Shares magazine 24 October 2024

GREAT VALUE

UK STOCKS

05 EDITOR’S VIEW

Gold and Bitcoin – your barometers for Trump’s chances next month

07 Budget likely to feature a raft of ‘stealth taxes’ to raise revenue

08 What the narrowest corporate bond spreads in two decades mean for investors

09 Baltic Classifieds is emulating Auto Trader and Rightmove in Eastern Europe

09 Why former stock market darling Fevertree Drinks has lost its fizz

10 BP’s green strategy in focus as it gets set to release quarterly results

11 The market is looking for Visa lawsuit clarity

12 UK economy continues to set course for a ‘soft landing’ as Budget looms

14 Take advantage of this rare chance to buy ASML at a bargain price

16 Get on board Futura Medical before its big profit breakthrough

19 Future shares dive on shock news of CEO departure

20 Why Motorpoint’s exciting recovery has further to run 22 INVESTMENT TRUSTS

the

Where to find the biggest bargains

Small-world: a whistle-stop tour of the comings and goings in UK small-caps

My Financial Life – what you need to consider when you are in your 60s

Three important things in this week’s magazine

GREAT VALUE UK STOCKS

Why ‘value’ stocks can keep performing as interest rates fall

We discuss the prospects for value investing with expert fund managers and get their tips on where to look for new ideas.

Revisiting the investment case for former high-flier Scottish Investment Trust

After five years of underperformance, can the popular trust focused on ‘exceptional growth companies’ rediscover its old form?

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:

What does it mean for savers and borrowers now inflation is below the BoE’s 2% target?

Lower consumer prices are a double-edged sword as while they benefit consumers and the housing market they hit depositors and those in retirement.

Gold and Bitcoin – your barometers for Trump’s chances next month

If anyone wants an insight into how the market sees the prospects of Donald Trump returning to the White House after next month’s ultratight presidential election they should look no further than gold prices and bitcoin.

As we write betting site Oddschecker has the market offering odds of 33/50 on Trump, which equates to a 60% probability of him winning the election. That compares to a 54.5% probability 10 days ago.

In this context, gold is in demand both as a hedge against inflation and also as a safe haven. Amid a perception Trump’s avowed plan to introduce sweeping tariffs on overseas goods would reignite inflationary pressures.

There is also concern in some quarters that Trump’s unpredictability would add to already elevated geopolitical tensions in the Middle East and Eastern Europe. Accordingly, the precious metal has reached new record highs.

Trump’s endorsement of cryptocurrencies, with a plan to make America ‘the crypto capital of the planet’ and build a strategic reserve of Bitcoin is an obvious catalyst for the price of the latter which is back in sight of its 52-week highs at close to $70,000.

Further strength in these assets may

well suggest the market sees a Trump victory as increasingly nailed on. However, the market, in tune with the broader consensus, called both the Brexit vote and Trump’s 2016 triumph wrong ahead of time so there’s no guarantee investors will get it right ahead of 5 November.

Whatever the outcome, we could be in for plenty of uncertainty and that may play to gold even if Trump doesn’t win, particularly given both Trump and his rival for the presidency Kamala Harris look set to stretch the US’ public finances even further based on their professed policy platforms. Bank of America analysts observe: ‘If markets become reluctant to absorb all the debt and volatility increases, gold may become the asset of choice.’

In the UK the Budget continues to loom large on the horizon and in this week’s issue Ian Conway looks ahead to some of the more recent speculation about potential measures which could be unveiled on 30 October. Our pensions columnist Rachel Vahey also answers a question on the fate of the tax-free lump sum allowance and whether this might be in the Treasury’s sights. Next week look out for a snap reaction to the Budget and its impact on your money and the markets.

Budget likely to feature a raft of ‘stealth taxes’ to raise revenue

Unfortunately for the new chancellor, and by extension taxpayers, the latest public finance figures reveal there is ‘no magic money tree bathed in the light of a rainbow,’ as AJ Bell’s head of financial analysis Danni Hewson put it.

Government borrowing in September was £16.6 billion, the highest since the pandemic and above official forecasts due to public sector wage deals and interest costs.

While the new Labour administration has little choice but to stick to its manifesto promise of not raising direct taxes on ‘working people’, it seems likely it will seek to plug the fiscal gap through ‘stealth taxes’, starting with prolonging the freeze on personal tax thresholds beyond the 2028 deadline. Without an increase in the thresholds each year at least in line with inflation, more people are finding themselves pushed into higher tax brackets – a phenomenon known as ‘fiscal drag’ – resulting in the UK’s tax burden hitting its highest level in nearly 80 years.

According to estimates, by extending the deadline

to the 2029-30 tax year the Treasury could raise another £7 billion.

It also seems likely capital gains tax and tax allowances will be tinkered with, which has led to a flood of directors selling shares and other investors dumping stocks especially at the smaller end of the market.

In addition, law firms have reported a surge in the number of enquiries they have received as business owners and landlords rush to sell assets.

Inheritance tax looks an easy target for the chancellor, as figures this week showed receipts for the six months to June hit £4.3 billion or £400 million more than the same period last year.

With just one in 20 estates liable for the tax, the temptation to widen the net to bring in more revenue will be strong, and because the rules are quite complex there are lots of ways the Government can tweak them to increase its take, including removing the tax-free status of pensions as pensioners aren’t ‘working people’ for the most part.

Finally, fuel duty – which is currently levied at around 53p per litre and brings in about £25 billion in annual revenue – is rumoured to be set to rise by up to 7p per litre in the Budget after being frozen since 2010.

As well as being an easy way for the Treasury to raise an extra £4 billion, pressure has been building on the Government from environmental and transport campaigners to bring the cost of driving more into line with rail and air fares. [IC]

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

What the narrowest corporate bond spreads in two decades mean for investors

Current credit spreads imply little margin for error amid ‘soft landing’ narrative

As the Federal Reserve signals the start of an interest rate cutting cycle aimed at recalibrating monetary policy, yields remain relatively high by recent historical standards. For example, 10-year US treasuries have a current yield a smidge above 4%.

Investors looking to grab some extra yield compared with US treasuries, can purchase investment-grade corporate and high yield or ‘junk’ bonds. The spread investors earn on high yield bonds is a proxy for default risk.

The high yield spread narrowed last week to 2.89 percentage points, its lowest gap since mid-2007 as investors increasingly bet the Fed has successfully engineered a soft landing.

Mike Scott, head of global high yield at Man Group (EMG) concurs: ‘Broadly speaking, the market is entirely priced for a soft landing.’

Meanwhile investment grade bond spreads have narrowed to 0.83 percentage points, levels not seen since March 2005, according to ICE BofA data.

While bond fund managers acknowledge there is not much ‘value’ to be had in the ‘spread’ component, they highlight the relatively high yields on offer compared to recent history.

For example, high yield bonds yield just shy of 7%, their highest since 2012 and investment grade bonds yield just over 5%, a level last seen 20 years ago.

ICE BofA US High Yield Index

Option-Adjusted Spread, Daily, Not Seasonally Adjusted

Shares magazine • Source: ICE, Federal Reserve Economic Data

must lower interest rates in response to lower inflation is misguided. It is financial conditions that matter, he says.

The lower spreads reflect increased demand as investors look to lock in higher yields. ‘You’re seeing tremendous demand for anything credit-related,’ says fund manager Bill Zox at Brandywine Global Investment Management.

But what if the Fed does not cut interest rates as expected?

Economists’ views on the direction of inflation and economic growth differ widely. Apollo chief economist Torsten Slok thinks the idea the Fed

With US stocks at record levels and very tight credit spreads, September’s half a percentage point interest rate cut by the Fed makes financial conditions even easier.

‘The risk with cutting interest rates too much too quickly is that the economy becomes too hot again,’ argues Slok.

Some investors not only agree with the Apollo view but are backing it with real money.

Famed hedge fund manager Stanley

Druckenmiller notched-up a staggering average annual return of 30% a year for three decades before closing his fund Duquesne Capital in 2010 to start his family office.

Druckenmiller’s latest move is a bold bet against US treasuries and the Federal Reserve. He is shorting (selling with the hope of buying back at a lower price) US treasuries in the belief that inflation remains persistently high, forcing the central bank to raise interest rates, rather than cut them. [MG]

Chart:

Baltic Classifieds is emulating Auto Trader and Rightmove in Eastern Europe

Classified advertising portal in demand with investors and up 35% year-to-date

Eastern European online automotive, jobs and property advertising portal, Baltic Classifieds (BCG), is enjoying a strong run.

Up 36% year-to-date, the shares have trebled from March 2022 lows and at 329p have nearly doubled from the 165p IPO price.

The FTSE 250 company has 14 online classified portals covering cars, real estate, employment opportunities and other services throughout the

Baltic region (which encompasses Lithuania, Latvia and Estonia).

As Berenberg analyst Ciaran Donnelly observes: ‘Baltic Classifieds operates the leading platforms in its verticals in Lithuania and Estonia, creating a strong defensive moat due to network effects.’

As with UK-focused businesses like Rightmove (RMV) and Auto Trader (AUTO), said network effects mean having more advertisers and users on the platform make it more of a go-to product for both parties.

