Shares magazine 12 September 2024

WHAT NEXT FOR

NVIDIA?

WHY BILLIONS OF DOLLARS HAVE BEEN WIPED OFF ITS VALUE

TAKEOVER TARGETS

Find out which companies could be next

The future of commerce. Robots delivering a helping hand.

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06 US August payrolls fail to quell investor worries of hard landing

Apple iPhone 16 launch falls flat as investor worries escalate

Report reveals UK pension funds have remarkably low domestic share holdings

Gamma Communications rings up new highs after raising outlook

Lords Group shares hit new low on continued ‘challenging’ trading

General Mills needs to remind investors why it is a cereal

12 Crucial week for interest rate decisions in the US, UK and Europe

of

Our Centamin call strikes gold with £1.9 billion takeover bid

Have JPMorgan Global Core Real Assets shareholders jumped the gun?

NEXT FOR NVIDIA? Why billions of dollars have been wiped off its value

What is thematic investing and how can you do it?

Three important things in this week’s magazine

WHAT NEXT FOR

NVIDIA?

What should investors do with shares in Nvidia?

The AI chip champion lost around $400 billion of market cap last week, roughly the same amount as the combined market cap of AstraZeneca and Shell, so what is next move?

What is driving the M&A wave and which companies might be next

The UK market seems to be a prime target for foreign companies looking to expand into new territories by buying on the cheap: we look at who could be next in their sights.

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:

UK pension funds are severely underweight domestic stocks

A new study suggests pension funds could increase their allocation to UK equities and still be well within historic norms and touching distance of their global counterparts.

To get the right balance, get the right expertise.

Murray International Trust

So, you want to generate a healthy income and grow the value of your capital. It’s a common request – but it requires uncommon expertise.

At Murray International Trust, we’re dedicated to seeking out companies from across global markets that are well positioned to deliver the right blend of growth and income generation.

And because we insist on conducting our own first-hand company research, you can be confident we’re working to deliver the very best balance of investments we can find.

Please remember, the value of shares and the income from them can go down as well as up and you may get back less than the amount invested.

US August payrolls fail to quell investor worries of hard landing

Fears the Federal Reserve is behind the curve are unsettling equity investors

US

August non-farm payrolls were hotly anticipated for several reasons, not least because Federal Reserve chair Jerome Powell told investors he was more concerned about the health of the labour market than accelerating inflation at his Jackson Hole symposium speech on 23 August.

July’s big miss, which showed 114,000 jobs created versus 190,000 expected by economists, set the scene for a ‘make or break’ reading on Friday (6 Sep) with investors hoping for confirmation of either a soft or hard landing.

Strategists at Bank of America framed the situation as follows; if August payrolls came in below 100,000 then the economy was already in trouble and investors should prepare for a hard landing.

Under this scenario the Fed would likely cut by half a percentage point on 18 September, Brent crude prices would sink towards $60 dollars per barrel and the Japanese yen would strengthen to around JPY 135 to the dollar.

On the other hand, a payroll reading between 150,000 and 175,000 would revive hopes the Fed was capable of achieving a soft landing which could prompt a renewed rally in technology and energy stocks while defensive sectors would lag.

The case for this would be boosted were the central bank to cut rates by half a percentage point.

The real world is rarely as neat and tidy as forecasters would like and the actual number came in at 142,000, higher than July’s reading but shy of consensus forecasts calling for 165,000 new jobs.

Stocks initially rallied while the US dollar hit session lows as investors interpreted the jobs report as ‘soft’ enough to allow the Fed to cut rates.

By the close of play, however, the benchmark S&P 500 index had sunk almost 2%, capping its worst week since March 2023, while bond yields fell.

It is hard to pin down exactly why stocks fell

so heavily but investor skittishness has been on the increase ever since July’s weak jobs report, sparking fears about the health of the economy, and August’s Japanese yen carry trade unwind.

Other factors include last week’s $400 billion selloff in AI darling Nvidia (NVDA:NASDAQ) after the company was subpoenaed by the Department of Justice for potentially breaking antitrust laws.

Its heavy weighting in both the Nasdaq index and Philadelphia semiconductor index dragged down other large-cap technology and semiconductor names as investors took profits.

Lastly, seasonal factors could be at play as the market enters one of the most dangerous periods of the calendar for stock investors. September and October have historically inflicted some of the worst losses for equities. [MG]

Chart: Shares magazine • Source: LSEG

Apple iPhone 16 launch falls flat as investor worries escalate

Tech giant Apple (AAPL:NASDAQ) saw the launch of its latest iPhone 16 eclipsed by a looming €13 billion Irish back taxes bill and Huawei’s own new smartphone launch.

Apple has been a long-run target of the European Union’s crackdown on Big Tech firms, and the EU’s Court of Justice’ decision to back a landmark 2016 decision that Ireland broke state-aid law by giving Apple an unfair advantage comes as a significant blow.

Apple’s chief executive officer Tim Cook has previously blasted as ‘total political crap’ the EU’s 2016 move to order the firm to pay €13 billion in back taxes. The EU’s antitrust chief Margrethe Vestager ordered Ireland to claw back the sum, which amounts to about a third of Apple’s second quarter 2024 iPhone revenue. The money has been sitting in an escrow account pending a final ruling.

‘The ECJ’s decision is a dramatic one not least as it overturns the findings of the EU General Court beneath it, which had upheld Apple’s appeal against the Commission’s findings that it had received unlawful state aid through tax advantages granted by the Irish government’, said Alex Haffner, a competition partner at law firm Fladgate.

‘From a financial perspective Apple will now have to forgo €13 billion that has been sitting in escrow pending the outcome of the case. But perhaps of more relevance will be the sense that, again, the EU authorities and courts are prepared to flex their (collective) muscles to bring Big Tech to heel where necessary.’

Shares in Google-owner Alphabet (GOOG:NASDAQ) – which itself lost a challenge over a €2.4 billion fine for abusing its market power, and Meta Platforms (META:NASDAQ) saw their stock prices come under pre-market pressure, albeit modest.

Competitors are also piling on the pressure. China’s Huawei reported a record three million pre-orders for its new z-shaped triple-folding Mate XT smartphone at its own launch event just hours before Apple’s.

This highlights the growing competition between the two brands, especially in the crucial Chinese market. Huawei has recovered from recent setbacks and is repositioning itself as a key competitor in the smartphone industry, posing a significant challenge for Apple in one of its most important markets.

‘There is a danger that Apple becomes the imitator, not the trend setter’, says AJ Bell investment director Russ Mould. ‘It cannot afford to be in that position from a reputational perspective. Apple built its empire through innovation and being at the cutting edge of technology. It needs to work harder to stay on top.’ [SF]

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

Report reveals UK pension funds have remarkably low domestic share holdings

their allocation to UK stocks

Astudy by think tank New Financial has revealed UK funds have a significantly lower absolute and relative allocation to domestic listed and unlisted stocks than almost any of their global peers.

The report, by William Wright and James Thornhill, concludes UK pension funds could increase their allocation to the UK market by 50% to 100% and still be comfortably in line with both their international counterparts and historic norms.

The authors found the proportion of UK pension funds invested in UK equities has fallen to just 4.4% from over 6% last year and more than half of all assets 25 years ago.

Whichever way you analyse it, however, the figure of 4.4% is one of the lowest of any pension system on the planet with only Canada, Norway and the Netherlands having a smaller allocation.

Within that figure there are big divergences, with public sector defined-benefit (DB) schemes investing around 9% in UK equities, private-sector defined contribution (DC) schemes around 8% and corporate DB schemes allocating just 1.4% of their assets to domestic stocks.

