Shares magazine 26 September 2024

VS

to shift from interest rates to earnings in coming weeks

15 Why Oracle’s run could go much further than you think

Why unloved cosmetics retailer Ulta Beauty is a buy

19 Judges Scientific confirms full-year outlook despite ‘subdued’ first half

20 Small World: AI and healthcare IPOs and big contract wins

What to expect from the markets as the US heads to the polls

The story behind China’s long-running e-commerce boom. Emerging markets: Chinese e-commerce and property and Mexican peso under

Three important things in this week’s magazine

1

What the US election could mean for investors

The race for the White House may cause some short-term volatility but contrary to popular perceptions a Democrat win might be better for the stock market.

2

Learn how to manage a portfolio with ease

In the second of our series on managing your portfolio we look at investing new money and above all not being distracted by short-term headlines and price fluctuations.

Visit our website for more articles

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

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

3

Catch up with the latest news from small-cap UK companies

Read our monthly round-up of business developments at the smaller end of the market.

‘Panic on the streets of London’ as Smiths tanks

Investors toast C&G Group outlook and buyback Australian rival REA ups offer for online property portal Rightmove

Investors nervously awaiting developments in Westminster and Washington

The Budget and US presidential election add to an uncertain market backdrop in the coming weeks

There are two political events in the remainder of 2024 on either side of the Atlantic to which investors need to pay full attention.

The first of these is Labour’s first Budget for 14 years on 30 October, with chancellor Rachel Reeves giving few clues to the details in her speech to the party conference on 23 September.

Previous references to ‘hard decisions’ and those with the ‘broadest shoulders’ bearing the heaviest burden imply this could mean considerable changes for UK investors.

As Dan Coatsworth explores in his latest column, this may include inheritance tax relief on AIM stocks being abolished.

There are already signs the gloomy rhetoric about the UK’s prospects from Labour, which is an attempt to manage expectations and pin the blame for economic woes on the Conservatives, is becoming a self-fulfilling prophecy.

The latest barometer of sentiment from consultancy GfK found consumer confidence fell to -20, the lowest level since March. This column warned of such a risk two weeks ago.

In next week’s issue, Ian Conway will discuss in a lot more detail the key areas to watch in the Budget.

This week our attention is centred on the US and the key factors to weigh ahead of the presidential election, with Americans going to the polls in a little over a month.

As usual our own thoughts are supplemented by some expert opinion. With polling suggesting the election is on a knife-edge, investors may have to brace themselves for volatility at the back end of the year.

Also in this issue, there’s the second entry in our three-part series marking the addition of our My

UK GfK Consumer Confidence Index NADJ

Portfolio section as Martin Gamble discusses how to manage a portfolio over time.

Our funds and trusts editor James Crux explains a key change impacting the investment trust sector, and we look at the fallout from the Federal Reserve’s blockbuster 50 basis-point rate cut.

There is no doubt the first Fed rate cut of the current cycle is a significant milestone, but it is not the only consideration for the market to consider.

This was summed up pithily by Bank of America, the investment bank opining: ‘For US equity returns, policy moves take a backseat to the scarcity or abundance of corporate profits.’ With thirdquarter earnings season due to get underway in mid-October, there will be hope US businesses can deliver some abundance and keep stocks afloat.

Chart: Shares magazine • Source: LSEG

Surprise jumbo rate cut sends stocks and gold to new all-time highs

Did the Fed go large to catch up or to get ‘ahead of the curve’?

MRebased to 100

aking a virtue out of necessity is the hallmark of a skilled communicator, and that certainly applies to US Federal Reserve chair Jay Powell after markets seemingly embraced his decision to start the rate-cutting cycle with an unusually large half a percentage point cut on 18 September.

The benchmark S&P 500 index soared to its 33rd new all-time high of the year while the Dow Jones Industrial Average breached 42,000 for the first time ever.

What was also interesting about the market’s reaction was gold touched a new high and the US 30-year Treasury yield moved higher, while shorterdated yields barely moved.

The yellow metal tends to benefit from a fall in inflation-adjusted interest rates and has also been in demand as tensions in the Middle East escalate.

That said, the move could suggest investors want to protect themselves from higher inflation. The move in the US 30-year Treasury bond yield gives some credence to that possibility.

A reminder inflation has not been quashed is the potential strike by US port workers which could affect 41% of the country’s container port volume leading to shortages and higher prices amid a fresh supply chain crisis.

Chair Powell effectively told the world the jumbo interest rate cut was intended to get ‘ahead

of the curve’ and maintain the strength of the labour market.

‘The labour market is in a solid condition, and we want to keep it there; same for economy,’ said Powell in a press conference.

Analyst Orla Norman at Pictet Wealth Management believes this represents a dovish shift in the Fed’s thinking and predicts another half a percentage point cut in November followed by a quarter-point cut in December.

Powell was careful not to declare victory over inflation and cautioned observers not to expect big rate cuts but a gradual recalibration of the Fed’s monetary stance back towards neutrality.

The central bank’s latest set of economic projections show officials believe the neutral rate of interest, where policy neither stimulates nor restricts activity, has moved up slightly to 2.9%.

Fed officials expect two further quarter of a percentage point rate cuts in 2024 and a total of 2.5% of cuts altogether, leaving the Fed Funds rate between 2.75% and 3% in 2026.

Making a bigger-than-expected rate cut without spooking investors is quite a coup. Historically the central bank has only moved by half a percentage point when it is worried about a weakening economy.

One thing remains clear – the battle between bulls and bears of the economy has a few more rounds in it yet. [MG]

Microsoft, BlackRock, Nvidia back enormous new AI datacentre fund

The world’s leading companies from the software, investment and microchip industries are to join forces to set-up an enormous new investment vehicle aimed at developing next generation AI (artificial intelligence) infrastructure and datacentres.

Microsoft (MSFT:NASDAQ) and BlackRock (BLK:NYSE), the world’s largest software company and asset manager respectively, hope to pull in $30 billion in private equity capital in a new joint fund, catchily named the ‘Global AI Infrastructure Investment Partnership’. It will be supported with expertise from Nvidia (NVDA:NASDAQ), the world’s biggest microchip design company.

to meet the soaring power requirements of datacentres.

As AI and cloud computing boom, the need for AI accelerator chips is rising fast, leading to an exponential increase in power consumption. According to Goldman Sachs research, a ChatGPT query needs nearly 10 times as much electricity to process as a Google search.

Alongside debt financing, the total funding might hit $100 billion, an enormous slug of new capital to design and build next-generation datacentres, while also funding various energy projects in the US

Goldman Sachs estimates that datacentre power demand will grow 160% by 2030 with the rise of generative AI and surging GPU (graphics processing units) shipments causing datacentres to scale from tens of thousands to 100,000-plus accelerators, shifting the emphasis to power as a missioncritical problem to solve.

Recent research showed the datacentre power needs of Microsoft, Alphabet (GOOG:NASDAQ) and Meta Platforms (META:NASDAQ) combined was larger than entire nations, like Nigeria and Ireland.

On 20 September Microsoft announced a partnership with US energy firm Constellation Energy (CEG:NASDAQ) that will see the infamous Three Mile Island nuclear power plant reopened to meet Microsoft’s insatiable datacentre energy demands while also helping to address its commitments to cut carbon emissions.

Three Mile Island was the scene of a 1979 nuclear disaster, at the time the world’s worst. The project has the support of the US Department of Energy, Pennsylvania politicians, and residents. The site will be renamed Crane Clean Energy Center.

Microsoft wants to be carbon negative by 2030, and by 2050 it aims to have removed from the environment all the carbon the company has emitted either directly or by electrical consumption since it was founded in 1975. [SF]

Investment trust sector celebrates ‘leap forward’ on cost disclosure

In a regulatory breakthrough, trusts will no longer have to double-count costs and retail investors could benefit from narrowing discounts

The investment trust sector is in celebratory mood after the Labour government and the FCA (Financial Conduct Authority) announced (19 September) they will exempt London-listed investment trusts from the EU’s PRIIPs (Packaged Retail and Insurance-based Investment Products regulation) and Mifid directives that forced them to double-count their costs.

Onerous and misleading disclosure requirements have had a material impact on the investment trust sector, particularly within alternative asset classes such as private equity where discounts have widened materially, leading some investors to question their involvement in the sector altogether.

Suspension of the rules paves the way for a permanent solution to this long-standing and damaging problem”

However, until the UK’s new framework for CCIs (Consumer Composite Investments) comes into force, the FCA will not action against trusts that don’t comply with PRIIPs (regulation) and there is no requirement for them to publish a KID document.