Donnelly also notes the company is underrepresented in relative terms

Why former stock market darling Fevertree Drinks has lost its fizz

Shares in the tonic water-to-sodas supplier have slipped below their Covid lows

Priced at 756.5p at the time of writing, shares in premium mixers pioneer Fevertree Drinks (FEVR:AIM) are down 30% over one year, have shed more than 60% of their value over five years and trade below their 935p Covid low.

Downgrades have dampened investors’ thirst for the tonic waterto-ginger beer supplier, which has seen slowing growth amid intense competition (from sleeping giant Schweppes and others), unhelpful weather and the inflationary squeeze on consumers’ disposable income, with cost pressures also eating into margins.

Fevertree served up (12 September) a return to profit growth for the half to 30 June 2024, but this uptick was largely due to lower glass costs and a cut to full year sales guidance didn’t go down well with investors. This was blamed on a weak first half with a soggy start to the summer in the UK and Europe, where business was also impacted by a subdued consumer backdrop and shipment timings.

More palatable progress from the flavoured sodas-to-cocktail mixers concern included a strong performance in its Rest of the World region and continued double-digit revenue growth in the US, where diversification beyond tonic is paying off given that Americans don’t have huge thirsts for gin. More broadly across the business, Fevertree is expanding its soft drinks range to account

in Latvia and sees scope for management to use M&A to address this.

The group is currently scheduled to announce its first-half results for the financial year running to 30 April 2025 on 5 December. [TS]

Drinks

for lower alcohol consumption among younger people.

CEO Tim Warrillow highlighted improved trading in July and August and said he was ‘optimistic of an acceleration of growth across the second half of the year’, while net cash of £66 million on the balance sheet means the drinks group expects being able to return surplus capital to shareholders during the 2025. [JC]

UK UPDATES OVER T HE NEXT 7 DAYS

FULL-YEAR RESULTS

25 Oct: Petra Diamonds

29 Oct:

Ultimate Products, YouGov

FIRST-HALF RESULTS

25 Oct: Airtel Africa

29 Oct: C&C Group

BP’s green strategy in focus as it gets set to release quarterly results

Reports suggest oil and gas production cuts have been canned

Oil and gas firm BP (BP.) has already released a teaser ahead of its thirdquarter results on 29 October.

Given this, the focus may be on the company’s long-term strategic direction with reports the company plans to ditch its target to cut oil and gas production by 25% by 2030.

This has already been watered down from the 40% cut initially outlined in 2020, so chief executive Murray Auchincloss will be expected to either confirm or deny this news when the results are announced.

BP has been left behind by US rivals, with investors turned off by the emphasis placed on the energy transition under Auchincloss’ predecessor Bernard Looney.

30

31

However, just turning away from a previous strategy isn’t a strategy in itself and Auchincloss could well face pressure from the market to demonstrate in which direction he wants to take the business.

Panmure Liberum analyst Ashley Kelty observes: ‘We remain

unconvinced the incumbent board have the courage to change direction and revitalise the strategy.’

For the three-month period just gone BP has already flagged net debt will be higher, thanks in part to a hit on refining margins.

The company said earnings in its customer and products segment face a dent of up to $600 million and the oil production and operations unit is expected to be impacted to the tune of $100 million to $300 million. [TS]

Chart: Shares magazine • Source: LSEG

The market is looking for Visa lawsuit clarity

Stock has recovered most of its lost value since monopoly probe was launched

It’s been an unusually bumpy spell for Visa (V:NYSE) since finding itself threatened with being hauled over the regulatory coals.

In September, the US Department of Justice launched a lawsuit against the credit and debit cards colossus over claims that Visa has been unfairly monopolising its debit cards power in the US, accusing the company of engaging in anticompetitive conduct to maintain its dominance, including exclusive agreements that hinder rivals and prevent technology companies from entering the market.

The news saw around $30 billion swiped off Visa’s market cap as the stock plunged below $270, yet the stock’s rebound has been swift, with almost all those losses now recovered.

Even so, the lawsuit will be a key talking point when Visa reports third quarter 2024 earnings (29 October), and it could make for a lively analyst call,

with Wall Street number crunchers seeking guidance on the potential for restrictions to growth if the case goes against it.

In the meantime, analysts are forecasting earnings per share of $2.58, up about 11% year-on-year, on revenue of about $9.5 billion. Meeting or beating those estimates will be a handy confidence booster

US UPDATES OVER THE NEXT 7 DAYS

QUARTERLY RESULTS

25 Oct: HCA, ColgatePalmolive, Aon

28 Oct:

Waste Management, Welltower, Cadence Design, Ford Motor, Brown&Brown, ON Semiconductor, Loews, FS Networks

29 Oct:

Visa, McDonald’s, Pfizer, Chubb, American Tower, Mondelez, PayPal, Chipotle Mexican Grill, Ecolab, Republic Services, Gartner, Corning, Electronic Arts, Super Micro Computer, Match Group, FMC

30 Oct: Microsoft, Meta Platforms, Eli Lily, AbbVie, Amgen, Booking, Airbnb, DoorDash, MetLife, Allstate, Prudential Financial, Garmin, Godaddy Inc, Clorox, Fox Corp, Marathon Oil, Dayforce

31 Oct: Apple, Merck&Co, Linde, Uber Tech, Comcast, Stryker, ConocoPhillips, Bristol Myers Squibb, Starbucks, Cigna, Intel, Motorola, Moderna, Live Nation Entertainment, Willis Towers Watson, Global Payments, Eastman Chemical

UK economy continues to set course for a ‘soft landing’ as Budget looms

Retail sales, housing and consumer surveys all suggest confidence is returning

The UK economy continues to surprise to the upside. Figures for September showed retail sales grew for the third month running, led by spending on non-food items, heading into the socalled ‘golden quarter’.

‘With peak trading and gifting season approaching, it is encouraging for non-food retailers such as department stores and consumer electronics retailers to see volume

increases,’ commented Bogdan Toma, partner at McKinsey & Company.

Meanwhile, house prices continue to rise, as shown by both the latest Halifax and Nationwide surveys and the Rightmove (RMV) asking price index, which rose by twice its longterm average in September with prices supported by increased levels of activity and lower mortgage rates.

Consumer confidence also appears to be improving, with the latest S&P Global sentiment index showing household confidence being lifted by positive income growth and slower inflation.

‘Confidence is being supported first and foremost by the strong labour market, with the survey showing both job security and income from employment improving at some of the fastest rates seen since data were first collected in 2009,’ observed Maryam Baluch, economist at S&P Global Market Intelligence.

‘An easing of inflation worries, combined with expectations of a further lowering of interest rates, has also helped allay worries over the cost of living,’ added Baluch.

Next week, the PMI (purchasing managers’ index) surveys will likely highlight further the gap between the relative strength of the UK and the US on one hand and the weakness of the eurozone on the other, before the focus splits midweek between the UK Budget and the US JOLTS and ADP non-farm employment data, both of which are likely to have an impact on markets. [IC]

Jump

European growth

Take advantage of this rare chance to buy ASML at a bargain price

The earnings multiple has only rarely been this low in the last five years

€669.80

Market cap: €264.9 billion

There’s a lot to be said for buying a great company going through a sticky patch and there’s no doubt, in our minds, that ASML (ASML:AMS) ticks both boxes. Crucially, we firmly believe the latter state of affairs is transitory and that now a great time to add this excellent technology company to your portfolio. Dutch firm ASML is a big deal in the chips space. The advanced lithography machines it makes cost a fortune and are crucial in semiconductor manufacturing. Put bluntly, it is the only company in the world capable of manufacturing the EUV (extreme ultraviolet) tools needed for printing bleeding edge, complex semiconductor chips, and that gives it a unique place in the complex AI (artificial intelligence) and wider semiconductors ecosystem.

ASML’s giant machines, arguably the most important piece of equipment used by companies like Taiwan Semiconductor Manufacturing (2330:TPE), Samsung Electronics (005930:KRX) and Intel (INTC:NASDAQ), take months to build, install and qualify for production in chip foundries that cost tens of billions of dollars to build and run.

The operators of these facilities know that they need to be running that gear flat out, 24 hours a day, to give themselves a chance of making a return on the massive upfront investment, and that means customers place orders with ASML typically when they’re confident that they’ll have enough demand to keep the machines busy as long as a year in the future, an element of crystal ball gazing that leads to miscalculations.

DEMAND NOT COMING THROUGH AS HOPED Evidently, some customers are not yet seeing the recovery they had hoped, so ASML orders have been sliding to the right, while operational issues at both Samsung and Intel are adding extra uncertainty to the mix.

What ASML said was that demand in some parts

Chart: Shares magazine • Source: LSEG

of the semiconductors ecosystem are soft – areas such as consumer electronics, smartphones and automotive. This was not new news. Companies like Apple (AAPL:NASDAQ) have experienced tougher market conditions for smartphone sales and the electric vehicle industry is growing at a slower rate than expected, but this has been evident for months.

Even so, the scale of the bookings (a predictor of future revenue) undershoot was ugly, with €2.6 billion in the third quarter nowhere near the €5.39 billion average of analysts’ estimates. Hence the sharp share price drop since the announcement.

Importantly, Bank of America analysts said ASML’s earnings ‘point to a sector divergence between robust AI demand and weak nonAI demand’.

