we saw bed and ISA transactions more than double, while this year in April alone we saw a 17% annual increase in the number of transactions carried out.

ISA CASH RATES HAVE RISEN

In recent years savers who have opted for a cash ISA account have often had to accept a lower interest rate to do so. Often ISA rates were lower than traditional savings account, whether you were fixing or opting for easy access. However, ISA rates now appear to have risen.

Based on Moneyfacts data the average easyaccess ISA rate was higher than the non-ISA version across the past three years (see chart above). This means that people don’t have to compromise on rates to select an ISA, removing one of the barriers to using an ISA account.

DISCLAIMER:

Financial services firm AJ Bell, referenced in this article, owns Shares Magazine. The author (Laura Suter) and editor (Tom Sieber) own shares in AJ Bell.

By Laura Suter AJ Bell Head of Personal Finance

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It could be now or never if the Fed wants to cut rates before the election

The presidential election could constrain the central bank amid signs the US economy is on the turn

The recent presidential debate brought the US election into focus and the November poll is now looming large in investors’ consciousness.

A knock-on effect of the timing of the election is the US Federal Reserve is running out of room if it is going to cut interest rates before doing so would be considered too political.

Based on the scheduled meetings of the Fed’s interest-rate setting Federal Open Market Committee, the summit which concludes on 31 July might be its last chance. Investors are pricing in a rate cut in September but it doesn’t seem too much of a stretch to suggest this could be too close to the poll for comfort.

The market has taken the scaling back of rate cut expectations surprisingly well. However, if the ultimate scenario is rates are, at best, cut once in December, then it could spark some concern and disappointment, particularly as there are signs the US economy has taken a turn for the worse and tightness in the jobs market has eased.

FOMC

THIS YEAR 30-31 July 17-18 September 6-7 November 17-18 December

As we discuss in this week’s feature on the US consumer, their spending power seems close to being exhausted. And, while the headline non-farm payrolls number came in ahead of expectations at 206,000 versus the consensus estimate of 190,000, unemployment ticked above 4% and average hourly earnings were up 0.3%, the smallest increase since the second quarter of 2021.

Readings on non-farm payrolls for the prior two months were revised down by a combined 111,000 which means the three-month moving average for total payrolls growth fell from 212,000 to 177,000 and from 178,000 to 146,000 within the private sector.

Richard Carter, head of fixed interest research at Quilter Cheviot, says: ‘Though this was a relatively solid jobs increase, coming in slightly higher than expected, when considered alongside the downturn in earnings as well as signs of softening elsewhere in the economy, it could prove to be enough for a shift in the Federal Reserve’s stance. The Fed’s decision-making is highly data sensitive, and with a growing number of datapoints suggesting a slowing economy it may well consider easing rates later this year.

‘However, as the presidential election campaign draws closer, the Fed will not wish to be seen as being political in any way, so it is unlikely to make any sudden moves while things are hotting up. The Fed has also confirmed it requires greater confidence inflation is heading sustainably back down to target, and with this not yet achieved and looking increasingly likely to be a slow process, just one rate cut this year is still likely to be a sensible prediction.’

How am I taxed on withdrawals from my pension?

Helping to navigate the allowances granted by HMRC to retirees

I retired officially a couple of years ago. At the time I had a big increase in my income, so I increased the amount put into long-term investments, and I spend the dividends generated by them. I also have several savings accounts.

I started a SIPP recently. My current intention is not to touch it before I’m 75. In the meantime, if I need more money, I could reduce the subscription payments and if necessary, sell investments in my ISA and dealing accounts.

I am confused with all the percentages quoted when talking about pensions. I understand that I can take 25% tax free, but the rest is taxed as income. I presume that relates to an initial payment when starting drawdown. However, I don’t expect I will be taking a lump sum, but I will be taking a 1% monthly income. How much of that would be subject to tax?

I think it is unlikely that I will be subjected to anything other than basic rate tax during my lifetime.

Paul

Rachel Vahey, AJ Bell Head of Public Policy, says:

For those who don’t deal with pensions tax every day the rules can be quite complicated, and they are always worth a re-cap.