It is hoped the new measures, which follow consistent lobbying by the Association of Investment Companies (AIC), will put investment trusts back on the radar of disillusioned investors and bring in the wide discounts that have blighted the sector, which will benefit existing investment trust shareholders.

The Treasury said the new fees disclosure regime will help investors to better understand the fees they are paying for investment trusts, as well as any additional costs that are being added by wealth managers and IFAs.

Richard Stone, chief executive of the AIC, said: ‘This leap forward on cost disclosure is great news for investment companies and their

investors. The temporary suspension of the rules paves the way for a permanent solution to this long-standing and damaging problem.’

Stone continued: ‘Ending misleading cost disclosures will enable us to continue delivering for investors and make a critical contribution to the economy as the government drives forward its ambitions for growth, investment and wealth creation.’

Ryan Hughes, interim AJ Bell Investments managing director, said news that the government and FCA have moved to allow investment trusts to temporarily ignore the current cost disclosure requirements will be ‘warmly welcomed’ by the investment trust industry and broader market participants alike.

‘Investment trusts play a hugely important role both in the financial services sector and the wider economy as a provider of capital and the unintended consequences of the current legislation created an unequal playing field that put investment trusts at a disadvantage and threatened, in some cases, their very existence,’ explained Hughes.

THE PROBLEM IN A NUTSHELL

Share prices already reflect the value of an investment trust based on a high level of cost disclosure (including on fees paid to their managers) but institutions and advisors who invested in investment trusts were being forced to report the costs again in their own disclosures to clients.

‘The removal of this unnecessary barrier will help the investment trusts sector regain its footing and allow them to compete equally against other investment structures, which will put them back on the radar for investors who have been reluctant to use them given the cost disclosure requirements.’

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

Communications kit designer Filtronic receives boost from SpaceX

Shares have gained 336% over the past year after Elon Musk tie-up

Communications equipment specialist Filtronic (FTC:AIM) has Elon Musk’s space exploration company SpaceX to thank for recent share price gains.

Over the past year Filtronic shares are up 336% as the company continues to maintain a relationship with SpaceX first announced in April 2024.

On 30 August, Filtronic announced a further follow-on production order with SpaceX valued

at £6.4 million for E-band solid-state power amplifier modules for the Starlink constellation of satellites.

As per the partnership agreement SpaceX now holds warrants for over 10.9 million Filtronic shares or 5% of the share capital.

Deliveries will take place during the calendar year 2025 and Filtronic says that it now expects to ‘trade ahead of existing market expectations for full year May 2025’.

Analysts at Cavendish have raised their 2025 adjusted pre-tax profit forecast by 20%.

Filtronic has also been expanding

Oxford Metrics slumps to six-year low after profit warning

Market picks up on weak trading at smart sensing firm

Smart sensing firm Oxford Metrics (OMG:AIM) is on its uppers after a damaging profit warning on 23 September.

The shares slumped to their lowest level since 2018 as the company said revenue would come in at £40 million to £42 million for the 12 months to 30 September 2024 compared with consensus forecasts for £48.6 million and, as a result, adjusted

pre-tax profit would be ‘materially below’ the £7.8 million previously penciled in.

The company will hope the ‘greater caution’ displayed by clients and the resulting more protracted purchasing decisions abate soon. Otherwise, there is no guarantee the opportunities which have been shunted forward actually materialise as new business.

The commentary in the trading update suggests while its Vicon, Engineering and Life Sciences units are slightly behind, the big culprit is the Entertainment division

into the LEO (low-earth orbit) satellite communications market.

‘We identify a serviceable addressable market for Filtronic in the LEO market in the range of $100 million to $300 million over the period 2025-2027, and we believe that this segment will remain a very important growth driver for the company,’ says Cavendish. [SG]

thanks to lower levels of activity in the computer game industry.

Much now rests on the firm’s motion capture technology Markerless, which is on track for commercial delivery in the next financial year. The company is at least afforded some breathing space by a net cash position of around £50 million. [TS]

UK UPDATES

OVER T HE NEXT 7 DAYS

FIRST-HALF RESULTS

27 Sep: Clean Power Hydrogen, Ceres Power Holdings, Helios Underwriting

30 Sep: Christie, Xeros Technology, Frenkel Topping, Bango, Playtech, Likewise, Surgical Innovations, Huddled, Gresham

House Energy Storage Fund, RBG, Zinc Media, Venture Life

2 Oct: Pinewood Technologies, JD

Sports Fashion, Inspiration Healthcare

3 Oct: Tesco

Tesco looks to extend its recent record of delivery

Britain’s biggest grocer is gaining share and growing volumes in a super-competitive

core market

Tesco’s (TSCO) shares have ticked up 35% over the past year, so Britain’s biggest grocer by some stretch will need to deliver good news with first half results (3 October) to sustain its upwards stock price momentum.

Steered by CEO Ken Murphy, Tesco is expected to update investors on another period of robust trading with further share gains in an ultracompetitive UK & Ireland market, where arch-rival J Sainsbury (SBRY) appears rejuvenated and Tesco’s keen prices are keeping German discounters Aldi and Lidl at bay ─ its Aldi Price Match, Everyday Low Value and Clubcard Prices mechanics are a powerful combination.

‘We continue to be the cheapest full-line grocer and are the most competitive we’ve ever been, with our value, product quality and service driving better brand perception and customer satisfaction,’ insisted Murphy at the first quarter results in June. Shore Capital forecasts 4.3% UK like-for-like sales growth for the first half, which would be a respectable outcome given easing inflation and

Tesco’s size and market leadership, and sees adjusted pre-tax profit coming in at roughly £1.3 billion. Investors will be hoping Tesco benefited from the summer of sport, with its Finest Dine In summer range flying off the shelves, although poor weather won’t have helped wholesaler Booker to shift impulse and outdoor eating lines.

Shore Capital sees scope to upgrade its full year 2025 estimates at the results, while cautioning that the Christmas period, as ever, ‘remains one that requires delivery and should not just be given as read’. [JC]

What the market expects of Tesco

No quick fix for hard-pressed Nike

The sportswear giant has switched CEOs in a bid to regain its sales and share price swoosh

Shares in Nike (NKE:NYSE) surged on Wall Street after the world’s biggest sportswear company announced (19 September) that Elliott Hill was coming out of retirement to take over as chief executive amidst slowing revenue growth, intense competition from Adidas (ADS:ETR), On Running and Hoka and concerns about the success of its pivot to direct-toconsumer sales.

First quarter results on 1 October will provide a swansong for John Donahoe, who retires on 13 October 2024 after a rocky stint running the iconic American sportswear firm, though he will remain an advisor until January 2025 to ensure a smooth transition.

Investors will hope first-quarter sales were no worse than the 10% plunge Nike guided to at the fourthquarter results in June, when it also slashed its full-year 2025 guidance due to ‘uneven consumer trends’ around the globe with sales proving stubbornly soft in China.

An investor day on 19 November 2024 will provide the first opportunity for Hill, a 32-year Nike veteran who

retired in 2020, to set out his strategy for turning round the sneakers-tosoccer balls titan which is in the middle of a restructuring having lost sight of innovation.

Challenges facing product guy Hill following his four-year Nike absence include rising competition, reinvigorating innovation and the need to rebuild relationships with wholesale retail partners.

Nike’s adjusted earnings per share of $1.01 for the fourth quarter to May 2024 beat the 83 cents expected by Wall Street thanks to its cost-cutting drive, but revenue of $12.61 billion was shy of the $12.84 billion analysts were looking for, while revenue in North America, the Oregon-based behemoth’s biggest market, came in below market expectations at $5.28 billion. [JC]

UPDATES OVER THE NEXT 7 DAYS

QUARTERLY RESULTS

1 Oct: Nike

2 Oct: Conagra Brands

3 Oct: Constellation Brands

Focus to shift from interest rates to earnings in coming weeks

US companies are seen increasing profits by 10% this year led by big tech

With rate cuts now in the rear-view mirror, and with the US market trading at an all-time price

high at the end of last week, attention is likely to turn to corporate earnings to make sure we aren’t overpaying for stocks at this point.

Macro diary 26 September to 3

Macro diary 26 September to 3

Macro diary 26 September to 3

Forecasts for S&P 500 earnings have been gently drifting down all year, which is perfectly normal as analysts routinely start the year on too optimistic a note and end up dialling down their expectations.