The AI chip market is set to grow 99% in 2024 and another 74% next year. Meanwhile, the semiconductor market overall is projected to grow 18% this year and 12% in 2025, according to consulting firm International Business Strategies, which tracks industry data. IBS data shows the AI chip market – also known as the accelerator chip market – outpacing the sector at large through 2030.

Berenberg analysts recently noted that foundry firms cannot afford to halt developing their ‘leading-edge generation technology, as this capability is essential for them to remain relevant in the foundry market’.

Geopolitics is another potential pinch point for ASML, where US and European regulators are restricting the sale of its latest kit to places like China as the west tries to limit other nations’ scope to gain an advantage in AI and machine learning, but that’s unlikely to lead to bans on Chinese foundries buying legacy lithography tools in the future.

SHARES ARE LOOKING CHEAP

Investors should consider that while ASML forecasts have been reduced for 2025 and 2026 (Berenberg lowered its earnings per share estimates by around 13% on a 6% revenue reduction for both years), it now means the stock can be bought for a price earnings multiple of around 27, a level seen only a handful of times since 2019.

Berenberg calculates a base case PE of 35 for the company long-term, which implies a valuation of more than 950p on 2026 estimates. Considering ASML has a long history of operating margins and returns on capital of 30% to 35%, we think this is a great time to invest in a great company at a great price. [SF]

Get on board Futura Medical before its big profit breakthrough

Company has a significant low-cost opportunity to broaden the global reach of its flagship drug

33p

Market cap: £99.8 million

Alittle over a year ago Shares highlighted a small company with only 12 employees punching way above its weight after it created the first significant innovation in the ED (erectile dysfunction) market in more than 20 years. If anything the momentum has accelerated since then, and this month (October) sees specialist sexual health company Futura Medical (FUM:AIM) officially launch its proprietary ED product Eroxon into the US market through exclusive US distribution partner Haleon (HLN). It marks a potential breakthrough point for both revenue growth and importantly, profit and cash generation. The earlier than expected launch also demonstrates the execution capability and laserlike commercial focus of the management team. There are always extra risks to consider when

investing in smaller companies operating with a single product, but we believe that for investors with the appetite and patience, an investment in Futura Medical could pay off handsomely.

A LARGE UNDER-SERVED MARKET

There are around four million men in the US who have been diagnosed with ED and take prescription medicines such as Viagra or Ciallis, equivalent to 500 million doses a year. But this only tells a small part of the wider investment case.

There are roughly 20 million men aged 22 to 75 in the US who suffer from ED but are not on treatment. This is the target market for Futura and its partner Haleon. Eroxon possesses unique selling points and advantages over current treatments.

Crucially, it is available without prescription or a consultation with a healthcare professional. It works in 10 minutes which introduces more spontaneity compared with existing treatments. Eroxon is the first topical gel clinically proven to treat ED.

The heavy marketing done in relation to existing

Futura Medical financial

ED products means the awareness of the issue among the general population is already high.

A 2022 Ipsos study on the market potential for Eroxon commissioned by Futura suggests peak annual sales of $350 million in year five, based on 7% uptake, 50 tubes purchased a year at a retail price of $5 per tube.

EUROPE AND REST OF THE WORLD

In Europe there are an estimated 20 million men affected by ED across the top five countries. Futura has partnered with Cooper Consumer Health, a leading European Union healthcare company which launched the product in the UK and Belgium in 2023, after receiving regulatory approvals in 2021.

A potential breakthrough point for both revenue growth and importantly, profit and cash generation”

The EU has granted patent protection until 2040. Analysts at Stifel highlight home studies conducted by Futura’s distribution partners covering more than 600 users which confirms the product has a greater than 60% success rate, in line with data from clinical trials.

Just as encouraging, says Stifel is data showing signs of repeat purchases in the UK market, running at between 15% and 20%. This is important because the UK is a comparatively tough market where competing products like Viagra are also available ‘over the counter’, in contrast to European and US markets. The company has launched Eroxon in more than 10 countries including the US, UK, France, Italy, and Spain with more expected. One notable one being Mexico where Futura’s Latin America partner M8 has confirmed a launch.

operating models

In the rest of the world there are an estimated 194 million men affected by ED and Futura has signed up distribution partners in Korea and the Middle East and Gulf regions.

HOW DO THE FINANCIALS LOOK?

At the first-half results (10 September) the business delivered a 300% increase in revenue to £7 million and a maiden profit after tax of £1 million. The board said it expected 2024 full year revenue and profit to be ‘significantly’ ahead of market expectations.

These were believed to be revenue of £9.5 million and a loss after tax of £2.63 million. Consensus forecasts have since moved higher and now call for revenue of £13.5 million and a small £410,000 profit in the year to 31 December.

Analysts are forecasting a ‘step-change’ in 2025 profit to £7 million.

Including the $5 million launch milestone payment recently received from Haleon, the company has a cash position of roughly £8 million. All promotional and advertising costs are borne by the company’s distribution partners. [MG]

Future shares dive on shock news of CEO departure

Jon Steinberg set to work his 12-month notice period before relocating to the US

Future (FUTR)

859p

Loss to date: 17.5%

We flagged media firm Future (FUTR) as a buying opportunity in August after a big retreat from highs above £38 in late 2021. We saw sense in the company’s growth acceleration strategy which included targeted investment in its so-called ‘Hero’ brands – 12 titles which generate 50% of its revenue – as well as plans for growth in US digital advertising.

WHAT HAS HAPPENED SINCE WE SAID TO BUY?

Chart: Shares magazine • Source: LSEG

For a time not a lot, with a trading update on 26 September seeing Future report its full-year 2024 would be in line with market expectations, but that changed on 18 October with shock news that CEO Jon Steinberg is set to depart.

The American, who only joined in 2023, is set to work his 12-month notice period but will then leave in 2025 to relocate back to the US with his family.

Given the progress Steinberg has made with Future, which owns 300 titles including Ideal Home, Games Radar, Marie Claire, TechRadar, and the price comparison site GoCompare, it’s not surprising the market took the news poorly with the shares down 18% on the day of the announcement.

WHAT SHOULD INVESTORS DO NOW?

We note the shares have already recovered some ground after the initial shock and we think the news is worth keeping in perspective for now. The notice period gives Future plenty of time to identify a new CEO. We will be watching full-year results on 5 December closely. Both for an update on the succession plan but also for any signs of a deterioration in Future’s prospects which might have fed into Steinberg’s decision to exit. [TS]

Why Motorpoint’s exciting recovery has further to run

The used car retailer has returned to profit and looks well placed to reaccelerate growth

Gain to date: 25.2%

We highlighted the recovery potential of nearly-new vehicles retailer Motorpoint (MOTR) at 139p on 20 June 2024. The used car dealer had just emerged from its toughest year in a quarter of a century, but we saw numerous upside catalysts in place with the company back in profit and market conditions improving. UK interest rates looked to have peaked, while key competitors, notably collapsed online car dealer Cazoo, had exited the marketplace.

Crucially, Shares was reassured by a balance sheet strong enough for Motorpoint to absorb any unforeseen shocks.

WHAT HAS HAPPENED SINCE WE SAID BUY?

Motorpoint’s shares have revved up 25.2%, buoyed by the Bank of England’s August rate cut - the same month that the company achieved its highest performing retail volume since March 2022 by the way. Lower borrowing costs have put consumers in a better position to press the button on big-

Chart: Shares magazine • Source: LSEG

ticket purchases, while Mark Carpenter-steered Motorpoint’s positive half-year trading update (8 October) confirmed the company is back in the fast lane.

Derby-headquartered Motorpoint returned to profitability in the six months ended 30 September 2024 on strong retail volume growth of 17%. And though the supply of nearly-new vehicles remained constrained, used car prices and margins were ‘broadly stable’ in the period and Motorpoint’s stock turn materially improved.

WHAT SHOULD INVESTORS DO NOW?

Keep buying one of the few remaining Londonlisted automotive retailers, which is opening stores once again and well placed to reaccelerate growth. Motorpoint has guided for first half pre-tax profits of £2 million and the full year consensus analyst forecast of £4 million looks conservative. Earnings upgrades could be on the way if momentum stays strong with the business and the Bank of England cuts rates again in the months ahead, leaving consumers feeling more confident about their finances. [JC]

PLEASE

The Merchants Trust PLC

The Merchants Trust aims to provide an above average level of income that rises over time. So whilst we focus on investing in large UK companies with the potential to pay attractive dividends, you can focus on travel, family, home, retirement – whatever really matters to you. Although past performance does not predict future returns, we’ve paid a rising dividend to our shareholders for 42 consecutive years, earning us the Association of Investment Companies’ coveted Dividend Hero status. Beyond a focus on dividends, Merchants offers longevity too. Founded in 1889, we are one of the oldest investment trusts in the UK equity income sector. To see the current Merchants dividend yield, register for regular updates and insights, or just to find out more about us, please visit us online.

www.merchantstrust.co.uk

INVESTING INVOLVES RISK. THE VALUE OF AN INVESTMENT AND THE INCOME FROM IT MAY FALL AS WELL AS RISE AND INVESTORS MAY NOT GET BACK THE FULL AMOUNT INVESTED.