In any debate on the decline in UK pension funds investing in their own domestic market, two broad arguments keep recurring say the report’s authors.

First, UK pensions and the stock market are somehow ‘uniquely dysfunctional’ and everyone else manages to handle the balance between domestic and international investment better than we do.

Second, this is part of a ‘structural shift’ across the global pensions industry towards investing on a global market-weighted basis so there is little point in the UK shouting at the waves as they put it.

Yet the report is highly relevant to the current political debate, with the new Labour government reviewing the pension industry and thinking about how to encourage greater investment in the UK.

Before the election, much was made of the potential for a ‘British ISA’ to funnel money into UK shares but that idea bit the dust after the new government accepted yet another savings product would just complicate the landscape.

There has also been talk of creating a UK sovereign wealth fund along the lines of Norway –an idea also being embraced by US politicians – but that could be years away.

While the report doesn’t specifically recommend UK pension funds increase their allocation to the UK, the authors suggest funds could as much as double their exposure to domestic stocks and still not be out of kilter with historic averages or their global peers.

Considering the ongoing valuation support for UK equities, and the prospects for a ‘soft landing’ and subsequent economic recovery, this would surely be an ideal time for UK pension funds to ramp up their investment in domestic stocks. [IC]

Gamma Communications rings up new highs after raising outlook

Firm sees growing customer demand for more complex solutions

Shares in business call services provider Gamma Communications (GAMA:AIM) soared to a new 12-month high of £16.60 this week, giving the company a market valuation of more than £1.5 billion, following a firsthalf update which hit all the right notes.

Revenue and operating profit rose by double digits, helped by positive underlying growth and a solid contribution from acquisitions, and the firm raised its guidance for full-year profit and earnings per share to the top of the range of analysts’ estimates.

‘Gamma has achieved another strong set of results, marked by robust revenue growth, stable margins, and strong cash generation’, said chief executive Andrew Belshaw.

‘Our broadened product set is resonating well with both channel partners and enterprise customers. As customers require more complex communications solutions, we continue to see opportunities to grow our revenues further.

‘We are making progress in developing a common Pan-European

Lords Group shares hit new low on continued ‘challenging’ trading

Among the various IPOs (initial public offerings) of the last few years, building materials distributor Lords Group Trading (LORD:AIM) seemed one of the more promising, but unfortunately the damage inflicted on the residential property market by 2022’s minibudget and subsequent regulatory changes have undermined the firm’s business.

In the six months to the end of June the group posted a 6% drop in like-forlike revenue due to ‘the challenging

economic backdrop’ and delays to the introduction of the Clean Heat Market Mechanism, which aims to dramatically increase the number of heat pumps installed each year.

Although management action to reduce costs has generated savings, adjusted operating profit fell 16% while earnings per share fell 83% leading the company to slash its dividend from 0.67p to 0.32p per share.

That sent investors scurrying for the exit, pushing the shares down another 2.7p or 7% to a new low of 36.3p

product set, expanding our enterprise offering while continuing to capitalise on the significant opportunities within our small and medium enterprises customer base.’

The Berkshire-based firm also revealed it was considering moving its listing to the main market, after more than 10 years on AIM, and promised a further update in January once it has engaged with its biggest shareholders. [IC]

compared with the listing price of 95p and a high of 146p shortly after the firm came to market in late 2021.

From a market value at IPO of £150 million, Lords is now valued at just £60 million, even though it has been a serial acquirer of property and other building supplies companies, in particular those providing timber products. [IC]

UK UPDATES OVER T HE NEXT 7 DAYS

FULL-YEARRESULTS

16 Sept: Wilmington 17 Sept: Springfield Properties

18 Sept: MJ Gleeson, Supermarket Income

REIT, PZ Cussons 19 Sept: Galliford Try

FIRST-HALFRESULTS

17 Sept: JTC, Northcoders, DP Poland, Good Energy, Jadestone Energy, Team17, Warpaint London, Fintel, Henry Boot, Kingfisher

18 Sept: Quiz, M&C Saatchi, LBG Media, Argentex, Skillcast, Star Energy, Strix 19 Sept: Judges Scientific, Next, S4 Capital

LBG Media looks to further advertising recovery and US growth in the first half

Youth publisher has seen its shares gain 88% over the past year

LADBible publisher LBG Media (LBG:AIM) seems to be in full recovery mode ahead of its half-year results on 18 September.

Back in July, the youth-focused publisher posted a strong interim trading update with direct revenue increasing by 92% to £22 million and signaled continued growth in the US.

Global audience numbers increase to 493 million up from 410 million in the first half of 2023.

Peel Hunt analyst Jessica Pok says [US digital media brand] Betches has performed well together and together with LBG brands has secured strong client wins in the US.

However, she adds it is crucial to understand whether the change in Facebook’s [META:NASDAQ] commercial model has impacted trading to date as that could imply more upside risk to the numbers going into the second half.

The group is expected to report first half revenue of around £42 million representing growth of 55% compared to last year with an

What the market expects of LBG Media

uplift from Euro-themed campaigns throughout the tournament.

Adjusted EBITDA (earnings before interest, taxation, depreciation and amortisation) is expected to be £10.2 million, an increase of 240%, driven by operational leverage, the Betches acquisition and a more efficient operating model in Australia and New Zealand.

Investors will be waiting to see whether the global implementation of a new commercial model for Facebook at the end of the first half has paid off and short-term volatility for the group has been ironed out.

General Mills needs to remind investors why it is a cereal winner

The Cheerios-to-Lucky Charms maker is struggling for growth as consumers cut back and retailers reduce stocks

Diversified food multinational

General Mills (GIS:NYSE), which makes and markets breakfast cereals

Cheerios and Lucky Charms, has a well-deserved reputation as a resilient total return stock. The company reinvests its reliable cash flows behind its brands whilst returning cash to shareholders through dividends and buybacks.

Shares in the meal, snack and baking mix supplier have rebounded strongly since the summer, when the company reported (26 June) a 6% decline in fourth-quarter sales to $4.7 billion amid retailer de-stocking and waning demand.

General Mills also forecast annual profit below expectations, so there’s pressure on the Minneapolis-based group to convince investors it has tasty long-run growth potential when it posts first-quarter earnings (18 September).

For the uninitiated, General Mills’ brand portfolio includes Nature Valley granola bars, Haagen-Dazs ice cream, Old El Paso sauces and the Blue Buffalo dog and cat food brand, which brings a long-run play

on the humanisation of pet feeding and treating.

Cost-saving progress and volume growth trends will also be in focus when General Mills updates the market, and investors will want to hear a plan for returning the Blue Buffalo dog and cat food brand to growth.

At the recent Barclays Global Consumer Staples Conference (3 September), General Mills reaffirmed its mellow full-year 2025 outlook for organic sales to range between flat to up 1% and operating profit to be between flat and 2% lower. However, chief executive Jeff Harmening highlighted ‘a good start’ to the year with ‘sequentially improving retail sales trends across many of our key categories’. [JC]

Crucial week for interest rate decisions in the US, UK and Europe

Central bank moves will be the key drivers of market direction

Over the last couple of weeks, the economic data from the US, the UK and the eurozone has painted a picture of a global economy which is slowing, but not alarmingly so, allowing stock markets to recover from their August

12

to 19

Macro diary 12 September to 19

swoon but not enough for them to make new highs.

Now, we are about to get the central bankers’ view of where each of these economies is and the big question investors are asking themselves is ‘Does the Fed/Bank of England/ECB know more than we do?’.

Table:

The danger is investors will take a big rate cut as a negative signal, creating more volatility and sending the market down again which is not the Fed’s intention. [IC] Macro diary 12 September to 19

Table:

Starting with Europe, where the ECB (European Central Bank) has already lowered rates once and is expected to go again this Thursday (12 September) with another 0.25% cut from 3.75% to 3.5%, the focus will be on the outlook.