The latest estimate for third-quarter reported index earnings is $54 compared with $47.65 last year, while fourth-quarter reported earnings are seen hitting $57.56 against $47.79, taking the fullyear total to $212.11, a 10.2% increase on 2023.

The biggest contribution is expected to come from technology stocks (22% of total index earnings for the third quarter and almost 25% for the fourth quarter), followed by financials (17.6% and 17.3%) and health care (13.3% and 13.2%).

Meanwhile, this week’s UK September PMI survey showed a solid rise in private-sector activity, albeit at a slower rate than in August, marking 11 straight months of continuous expansion.

Also pleasing, especially for the Bank of England, was the news price rises slowed to more than a three-year low as weak inflation in the service sector more than offset price hikes by manufacturers who are experiencing higher wages and shipping costs. [IC]

Next Central Bank Meetings & Current

•

Table:

Add Definition to Your Portfolio

Defined outcome strategies that increase potential to reduce systematic risk and equity volatility.

Why Oracle’s run could go much further than you think

Enterprise cloud and database firm worth buying even after 60% rally this year

$165.95

Market cap: $460 billion

There are investors who believe that the world’s three hyper-scale cloud computing firms – Amazon (AMZN:NASDAQ), Microsoft (MSFT:NASDAQ) and Alphabet (GOOG:NASDAQ) – have that market tied up. Shares believes that Oracle (ORCL:NYSE) has a very good chance of crashing the cloud party, that consensus growth estimates could prove too low, and that the stock – up 60% already this year – has a great chance of shooting beyond the $210 12-month peak price targets of analysts.

Between them, AWS, Azure and Google Cloud have about two-thirds of the global cloud market wrapped up, according to data from Synergy Research, yet Oracle’s ability to work with them presents an enormous opportunity.

Oracle, with a client base that includes Fortune 500 companies as well as governments, remains one of the world’s leading database enterprise companies, and it’s that infrastructure that is crucial, helping solve tricky migration issues for cloud partners.

Chart: Shares magazine • Source: LSEG

One of the big challenges it has faced in recent years is, as enterprises embraced cloud solutions, many were bypassing Oracle’s technology. But recent years have seen the company target investment into its own cloud ecosystem, and that’s becoming the fastest growing part of the business.

CLOUD CONTROL

In the most recent quarter to 31 August 2024, overall cloud revenues rose 21% to $5.6 billion, while Oracle Cloud Infrastructure consumption revenues jumped 56% as demand continued to outstrip supply, including winning cloud computing contracts from AI-focused startups and with AWS. That has helped Oracle outrun struggles that have hit other software stocks this year.

AWS, Azure, and Google Cloud, as well as Oracle’s ‘AI-first cloud architecture’ could play a role in helping Oracle support growth, according to Melius analysts, who see those partnerships as a signal that those companies increasingly ‘need to work with Oracle to keep driving their own Cloud segment growth.

Shares magazine • Source: Synergy Research, Statista

Bernstein called Oracle their ‘top investment idea’ after the event, citing Oracle’s cloud services growth, AI vision, and the shift of its flagship database business to the cloud.

Jefferies analysts said they believe Oracle could be ‘getting its mojo back’ after attending the company’s recent CloudWorld event, where the tech titan said it expects sales to nearly double in the next five years on AI-driven demand for cloud services.

At Oracle’s annual briefing for financial analysts, the company said it expects its revenue will rise to at least $104 billion by fiscal 2029, nearly doubling the $53 billion Oracle reported in June for fiscal 2024.

The company also raised its sales projection for fiscal 2026 to at least $66 billion, up from an earlier $65 billion. This won’t be easy and Citi analysts called the new targets ‘aggressive’ and said Oracle could be ‘reaching for the sky’ with its projections, so there is clearly scope that it could disappoint.

WHAT ABOUT VALUATION?

averages, what many fund managers do, including Gerrit Smit, who runs the popular Stonehage Fleming Global Best Ideas Fund (BCLYMF3)

First, the one-year picture. According to consensus data from Koyfin, Oracle is seen growing revenues and EPS (earnings per share) by about 10% and 13% this year to 31 May 2025. It puts the stock on a PE (price to earnings) of roughly 26, or a PEG (price to earnings growth) of 2.0.

The S&P 500 is on a 12-month forward PE of 22.2 and PEG of 1.85. Now let’s look at Oracle’s three-year averages. Again, based on Koyfin data, the stock is trading on a three-year average PE of 22.7 and PEG of 1.57, implying that growth is seen accelerating, drawing the PE down.

So, what’s priced in? It can be argued that with a constantly forward-looking market, using one-year metrics for growth, earnings or valuation has limit use. Better to look at trends rather than absolute figures, perhaps better captured by, say, three-year

This is borne out by consensus forecasts trends. Consensus for fiscal 2025, 2026 and 2027 have increased by roughly 10%, 12% and 14% respectively over the past year as analysts have become more bullish on the growth potential. We believe this estimated upgrade cycle may have further to run, either making the stock cheaper down the line or, more likely in our view, driving the share price to new records.

On our back of notebook calculations, a 10% to 12% increase to 2027 estimates could imply a share price near $250, assuming a similar PE to the current one-year rating. [SF]

Why unloved cosmetics retailer Ulta Beauty is a buy

Warren Buffett’s Berkshire Hathaway conglomerate recently snapped up a stake in this pretty resilient US retailer

$391.70

Market cap: $18.5 billion

A20% year-to-date share price drop at Ulta Beauty (ULTA:NASDAQ), America’s biggest specialist beauty retailer, presents an attractive buying opportunity for growth and value seekers alike. Warren Buffett’s Berkshire Hathaway (BRK:B:NYSE) evidently sees value in the name, having recently snapped up a stake in the Illinoisheadquartered make-up, haircare, skincare and fragrance products purveyor which has lately suffered from intensifying competition and cooling consumer demand, with same-store sales growth weakening as a result.

However, in common with the likes of Estee Lauder (EL:NYSE), L’Oreal (OR:EPA), elf Beauty (ELF:NYSE) and Warpaint London (W7L:AIM), Ulta operates in a cosmetics market that has demonstrated resilience through economic cycles, often referred to as ‘the lipstick effect’. In addition, this cashed-up retail cosmetics chain benefits from

a loyal customer base and its overseas growth potential doesn’t appear to be priced in, with Ulta’s shares looking cheap relative to history with scope to re-rate if the company can rejuvenate its growth rates.

BEAUTIFUL POSSIBILITIES

Ulta Beauty is the largest beauty retailer in the US, selling both mass and prestige cosmetics, fragrances, skin care and hair care products, as well as offering salon services, through some 1,411 brick and mortar stores and online via ulta.com. Sales topped $11.2 billion in the year to January 2024, an impressive jump from the $7.4 billion of revenue

notched up in pre-pandemic 2019.

The $18.5 billion cap benefits from access to leading brands and exclusive products, while its best-in-class merchandising encourages frequent store visits and draws shoppers from department stores. Stockopedia data shows Ulta Beauty’s ROCE (return on capital employed), a key gauge of profitability, exceeded 40% in the last three financial years to January, while Morningstar estimates the company’s adjusted ROIC (return on invested capital) including goodwill will average out at a healthy 31% over the next decade.

Recent share price weakness reflects CEO Dave Kimbell’s warning of softening beauty demand at an investor conference back in April followed up by disappointing second quarter results on 29 August, when Ulta delivered its first EPS (earnings per share) miss since May 2020. Second quarter samestore sales fell 1.2%, well below the 1.4% growth

Wall Street was looking for as the company lapped tough prior year comparatives, and Ulta also cut its full year sales and EPS guidance.

Encouragingly for shareholders, including Buffett and Berkshire, Kimbell insisted he was ‘clear about the factors that adversely impacted our store performance’ and insisted Ulta Beauty has ‘actions underway to address the trends. We are focused on driving stronger sales and traffic and continuing to exercise financial discipline.’

Reassuringly, the company is in rude financial health, having closed the quarter with cash and cash equivalents of $414 million, giving it the firepower for future expansion and additional earnings enhancing share buybacks should share price weakness persist.

ATTRACTIVE VALUATION

Morningstar points out that Ulta Beauty has felt some competitive pressure, especially in prestige makeup, noting that ‘direct competitor Sephora has expanded rapidly in suburban areas by opening shops within Kohl’s (KSS:NYSE) locations, while Amazon (AMZN:NASDAQ) continues to increase its partnerships with leading beauty brands’.