A ranking, a rating or an award provides no indicator of future performance and is not constant over time. You should contact your financial adviser before making any investment decision. For further information contact the issuer at the address indicated below. This is a marketing communication issued by Allianz Global Investors UK Limited, 199 Bishopsgate, London, EC2M 3TY, www.allianzglobalinvestors.co.uk. Allianz Global Investors UK Limited company number 11516839 is authorised and regulated by the Financial Conduct Authority. Details about the extent of our regulation are available from us on request and on the Financial Conduct Authority’s website (www.fca.org.uk). The duplication, publication, or transmission of the contents, irrespective of the form, is not permitted; except for the case of explicit permission by Allianz Global Investors UK Limited.

Reassessing the Scottish Mortgage investment case

Why we are optimistic that shares in the popular trust can continue to deliver outsized returns

This is the first time for a long time that Scottish Mortgage (SMT) has underperformed its FTSE All-World Index benchmark over five years, the timeframe the trust’s Baillie Gifford manager believes is most useful.

It might not be the case as you read this feature, such are the daily ebbs and flows of share prices and indexes, but it was in mid-October 2024. The three-year performance is far uglier, the share price off around 40% versus a near 30% gain for its benchmark. It’s been a particularly testing time for shareholders spoiled by prolonged spells of scorching returns.

Over the past decade (to 30 September 2024), for example, the share price has produced total returns of 282%, while NAV (net asset value) has increased 348%, versus 211% for the benchmark. In the 10 years to November 2021, at £15 all-time highs, the stock was showing a 10-year capital return of more than 1,000%.

Even Baillie Gifford director Stewart Heggie can’t remember the trust’s five-year returns underperforming, and that’s including during his 15 years as a discretionary fund manager before

joining Baillie Gifford in 2019. But Heggie stresses the unique conditions during the post-pandemic years, when the shift to work-from-home and online everything started to run out of puff, inflation turned ugly, and interest rates surged.

The trust has also suffered because it has a significant portfolio of private holdings, with a weak IPO market creating fewer opportunities to crystallise value.

INVESTMENT STRATEGY

Thousands of UK investors will be wondering, what now? To recap the trust’s pitch – Scottish Mortgage, run by Tom Slater and Lawrence Burns, aims to identify and back the world’s most exceptional growth companies, and, by doing so, deliver exceptional returns for shareholders over the long term. As with many things, it sounds simple yet is deceptively difficult to execute and investors must be willing to accept what might be called exceptional risk too.

But, the trust argues, it is an investment philosophy still capable of delivering ‘asymmetric’ returns, or in other words, has scope for unbounded upside versus capped downside.

Scottish Mortgage's top 10 stakes

guidance to future returns, which in part explains why Scottish Mortgage has been aggressively recycling its Nvidia profits into new ideas, such as Latin American banking business Nu Holdings (NU:NYSE) and Hermès (RMS:EPA), the French luxury brand.

Nu Holdings, commonly known as Nubank, is a digital banking powerhouse, the trust describes, that has shaken up the traditional banking scene in Latin America. Hundreds of millions of people in Latin America are under- or un-banked. Nubank, led by its founder and chief executive David Vélez, is using technology to help change that.

Hermès is a luxury leading light, says Scottish Mortgage, with exceptional craftsmanship and timeless elegance. ‘This iconic brand, known for its exquisite leather goods, silk scarves and high-end jewellery, still has exceptional growth potential by captivating the hearts of the newly affluent and aspirational,’ the trust says.

Table: Shares magazine • Source: Scottish Mortgage 30 September 2024

In truth, share price performance is not always the best gauge over shorter-term spells, illustrated by the fact that many of the companies in which Scottish Mortgage owns its largest stakes have continued to post very decent operating metrics over the past three years.

The most obvious example is Nvidia (NVDA:NASDAQ). In June this was the trust’s largest single stake with a 9.4% weighting. Thanks to its pole position in AI (artificial intelligence) chips, it has seen revenues surge from $16.7 billion to nearly $61 billion between 2021 and 2024 (to 31 Jan), startling growth.

Operating profit and earnings have increased by 631% and 592% respectively, margins and returns on capital have continued to rise (albeit, not in straight lines) and free cash flows have surged 10fold.

Yes, but Nvidia is an outlier, you might argue. However, it is just such outliers that are bread and butter to Scottish Mortgage. Nvidia’s stock has risen from $13 to $135 since the start of 2021. The trust first started buying Nvidia back in 2016 when the stock traded at around $1. Scottish Mortgage calculates its total return (to 30 September) at 8,591%.

Of course, yesterday’s profits offer little

Private company activity over time

Baillie Gifford, to 30 June 2024

As of 30 September 2024, Scottish Mortgage’s Nvidia stake was down to 4.1% of funds, still its fifth largest but far lighter than three months ago. The application of active management may help ease any investor concerns that Scottish Mortgage is merely resting on its laurels.

WHAT COULD SPARK THE STOCK

So far, 2024 has been a year of volatile performance, taking in peaks of more than 900p, and lows below 750p. At roughly 850p, as we write, the stock is about 8% higher than where it began 2024.

Scottish Mortgage

As we push through the final quarter of 2024, attention inevitably turns to what might enliven the share price through 2025 and beyond, and two clear reasons stand out: the discount and interest rates.

‘We now expect the Federal Funds target (upper) rate to fall to 4.5% by the end of this year, and to 3.5% by the end of 2025, and then to a neutral level of 3% by June 2026,’ said analysts at rating agency Fitch recently. They also admitted to being caught off guard by the Federal Reserve’s aggressive 50 basis point cut to 5% in September 2024.

With Scottish Mortgage’s focus on owning growth companies, the last couple of years have been a struggle. High interest rates act as a brake on these sorts of businesses as it raises the cost of capital, a vital source of growth funding. It also sees investors apply sharper discounts to tomorrow’s profits when so-called risk-free rates (government bonds) are more attractive.

But as rates come down, growth stocks should begin to become more popular with investors again, which will be good news for Scottish Mortgage.

A wider than usual discount also makes the shares in Scottish Mortgage appear more attractive, which should pull in new investment in the UK and, importantly, from abroad. Scottish Mortgage’s Stewart Heggie says the trust has been doing a lot of work with investors overseas, particularly in the US, an investment market seriously under tapped so far.

Scottish Mortgage shares are trading at a 13.7% discount to NAV (net asset value). In theory, this means investors can buy Scottish Mortgage stock for less than the trading value of its investee

company stakes.

True, because of the perceived higher risks of the growth companies in which the trust invests, Scottish Mortgage shares typically trade at a discount, but the long-term average is significantly below what it is today.

The Scottish Mortgage team know this and have implemented measures to cut the discount. For example, the trust recently outlined plans to purchase ‘at least £1 billion’ worth of its own shares over the next two years, with that figure having already been exceeded and more to come as the trust tries to ‘facilitate trading around NAV in normal market conditions.’

So, there are a few reasons to think Scottish Mortgage shares will rise in the months and years ahead. It almost certainly won’t be a smooth run, volatility is inherent in the stock, yet this remains a clearly focused investment trust aiming to capture outlier returns amid market risk aversion from many of the largest investment themes around, such as AI, energy storage, digital commerce, and healthcare technology.

Shares believes this means share price performance will improve and could match the benchmark-beating returns of the past 10 years in the decade to come.

By Steven Frazer News Editor

DISCLAIMER: The author of this article (Steven Frazer) owns a personal stake in Scottish Mortgage.

Temple Bar Investment Trust is managed by Redwheel’s Ian Lance and Nick Purves, who have more than fifty years of investing experience between them.

Experts in the UK stock market, Ian and Nick are classic value investors, looking to build a diversified portfolio of the most compelling undervalued companies they can find.

With the UK stock market currently among the most attractively valued assets that investors can buy anywhere in the world, they are currently very excited about the potential opportunity that lies ahead for the Trust.

Think value investing Think Temple Bar

“UK stocks look very attractively valued in a global context and when compared to history. Overseas businesses are already recognising this potential through acquisitions, and management teams are buying back shares at a record pace. These could represent meaningful catalysts for unlocking the inherent value in UK stocks. The long-term opportunity for UK value investors is significant.”

Ian

Lance,

Portfolio Manager

Temple Bar Investment Trust

For further information, please visit templebarinvestments.co.uk

GREAT VALUE UK STOCKS WHERE TO FIND THE BIGGEST BARGAINS

By the Shares’ team

The fact the UK market is cheap relative to its international peers is hardly new news to anyone who has been investing for a few years, and the reason usually given is the UK doesn’t have the same exposure to growth stocks as markets like the US.

When the bulk of the gains in the S&P 500 over the last couple of years have been generated by just half a big tech dozen stocks, that argument does seem pretty valid, but it still doesn’t explain why the UK as a whole is so undervalued.

Thomas Moore, manager of investment trust abrdn Equity Income (AEI), believes the problem lies with low investor expectations: ‘The UK is one of the most lowly-valued markets in the world. Side by side, UK companies tend to trade at lower valuations than US companies of comparable quality.’

However, the flip side of the coin is low expectations can be an opportunity for investors who are willing to go against the flow, says Moore.