Eurozone inflation is mildly above the bank’s 2% target, but manufacturing PMIs (purchasing managers’ indices) are still deep in negative territory and German economic data has been weak for the last two months, so there is a possibility the bank could signal more cuts in October, which could weigh on sentiment and lead to increased volatility rather than reassuring markets.

In the UK, the decision on whether to cut a second time is finely poised as manufacturing surveys are positive, as is consumer confidence, and house prices are beginning to run away again, whereas wage growth has slowed somewhat and data from the retail sector shows shoppers are still reluctant to spend, so a further 0.25% reduction in rates could go a long way to generating a ‘feelgood factor’.

The biggest conundrum though is what the Fed will do – US manufacturing data has been ok, inflation is ok and even the jobless figures have been ok, but some current and former decisionmakers are hinting a cut of 0.5% is needed which suggests things aren’t quite as ok as they look on the surface.

Polar Capital Technology is one of the best specialist funds around

Why you should put your pounds to work with trust’s tech experts

Polar Capital Technology Trust (PCT)

£27.71

Trust size: £3.32 billion

It’s a simple fact of modern investing that tech stocks need to be part of a broadly-based portfolio, but as the recent spell of volatility shows it can be a minefield.

What you want is a broad selection of highquality, innovative companies exposed to long-run profitable technological change while avoiding the hype and bluster merchants which produce precious little shareholder return.

Shares believes Polar Capital Technology Trust (PCT) is one of the best, broadly-based tech funds around. Run for nearly 20 years by Ben Rogoff, it has an excellent record of superior investment returns averaging an 18.6% total return per year over the past decade versus 14.9% for the Nasdaq Composite and 12.7% for the S&P 500, according on Morningstar data.

That seemingly small percentage premium can add up to a significant difference over the years. For example, a £1,000 sum invested at 18.6% per year would leave you with £2,347 after five years versus $1,818 for the Nasdaq and the gap widens further over time.

Polar Capital Technology

quarter 2024, Information Technology produced 20.5% of all S&P 500 earnings, the biggest single sector contribution. S&P’s own data has that share growing to 25% by December 2025.

With a portfolio of around 100 stocks, Polar Capital Technology not only captures the very largest companies – Nvidia (NVDA:NASDAQ), Microsoft (MSFT:NASDAQ) and Apple (AAPL:NASDAQ) are its three top holdings – but also tech companies you probably haven’t heard of.

Returns from tech have beaten the wider market massively over the years. For example, over the past decade Information Technology has been the best-performing sector in the US (and ergo the world) with an average total return of 20.1% per year. That’s nearly twice the returns of the next best Consumer Discretionary segment’s 11.8%.

Why? Because tech companies are increasingly dominating market profits growth. Data from S&P suggests this trend is accelerating too. In the June

These include science kit maker KLA Tencor (KLAC:NASDAQ), marketing software firm HubSpot (HUB:NYSE), plus a number of European, Japanese and other Asia-Pacific opportunities. Crucially, Rogoff actively manages fund stakes and weightings.

Nvidia is a great example, lifting the fund’s stake from 3.9% of assets to the current 11.4% during a spell when the share price soared from around $45 to $106 now. That sort of market savvy justifies the 0.81% ongoing charge in our view. With the trust’s discount to net assets wider than normal at 11.7% versus 8.4% on average, this is a great time to invest if you haven’t already.

DISCLAIMER: The author of this article (Steven Frazer) owns a personal stake in Polar Capital Technology Trust.

Smiths News is a bargain not to be missed

A 2022 poll showed 58% of Brits prefer reading physical magazines

Smiths News (SNWS)

57p

Market cap: £142.2 million

Successful investing comes down to what you get in the future for what you lay out today. How does doubling your money in around eight years sound, with the possibility of doing even better?

In a nutshell, that is the investment case for the UK’s leading newspaper and magazine distributor Smiths News (SNWS) which has been delivering print across England and Wales for over 200 years.

The company has built an efficient and extensive network of distribution centres which allows it to distribute 20.6 million newspapers and 5.5 million magazines each week, making it the clear market leader with a 55% share.

Unmatched scale and strong customer relationships mean circa 74% of contracted revenue is secure until at least 2029 providing stability and good visibility of cash flow.

The company trades on a forward PE (price to earnings) ratio of just 5.7 times and a dividend yield of 9.1%, with the dividend twice covered by EPS (earnings per share).

This is not one of those cases where a high dividend yield reflects concern over the sustainability of income or financial stress, but simply an unloved and unfashionable business trading very cheaply.

The dividend has increased three-fold since 2019 as the company’s finances have improved, with strong cash flow allowing it to reduce debts. Average net debt has shrunk from £59 million in 2022 to £13 million in the first half of 2024.

In May, the company refinanced its banking facilities lowering the interest margin paid over

money market rates to 2.45% from 4%.

Importantly, the new arrangement removes the prior restriction on the dividend of £10 million a year paving the way for increased dividends and return of capital to shareholders.

Without assuming any contributions from increased dividends and capital growth or a rerating of the shares an investor could double their money in around eight years by simply reinvesting the current dividend, which speaks to the value on offer

The obvious challenge for the business is managing the declining circulation of newspapers and magazines and rising cost inflation, but management has proven adept at mitigating costs and squeezing more cash from the business.

There are also signs magazine circulation is seeing a renaissance as publishers recognise magazines can engage a focused, informed and motivated audience in a way online content cannot.

The company’s organic growth strategy is gathering momentum with organic growth ventures expected to have generated £2 million of profit across the August 2024 financial year. [MG]

Our Centamin call strikes gold with £1.9 billion takeover bid

South African buyer lured by quality of the company’s assets

Centamin (CEY) 149p

Back in February we tipped Jerseydomiciled gold miner Centamin (CEY) both as a growth story and as a way to play the rising price of the precious metal, which at the time was trading just above $2,000 per ounce.

As well as exposure to the gold price, the FTSE 250 firm offered operational gains from its threeyear investment programme which had set the company up for ‘a pretty good 2024’ according to chief executive Martin Horgan, with production costs in the ‘lower half of the industry curve’.

WHAT HAS HAPPENED SINCE WE SAID BUY?

In March, the firm posted a double-digit increase in full-year 2023 profit as it delivered on its production guidance once again with revenue also up double digits driven by higher prices and higher output from its main Sukhari mine in Egypt.

The company’s all-in cost of production was $1,205 per ounce, down from roughly $1,400 the previous year, while its average selling price was $1,948 per ounce against $1,794 previously.

are high or rising.

This appeal clearly isn’t lost on South African firm AngloGold Ashanti (ANG:JSE), which has made a cash and share offer valuing Centamin at £1.9 billion or 163p per share, a 37% premium to its previous market value. AngloGold argues Centamin makes ‘a compelling strategic fit’ and describes Sukhari as a ‘world-class asset with a long life, compelling cost profile and attractive development potential.’

WHAT SHOULD INVESTORS DO NOW?

As it stands, Centamin shares are trading at a discount to the offer price to reflect the fact it is mostly stock-based and therefore vulnerable to changes in the AngloGold price.

Meanwhile, the gold price has continued to climb and now sits above $2,500 per ounce as central banks around the world embark on a cycle of lowering interest rates.

Low and falling interest rates make gold more attractive, relatively speaking, as its lack of yield matters less to investors than it does when rates

The offer itself represents a fairly low premium to fair value according to analysts at Cannacord Genuity, but as the Centamin board has recommended the deal the only way investors will get a higher price for their shares is if a third party starts a bidding war.