That said, Ulta has been taking market share from department and drug stores for years, and Morningstar thinks its partnership with Target (TGT:NYSE) will make it even stronger. And while US sales growth has slowed from peak levels as Ulta Beauty has become much larger and opportunities for new stores across the pond have diminished, the company has a deal to expand into Mexico and will consider other international growth opportunities in time. In fact, Ulta is expected to outline its international growth plans during an analyst day in October, which could act as a catalyst for a share price rebound.

For the year to January 2025, Stockopedia shows Ulta’s net profits are forecast to fall from $1.29 billion to $1.11 billion before rising to $1.15 billion in full year 2026, driving an uptick in EPS from $23.2 to $24.9. Based on those estimates, Ulta’s shares are trading on a prospective PE (price to earnings) ratio of 16.9 for full year 2025 falling to 15.7 on 2026 estimates. That is a massive discount to the stock’s own recent history – the PE multiple peaked at 90 times in 2021 – which should entice contrarian investors prepared to show some patience. [JC]

Judges Scientific confirms full-year outlook despite ‘subdued’ first half

We are sticking with our call despite short-term headwinds

Judges

Gain to date: 0.7%

While it is frustrating to see one of our picks give up gains of more than 20% to trade flat on our entry price, we believe world-class scientific instrument maker Judges Scientific (JDG:AIM) has a lot more to offer investors who are prepared to stay the course.

WHAT HAS HAPPENED SINCE WE SAID BUY?

The shares topped £122 in May before the firm cautioned that first-half trading was below its expectations, largely due to a drop in orders from China, and it would miss full-year earnings estimates.

On 19 September the company released more detail on its first half, with revenue and profit declining as guided, and gave more colour on current trading.

As chief executive (and major investor) David Cicurel explained to Shares, China’s pivot away from spending on R&D (research and development) and towards boosting consumerism means orders for the firm’s high-end equipment

Judges Scientific

(p) Oct 2023 Jan 2024 Apr Jul

from universities and companies have shrunk, and the country is only likely to account for around 10% of sales in future.

In addition, some projects which were expected to fall into the first half have been deferred until the second half or 2025, while the world has become ‘a very nervous place’, representing a headwind to scientific research, which thrives on free exchange and global cooperation.

However, the good news is the second half should show a ‘significant’ improvement, both in terms of contracts and margins, meaning the firm is sticking to its full-year outlook, and with the signing of a 2025 Geotek coring contract order intake is now ahead of the same period in 2023.

WHAT SHOULD INVESTORS DO NOW?

We would urge holders to look put the difficulties of the first half behind them and keep faith with the firm on the basis of its formidable long-term track record.

Despite the current headwinds, management is completely focused on shareholder value and has raised the first-half dividend by 10% in a sign of its confidence in the future. [IC]

Small World: AI and healthcare IPOs and big contract wins

New listings, new orders and games success are the highlights this month

We start the review on a positive note with the news of two small-cap IPOs (initial public offers), one in the healthcare space and one in the redhot AI (artificial intelligence) space. Having sold its governance, risk and compliance software business to private equity earlier this year and returned £225 million to shareholders via a buyback and special dividend, business services group Marlowe (MRL:AIM) announced earlier this month it would demerge and list its occupational health division Optima Health.

GenIP ‘harnesses the power of GenAI’ using bespoke software and its executive recruitment platform to provide companies, research bodies and venture groups with support and expertise in AI to ‘cost-effectively mitigate adverse selection and commercialise new discoveries’.

Following the listing, which is expected to raise around £1.5 million, Tekcapital will retain 63% of the shares.

NEW ORDERS

Following on from last month’s update on its order book, Light Science Technologies (LST:AIM) revealed it had received further contracts for both its passive fire protection unit and its contract manufacturing unit.

The fire protection business now has orders worth in excess of £7 million while revenue at the manufacturing business is expected to top £9 million this year.

After the sad news of the sudden passing of chief executive Paul Webb in August, this month security and surveillance firm Synetics (SNX:AIM) revealed it had been awarded a further contract worth $3.2 million on top of its existing $10 million contract to upgrade and expand surveillance at a major gaming

Synectics

Source: LSEG

Marlowe shareholders will receive ordinary shares in Optima by way of a dividend on a onefor-one basis, following which Optima will join the AIM market as an independent entity with Marlowe continuing as a pure testing, inspection and certification business.

Meanwhile, intellectual property investor Tekcapital (TEK:AIM) announced it had filed to list portfolio company GenIP separately on the AIM market.

Source: LSEG

resort in South-East Asia.

It followed this news with a positive third-quarter trading update and raised its full-year outlook, saying underlying pre-tax profit for the 12 months to the end of November would be ‘materially ahead of forecasts’.

Data and technology services firm Made Tech (MTEC:AIM) announced it had won a four-year, £13 million contract with the Department of Education with an option to extend for a fifth year at a cost to the government of a further £3.3 million.

GAME ON

Holding company TruFin (TRU:AIM) swung to a profit, beating market estimates partly thanks to two hit new indie games for its Playstack business, Balatro and Abiotic Factor, which ‘significantly surpassed internal expectations, were met with critical acclaim and have garnered extraordinary interest from players and platforms alike’.

Chief executive James van den Burgh described the firm’s performance as ‘full of firsts: growing revenue by more than 200%; recording profitability; and generating cash for a half-year for the first time’.

Transense Technologies (TRT:AIM), which makes sensors and measurement systems for car and aircraft makers, was selected as a key partner in an ambitious £11 million government-funded EV (electric vehicle) drive-system project.

Winning the bid was ‘testament to the confidence in our technology and expertise’ said managing director Ryan Maughan, underpinning the firm’s near-term revenue forecasts and presenting longterm opportunities for production revenue.

MORE IS LESS

On the other side of the ledger, hospitality firm Hostmore (MORE) dropped a bombshell on investors with the news it was no longer pursuing the acquisition of the TGI Fridays Inc brand due to a management change which meant it would no longer be able to collect royalties, undermining the value of the deal.

The group also revealed that the sale process for its existing restaurants was at ‘an advanced stage’, but the leading bids were lower than the par value of the holding company’s debt and therefore the process was ‘unlikely to recover any meaningful value’.

The strategic review confirmed that none of the strategic options up for consideration were unlikely to provide value and therefore the company would most likely be wound up and delisted ‘contemporaneous with the conclusion of the sale process’.

Investors stampeded towards the exit, sending the shares down 90% to less than a penny compared with 120p shortly after the firm came to market in 2021.

SEE YOU IN COURT

Finally, Oxford Nanopore Technologies (ONT) announced it was filing leave with a California court to serve subpoenas on a raft of companies in support of a lawsuit it intends to bring in England and Wales.

The group expects to bring claims against the companies ‘for breach of common law obligations of confidence, breach of duties under the Trade Secrets (enforcement etc.) Regulations 2018, and an entitlement claim to a license of certain patents’.

The filing singled out one firm in particular, saying Oxford Nanopore ‘does not believe BGI’s nanopore-based sequencing technology is able to be used in commercial products around the world without infringing or misappropriating the group’s substantial portfolio of proprietary rights’.

By Ian Conway Deputy Editor

Oxford Nanopore Technologies (p)

Schroder Oriental Income Fund Capturing the artificial intelligence opportunity in Asia

Artificial intelligence (AI) has become a major force in global stock markets, driving significant returns over the past couple of years.

Although much of the attention has focused on Nvidia, the US technology company that designs the advanced chips which are essential for AI processing, there is a robust ecosystem of other technology companies that contribute at various stages of the AI value chain. Asia has become a pivotal hub in this AI revolution and whilst the AI related revenues for many of these Asian companies are starting from a low base it is a fast-growing area often utilising leading-edge products and technologies thus enhancing returns for companies that can successfully supply into the space. These include companies that not only fabricate and package the chips but also those that can supply the high-end servers required or fabricate parts

and components to meet the demands of AI. These include items such as the power supply for servers which have to be able to cope with much higher loads than for ordinary applications. The Schroder Oriental Income Fund is strategically positioned to capitalise on this growing opportunity and is currently exposed to all of those areas.

It should be remembered that whilst AI should continue to be a positive driver for the IT sector it is not the only driver and the industry should continue to benefit longer term from positive trends around digitisation, cloud and 5G.

With more than 30% of its portfolio allocated to the Information Technology sector, the Schroder Oriental Income Fund is well ahead of its benchmark index (MSCI AC Pacific ex Japan Index, 26.3%). In recent years, this positioning has added value through outperformance and as a strong source of dividends and dividend growth.

means it has exposure to the mobile, display and foundry sectors.