‘If expectations are high, there is a risk that everything has to go right to justify the valuation. Even a small miss can cause a major wobble. By contrast, there is a decent chance that expectations are low enough for UK companies that even a small improvement in their operations could drive a valuation re-rating.’

Alex Wright, manager of Fidelity Special Values (FSV), argues the better-than-anticipated performance of the UK economy, and corporate earnings which have proved resilient in a global context – giving companies the confidence to buy back their own shares or launch takeovers – will start to draw more investors to the market.

‘Given the relatively robust performance of UK companies, it has been a surprise that we have not started to see the valuation gap between the UK and other global markets close. For us, this demonstrates the strong opportunity for savvy investors willing to invest in the UK market today,’ adds Wright.

ARE FALLING RATES A TAILWIND?

Considering ‘value’ stocks outperformed ‘growth’ stocks as interest rates rose in 2022, the idea they will outperform as rates fall seems somewhat counter-intuitive.

Surely lower interest rates are better for longduration ‘growth’ stocks, as a lower discount rate brings forward more of the earnings from future years?

Not so, says Simon Adler, global value equity manager at Schroders (SDR). ‘While many believe cheaper companies perform better when rates

are high, history shows this is not the case and that value has worked across many different rate environments. Ultimately it is starting valuations that have the biggest impact on future returns, regardless of the level and direction of rates.’

Redwheel’s Ian Lance, manager of Temple Bar (TMPL), concurs, calling it ‘somewhat of a myth that value cannot perform when rates are coming down’.

Buying a secondhand car for a low sticker price does not guarantee you are getting good value”

‘If you take the three periods in the last 25 years when value did really well – 2000 to 2005, after the TMT (technology, media and telecom) bubble burst; 2008 to 2010 after the GFC (global financial crisis); and from 2020 to 2022 – they all occurred when rates were falling.’

Also, says Lance, what all three starting points had in common was “a market dislocation which increased the spread in valuations between the cheapest and most expensive parts of the market’.

‘With TMT it was “sell anything old economy no matter how cheap in order to buy tech as that’s where the growth is”; in the GFC it was “flight to quality” because some people thought the financial world was coming to an end; and during the pandemic it was “sell anything cyclical no matter how cheap as lockdown would lead to a perma-recession”. In all three cases, the unwind of these narratives led to spectacular gains for “value” stocks.’

And, as Simon Gergel, manager of UK equity income fund Merchants Trust (MRCH) points out, ‘value’ stocks ‘tend to be more economically sensitive and cyclical than the average company, as investors will often pay a premium for companies with steady and reliable cashflows and profits growth’.

Therefore, at a fundamental level, ‘value’ shares ‘may do better when interest rates fall, as lower borrowing costs should help support the economy, benefitting more cyclical businesses’.

However, says Gergel, ‘We don’t find the categorisation of “value” and “growth” shares particularly helpful. We prefer to think about individual companies and whether they are cheap compared to our assessment of their fundamental worth, or intrinsic value.

‘Some highly-priced shares may offer good value if the company’s prospects are strong, and many lowly-priced companies will not offer value.

Buying a second-hand car for a low sticker price does not guarantee you are getting good value.’

WHAT IS ‘INTRINSIC VALUE’?

For abrdn’s Moore and his colleagues, understanding the drivers of a company’s cash flows –which are essential for the dividends they can expect to receive as shareholders – is fundamental to determining its ‘intrinsic value’.

‘We look to identify companies whose cash flows and dividends have not been properly factored into their share prices’, continues Moore.

‘One of our largest holdings, Imperial Brands (IMB), has a new management team who have focused on improving the delivery of cash flows by concentrating on core markets. This has resulted in a turnaround in its profitability, allowing both a generous dividend and a significant share buyback programme.

‘Added together, the dividend and buyback represent a mid-teens total distribution yield. At this pace, it would not be long before the entire market capitalisation of the company has been returned to shareholders.’

Gary Shannon and the team at Aurora Investment Trust (ARR) are also firm adherents to the concept of intrinsic value and use discounted cash flow models to measure what they believe companies could ultimately be worth.

Each model is unique to each business, and by using different assumptions and inputs the team can create a range of outcomes, including what they call a ‘stresses scenario’, and only if there is a substantial ‘margin of safety’ in the current valuation will they pull the trigger.

‘We invest in a way and build a portfolio that will deliver whatever happens, because it doesn’t rely on macro or global factors,’ says Shannon.

‘Cheap stocks today are as attractively priced as

they have been over the last 50 years,’ comments Schroders’ Adler.

‘Very few areas of the equity market are at a discount to their own history, but the cheapest 20% of listed companies globally are trading at roughly 10 times normalised earnings compared to circa 12 times since 1970. History shows these levels of starting valuations are a good thing for subsequent returns.’

WHAT ARE THE MANAGERS BUYING?

Redwheel’s Lance sees the most value in cyclical sectors such as energy, financials, retail and media, and is encouraged the level of corporate takeovers and share buybacks this year, both of which have driven sizeable gains in some companies.

Aurora’s managers are bullish on UK housebuilders and own shares in both Barratt Redrow (BTRW) and Bellway (BWY).

‘With inflation continuing to moderate, and interest rates starting to decline, mortgage rates have lowered and there is an increase in demand for mortgages and house buying, so volumes and prices have started to rise.

‘None of these developments have changed our central expectations of what will happen, but they have removed downside risks. If the Government succeeds in raising new housebuilding output, it will increase the upside,’ observe the managers.

Merchant’s Gergel is finding interesting value opportunities within in a broad range of sectors, including cyclical industries like housebuilding and building materials, real estate and parts of retail, as well as more defensive industries like utilities, tobacco and healthcare.

Schroders’ Adler says he sees compelling ideas trading on big discounts ‘across consumer-facing businesses, health care and telecoms, where the market has become overly fearful on company prospects, allowing us to pick up companies for far less than their worth’.

One example is Molson-Corrs (TAP:NYSE), the US alcohol business with a global leading beverage franchise across several markets. ‘The firm trades on low double-digit normalised earnings and is backed by a strong balance sheet on top of a world-class brand with a loyal customer base,’ says Adler.

‘Elsewhere, we have large health care companies trading on big discounts as the market is worried about the patent pipelines, despite robust balance sheets, very healthy R&D (research and development) spend with proven track records of innovation.’

Asset Value Investors’ Joe Bauernfreund, manager of AVI Global Trust (AGT), says he looks for three main characteristics when assessing a business: ‘a durable franchise which is growing in value; deeply discounted valuations; and catalysts to unlock and grow value, which includes our own activism.’

‘As things stand, discounts across all parts of our universe are wide by historical standards and we have constructed a concentrated-yet-diverse portfolio of companies with idiosyncratic catalysts and events to drive returns.

‘We believe this stands us in good stead, whatever the weather, with our largest holdings in (Belgian car parts distributor) D’Ieteren (DIE:EBR), News Corp (NWS:NASDAQ) and Chrysalis (CHRY) indicative of this approach.’

RIO TINTO

LARGE-CAP VALUE PLAY

£49.85 MARKET CAP: £84.6 BILLION

ahead of its peers in an area which is increasingly relevant thanks to the role miners have to play in the transition.

Poor sentiment around China has put a dent in Rio Tinto’s (RIO) share price in 2024 but we see long-term value in the mining giant.

The company is currently heavily dependent on iron ore for profit and revenue, with Chinese demand key here. However, it is expanding its copper footprint and this metal is likely to be in heavy demand thanks to the energy transition.

Output from its Oyu Tolgoi copper mine in Mongolia is expected to hit half a million tonnes a year by 2028 –which would make it the fourth biggest copper mine anywhere in the world.

The company is also developing new ways of processing copper through its Nuton unit which can increase levels of copper extraction.

Current CEO Jakob Stausholm has been confronted with some material ESG (environmental, social and governance) challenges from the beginning of his tenure. His response means the company could be

To quote Jefferies analyst Christopher LaFemina: ‘We believe that Rio is defensively positioned at this point, given its low production costs, strong balance sheet, and significant capital returns.’

Based on consensus forecasts Rio is on a 2025 price to earnings ratio of 9.6 times and offers a dividend yield of 6.1%. Given the generous dividends, investors are being paid to wait for the shares to return to their long-term average rating of around 12 times earnings. [TS]

Source: Rio Tinto

MID-CAP VALUE PLAY

INCHCAPE (INCH)

CAP: £3.2 BILLION

well as its weighting towards emerging markets offering faster growth and higher margins.

Exposure to developing regions does entail a greater risk of earnings instability, but operations in over 40 markets diversify this risk for the Duncan Tait-steered group.

The stock market is undervaluing global automotive distributor Inchcape (INCH), whose stubborn PE (price to earnings) discount to historical valuation ranges and attractive 4.3% dividend yield imply significant re-rating scope.

Having recently sold its UK retail operations for £346 million to Group 1 Automotive, the FTSE 250 company is now a focused automotive distribution business with structurally better margins, higher returns, superior cash generation and a strengthened balance sheet to boot.

As a pure-play global vehicle distributor, the £3.2 billion cap is in pole position to profit from increased vehicle ownership, outsourcing by OEMs (original equipment manufacturers) as

Selling brands ranging from Toyota, Jaguar and Land Rover to Mercedes-Benz, Volkswagen, Porsche and Subaru, Inchcape has prudently guided for ‘moderated’ growth in the current calendar year, but cyclical upswings in key regions and territories and the likelihood of new distribution contract wins suggest there’s upside risk to forecasts.