For our part we would call it a day, cash in on the rally and move on to pastures new. [SG]

Have JPMorgan Global Core Real Assets shareholders jumped the gun?

The property and infrastructure trust’s continuation vote failure comes as rates turn from a headwind to a tailwind

Recent years have been dire for shareholders in long-duration assets, with rising interest rates driving a derating of high-yielding alternatives trusts including infrastructure and real estate-focused funds to deep NAV (net asset value) discounts.

But there is now potential for significant reratings across this space as central bank rates decline and the competition from cash and government bonds decreases.

This is why a continuation vote failure (3 September) at the annual general meeting of JPMorgan Global Core Real Assets (JARA), whose portfolio straddles property and infrastructure, may look ill-timed with the benefit of hindsight.

From shareholders’ perspective, voting against continuation is understandable given frustrations with the trust’s poor performance and the wide double-discount to NAV (net asset value), 18.8% at the time of writing.

Yet ‘JARA’ had outlined a plan in June to reduce its troublesome real estate exposure over time in favour of non-real estate offerings with higher yields, while the wave of interest rates cuts could act as a powerful catalyst for a turn in sentiment towards the trust.

UNDERSTANDABLE FRUSTRATIONS

JARA is sub-scale with a lowly £154 million market cap and £190.2 million in net assets, and the quarterly dividend-payer has struggled to grow in order to get on the radar of a wider range of investors.

To recap, the company raised £149 million at IPO in September 2019 to invest in private real assets through private funds and managed accounts on JPM Asset Management’s Global Alternatives platform and came to market with a return target of 7% to 9% per annum, with 4% to 6% expected to come from dividends. Unfortunately, the trust has actually delivered total

JPMorgan Global Core Real Assets

returns of 2.3% per annum since inception to 31 May 2024, or 5.7% per annum since becoming fully invested.

Shares highlighted the attractions of JARA, including its low correlation to traditional assets in June of this year, flagging its diversified exposure to quality real assets around the world, spanning property, infrastructure and transportation. Our view was JARA provided strong diversification alongside reliable income and growth and represented a unique vehicle providing retail investors with access to a cornerstone real assets investment strategy.

Arguably, the trust has not been helped by an overly diversified strategy, with at least 14 sub-sector allocations. And JARA was asking for further patience from shareholders in terms of its turnaround strategy. There was plenty of work left to do to re-direct its portfolio away from underperforming US office equity and more towards transport and infrastructure funds as planned.

JPMorgan Global Core Real Assets - portfolio breakdown by sector

WHAT HAPPENS NOW?

JARA’s board will now consult with shareholders on the best course of action to take. Proposals may or may not involve winding-up the company or liquidating all or part of the existing portfolio. In terms of the analyst reaction, Deutsche Numis noted that with the bulk of the portfolio invested in JPMorgan managed illiquid private funds, substantial capital returns over the near term would be restricted were JARA to pursue a managed wind down process.

A merger with another trust ‘may be hard to achieve’, warned Deutsche Numis, ‘given that the funds are managed by JPMorgan and they will take a long-time to realign to any proposed strategy’.

Stifel was ‘quite surprised’ that JARA failed its continuation vote, ‘especially as the shareholder register does not appear to have many activists that would typically push for this outcome’.

The broker added: ‘In our view, while there might be some low-hanging fruit in terms of capital being returned quickly, this could drag on for two or three years. It will be interesting to see whether the board sees the vote against continuation as a desire for shareholders to see the fund wound down with capital returned or whether it will look to provide further concessions to maintain the product.’

Also lending a view was Panmure Liberum, which observed: ‘At its current size and taking account of its performance track record since 2019, the prospect of raising equity in the medium term is slim. A managed wind-down seems the most likely route. While this will probably take a few years to complete, we think this is probably a better route for investors than pursuing the previously proposed turnaround plan.’

By James Crux Funds and Investment Trusts Editor

WHAT NEXT FOR

WHY BILLIONS OF DOLLARS HAVE BEEN WIPED OFF ITS VALUE NVIDIA?

As we write AI (artificial intelligence) chip champion Nvidia (NVDA:NASDAQ) has fallen more than 16% since reporting second quarter numbers. That’s the equivalent of losing an entire Proctor & Gamble (PG:NYSE) or two AstraZeneca’s (AZN), the UK’s largest listed company.

To lose one AstraZeneca might be considered unfortunate, losing two is downright incompetence.

Quips aside, more than $400 billion of market cap has vanished in eight days (at $105) since it reported another record quarter (overnight 28 Aug). Those Q2 figures showed year-on-year revenue and earnings growth of 122% and 168% respectively. Data centre revenue, where most of its AI income is focused, increased 154% year-on-year.

‘Overall, the company continues to deliver amid high expectations, and it seems clear that data centre sequential growth is still well in the cards into year-end’, said Citi analysts.

Bernstein’s team believes that ‘several’ billion dollars of incremental Blackwell revenue into Q4 ‘should drive solid further sequential growth, and it feels to us that Hopper could easily continue to show sequential strength as well which might further accelerate things’.

Blackwell and Hopper are Nvidia’s next two generations of GPU (graphics processing units) earmarked for AI’s next development phase.

In truth, Nvidia’s share price is being impacted by more than company specifics, with a recent change of tone by Federal Reserve chief Jay Powell from taming inflation to propping up a weakening US economy requiring new balancing act skills.

Cutting interest rates too quickly (there’s been talk of a 0.5% cut at the upcoming meeting on 18 September) could send a message that the economy is slowing too fast and needs more desperate measures, although consensus still sees a 0.25% cut as most likely. Complicating matters, a

bigger cut also runs the risk of being interpreted as political, given the proximity of the US election in November.

Even so, for (currently) the world’s third largest company, and one of the most widely owned stocks, such a large market cap drop is a big deal. Even if you don’t own Nvidia shares directly, you’re almost certain to have exposure to the company through any number of index ETFs or active funds.

ANTITRUST PROBE

Where worries about maintaining this sort of electrifying growth amid production delays for Blackwell (now sorted out) dominated, Nvidia is now facing a fresh challenge, falling under the scrutiny of US Department of Justice regulators.

In June, the DoJ and the FTC (Federal Trade Commission) reached a deal to carry out antitrust investigations into Nvidia and fellow AI (artificial intelligence) industry leaders Microsoft (MSFT:NASDAQ) and OpenAI, the firm behind ChatGPT.

Antitrust officials are said to be worried by complaints over Nvidia making it difficult for customers to switch or shop around for AI chips

from competitors, like Advanced Micro Devices (AMD:NASDAQ) for example. Investigators are also concerned by talk that Nvidia penalises buyers that don’t exclusively use its AI chips.

Investigators have reportedly also asked for evidence from other companies in the industry after initially sending questionnaires about Nvidia’s business practices.

‘We have inquired with the US Department of Justice and have not been subpoenaed,’ the company said in a statement. ‘Nonetheless, we are happy to answer any questions regulators may have about our business.’

Nvidia’s clarification that it has not been ‘subpoenaed’, as first reported, appears to be a minor quibble, but semantics aside, the company is naturally putting up a stern defence, arguing that its edge in the AI computing market is a consequence of the superiority of its products.

‘Nvidia wins on merit, as reflected in our benchmark results and value to customers, and customers can choose whatever solution is best for them,’ the company said in a statement.

This is supported by anecdotal evidence. For example, an article in the Financial Times (3 September) reported Huawei’s rival Ascend AI chips had faced significant customer criticism due to ‘bug ridden software’ and slower inter-chip connectivity.

IMPACT ON GROWTH

Nvidia’s rampant growth in recent years has been driven by its dominance in the AI chip market, where it is estimated to have an 80% market share. These GPUs have become essential for large language model training because of their superior scope for handling vast quantities of data.