Elsewhere amongst the portfolio holdings is Hon Hai, not only a manufacturer of smartphones and other high end consumer products but also a manufacturer of servers key to the growth of AI and MediaTek, which has successfully forged a position as a global leader in mobile chipsets, which have the potential for greater AI-driven applications. As an asset light, cash generative business, it has also been steadily growing its dividend as it returns significant cash to shareholders.

CAN THE AI BOOM CONTINUE?

Although returns from Asian technology stocks have been strong in recent years, the key question for investors right now is, can the growth continue? Some industry commentators worry that the stock market’s enthusiasm for AI and technology may have fuelled an investment bubble, similar to the one that greeted the internet boom in the late 1990s.

For Richard Sennitt, portfolio manager of the Schroder Oriental Income Fund, there are reasons for cautious optimism.

“We remain positive about the role that Asian technology companies can play in AI’s continued development. We are still in the early chapters of the AI story, and there is plenty of growth and innovation still to come, with implications for all industries and, indeed, all parts of daily life. This will inevitably drive risk as well as opportunity. However, expectations in parts of the IT sector related to AI are now high and longer-term question marks around the monetisation of the technology remain. Therefore, one needs to be disciplined when assessing stocks associated with the theme. Whilst Asia remains an interesting way for investors to gain exposure to the AI theme the broader sector also has longer term attractions and on balance, valuations for Asian technology stocks as a whole have not yet responded to the extent that they have in the US.”

DISCIPLINE IS KEY

Nevertheless, investors should be mindful of potential volatility in the near term. Although Asian technology stocks have not risen as far or as fast as those in the US, they are unlikely to be immune should US technology stocks suffer a correction.

The best protection against this risk is a long-term, disciplined investment approach, such as the one that Richard adopts for the Schroder Oriental Income Fund.

“We are pragmatic stock pickers and aim to look beyond the day-to-day swings in sentiment to which markets have always been prone. We are looking for the genuine long-term winners across a wide range of sectors, and maintain a strong valuation discipline to ensure that, when we find them, we don’t overpay for them.”

Richard and his team focus on quality companies that have strong management, appropriate balance sheets and sustainable long-term competitive advantages. Richard draws on Schroders’ extensive research resources in Asia, where on-the-ground analysts engage directly with company management teams, ensuring that the fund remains focused on opportunities that can deliver attractive

Risk Considerations: Schroder Oriental Income Fund Limited

• China risk: If the fund invests in the China Interbank Bond Market via the Bond Connect or in China “A” shares via the Shanghai-Hong Kong Stock Connect and Shenzhen-Hong Kong Stock Connect or in shares listed on the STAR Board or the ChiNext, this may involve clearing and settlement, regulatory, operational and counterparty risks. If the fund invests in onshore renminbi-denominated securities, currency control decisions made by the Chinese government could affect the value of the fund’s investments and could cause the fund to defer or suspend redemptions of its shares.

• Concentration risk: The Company may be concentrated in a limited number of geographical regions, industry sectors, markets and/or individual positions. This may result in large changes in the value of the company, both up or down.

• Counterparty risk: The Company may have contractual agreements with counterparties. If a counterparty is unable to fulfil their obligations, the sum that they owe to the Company may be lost in part or in whole.

• Currency risk: If the Company’s investments are denominated in currencies different to the

dividend profiles.

Having grown its dividend every year since its launch, this approach has served the Schroder Oriental Income Fund well in the past. Richard comments.

“We have a robust and repeatable investment process. The disciplined focus on valuation ensures we can adapt to evolving market conditions, allowing the portfolio to deliver its continued focus on income, while still being able to capture some of the best opportunities in Asia, in technology and beyond.”

currency of the Company’s shares, the Company may lose value as a result of movements in foreign exchange rates, otherwise known as currency rates.

• Derivatives risk: Derivatives, which are financial instruments deriving their value from an underlying asset, may be used to manage the portfolio efficiently. A derivative may not perform as expected, may create losses greater than the cost of the derivative and may result in losses to the fund.

• Emerging markets & frontier risk: Emerging markets, and especially frontier markets, generally carry greater political, legal, counterparty, operational and liquidity risk than developed markets.

• Gearing risk: The Company may borrow money to make further investments, this is known as gearing. Gearing will increase returns if the value of the investments purchased increase by more than the cost of borrowing, or reduce returns if they fail to do so. In falling markets, the whole of the value in such investments could be lost, which would result in losses to the Company.

• Liquidity Risk: The price of shares in the Company is determined by market supply and demand, and this may be different to the net asset value of the Company. In difficult market conditions, investors

may not be able to find a buyer for their shares or may not get back the amount that they originally invested. Certain investments of the Company, in particular the unquoted investments, may be less liquid and more difficult to value. In difficult market conditions, the Company may not be able to sell an investment for full value or at all and this could affect performance of the Company.

• Market Risk: The value of investments can go up and down and an investor may not get back the amount initially invested.

• Operational risk: Operational processes, including those related to the safekeeping of assets, may fail. This may result in losses to the Company.

• Performance risk: Investment objectives express an intended result but there is no guarantee that such a result will be achieved. Depending on market conditions and the macro economic environment, investment objectives may become more difficult to achieve.

• Private market valuations, and pricing frequency: Valuation of private asset investments is performed less frequently than listed securities and may be performed less frequently than the valuation of the Company itself. In addition, in times of stress it may be difficult to find appropriate prices for these investments and they

IMPORTANT INFORMATION

This communication is marketing material. The views and opinions contained herein are those of the named author(s) on this page and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds.

This document is intended to be for information purposes only and it is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Information herein is believed to be reliable but Schroder Investment Management Ltd (Schroders) does not warrant its completeness or accuracy.

The data has been sourced by Schroders and should be independently verified before further publication or use. No responsibility can be accepted for error of fact or opinion. This does not exclude or restrict any duty or liability that Schroders has to its customers under the Financial Services and Markets Act 2000 (as

may be valued on the basis of proxies or estimates. These factors mean that there may be significant changes in the net asset value of the Company which may also affect the price of shares in the Company.

• Share price risk: The price of shares in the Company is determined by market supply and demand, and this may be different to the net asset value of the Company. This means the price may be volatile, meaning the price may go up and down to a greater extent in response to changes in demand.

For help in understanding any terms used, please visit address www.schroders.com/en-gb/uk/individual/ glossary/

We recommend you seek financial advice from an Independent Adviser before making an investment decision. If you don’t already have an Adviser, you can find one at www.unbiased.co.uk or www.vouchedfor.co.uk. Before investing in an Investment Trust, refer to the prospectus, the latest Key Information Document (KID) and Key Features Document (KFD) at www.schroders. co.uk/investor or on request.

amended from time to time) or any other regulatory system. Reliance should not be placed on the views and information in the document when taking individual investment and/or strategic decisions.

Past Performance is not a guide to future performance. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested. Exchange rate changes may cause the value of any overseas investments to rise or fall.

Any sectors, securities, regions or countries shown above are for illustrative purposes only and are not to be considered a recommendation to buy or sell.

The forecasts included should not be relied upon, are not guaranteed and are provided only as at the date of issue. Our forecasts are based on our own assumptions which may change. Forecasts and assumptions may be affected by external economic or other factors.

Issued by Schroder Unit Trusts Limited, 1 London Wall Place, London EC2Y 5AU. Registered Number 4191730 England. Authorised and regulated by the Financial Conduct Authority.

VS

WHAT TO EXPECT FROM THE MARKETS AS THE US HEADS TO THE POLLS

With just over a month to go until the US presidential elections, Shares takes stock of where the two candidates stand in the polls and what the implications of a Democrat or Republican victory would mean for investors.

There is no question the televised debate earlier this month was negative for Donald Trump, to the extent he refused to schedule a re-match.

Yet, despite his poor performance, voting in the seven key states which hold the key to winning the race to the White House is still close, so although Kamala Harris may be polling ahead in the popular vote – as Hilary Clinton was in the 2016 election – the Republican party could still carry the day.

Crucially, investors need to separate popular perceptions of each candidate from the reality of their policies and the potential impact on US businesses, consumers and financial markets.

Finally, we will look at the market’s likely behaviour leading up to the election and in the weeks which follow using historical data to guide our insights.

DEBATES AND DONORS

‘The debate achieved its goal by providing a decisive edge to one of the candidates in what has been an exceptionally close race,’ says Charu Chanana, Saxo Bank’s global markets strategist.