Pension savers have a few options about how to access their pension pots. This flexibility means they can take income in a way that both suits their needs and can minimise the amount of tax they pay.

Pension savers can usually take up to 25% of their whole pension pot as a tax-free cash lump sum (as long as they haven’t gone over a limit of

£268,275 which applies across all their pension pots). They could use the rest to buy an annuity – which pays a guaranteed income throughout their life – or keep the rest invested in drawdown and take an income from it when they need and want to. This could be a regular income or one-off withdrawals.

Any income you take from the pension pot is added to other income – for example from earnings or state pension – and will be subject to income tax.

The 25% tax-free amount is obviously a big tax perk. But if you don’t need the money then it may just sit in your bank account and could potentially be subject to inheritance tax when you die if you haven’t used it.

A RANGE OF OPTIONS

However, you don’t need to take all the 25% at the one time. There are other options. You can take just a small amount from your pension, instead of accessing all of it. Again 25% of this smaller amount will be tax free. The other 75% will be taxed and you can:

• move it into drawdown (this is sometimes called ‘drip-feed’ drawdown when you move small amounts over to drawdown on a regular basis) and then take an income from it whenever you want; or

• buy a small annuity with it.

You can also take single payments called ad-hoc lump sums or uncrystallised funds pension lump sum (UFPLS)), each of these payments are 25% tax free, 75% taxed.

There could be tax advantages to just cashing in small amounts of your pension when you need them. It means each income payment will be partly tax-free which can help keep your tax bill down. It also means you are only taking what you need

Ask Rachel: Your retirement questions answered

it elsewhere if you don’t need it immediately, but which may fall into your estate when working out if any inheritance tax is due.

WORD OF WARNING

But just one word of warning. If you don’t use up your full 25% tax-free cash entitlement and you die after your 75th birthday, that tax-free entitlement cannot be passed onto your beneficiaries. The payments they take from inherited pensions may be completely tax-free if you die before age 75 but are taxed if you die after age 75.

from your pension pot and leaving the rest of it invested tax efficiently – no income tax or capital gains tax is due on any investment returns – and by doing this you could boost your overall pension pot, including the tax-free amount.

Any untouched pension pot when you die will usually be sheltered from inheritance tax and can be passed on to loved ones. This could be more tax efficient than taking a regular income, investing

DO YOU HAVE A QUESTION ON RETIREMENT ISSUES?

Send an email to askrachel@ajbell.co.uk with the words ‘Retirement question’ in the subject line. We’ll do our best to respond in a future edition of Shares Please note, we only provide information and we do not provide financial advice. If you’re unsure please consult a suitably qualified financial adviser. We cannot comment on individual investment portfolios.

Vahey, AJ Bell Head of Public Policy,

WHO WE ARE

EDITOR: Tom Sieber @SharesMagTom

DEPUTY EDITOR: Ian Conway @SharesMagIan

NEWS EDITOR: Steven Frazer @SharesMagSteve

FUNDS AND INVESTMENT

TRUSTS EDITOR: James Crux @SharesMagJames

EDUCATION EDITOR: Martin Gamble @Chilligg

INVESTMENT WRITER: Sabuhi Gard @sharesmagsabuhi

CONTRIBUTORS:

Daniel Coatsworth

Danni Hewson

Laith Khalaf

Laura Suter

Rachel Vahey

Russ Mould

Shares magazine is published weekly every Thursday (50 times per year) by AJ Bell Media Limited, 49 Southwark Bridge Road, London, SE1 9HH. Company Registration No: 3733852.

All Shares material is copyright. Reproduction in whole or part is not permitted without written permission from the editor.

Shares publishes information and ideas which are of interest to investors. It does not provide advice in relation to investments or any other financial matters. Comments published in Shares must not be relied upon by readers when they make their investment decisions. Investors who require advice should consult a properly qualified independent adviser. Shares, its staff and AJ Bell Media Limited do not, under any circumstances, accept liability for losses suffered by readers as a result of their investment decisions.

Members of staff of Shares may hold shares in companies mentioned in the magazine. This could create a conflict of interests. Where such a conflict exists it will be disclosed. Shares adheres to a strict code of conduct for reporters, as set out below.

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