Furthermore, cash generative Inchcape’s increased £150 million buyback should boost EPS (earnings per share) and the company has the firepower for further acquisitions in fragmented end-markets.

For the year to December 2024, analysts at Berenberg forecast a pre-tax profit of £470 million and EPS of 75p, revving up to £518 million and 87p respectively in 2025.

Those estimates place the shares on an undemanding forward PE of 10.5 times falling to just nine times on next year’s numbers. Inchcape is scheduled to motor in with a third quarter update on 24 October. [JC]

SMALL-CAP VALUE PLAY

MARSTON’S (MARS)

PRICE: 43.2P MARKET CAP: £283.9 MILLION

Pubs group Marston’s (MARS) sits on a miserly five times consensus earnings forecasts for 2025 EPS (earnings per share) and trades on half book value, representing a great value opportunity for long-term, patient investors.

At an investor day on 16 October, management revealed plans to drive a high-margin, highly cash generative pure-play local pub business, capable of delivering over £50 million of annual free cash flow and margin expansion.

This represents a free cash flow yield of 17.6% which speaks to the value on offer.

The large £300 million reduction in net debt following Marston’s sale of its joint venture with Danish brewer Carlsberg (CARL-B:CPH) leaves it well placed to benefit from equity transfer.

That is, as debt is reduced, more of the underlying profit and cash flow is transferred to shareholders from debt holders.

Shore Capital’s leisure analyst Greg Johnson points out Marton’s has no bank debt, while improved profitability means cash flow is now ‘comfortably’ above scheduled bond repayments.

This provides the company with increased balance sheet flexibility and optionality, supported by the potential for an upward revision to the year-end (30 September) property

valuation. At the end of March, the estate was valued at £2.1 billion.

Marston’s community-led estate and flexible operating model is well positioned to exploit post-pandemic socialising trends. [MG]

TR Property: creating value through sustainable refurbishment

Though TR Property Investment Trust is best known for providing our shareholders with exposure to quality listed property companies, the real estate that we own directly also makes up a crucial part of our strategy. Up to 15 per cent of the trust’s value can be in direct holdings, allowing us to “practice what we preach”. We expect investee companies to commit to environmental targets – and we do the same at our own properties.

One example is our refurbishment of Ferrier Street Industrial Estate, a London site we acquired in 2002. This ongoing project is a key step in our commitment to reach net-zero carbon within our physical property portfolio by 2040.

Due to high tenant demand, the 35,000 square-foot estate is undergoing a proactive transformation, ensuring the units meet the highest environmental standards. Key features of the refurbishment include a new roof fitted with photovoltaic cells to generate renewable energy; upgraded electrical systems including energy-efficient LED lighting; and enhanced insulation – all contributing to an A* energy

Risk disclaimer

performance certificate (EPC). Only 7 per cent of commercial premises have an A or A* certificate.

Light industrial is a sector favoured in our listed holdings and our investment in Ferrier Street further reflects the growing demand for high-quality industrial workspace in major cities. The units match the needs of multichannel retailers, allowing them to service online customers, and supply physical stores around the city.

We have housed Wandsworth Foodbank at Ferrier Street for three years and relocated them to another unit when works commenced, ensuring there was no disruption to their essential service providing emergency food supplies to local residents. Given the importance of the built environment, the impact of our activities on surrounding communities is always considered.

To learn more, visit trproperty.com

Your capital is at risk. TR Property Investment Trust PLC is an investment trust and its Ordinary Shares are traded on the main market of the London Stock Exchange. English language copies of the key information document (KID) can be obtained from Columbia Threadneedle Investments, Cannon Place, 78 Cannon Street, London EC4N 6A. Email: inv.trusts@ columbiathreadneedle.com or electronically at www.columbiathreadneedle.com. Please read before taking any investment decision. The information provided in the marketing material does not constitute, and should not be construed as, investment advice or a recommendation to buy, sell or otherwise transact in the Funds. The manager has the right to terminate the arrangements made for marketing. Financial promotions are issued for marketing and information purposes; in the United Kingdom by Columbia Threadneedle Management Limited, which is authorised and regulated by the Financial Conduct Authority, approved as at 14/10/2024.

George Gay, fund manager – direct property and Hanna Corney, asset manager

Small-world: a whistle-stop tour of the comings and goings in UK small-caps

We start this month with more takeovers, beginning with fashionto-homewares retailer N Brown Group (BWNG:AIM), whose shares had been on a tear, more than doubling from their multi-year lows of 14p in May, well before this month’s bid came in.

On 17 October, the board announced it had agreed an all-cash offer of 40p per share from nonexecutive director Joshua Alliance, a member of the founding family behind the JD Williams to Jacamo owner.

The family said it had every confidence in the current executive team at N Brown, as well as its portfolio of well-established brands, but given the low liquidity in the shares, the lack of UK fund manager appetite for small-cap stocks and the costs of maintaining a listing, there was simply no benefit to the business remaining listed on AIM.

Luxury brand Mulberry (MUL:AIM) also found itself the subject of a bid this month, and after initially rejecting a 130p per share offer from the all-consuming Frasers (FRAS) said it was ‘considering’ the raised bid of 150p per share.

Shirebrook-based Frasers already has a 37% minority stake in the West Country leather goods

maker, but Singapore-based majority shareholder Challice, the investment vehicle of Malaysian billionaire Ong Beng Seng, described it as ‘an inopportune time for Mulberry to be sold’ and said it ‘particularly regrets the distraction the possible offer is bringing to the company and its management team at this time’, which we take to be a no, at least not at the current price.

Showing how it should be done, perhaps, is

TI Fluid Systems

automotive components maker TI Fluid Systems (TIFS), which said it was ‘considering its position’ after Canadian rival ABC Technologies raised its allcash bid for the firm for a fourth time.

Having initially pitched its offer at 165p, ABC returned with offers of 176p, 188p, 195p and finally 200p per share, ultimately a 51% premium to the undisturbed share price the day before its first approach.

The TIFS’ board insists it is ‘confident in its strategy’, but should ABC make a firm offer at 200p it would pull its arm off, or ‘be minded to recommend it to shareholders’ as the press release rather more delicately put it.

RACE TO SHED ASSETS

As well as firms selling themselves, quite a few smaller companies have announced they are ‘rationalising’ (i.e. downsizing) their operations over the last few weeks, the most high-profile of which is probably banknote printer and identification specialist De La Rue (DLAR)

The firm, whose shares had trebled from their summer 2023 low of 30p but were still some way from their pre-Covid level of 300p, revealed last week (15 October) it was disposing of its Authentication business for an enterprise value of £300 million to Connecticut-based Crane NXT (CXT:NYSE), sending its shares above the 100p mark.

Since July 2023, De La Rue has been looking for buyers for both its Authentication and Currency businesses, and this month’s sale ‘realises

significant capital and provides cash to the group for the benefit of all stakeholders by unlocking the intrinsic value’ of the division.

The cash will be used to repay debt and reduce the deficit in the legacy defined-benefit pension scheme, as well as giving the board breathing

De La Rue

room as they try to work out what to do with the Currency division.

Meanwhile, shares in IT services and communications group Cloudcoco (CLCO:AIM) more than doubled from 0.14p to 0.40p on the news (16 October) it had reached a deal to sell its IT managed services business for £9.2 million. Proceeds from the sale will be used to reduce long-term debt and ‘focus on expanding our value-added reseller operation, particularly in e-commerce, where we see significant opportunity’, said chief executive Simon Duckworth.

At the same time the firm is in advanced discussions to sell its Connect business to further bolster its financial position and ‘streamline’ its proposition.

BUY, BUY, BYE

Bath-based digital media firm Digitalbox (DBOX:AIM), which owns among other titles The Daily Mash, a firm favourite with this author, announced that having narrowly swung to a profit in the six months to June it would conduct a strategic review of its operations.

The return to profitability has been driven by acquiring and optimising digital assets, and the company is convinced there is scope to continue with its strategy, in particular in the entertainment space with highly-targeted brand launches, but after ‘clear representations’ from a key shareholder ─ which we take to be a UK fund manager

DigitalBox

specialising in micro-caps ─ the firm has decided to explore various options to maximise value, including putting itself up for sale.

Finally, micro-cap internet solutions firm Crossword Cybersecurity (CCS:AIM) had no choice but to hoist the For Sale sign after an internal review suggested it would need to raise up to £600,000 within the next six weeks if it were to remain a going concern.

The company has held talks with its biggest shareholders and a potential investor about raising further finance, but experience suggests a deal may be elusive as backers often turn out to have short arms and deep pockets when it comes to bail-outs.

By Ian Conway Deputy Editor

Chart: Shares magazine • Source: LSEG

BRIJ-ing the Gap in Your Portfolio

My Financial Life – what you need to consider when you are in your 60s

Retirement may or may not be the best option depending on your situation

As part of AJ Bell’s Money Matters campaign, which aims to help more women become empowered to live their best financial lives, we’re putting together a series of articles breaking down some of the particular considerations depending on your age.

This article focuses on a hugely important and pivotal decade, your 60s.