‘The stark contrast to the previous debate in June, which led to Biden’s withdrawal and

By Ian Conway Deputy Editor

Harris’s endorsement as the new Democratic nominee, was evident. Harris demonstrated a clear advantage over Trump, with her odds of winning increasing on PredictIt to 56%, up from 53% before the debate. Her strong performance, particularly on tariffs and race issues, highlighted the effectiveness of her arguments and critiques.’

Harris showed her political astuteness, regularly baiting Trump, diverting him from talking about his policies, and giving him free rein to rant about migrants eating pets on the streets of Ohio.

Debates aren’t everything in American politics, far from it, but they do matter to swing voters in as much as they help them decide who they don’t want to vote for. Then it’s up to the campaign managers and advertisers to encourage them to go out and vote for who they do want to win.

Debates also matter to donors, who are crucial to a candidate’s success, and in the 24 hours after the event the Harris campaign reportedly raised $47 million, reinforcing its lead, while the New York Times reported Trump’s rambling, claims aggravated a good many of his rich supporters.

Yes, Trump raised tens of millions in donations after he was convicted in May and after the attempt on his life in July, but last month alone Harris raised $360 million including a $40 million ‘bump’ from the Democratic National Convention, nearly three times the amount received by the Trump camp.

Still, a lot can happen in the next few weeks, and while money can buy ads and boost the candidates it can only do so much, although random events

such as an endorsement by megastar Taylor Swift will have done the Harris ticket no harm.

PERCEPTIONS VERSUS REALITY

The current view is a Harris win would be bad for US companies due to her campaign pledge to raise corporate taxes from 21% to 28% and preference for greater regulation, while a Trump win could lead to lower taxes and support for the fossil-fuel industry in particular given his donor base.

‘Harris’ rising prominence could have notable effects across various sectors,’ notes Chanana.

‘Crypto and energy stocks might face headwinds as market sentiment adjusts to the shifting political dynamics. Many of the other Trump Trades such as a weaker Chinese yuan or traction in defence stocks could take a backseat as Harris gains momentum.

‘While a Harris Trade is still challenging to price in, given the complexities of the Senate limiting the prospects of a Democratic clean sweep, a split Congress could mean restrained fiscal spending, keeping the risk of a recession alive for 2025.’

During his first administration, Trump imposed overall tariffs of 2% on imports, but this time as part of his ‘America First’ philosophy he is proposing tariffs of 17% which would represent the highest level since The Great Depression and one of the biggest tax hikes in history according to economists at Barclays.

‘Even after the US imposed an average of 19% tariffs on imports from China, data from the USTR (Office of the United States Trade Representative) show the trade-weighted tariff on all US goods imports was only 2%, with nearly half of all imports currently free from any tariffs. Substitution effects allowed US importers to offset much of the effect of China tariffs. This time would likely be different. The former president plans for a blanket 10% tariff on all US imports, in addition to 60% on China, say the analysts.

In other words, due to the size of their home market it was possible for US companies to find domestic suppliers to substitute for Chinese imports under the previous tariff regime, but as the analysts say this time it would be different.

Some Biden policies, such as big spending on infrastructure, are likely to remain in place whoever wins, but there are concerns big tech companies could face a rough ride as both candidates have called for them to be reined in, for different reasons.

Gerrit Smit, manager of the Stonehage Fleming Global Best Ideas Fund (BCLYMF3), believes regulation of tech companies is already complex but is unlikely to be made worse whoever wins the election.

‘I can’t see much of a difference between Trump and Harris. Tech is too important to the US economy,’ says Smit. He also points to the fact US companies lead the world in technology and ‘they are the job creators’, so burdening them down with more regulation would be counterproductive.

While the common perception is the US stock market would respond better to a Trump win, investors really need to take on board the full implications of him regaining the White House and in particular his plan to impose stringent tariffs on imports.

As Bloomberg columnist John Authers says, most of the time when Donald Trump is making policy pronouncements he should be taken ‘seriously, but not literally’.

If Trump is to be taken literally, ‘Once put into effect, this trade policy would force a total revision of the expectation that interest rates are heading lower,’ warns Authers.

‘It would also shake the assumption that the US will continue to grow faster than other economies. And — unlike his ideas on tax, or many of the more market-unfriendly policies backed by Kamala Harris — the president has wide authority to impose tariffs without approval from Congress.’

Not only would tariffs on this scale damage the US economy, implemented in full they would cut eurozone GDP by 0.7% and Chinese GDP by up

Previous closely-contested US elections

to 2%.

‘Tariffs are not a zero-sum game with winners and losers. In a global trade war, everyone loses,’ says Barclays’ Ajay Rajadhyaksha.

WHAT WOULD IT MEAN FOR MARKETS?

If Trump wins, and actually implements acrossthe-board tariffs, it is likely the dollar would spike, which is something the former president explicitly doesn’t want.

Inflation would also likely spike, which could force the Federal Reserve not just to stop cutting rates, as Authers suggests, but actually to raise rates, which in turn would push the dollar higher, putting the central bank on a collision course with the White House.

The equity market – and even more so the bond market – would likely take a very dim view

Tariffs are not a zero-sum game with winners and losers. In a global trade war, everyone loses”

Trifecta means one party controls The White House, Congress and the Senate Table: Shares magazine • Source: Research Affiliates

S&P 500 price change by presidential term

Joseph Biden performance shown up to the start of September 2024 Table: Shares magazine • Source: Y Charts, Shares magazine

HOW DO STOCKS BEHAVE AROUND U.S. ELECTONS?

Sorted by close vs. landslide, and by winning party, 1928 to 2020

continuing their upswing, albeit with greater volatility, post-election day.

The study finds that in the lead-up to an election, growth and value stocks tend to exhibit similar performance. After the election, however, value stocks tend to rebound when Republicans win the White House while growth stocks tend to rebound when Democrats take office.

examines daily stock price movements before and after all 24 US presidential elections since 1928, the politics of the winner has less bearing on how markets respond than whether the election is close and contentious, which would appear to be the case this time round.

‘Why would liberal versus conservative matter less than whether the election is tight and the electorate polarised? Because if each side views losing as a disaster, their partisans will invest accordingly,’ suggest the study’s authors.

‘Investors tend to be risk-off in the run-up to the election, but once the election is over and the uncertainty dissipates those on the winning side are relieved by the outcome and return to riskon positions.

‘Those on the losing side will no doubt be despondent, but they are already risk-off so their portfolios already reflect those fears. Both sides sell in the weeks before the election. One side buys in its aftermath.’

According to the data, stocks overall tend to fall in the run-up to a close election, then surge in the final week of the campaign as the likely result becomes clearer and less alarming to voters, before

Finally, small-caps tend to lag the market in the run-up to elections, except in cases where the outcome is expected to be close, when they perform similarly to large-cap stocks in the run-up but outperform by a couple of percentage points in the following weeks reflecting the return of risk appetite.

INVESTORS LIKE CONTINUITY

It is also worth noting, as we flagged some time ago, that markets tend to like continuity, so a second term for the Democrats may not be a bad outcome in the long run.

Research from US asset manager T. Rowe Price finds that, over the past 96 years, markets have proved more resilient and less volatile when incumbents are re-elected, and one of the key factors in their re-election is the state of the economy, which at the moment is holding up reasonably well although Americans have had to endure a period of high inflation.

Each side views losing as a disaster, their partisans will invest accordingly”

As Bill Clinton’s chief strategist James Carville famously replied in the 1992 election campaign when asked what matters most to voters: it’s the economy, stupid.

Source: Research Affilates

Source: Research Affilates

FUND MANAGER VIEWS

At a presentation earlier this week hosted by the AIC (Association of Investment Companies), fund managers were asked their views on the elections and on the risks and opportunities in investing in US stocks.

What impact will the election have on the market, and what result would be best for the markets?

Jeremiah Buckley, manager of the North American Income Trust (NAIT), believes the election result could cause some market volatility over the short-term but won’t have a meaningful impact on the medium- to long-term outlook for US equities.

‘When we look at history, there hasn’t been a material difference in the performance of the US equity market whichever party has the presidency and there are numerous examples of strong performance when each party has held the top office.

‘The best outcome might be if we have a split government where neither party has control of all three branches, making it harder to push through new legislation and forcing the parties to compromise, potentially creating less uncertainty around policy and limiting any dramatic shifts.’

David Zhao, co-manager of the BlackRock Sustainable American Income Trust (BRSA), agreed elections tend to ‘create volatility and add additional noise to the market, especially more tightly contested ones as market participants struggle to price in outcomes’.