In the five quarters since Q1 2024, Nvidia revenues have expanded from $7.19 billion to more than $30 billion. Annual revenues have soared since 2020’s $10.9 billion, hitting $60.9 billion last year (to 31 Jan 2024) and are seen tripling over the next two years.

Nvidia's rampant quarterly revenue growth

NVIDIA - A SNAPSHOT

Nvidia’s premium processors were initially used for graphics-heavy computer games, striking key licensing deals to place its chips in Xboxes and PlayStations. But the ability of Nvidia’s GPUs, or graphics processing units, to accelerate the speed of data processing have helped to put it at the forefront of the AI revolution.

Earnings per share $

WHAT HAPPENS NOW?

If proven, the antitrust investigation could lead to regulatory challenges and potential legal action, which could negatively impact Nvidia’s market dominance, its ability to expand market share and future revenue and earnings growth.

But it’s a big if. Nvidia will put up a strong defence if the probe escalates, one that could pull in US Government restrictions on its ability to sell in some overseas markets, China in particular. If so, it could open a complex can of worms.

It’s also worth noting that antitrust challenges are par for the course in the technology industry, and they are typically brushed off by analysts and investors with most eventually settled by fines and/or modest remedies before being consigned to history.

It’s impossible to know how this one will play out but what we can say is that the probe into Nvidia adds an extra layer of uncertainty around the company right now, hence the discount the market

There’s nothing wrong with investors trimming exposure to Nvidia, even after the recent weakness it is still up more than 100% year-to date, as part of a risk adjustment exercise. But often in times of uncertainty, doing nothing is your best bet, and that’s probably your best bet now. Revenue $bn

has applied to the share price.

Bernstein recently raised its price target on Nvidia stock from $130 to $155, demonstrating its confidence in the long-run potential. The consensus target price is $148.50, implying 40% upside from current levels. 56 of the 60 analysts that cover Nvidia have the stock as a Buy (the other four are Holds), according to Koyfin data.

Koyfin also has the forward PE (price to earnings) multiple at 31.4, its lowest since a blip in April 2024, otherwise its lowest since January, while Stockopedia’s rolling 12-month PE is 30.2, on par with Apple (AAPL:NASDAQ) and Walmart (WMT:NYSE), neither of which is expected to put up growth numbers anywhere close to Nvidia’s.

What is thematic investing and how can you do it?

Tapping into long-term trends can be a powerful driver of returns

Areport published in 2023 by BNP

Paribas showed that 70% of investors surveyed expected to increase their focus on thematic investing over the following three years. Clearly this is an area which is moving into the mainstream at pace but what exactly is thematic investing and how should investors think about getting involved?

In this article we’ll look to provide a broad-brush definition of thematic investing. Discuss why it can be an investment approach worth pursuing. Identify what the main themes are and explain how to achieve thematic exposure.

We’ll also round things off by discussing the core-satellite strategy and how you can avoid concentration and duplication risk.

WHAT IS THEMATIC INVESTING?

So, headline-view – what is thematic investing? It’s an approach based on identifying longer-term structural trends which will shape our world, our economy and influence which companies can dominate in the decades to come.

A good starting point is to consider what it is not – i.e. it’s not a cyclical disturbance which will tend to revert to its previous level over a cycle of a few years. A structural trend involves more permanent or long-lived change.

Or, to look at it another way, cyclical growth relates to where we are in the economic cycle. As an economy grows, wages, productivity and consumer spending all tend to rise, while the labour market tightens. The opposite occurs when the economy goes through a period of contraction, which can lead to recession.

Cyclical industries are sensitive to the business cycle, performing well as the economy grows but less so as it contracts.

ISE Cyber Security

shift in the inner workings of an economy itself –and sometimes this change can be dramatic – with the proliferation of the internet an obvious 21st century example.

WHY INVEST IN THEMES

In terms of why you might invest in themes – there are two key compelling reasons for doing so.

First of all, investing itself should be a long-term activity. Investing on less than a five-year horizon is more akin to speculation given how exposed you are to bouts of short-term volatility. In that sense looking at themes which might play out over decades chimes with genuine investing.

Structural growth drivers are related to a

The other point is that themes can be a powerful driver of returns. A chart of the ISE Cybersecurity index makes this point – it has risen six-fold over the last 15 years.

What are the most popular themes. One is the ageing population with a big increase in the global cohort of over-65s expected in the coming decades.

Then there are areas like AI (artificial intelligence) automation and robotics. AI has clearly been the hot theme of the last year-and-a-bit.

You have cloud computing and cybersecurity –clearly hugely important in an increasingly digitised world. Then we have the energy transition.

There are a huge number of trends beyond the few highlighted here, some are more niche than others and some could be characterised as sub themes.

The key question facing investors is are you investing in a genuine structural trend or is this a short-term fad which has generated excitement but will fizzle out.

THEMES WON’T ALWAYS PLAY OUT AS YOU EXPECT

Even within this, the trajectory and pace at which a theme translates into investment returns can be

highly unpredictable. The dotcom bubble and the crash that followed illustrate this neatly.

Clearly the internet has been transformative to so many aspects of our lives that it’s hard to keep track. However, while there was lots of excitement about the role the world wide web, to employ the vernacular of the time, there wasn’t a lot of discrimination going on in 1999 and 2000.

As a crude proxy for the dotcom bubble we can examine the performance of the Nasdaq Composite index which reached what was then an all-time high of 5,048.62 in March 2000 before falling to lows below 1,400 in 2002. It didn’t recover its March 2000 mantle until nearly 15 years later.

It has though come on leaps and bounds since and a business like Amazon (AMZN:NASDAQ), which was caught up in the dotcom boom and bust and didn’t enjoy its first profitable year until 2003, now bestrides the world as a tech colossus with dominant positions in e-commerce and cloud computing. So, some businesses got there eventually, but the road was pretty bumpy and at times circuitous.

HOW TO INVEST IN THEMES

That’s the what and the why of thematic investing covered – now we need to consider the important bit which is how.

There are several key options. You can buy an individual stock which plays into the theme. Nvidia (NVDA:NASDAQ) is an obvious example of a stock which people have used to play the growth of AI. However, the danger here is a lack of diversification Nasdaq Composite

– which can leave you exposed if something goes wrong with the business itself or it proves not to be the right way to capture a trend.

With Nvidia – which is plainly at the leading edge of the sort of powerful microchip designs required to power AI – the case for it being a good play on the theme is pretty unanswerable. However, it’s not always so clear cut.

Grocery delivery service Webvan.com expanded rapidly in the late 1990s and in the summer of 1999 the company announced a $1 billion investment in warehouses to expand from a base of eight US cities to more than 26 by 2001.

It listed on the market at $30 with a $1.2 billion valuation in November 1999, raising $375 million. But in running before it could walk, with a customer base and margins which weren’t large enough to support the planned expansion, it burned out very quickly. By the time it announced it was shutting up shop in July 2001 its stock was worth just 6 cents.

This was clearly a business which was ahead of its time, with many of us now well used to doing the weekly shop over the internet, and yet it still failed.

A COLLECTIVE APPROACH

That provides an incentive to look at collective vehicles focused on different trends and themes in order to diversify your exposure. An obvious starting point for some would be exchange-traded funds where there has been a significant expansion in choice in recent times.

Advantages include transparency (you can see

exactly what is in the portfolio), their low cost and the solution they provide to the diversification problem with most products encompassing upwards of 100 constituents.