It’s the decade you’ve probably been thinking about for years and hopefully have been saving for.

We know the gender pension gap is real and far too wide for comfort, especially because women still live longer than men, but even as you approach state pension age it’s not too late to take control, in fact it’s more important than ever.

The first thing to do is actually work out what you have in your pension pot, and we know a third of women surveyed for AJ Bell research into that issue didn’t have a clue how much they had while more than half worry that they won’t have enough put by to live comfortably.

Thanks to a changing work environment, more women coming into their 60s today won’t have to rely solely on the state pension, but we also know that half have never paid more than the minimum contribution required. This is one of the reasons why, according to AJ Bell research, on average, woman have £16,415 less in their pots than their male counterparts.

There is a lot to think about before you swap your workplace wardrobe for your gardening gloves, though.

The ideal retirement age will be different for everyone, and we know that by the time they reach their 60s a lot of women have already stepped back from paid employment because of the impact of the menopause or because they have too many other responsibilities.

LOOKING AFTER THE GRANDKIDS

We know many women in their 60s find themselves sandwiched between caring for elderly parents and looking after grandchildren.

Even if they are able to keep working, they might have to cut back their hours which is a double whammy as they often find themselves out of pocket especially when it comes to providing free childcare.

No one wants to say no to helping out their children, but it is worth considering asking to be reimbursed for expenses like nappies and food; it will still be much cheaper for them than having to fork out for childcare.

And remember, if you are caring for under 12s and you have any holes in the National Insurance Contributions you may have amassed over the years, make sure you let HMRC know because you’ll be able to claim credits to fill those holes.

It’s also worth flagging that until 5 April 2025 you can ‘buy’ additional years all the way back to 2006, after then you can only fill in gaps from the previous six years.

It won’t be right for everyone, but with many women working part-time or taking time off to look after children, they could find they haven’t amassed enough contributions to qualify for the full state pension (you need 35 years).

For many people, reaching state pension age is that magic point but it’s worth making sure you

Danni Hewson: Money Matters

know exactly when that is for you.

People entering their 60s now won’t be able to claim the state pension until they turn 67, and those currently aged between 63 and 64 will very likely find themselves caught up in the transition period as the age changes from 66 to 67 (the changes take place between 2026 and 2028).

Contrary to popular belief, you don’t have to retire when you reach that magic number, whatever it is, and you don’t have to start collecting your state pension then either.

If you are still working full time it could make sense from a tax perspective to delay taking your state pension and that delay, as long as it’s over 9 weeks, will mean your state pension will be worth more by the time you finally take it (it increases by the equivalent of 1% for every nine weeks you defer, or 5.8% for a full year – right now that’s an extra £12.82 a week if you’ve deferred for a full 52 weeks).

If you are still working, chances are you are also still paying into a workplace or private pension.

You can take 25% tax free from your private pensions and claim the state pension without triggering the MPAA, the cliff edge that alters the amount you can pay into a pension every year which gets cut from the usual £60,000 annual allowance to just £10,000.

Working full- or part-time through your 60s and beyond is becoming increasingly common as people live longer, healthier lives.

But there will come a time when you want to slow down or step off the hamster wheel entirely, so it’s important to take steps as early as possible to prepare your finances for that point.

Do you want to swap your pension pot for an annuity, an insurance product which guarantees

Check NI contributions –have you qualified for the full state pension?

you an income for life, or would you rather have the flexibility of staying invested and just taking, or drawing down, the amount you want when you want it – something which also gives you the benefit of a longer time horizon (more time for your pot to grow).

A SIPP, or self-invested personal pension, is a product which can give you that flexibility and offers you lots of options to invest in.

DIFFERENT FOR EVERYONE

Everyone’s decision will be different but if you want to take all your pot in one go, either to buy an annuity or to take it all as cash, then you might want to reduce your investment risk as you approach that date, sometimes referred to as “life-styling”.

Stock markets can be volatile particularly over the short term and you don’t want to become a hostage to fortune.

Everybody’s retirement will be different so it’s important to remember there are no wrong choices as long as you’ve given yourself good building blocks.

Your 60s might seem as daunting as they are exciting, but the key is not to get overwhelmed, take slow but steady steps and look at your financial situation in the round.

We know there is a gender pension gap so think about the property you live in, other savings or investments you might have, and if you have a partner talk to them about how your finances will work together and plan early.

DISCLAIMER: AJ Bell referenced in the article owns Shares magazine. The author (Danni Hewson) and editor (Tom Sieber) of this article have an investment in AJ Bell.

MY FINANCIAL LIFE – 60S CHECK LIST

Tot up your pensions – do you know where all your pots are and could you bring them all together?

Plan ahead – do you have a clear idea of when you want to retire?

Think about your allowances and the tax man –remember, your pension income is still an income.

Don’t get stressed – taking small steps can make a big difference.

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Weight-loss drug stock rally: is it over or simply catching its breath?

Shares in Eli Lilly and Novo-Nordisk have lost momentum since the summer

Investing in firms which develop and sell life-changing drugs has been a rewarding trade over the past five years. The MSCI World Healthcare index has returned 73%, according to FE Fundinfo, nearly twice the return of the FTSE 100 (42%) in dollar terms.

Over the long term, those kind of returns are an incredibly powerful driver for wealth creation in an investment portfolio, although like any sector there will be good and bad years. There is also no guarantee returns from the healthcare sector will always be that strong.

If you think that 73% is a decent return, there is one stock which has outperformed the MSCI index 11 times over – Eli Lilly (LLY:NYSE), which

has a duopoly with Novo Nordisk (NVO:NYSE) in the provision of weight-loss drugs and has returned 806% in five years, the kind of gains most investors can only dream of achieving.

A study published in the JAMA Internal Medicine journal recently found Eli Lilly’s Mounjaro was more successful at helping users lose weight than Novo Nordisk’s Ozempic (known as Wegovy in the UK).

Does that explain why Eli Lilly has eclipsed Novo Nordisk on the stock market, with the latter ‘only’ achieving 350% returns over the past five years?

Whether that is purely a coincidence or not, demand currently exceeds supply for weightloss drugs from both companies. This situation puts pressure on Eli Lilly and Novo Nordisk to complete investments in additional production capacity so they can get more product onto the market.

It doesn’t look like a coincidence that their shares have stumbled given the supply constraints: Eli Lilly’s share price has been flat in recent months, while Novo Nordisk’s shares have eased back.

WHAT HAPPENS NEXT?

Investors can see potential challengers on the horizon as the next 12 to 24 months could bring Phase Three trial data for rival products. Drugs have to go through multiple tests before the regulator will consider them for commercial use, and Phase Three trials are the last stage of testing before submission to the authorities for approval.

So many names are trying to get in on the game, from small biotechnology companies to large players such as Amgen (AMGN:NASDAQ), AstraZeneca (AZN) and Pfizer (PFE:NYSE). Eli Lilly and Novo Nordisk have enjoyed massive success

commercially and on the stock market because they found a way to make weight-loss drugs more effective. The downside is users can experience nasty side-effects such as nausea, which has led people to come off the drugs.

The next phase in the weight-loss drug boom is for scientists to find ways to reduce the side-effects. Whoever does crack the magic formula could make a fortune.

BIG MARKET OPPORTUNITY

Greater volumes of weight-loss drugs should bring down prices, yet that should also broaden the potential market as the products become more affordable. It implies the sector still has a large opportunity to make money while at the same time helping to transform people’s lives.

‘It’s human nature that we don’t all want to diet and exercise, it’s not cutting it in terms of the obesity problem we’ve got, and people are getting more obese,’ says Ailsa Craig, joint fund manager of the International Biotechnology Trust (IBT). That might explain why individuals are looking for a different solution and embracing a weight-loss drug such as Zepbound and Wegovy. They are even more powerful than you think, with farreaching benefits.

‘It’s not just a lifestyle drug (to lose weight),’ adds Craig. ‘It’s also helping patients because it can reduce heart disease, hypertension, cholesterol, diabetes and kidney disease. All these comorbidities, each of which are separately treated with other drugs, could be prevented if these patients lost weight.’

There is the potential to have a weight-loss drug on the market which not only tackles obesity but also helps to reduce alcohol or substance use”

The benefits go even further. There is the potential to have a weightloss drug on the market which not only tackles obesity but also helps to reduce alcohol or substance use, and even used on a wider basis such as potentially helping to prevent

dementia and improve cognitive function in people with Alzheimer’s disease.

A US study of more than 500,000 people with a history of opioid- and alcohol-use disorder showed those who were separately prescribed weightloss drugs experienced up to 50% lower rates of overdose and intoxication than those without the treatment, according to the Financial Times

THE INVESTMENT THEME HASN’T PLAYED OUT

This broad spectrum of applications explains why weight-loss drugs have been one of the hottest investment themes in recent years, second only to AI (artificial intelligence).

No-one knows who the big players of tomorrow will be, and investing in the biotechnology and pharmaceutical industries comes with considerable risk which is why investors

Investing in the biotechnology and pharmaceutical industries comes with considerable risk which is why investors typically prefer to use a diversified specialist fund”

typically prefer to use a diversified specialist fund rather than betting everything on a single company.