‘While you cannot discount the importance of elections, we believe as fundamental investors that by focusing on identifying

high quality companies that can drive earnings through a business cycle, we can mitigate short term risks associated with election outcomes and drive long term performance,’ added Zhao.

What are the main risks facing investors in the US at the moment?

Buckley argues the two largest risks for investors in the US are whether companies get a solid return on all the capital being invested in generative AI and whether the job market can maintain its current level of growth.

‘On AI-related capex, since it is such a transformational technology with substantial potential, companies are spending rapidly to make sure they participate in this paradigm shift. There is a risk the

We can mitigate short term risks associated with election outcomes and drive long term performance”

returns on this spending don’t materialise as expected which could lead to a rationalisation period of capital and R&D (research and development) spending in the US which could lead to a material slowing in the economy.’

On the jobs front, the hospitality, healthcare and construction industries have contributed the vast majority of private-sector job gains in recent months, says Buckley.

‘Hospitality and healthcare are close to fully recovering from the pandemic pullback and there are signs leading indicators for the construction sector are weakening. Therefore, we need more sectors to start contributing to job gains in a material way for the healthy job market we are currently seeing to continue.’

For Zhao, one of the biggest risks is the historically high level of concentration in broad US indexes: ‘Due to the narrow leadership from US mega-cap stocks, indices like the S&P 500 have moved to extreme levels of concentration in both the weightings of the largest stocks and style exposure within the indexes.’

As of the end of August, the six largest S&P 500 tech companies accounted for nearly 30% of the index, and the index itself is overweight to the growth style at 43% exposure.

‘This phenomenon can lead to unintended risks and much greater drawdown potential if the market rotates away from growth, which has historically been more volatile than the other styles,’ warns the manager.

Where are the best stock picking opportunities?

‘We continue to think there are attractive opportunities in the technology sector as the demand for infrastructure to support the substantial demand for generative AI will continue for years, which makes us still want to be overweight semiconductors,’ says Buckley.

‘We also believe there will be a number of attractive applications using AI which make significant progress in the marketplace over the coming years so we continue to be overweight software and IT services.’

Aside from technology, the fund is finding attractive opportunities in healthcare and REITs (real estate investment trusts). ‘In healthcare, we

A rationalisation period of capital and R&D (research and development) spending in the US which could lead to a material slowing in the economy”

continue to find attractive ideas that are both defensive and offensive. We believe these businesses will hold up well if we see a greater than expected economic slowdown. At the same time, with the impressive level of innovation in biotech and medical devices right now, we should see attractive relative earnings growth even in a stronger economy.’

Given the underperformance of REITs over the last couple of years and the prospects for lower interest rates, the sector offers very attractive income opportunities says the manager.

More broadly, Buckley is encouraged by the innovation and productivity gains US companies continue to drive through capital and R&D spending.

‘The investments required to stay relevant and prosper in the new digital economy are significant and therefore favour the largest companies which

lead their industries. Having large amounts of data which can inform strategy and execution has become critical.’

Zhao argues concentrating on a handful of communication and technology companies when looking for growth in the US market made sense when investors were nervous about the outcome for the economy, but with a soft landing looking increasingly likely investors should be starting to broaden their focus and look to other, fresher growth themes including healthcare.

‘The US healthcare sector has been supported by long-term demographic trends. Ageing populations around the world have created additional demand for medicines, while rising costs facilitates a need for increased efficiency within the healthcare ecosystem.’

The number of Americans aged 65 and older is projected to increase from 58 million in 2022 to 82 million by 2050, and for many European countries populations are ageing even faster.

‘There is also significant innovation in the healthcare sector. Breakthrough drugs in obesity, cancer and gene therapy could be a game-changer for a number of the pharmaceutical giants. In 2023, GLP1 drugs, designed to tackle obesity and diabetes, proved to be blockbusters, and the growth prospects for some of those new products remain very strong,’ adds the manager.

Keeping on top of your portfolio is easier than you think

Try not to be distracted by the short-term ups and downs in stock prices

This is the second article in our miniseries covering portfolio construction. It is focused on how to manage and maintain a portfolio.

Once a balanced portfolio has been constructed and is up and running, for some investors, there may be a temptation to tinker.

It is therefore worth reiterating what we said at the outset, that investing is a marathon and not a sprint. What is most important is to monitor how your investments are performing relative to expectations.

FEAR AND GREED

One challenge for investors, which can be a distraction, is that stock prices tend to swing around a lot more than underlying company fundamentals such as sales and profit growth. These are the real drivers of long-term market value.

This dilemma was nicely summed up by the socalled father of fundamental investing, Benjamin Graham who coined the phrase ‘in the short term the market is a voting machine but in the long term it is a weighing machine’.

What Graham meant by this is that in the short-

term investor’s emotions such as greed and fear tend to drive share prices up and down, but over the long-run rationality takes over with share prices following profits.

The stock market is not there to inform you according to Graham but to be exploited. ‘The intelligent investor is a realist who sells to optimists and buys from pessimists’ said Graham.

This leads us to the first principle of managing a portfolio, which is to focus on news and developments related to the fundamentals which drive business value and ignore the swings in sentiment and short-term price movements.

MANAGING CASH FLOWS

Typically, there are two sources of cash flowing into a portfolio which need to be managed. The first is new money built up from savings, usually monthly or quarterly.

Remember to consider the size of new investments in relation to the costs of dealing. This may mean letting cash build up until it becomes financially viable to invest the new cash. Keeping costs low is an important aspect of successful investing.

Deploying new cash can be very useful when

Monitoring a portfolio checklist

Think about how you fund your account and consider reinvesting dividends Checking monthly or quarterly is sufficient for most investors

Monitor news about companies (and their competitors) and funds you own as well as macroeconomic developments

Keep track of what’s expected from your holdings before they report earnings

it comes to maintaining balance in a portfolio because it allows an investor to naturally rebalance exposure to different assets and sectors which may have shifted.

The performance of individual investments will inevitably diverge from each other in the short term, which is one of the reasons for diversifying which we discussed in the first article of this series.

It presents an opportunity to add to laggards in the portfolio. This is a cost-effective way of rebalancing portfolio weightings and allows an investor to take advantage of the natural ups and downs of stock prices.

Dividend income is a second source of cash flow into a portfolio. It is worth reminding readers of the importance of reinvesting dividends.

Dividend income allows an investor to buy more shares which increases dividend income next time, which allows more shares to be purchased and so on, creating a virtuous circle. This is the principle of compounding.

Putting new cash to work and reinvesting dividends are key parts of portfolio maintenance.

HOW OFTEN SHOULD I CHANGE MY PORTFOLIO?

It is not necessary to keep track of the performance of your portfolio minute by minute or even daily or weekly. Following progress monthly or quarterly is sufficient for most investors.

It is more important to monitor the fundamental news flow from the companies you own, and their competitors, and macroeconomic developments. This helps build knowledge and understanding of the key drivers.

Investment platforms such as AJ Bell and investment software providers such as Stockopedia and Sharepad provide services which allow customers to create watchlists, portfolios, a calendar of future earnings announcements and dividend payments.

The London Stock Exchange (LSEG) is also a good source of news announcements and corporate events.

When it comes to assessing new information contained in earnings results, it is worth remembering that first-half and full-year results only cover a relatively short period of performance.

Legendary investor Warren Buffett says: ‘Do not take yearly results too seriously. Instead, focus on four or five-year averages.’

The direction of travel is more important than specific numbers which only represent a snapshot of the business at a point in time.

Remember stock prices respond more to how a company has performed relative to consensus expectations and the outlook, rather than past numbers. Therefore, it is worth the effort to find out what the forecasts are going into an earnings report.

Larger firms often state what analyst consensus

expectations are on RNS (regulated news service) announcements. Paid for services such as Research Tree aggregate research reports and forecasts. A free service (sign-up required) is available at Marketscreener.com and for US stocks Koyfin provides an investor service covering news, forecasts, and data.

Unless performance is wildly different from what was expected, it is often wise to take Buffett’s advice and do nothing. Investments are a long-term endeavour.

DISCLAIMER: AJ Bell owns Shares magazine. The author (Martin Gamble) and editor (Ian Conway) of this article own shares in AJ Bell.

By Martin Gamble Education Editor

WE WANT TO HEAR FROM YOU

We are looking for individuals or couples to share their experiences of managing their own investment portfolios.