However, there are some drawbacks. A criticism sometimes levelled at thematic products is that by the time they are created all of the easy money has been made. That’s because in order for an asset manager to decide its worthwhile launching a product they need to be confident that a theme has broad appeal with investors. Otherwise, it could fail to attract the required level of assets.

In addition, although the indices which these vehicles track are adjusted over time, they are highly unlikely to be as flexible as a portfolio which is being actively managed by a professional. A potential lack of discrimination might also mean you end up with a lot of dross which doesn’t effectively capture the theme and drags down the performance of those names in the portfolio which do.

That brings us on to the other main option which is to entrust a fund manager to exploit a theme for you. The major downside – compared with an ETF – is you are more than likely to pay a price for this active management.

The upside is an active manager can react more sharply as a trend develops, potentially look to capture multiple themes and identify trends before they have peaked.

Sometimes you have to do a bit more homework to work out if you are backing a thematic fund –they may not have the obvious labels that an ETF would – but any technology-focused fund worth its stripes, for example, is very likely to be tapping into trends around cybersecurity, cloud computing and AI.

THE CORE-SATELLITE APPROACH AND AVOIDING DUPLICATION

It would be useful to talk about where thematic investments can fit within a broader investment portfolio. And that’s where the core-satellite strategy can come into play.

As the name suggests this involves having a core of long-term investments which provide exposure to a decent spread of the financial markets. Then on top of that you have satellite investments which are a bit more adventurous and concentrated – i.e. thematic stocks and funds. These might be more

volatile than the steady eddies which account for your core holdings but also carry with them the possibility of greater reward.

There are no fixed rules with this but a decent pointer is somewhere around 60% to 80% would be in the core with the remainder allocated towards these satellite investments.

Its also worth providing a health warning about avoiding concentration and duplication risks associated with thematic investing.

Let’s deal with concentration first. We’ve already talked about these risks when buying individual stocks but sometimes even when buying a fund or ETF you will end up with your fortunes tied up with just a handful of stocks.

This risk is more acute with a more nascent or niche theme. Because either you end up with only a handful of relevant listed names or you dilute exposure by including stocks whose link to the trend is at best tangential. So, for example, the top 10 holdings in the L&G Hydrogen Economy ETF (HTWG) account for well in excess of 50% of the whole portfolio.

DOUBLE TROUBLE

Then you have to consider the duplication risks. If you compare the top three in the MSCI World index, for example, with the top three in most tech-specific indices they are the same – reflecting the fact that Apple (AAPL:NASDAQ), Nvidia and Microsoft (MSFT:NASDAQ) are the three largest companies in the world by some distance. So, in this scenario you would need to think carefully about whether it makes sense to hold products tracking both indices in the same portfolio.

The answer, and this is a wider principle, is to look carefully at what’s in the product or vehicle you are buying. This will not only answer questions about duplication risk but will also ensure you are getting exactly the sort of exposure you want. As ever with investing it always pays to do your homework.

By Tom Sieber Editor

Money & Markets podcast

featuring AJ Bell Editor-in-Chief and Shares’ contributor Dan Coatsworth

EPISODE Market wobbles, Nvidia concerns, Nick Train on Rightmove’s takeover interest, and your pension questions answered

US money market funds attract record inflows ahead of Fed rate cuts

The central bank is widely believed to begin cutting interest rates imminently

USmoney market funds raked in their biggest haul of the year in the month of August, some $127 billion, taking total cash assets to a record $6.26 trillion according to data from the Investment Company Institute.

To put that into perspective the total value of all publicly traded US stocks is $56.5 trillion based on the Wilshire 5,000 Total Market index. That means money market funds hold cash equivalent to around 11% of the value of the stock market.

That may sound like a high percentage but historically it is relatively low.

Demand has been boosted by investors wanting to lock in decades high interest rates before the Federal Reserve likely begins cutting rates at its next policy meeting on 17 September.

The popularity of money market funds has been driven by the one of the steepest rate hiking cycles in history which has taken official interest rates to 5.5% from virtually zero in 2021.

A SIMPLE EQUATION

For many retail investors the equation is quite simple: Why take the extra risk of investing in the US stock market, which is trading on one of its richest ever valuations by some measures, when

you can earn a risk-free rate north of 5%?

That is equivalent to half the average long term total return (including reinvesting dividends) of the S&P 500 index, for taking no risk.

Retail investors are in good company. Famed investor Warren Buffett revealed the sale of around half of Berkshire Hathaway’s (BRK-B:NYSE) stake in Apple (APPL:NASDAQ), taking the firms cash hoard to a record $277 billion, roughly equivalent to the $285 billion value of Berkshire’s

Weekly Total Net Assets (TNA) of Money Market Mutual Funds

($ millions)

Total value of all publicly-traded stocks / GDP Ratio

Total value of all publically-traded stocks / GDP ratio

Source: Longtermtrends.net

public stocks portfolio.

Another reason to hold on to cash in the face of imminent rate cuts is the uncertainty surrounding the pace and timing of those cuts as Fed chair Powell spelt out very clearly at his Jackson Hole Symposium speech on 23 August.

If the incoming data remains patchy or inflation proves stickier, the Federal Reserve has given itself some wiggle room to slow the pace of rate cuts which could mean higher rates for longer.

As mentioned earlier, from a valuation perspective, the US stock market is looking expensive.

Based on Robert Shiller’s CAPE (cyclically adjusted price to earnings) ratio, the S&P 500 index is trading on a rich 36.1 times.

It has only been more expensive on two other occasions – December 1999 (44.2 times) and November 2021 (38.6 times). The S&P index is also flashing ‘very expensive’ on the so-called Buffett indicator which measures the value of the stock market against GDP.

These metrics do not prevent some strategists

from making the case that investors sitting in cash are missing out on better returns which stocks and bonds have historically provided. Investors are also able to invest outside of the US market in areas which are not on such lofty valuations.

Research by Seattle-based Coldstream Wealth Management has looked back into the data archives.

It found that on average in the 12-months following the start of a typical rate cutting cycle stocks have returned 11% with treasuries returning 5% and cash 2%.

The obvious problem with this type of approach is that the current economic cycle is anything but typical. We have seen a global pandemic, the discovery of a vaccine in record time that disrupted global supply chains which were further impacted by conflicts in Europe and the Middle East. A truly unique confluence of events.

By Martin Gamble Education Editor

BECOME A BETTER INVESTOR WITH

SHARES

MAGAZINE HELPS YOU TO:

• Learn how the markets work

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• Monitor stocks with watchlists

• Explore sectors and themes

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Discover four stocks which might be next on the hit list

The common thread uniting FTSE 100 takeovers this year Rightmove

At the start of 2024, I speculated that interest rate cuts could lead to takeovers involving bigger companies than the type of deals seen in 2023. While the rate-cut journey still remains in its infancy for the UK and other key geographies, the predicted wave of large-cap takeovers is firmly in motion. It’s a reminder there is value on the UK market in droves.

There have been bids or expressions of interest for five FTSE 100 companies so far this year including Anglo-American (AAL), Darktrace (DARK), DS Smith (SMDS) and Rightmove (RMV). In addition, we’ve seen bids for mid-cap stocks including banking provider Virgin Money (VMUK), housebuilder Redrow, Royal Mail owner International Distributions Services (IDS) and drinks group Britvic (BVIC), among others. Takeover rumours have also circulated insurer Hiscox (HSX) and outsourcing group Serco (SRP)

There were four common themes to last year’s wave of takeovers. Acquisitions enabled the buyer to expand into a new country. We saw private equity firms use their large cash piles to snap up companies where they were prepared to take a long-term view rather than worry about near-term problems. Elsewhere, certain buyers made offers

based on the premise that a target was looking cheap and its recovery efforts should happen out of the public spotlight.