Just because Eli Lilly and Novo Nordisk’s share price rallies have lost steam doesn’t mean the weight-loss drug theme has fully played out.

It’s perfectly normal to see a pause as the industry transitions to its next phase. We’re definitely at that stage now, but what’s certain is the space is getting even more interesting rather than fading away.

Finding Compelling Opportunities in Japan

What lower inflation means for your personal finances

CPI is below the Bank of England’s 2% target for the first time in three years

The CPI measure of inflation for September came in at 1.7% according to the latest set of figures produced by the Office for National Statistics. This is the first time in three years the inflation reading has dipped below the Bank of England’s 2% target, and against the backdrop of a painful inflationary period it marks a welcome return to less rampant price rises.

We shouldn’t read too much into one month’s inflation figures, especially when October’s rise in the energy price cap could see CPI rising again. However, lower inflation does widen the path for the Bank of England to loosen monetary policy. Markets are now pricing in the base rate falling back to 4.5% by the end of this year, and 4% by the middle of next year, so it’s worth considering what this might mean for your personal finances.

CASH

Lower inflation is, on the face of it, good for cash savers, as it means the interest earned on savings goes further in terms of increasing your spending power. But if interest rate cuts materialise, they will feed into lower cash returns too, particularly for

variable rate accounts. Nonetheless, cash savers still have their heads well above water when it comes to beating inflation with the best rates still offering around 5%.

That said, it’s future inflation and interest rates which will impact on the real return enjoyed by savers. We’re due an updated forecast from the Bank of England, but their last monetary report suggested inflation would be around 2.5% over the next year or so.

If interest rates fall in line with expectations, this will lead to a squeeze on the real returns enjoyed by savers in variable rate accounts. Given the outlook for rates to fall, the best deals for fixed term accounts still look pretty perky, and those who don’t need immediate access to their cash might consider whether it’s a good time to lock in current rates.

Chart: Shares magazine • Source: LSEG

Personal Finance: Inflation

MORTGAGE RATES

As interest rates fall, mortgage rates can be expected to follow suit, which is of course good news for anyone stepping onto the housing ladder for the first time. Lower rates are also good for those remortgaging, but how borrowers feel about coming off their old deal will very much depend on when it was brokered.

Five-year fixes coming up for renewal will have been taken out in the fourth quarter of 2019, when a typical rate for a 75% loan to value mortgage stood at around 1.7%, according to Bank of England data. These borrowers might be in for a nasty rate shock, although unless they’ve been living under a rock they probably know what’s in store.

By contrast anyone coming off a two-year fix might well have set their deal in the fourth quarter of 2022, when Kwasi Kwarteng’s mini-Budget wreaked havoc in the mortgage market. Average rates for a two-year fix on a 75% loan to value mortgage hit 6% at that time, and some borrowers will have been stuck paying significantly more. Remortgaging in a market where the best two-year fixes are coming in under 4% might seem like sweet relief to these borrowers.

BONDS

Lower inflation is good for conventional bonds, as it increases the value of their fixed income streams and serves to lower expectations for interest rates, pushing prices up and yields down. In theory, gilt yields should reflect interest rate expectations over the term of the bond, so it’s not the case that an interest rate cut will necessarily produce a commensurate fall in bond yields.

However, if inflation continues to come in below expectations it would prompt markets to accelerate and deepen their forecasts for

interest rate cuts, which would be positive for bond prices. Gilt yields have been rising in recent weeks, probably reflecting some jitteriness about the forthcoming Budget, which shows that government debt issuance and affordability also plays a part in government bond pricing, as do the Bank of England’s gilt sales, as it seeks to unwind quantitative easing.

Gilts are current yielding 4% at the two-year maturity, which doesn’t look too sharp for savers when you consider the best two-year fixed term accounts are yielding somewhere in the region of 4.5% according to Moneyfacts. However, the gilt yield starts to look more attractive for low coupon government bonds which offer a return which is almost tax-free, because gilts aren’t subject to capital gains tax. For example, a theoretical gilt yielding 4% delivered entirely through capital gains would be equivalent to an interest-bearing savings account paying 6.6% in the hands of a higher rate taxpayer who had used their Personal Savings Allowance, or 7.3% in the hands of an additional rate taxpayer. Little wonder then that low coupon gilts have been used as cash alternatives by wealthier individuals looking to manage their tax bill.

UK EQUITIES

Lower inflation is also good for UK equities as it means dividends and capital growth look more attractive in real terms. Like other assets, each percentage point of annual returns delivered now provides more bang for your buck when it comes to growing your spending power. A more buoyant consumer who is less constrained by inflation also spells good news for companies which sell discretionary items to UK households.

Limp economic growth and weak investor sentiment may continue to drag on the performance of the UK equities though. More money in consumer pockets combined with lower variable cash rates might persuade more individuals to invest in the stock market, though in recent times that’s meant more money going into global rather than UK funds.

By Laith Khalaf AJ Bell Head of Investment Analysis

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Is my pension tax-free lump sum under threat and what should I do?

Our resident expert looks at the issues posed by potential changes in the Budget

I have been reading more and more press reports that the chancellor is going to reduce the amount of tax-free cash lump sum that I can take to only £100,000.

I haven’t yet touched my SIPP but I’m really worried that I will lose out if this change goes ahead. Can you tell me whether it is going to affect everyone, or only those who have not yet started taking their pension benefits? And is there any way I can protect what I have? Will it be an immediate change, and if so am I better taking my tax-free cash today?

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

It will have been a wait of almost four months between Labour winning the general election and their first Budget. That is four months of mounting speculation on the tax measures the government could take to close the now infamous £22 billion black hole in public finances.

Many press column inches have been devoted to the possible tax cuts, balancing the pros and cons of each option, with a growing focus on pensions’ tax advantages.

From the most recent reports, it seems increasingly unlikely the Government will restrict tax relief on individuals’ pension contributions, but the rumours around a cut in the maximum tax-free cash still appear rife. Reports often refer to £100,000 – a figure suggested by an Institute of Fiscal Studies report a few weeks ago.

If the Treasury did make this change, they would cut the LSA (lump sum allowance). This is the maximum amount of tax-free lump sums someone can usually take in their lifetime. This is currently £268,275, and you’d need a pot of at least £1,073,100 to take full advantage of this.

We have had no word from the Treasury that

they are going to make any changes. However, in the absence of hard facts, it’s very easy to feel pressurised . Pension schemes have generally seen a sharp increase in the number of people accessing their tax-free cash to make sure it’s not lost.

THINGS TO THINK ABOUT

But before you rush to do the same, there are a number of practical things to think about. First, you have to be over the age of 55 to access your pension pot today. If you are younger than that, you cannot take your tax-free cash.

It’s far from certain who any cut in the LSA would affect. On the past occasions when the pensions lifetime allowance has been cut, those who had amassed benefits based on the old limit have been offered protection. So, another layer of protection could apply if the LSA was cut, making sure people that have already saved based on the higher limit don’t lose out.

You will be removing the cash from an environment where it can grow tax free, so if you do choose to access it, at the very least make sure you have a plan for it. If you just take the money out of your pension and put it in a bank account earning little to no interest, its value will likely quickly be eaten away by inflation.

It could also be a sizeable sum and may take several years to move to an ISA if using the

Ask Rachel: Your retirement questions answered

maximum £20,000 a year subscription limit. Left outside a tax wrapper such as ISA or pension, and any growth will be liable to income tax and capital gains tax (the rate of which is strongly rumoured to increase in the Budget).

But if left in your pension, your tax-free cash entitlement could have the opportunity to grow tax free too, boosting your pension funds for when you need them.

To tackle their current financial woes, the Government needs a solution that is quick and easy to implement and raises sufficient funds to make it worthwhile. If they chose to cut the maximum tax-free cash, then theoretically that could happen immediately. But this would very much depend upon the wording of the Budget statement.

KEEP A CALM HEAD

However, it’s unlikely this change would deliver the substantial in-year savings sought by the Treasury, and pension savers would certainly change their behaviour to only take the maximum

tax-free amount allowed. It would also be deeply unpopular – most people know they get 25% of their pension pot as a tax-free cash lump sum, and far more would have this capped were the maximum allowed subject to such a drastic cut. With so much ‘noise’, it can be difficult to make a rational decision. But ultimately, pension savers need to take a cool calm look at their own situation and make choices based on what works best for their long-term future.

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.

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 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.

1. In keeping with the existing practice, reporters who intend to write about any securities, derivatives or positions with spread betting organisations that they have an interest in should first clear their writing with the editor. If the editor agrees that the

reporter can write about the interest, it should be disclosed to readers at the end of the story. Holdings by third parties including families, trusts, selfselect pension funds, self select ISAs and PEPs and nominee accounts are included in such interests.

2. Reporters will inform the editor on any occasion that they transact shares, derivatives or spread betting positions. This will overcome situations when the interests they are considering might conflict with reports by other writers in the magazine. This notification should be confirmed by e-mail.

3. Reporters are required to hold a full personal interest register. The whereabouts of this register should be revealed to the editor.

4. A reporter should not have made a transaction of shares, derivatives or spread betting positions for 30 days before the publication of an article that mentions such interest. Reporters who have an interest in a company they have written about should not transact the shares within 30 days after the on-sale date of the magazine.