The fourth theme is the one that’s really gathered pace this year. The suitors have pounced on the companies while their shares were depressed by various bits of unwelcome news, taking the view this was a rare opportunity to buy a business cheaper than it might normally trade.

The chart of DS Smith is a perfect example. Its share price saw a big fall in 2022 and struggled to recover in 2023. In early 2024, Mondi made a bid for the group which enticed a second party to also throw its hat into the ring. International Paper wasted no time in making its own offer for DS Smith and that deal is heading towards completion.

As for Rightmove, its share price had gone sideways for two years amid investor concerns about a lacklustre UK property market and a new competitive threat. Australia’s REA recently confirmed it is interested in buying the group but hadn’t made a formal bid at the time of writing.

FTSE 100 STOCKS WITH NEGATIVE 12-MONTH RETURNS

Given the spate of takeover activity among the biggest companies on the UK stock market, it begs

Chart: Shares magazine • Source: LSEG

the question of which other companies in the FTSE 100 might be takeover targets because of share price weakness.

Analysis by AJ Bell finds that 22 companies in the FTSE 100 have seen a negative share price performance over the past 12 months, a period when the UK index has increased by 12% in value. Certain companies have suffered mistakes of their own making, others suffered weakness in their end-markets. Four names stand out from the crowd as being vulnerable to takeovers, being Burberry (BRBY), Entain (ENT), Diageo (DGE) and Whitbread (WTB). Here are the reasons why they might be targets.

Burberry’s shares have fallen by 70% in value over the past 12 months. The stock is now trading at a 14year low. Any potential bidders would have to see through near-term problems and be confident in the company’s ability to get back on track.

The decision to take Burberry more upmarket and then heavily discount products to shift unsold stock was a bad move. While shoppers love a bargain, discounting can tarnish a luxury brand. Making matters worse was a lacklustre economic rebound from China post-pandemic, given the country has historically been a rich source of earnings.

What makes Burberry appealing to a potential buyer is the enduring appeal of its products. There is instant brand association with its chequered patterns. While styles go in and out of fashion, Burberry’s products have stood the test of time.

Worst performing FTSE 100 stocks over past 12 months

Table: Shares magazine • Source: AJ Bell, SharePad. Data to 2 September 2024

ENTAIN HAS ALREADY HAD TWO BIDS… MORE TO COME?

Ladbrokes’ owner has previously been subject to takeover interest from MGM (MGM:NYSE) and DraftKings (DKNG:NASDAQ), but neither suitor was successful. Since then, Entain’s share price has drifted downwards and left it a sitting duck. Buying Entain would be one way for a rival company to increase scale, something that really matters in the gambling sector.

The stock is down 45% over the past 12 months, partially dragged down by a bribery investigation and losing share in the lucrative US market. The company has also faced accusations that it overpaid for acquisitions.

A new CEO joined this month, which raises the prospect of a sweeping review of the business and potentially strategic changes. The pressure is already on, given activist investors on the shareholder register.

One might ask why any potential bidders haven’t already shown their cards this year given the share

price weakness. It might be that they want to see a repair job at Entain before swooping in.

While that might result in a bidder paying a higher price than now, it would mean the suitor makes an offer once risks have lowered.

TOO BIG TO BUY?

Shares in Diageo are down 23% over the past 12 months thanks to disappointment around performance in Latin America. In July, it reported an operating profit decline in four out of its five operating regions, two of them in substantial double-digit territory.

Management seems to have taken its eyes off the ball when it comes to monitoring inventory levels and working out ways to keep consumers spending.

The most recent results didn’t include a new share buyback programme, which troubled investors. That’s not a surprise given the balance sheet is close to getting out of the company’s comfort zone. Diageo targets 2.5 to 3 times net debt to adjusted earnings and the leverage ratio is now sitting at the top end.

While the current news flow is fairly gloomy, Diageo could be a takeover candidate for a bidder looking to own a portfolio of well-known drinks brands and wanting to pick up an industry giant at a big discount to where it has historically traded. The key sticking point is the fact such a takeover deal would require a significant cash outlay, even if the bidder got a bargain price.

Diageo is currently worth £55 billion. Apply a potential 30% bid premium and a suitor would

need to stump up a large amount of money. One route might involve breaking up Diageo, with a beer company taking on Guinness and another company taking on the spirits brands.

HIT BY GROWING PAINS

It’s not been the best time for Premier Inn owner Whitbread, with its share price down 17% over the past 12 months. The market has been worried about a lack of organic growth in its UK operations and that we won’t see a major improvement any time soon. German operations are performing better but they only account for small part of the group.

While certain investors will be disappointed at the company’s situation, there is the potential for Whitbread to be on the radar of private equity or an overseas-based operator looking to get ahead in the UK through buying one of the country’s bestknown hoteliers.

The shares are trading on a low rating of 12.2 times consensus earnings for the year to February 2026. That bargain-basement rating, together with weak market sentiment towards the stock, could be enough to draw out a bid. Premier Inn is front of mind for consumers looking for affordable accommodation and scores well with tourists seeking decent, reliable hotels when visiting the UK.

DISCLAIMER: AJ Bell, referenced in this article, owns Shares magazine. The author (Dan Coatsworth) and editor (Tom Sieber) own shares in AJ Bell.

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Is Labour going to limit pensions tax relief?

There are rumours of changes to the current set-up but it’s important not to overreact

If you’ve been tuned out of the political narrative over the summer, you might not have heard the government is facing a £22 billion black hole in its finances and a ‘painful’ Budget lies ahead. Then again, if you’ve got a smart phone, you’re probably up to speed. There is plenty of speculation flying around about the taxes Labour are going to hike, especially after Keir Starmer said the heaviest burden will fall on those with the ‘broadest shoulders’. One of the rumours doing the rounds is that the chancellor will axe higher rate tax relief on pension contributions. Currently pension contributions receive tax relief in line with the rate of tax you pay. So basic rate taxpayers ger 20% relief, higher rate taxpayers get 40% relief and additional rate taxpayers get 45% relief. It’s a generous arrangement for sure and costs the Treasury around £40 billion a year. Given the pressure on the public finances, there is now speculation this could be scaled back. Possible alternatives include restricting everyone to basic rate tax relief, or more generously, restricting everyone to a flat rate of tax of perhaps 30%.

WHAT IF THERE ARE CHANGES?

If this comes to pass, basic rate taxpayers would be in the same situation, or possibly better, but it would be a blow to higher rate taxpayers. It’s important to acknowledge that not all the rumours doing the rounds will translate into reality, and pensions tax relief is a particularly thorny nettle for the new chancellor to grasp. The way defined benefit pension schemes work makes it extremely challenging to divorce levels of tax relief from the tax rate paid by members. Raiding pensions isn’t a good look for politicians either. Gordon Brown is still lambasted for removing the dividend tax credit from pensions in his first Budget back in 1997.

The Labour government has also committed to a review of the pensions system, so it would be a bit odd if Rachel Reeves jumped the gun and axed higher rate tax relief before that was completed. Stranger things have happened of course, and given the pressure on public finances, it’s within the bounds of possibility that pensions tax relief might find itself in the chancellor’s crosshairs come October. We’ve got a new government, who were pretty tight lipped in the election campaign, so there is a sense of the unknown in terms of policy direction.

WHEN MIGHT CHANGES HAPPEN?

Many people will no doubt be thinking of making pension contributions before the Budget, in case higher rate tax relief does get the chop. It’s worth bearing in mind that even if Rachel Reeves announces restrictions on pensions tax relief in October, they may not come in immediately. The tax year runs from 6 April to 5 April, so it would make more sense to bring in any changes from the start of a new tax year.

Otherwise, it would be pretty unfair to those who chose to contribute to their pension in the second half of the current tax year, compared to the early birds doing so in the first half. It would also create mayhem in the workplace pensions world, where higher rate tax relief is baked into the collection of pension contributions.

For higher rate taxpayers who want to take a belt and braces approach, it might make sense to bring forward any pension contributions they’re making this tax year to before 30 October, just in case. Ultimately you’re just bringing these forward by a few months. In terms of bringing forward pension contributions from future years, you would need to consider whether you can afford to make them, and whether you might need access to that money before you draw on your pension. As things stand the minimum age at which you can gain access to your pension is 55, and that is rising to 57 in 2028.

DON’T OVERDO IT

It’s also important not to overdo it. You may end up costing yourself higher rate tax relief if you do. Most people have an annual pension allowance of £60,000 a year. But you will only get higher rate tax relief up to the amount of higher rate tax you have paid. So, in a simplified example, if you earn £80,270 per annum and have no other income, you currently pay tax on the £30,000 of your salary above the higher rate tax threshold, which is £50,270. Consequently, if you make a £60,000 pension contribution, you will only be eligible for higher rate tax relief on £30,000 of that contribution. The remainder will only attract basic rate relief.

The uncertainty caused by Budgets aren’t helpful for financial planning, so we should probably be grateful that Rachel Reeves has committed to holding only one big fiscal event each year. It’s also worth mentioning that there has been speculation that other elements of the pension system might be tweaked, like lowering the annual allowance, reducing the amount of tax-free cash pension savers can take, and applying inheritance tax to pensions on death.

It’s almost certain that Rachel Reeves hasn’t decided on any of these policies yet, so to a certain extent, all of this is hot air. That won’t stop some people taking action before 30 October, though it’s probably a good idea not to perform too many contortions in order to avoid something which may not even happen.

By Laith Khalaf AJ Bell Head of Investment Analysis

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Gloomy messaging ahead of economic set-piece could become a self-fulfilling prophecy

Could the Budget ruin consumer-facing firms’ ‘golden quarter’

As an exercise in expectations management, the Labour government’s trailing of its October Budget has been impressive.

Rhetoric around what people should come to expect at the end of next month has been gloomier than a wet Tuesday in February. In our Personal Finance section this week Laith Khalaf explores whether material limits could be placed on pensions tax relief, for instance.

As Panmure Liberum’s chief economist Simon French notes, the talking-down of the UK economy could end up being a self-fulfilling prophecy.

‘In recent meetings with companies and investors I have picked up a palpable fear of what is now coming at the 30 October Budget. Government messaging designed to achieve a political goal now risks having an economic blowback. While most businesses acknowledge the need to fund public services correctly – and that this can be growthenhancing – the job becomes decisively harder if consumers spend less and businesses pull back on investing. The hope is the mood music changes the other side of the Budget, and someone in the Treasury dusts off their D:REAM LP in time for the Christmas Party.’

The reference to Christmas is apt as we are approaching the so-called ‘golden quarter’ when consumer-facing businesses make a good chunk of their annual revenue.

If the downbeat commentary from chancellor

Rachel Reeves and prime minister Keir Starmer means people scale back their festive spending then industries like retail and travel could take an unwelcome hit.

More positively, consumer demand could be stoked by falling interest rates. Numbers from KPMG and the Recruitment and Employment Confederation show a cooling UK jobs market in August which would allow the Bank of England room to countenance further cuts to rates when it next meets on 19 September.

At the end of August this column discussed oil prices and their inherent unpredictability, a theme which has been borne out by the events of the intervening period.

Prices, which had moved higher on Libyan outages and Middle East tensions, subsequently plunged to 30-year-lows amid concerns about the health of the global economy and have rebounded again on expectations of storm disruption to operations on the US Gulf Coast.

Just two weeks after cutting its oil price forecast for the fourth quarter to $80 per barrel, Morgan Stanley has trimmed this further to $75. Concerns about Chinese demand have persisted for some time but now those concerns have spread to the US after disappointing non-farm payrolls data, a topic which Martin Gamble addresses in this week’s news section.

How much can I pay into a pension as director of my own limited company?

Answering a question about employer’s contributions and how they receive tax relief

I am a director of my own limited company. Currently I take a salary up to my personal allowance, and receive the rest of my remuneration as dividends.

I have heard that through carry forward I can pay in an employer’s pension contribution up to £180,000 gross. But that this may be limited by the company’s anticipated profits in the tax year, if they are going to be less than £180,000.

Could you clear up the confusion?

Andy

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

How much can I pay into a pension should be an easy question to answer but often it gets confusing when thinking about the different types of contributions that can be made and the allowances that apply.

Employer contributions can be paid into a pension. To receive corporate tax relief the pension contribution has to be ‘wholly and exclusively’ for the purposes of the business. Basically, this means the contribution should be at a reasonable level for the individual concerned. The local inspector of taxes will make the call on whether the employer contribution is reasonable.

CONTRIBUTIONS CAN BE MADE BY AN INDIVIDUAL OR THIRD PARTY

Contributions can also be made by the individual or another third party, for example a spouse or a grandparent. The value of these individual contributions plus the 20% tax relief paid by HMRC into the pension cannot be more than 100 per cent of the individual’s earnings each year. If they are then the excess will have to be refunded back to the individual.

Earnings generally include salary from

employment or profits from self-employment, but don’t include any investment income such as dividends. Therefore, anyone earning a salary of £12,570 could pay in a net contribution of £10,056, HMRC adds 20% tax relief, and that brings the total contribution to £12,570.

Even if an individual doesn’t have any earnings, they (or others) can still pay in up to £3,600 a year to a pension – that’s £2,880 individual contribution, with HMRC adding £720.

There are a few allowances on top of that. The annual allowance is set at £60,000 a year and includes both employer and individual contributions. For example, an individual could pay £40,000, HMRC adds £10,000 tax relief, and their employer could then pay in another £10,000, making £60,000 overall. (But that contribution would only be allowed if the individual earned at least £50,000.)

Any contributions over the annual allowance will suffer a tax charge at the individual’s marginal rate of tax, to put them back into the correct tax position.

TWO OTHER ANNUAL ALLOWANCES

There are two other annual allowances. One is the

Ask Rachel: Your retirement questions answered

money purchase annual allowance which is set at £10,000, and is triggered if the individual ‘flexibly accesses’ their pension, say by taking an income through drawdown. The other is the tapered annual allowance which applies to very high earners. The taper can reduce the £60,000 annual allowance to as little as £10,000, depending on the individual’s income level.

If someone has not used up their annual allowance from the previous three tax years, then they can carry forward any unused annual allowance into the current tax year. They have to use up the annual allowance from the current year first, but could then go back and use up the annual allowance from the previous tax years, using the oldest year’s first. They don’t need to have made any contributions to the pension (they just need to have had a pension). If someone had not made any contributions over that whole period then they could have a total annual allowance of £200,000. (That is made up of £60,000 annual allowance from this year and last year as well as £40,000 from the two previous tax years.)

This sounds a very good opportunity in

Rachel Vahey, AJ Bell Head of Public

Policy,

is here to answer your questions

theory. A company director who had no pension contributions could receive a very big employer contribution. However, whether that employer contribution would receive tax relief or not would depend upon whether the local inspector of taxes judged that it met the ‘wholly and exclusively’ rule. If the contribution was a personal one from the individual, then they could only pay in up to their earnings. If someone wanted to pay a big employer contribution, then a conversation with the company’s accountant would be a good starting point.

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.

Rachel Questions about retirement?

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:

Dan Coatsworth

Danni Hewson

Laith Khalaf

Laura Suter

Rachel Vahey

Russ Mould

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.

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