If you would like to take part, we want to know why you chose certain stocks, funds or bonds, why you might have subsequently sold some of them, and what you hope to achieve from investing.

We will pay £50 in John Lewis vouchers as a thank you to anyone whose story is published in the digital magazine.

Drop us a line with your name and two lines describing your investment experience. For those picked to feature in the magazine, we’ll be in touch to get the full story.

CONTACT: shareseditorial@ajbell.co.uk with the words My Portfolio in the subject line.

DISCLAIMER: Shares/AJ Bell does not provide advice or personal recommendations. The My Portfolio articles are for information only. You must do own research and consider your own personal circumstances before making investment decisions.

Emerging markets outlook

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The story behind China’s long-running e-commerce boom

Country leads the way on web-based retail, outpacing the US

Mainland China corporate e-commerce sales

Hundreds of millions Chinese yuan

According to data from the US International Trade Administration China became the largest global market for e-commerce in 2021 with revenue of $1.5 trillion, overtaking the US itself. Also according to the government agency, the country accounts for 50% of the world’s web-based transactions.

Factors like the widespread adoption of mobile phones and the internet, a rising middle class and urban population and low-cost manufacturing capacity have helped drive the growth of the sector in the intervening period.

This is reflected in the Chinese stock market where internet companies dominate. Combined, leading e-commerce plays Tencent (0700:HKG), Alibaba (0241:HKG), Meituan (3690:HKG) and

Temu-owner PDD (PDD:NASDAQ) have a weighting of 33.2% in the MSCI China index. Drilling down further into these individual companies, Alibaba is established as a global leader in e-commerce, Tencent provides online retail services off the back of its WeChat app, which has a vast number of users in mainland China, while PDD has been expanding outside of China with its Temu brand. Meituan is a leader in food delivery with an additional focus on offering deals and vouchers linked to local Chinese merchants.

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Emerging markets outlook

Emerging markets: Chinese e-commerce and property and Mexican peso under pressure

Three things the Templeton Emerging Markets Investment Trust team are thinking about today.

1.

Chinese e-commerce: Recent data has confirmed that China is experiencing prolonged softer demand. This has resulted in rising competition. This is especially noticeable in China’s e-commerce firms, which have reported mixed earnings for the most recent quarter. Despite this, our China e-commerce research analyst is keeping a positive view on selected e-commerce companies. In his view, some of these companies are proactively taking steps to improve their bottom lines. In addition, any weakness in their latest results could have hidden the finer details of the strengths or strategies of these companies. For example, a company in our analyst’s area of coverage is looking to scale back in categories where there is stronger competition. He believes that this move, together with plans to improve monetization, may bring a positive impact to the company’s financials.

2.

China property market rout

accelerating: The value of new home sales among China’s top 100 developers declined 27% in July. This was partially attributed to the removal of new home price guidance in 10 Chinese cities. Previously developers needed approval from local government for the prices of new property launches. While the price decline is painful, property developers have already witnessed their market valuations fall significantly in expectation of this decline. We view the price adjustment as positive, as it creates a market clearing price for new homes and brings primary market pricing closer to secondary market trends. While this is not a catalyst for a recovery, we believe it is one step further on the path to rehabilitation of the Chinese real estate sector.

3.

Mexican peso and credibility under pressure: The Mexican peso has depreciated 15% and the MSCI Mexico Index has underperformed MSCI Emerging Market index by 7% since the presidential elections at the start of June. The weakness is driven by concerns over judicial reforms proposed by the outgoing president and supported by presidentelect Claudia Sheinbaum. The reforms centre on the direct election of judges, with candidates proposed by the government. This contrasts with the current practice of proposal by the president and ratification by the Senate. Implementation of the change requires supermajority approval by both houses of Congress and a majority of Mexico’s 31 states.

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The pros and cons of scrapping inheritance tax relief on AIM shares

It’s an obvious target for the government but such a move could backfire

The new UK Government has made it perfectly clear that the Budget on 30 October is going to involve some tough decisions that will affect people’s finances. While much of the media speculation has focused on how capital gains tax might evolve, inheritance tax (IHT) is also a potential target for big changes such as abolishing tax relief on owning certain AIM-quoted shares.

The Institute for Fiscal Studies said in April that abolishing IHT relief on AIM stocks would raise £1.1 billion in the 2024-25 tax year, rising to £1.6 billion in 2029-30. With public finances in a crisis, every extra penny matters to the government and this seems like one of the most vulnerable places for change.

Scrapping the tax relief on AIM stocks could backfire. Principally, it goes against the Government’s efforts to support growth of UK businesses.

COULD DAMPEN INVESTOR INTEREST IN SMALL CAPS

Companies typically admit their shares for public trading so they can access capital markets. AIM has a good reputation of being a vibrant marketplace where companies can tap investors for more cash through placing new shares. Many of these companies will have joined AIM in the knowledge that the tax relief benefits are a key attraction for investors. Take the benefits away and there is a danger that fewer investors would be willing to back the type of stocks you find on AIM, principally small companies.

Just look at a company like document management specialist Restore (RST:AIM). It has

regularly tapped investors for more cash over the years and used the proceeds to increase market share, expand its skillset through acquisitions and become a much bigger business. Investors who funded this growth plan included fund managers running portfolios specifically to invest in AIM stocks that qualify for the IHT relief.

COULD DERAIL REVIVAL IN UK MARKET INTEREST

Scrapping AIM IHT relief could trigger a sell-off in small caps just at the point where investors are starting to show more interest in the UK market.

Concerns about an economic slowdown in the US has led certain investors to look for ways to diversify their portfolio beyond the popular fastgrowth tech stocks that have delivered big gains in recent years.

The UK market might have what they need as it is full of cheap stocks offering slow but steady growth, often with defensive qualities that could see them prosper in good or bad economic conditions. While such names are typically members of the FTSE 350 index, any sell-off in AIM could still hurt the reputation of the broader market.

AIM’s biggest companies by market value often feature in AIM IHT portfolios including telecoms provider Gamma Communications (GAMA:AIM), veterinary specialist CVS (CVSG:AIM) and engineering services group Renew Holdings (RNWH).

COULD DEPRESS COMPANY VALUATIONS

Abolishing the tax relief could result in fewer people wanting to hold such stocks, causing share prices to fall and these types of companies to trade on lower valuations. The knock-on effect could be an acceleration of UK takeovers if more companies are trading cheaply.

There aren’t enough companies joining the stock market to replace those leaving through takeovers, meaning we’ve got a shrinking pot of opportunities. It’s no wonder that fund managers are starting to moan about a lack of choice on the UK market.

TAKING A DIFFERENT VIEW

Despite there being reasons to keep the tax relief, it’s important to take a balanced look at the situation and consider why the Government could take it away. In addition to the financial benefits to the Treasury, there is an argument to say the system is outdated and hard to defend.

The rules state an investor’s estate won’t have to pay the 40% inheritance tax charge upon their death for any investments in AIM stocks that qualify for business property relief, subject to certain conditions.

Business property relief legislation came into power in 1976 for family firms passed down through generations so that inheritance tax bills wouldn’t put a privately-owned business into liquidation.

It was subsequently expanded to include holdings in businesses quoted on London’s AIM stock market following concerns that such investments were harder to sell quickly than shares on London’s Main Market.

While AIM stocks are typically remain smaller

in size versus ones in the FTSE 350 index, it’s fair to say that liquidity has improved since the junior market launched in 1995.

HOW THE SYSTEM WORKS

An individual would need to invest in qualifying AIM companies for at least two years in order to get the inheritance tax relief. The clock starts ticking from the point at which they invest in qualifying stocks. If they make a second (or more) deposit of funds, a new clock starts for that amount of money.

If they sell the stocks after the two-year qualifying period ends, there are three years to use that cash, but the investor must reinvest in qualifying stocks by the time that three-year period ends and at the point of death.

The rules are complicated and HMRC refuses to publish a list of qualifying stocks. An investor unsure of which stocks qualify for the relief could instead use one of the AIM IHT portfolio services run by various asset managers but charges can be expensive, often between 1.5% and 2% a year.

CHASING THE TAX BENEFIT

COULD LEAD TO POOR OUTCOMES

For those managing their own investments, there is an argument to suggest the tax relief encourages DIY investors to pick AIM stocks purely because of the IHT benefits, not because they are good companies or good investments. That poses the risk of having inferior stocks in a portfolio simply to avoid tax, which is a poor approach to investing.

Fundamentally, this is a tax benefit for the wealthy and that puts it directly in the line of sight for the Keir Starmer’s administration. If you had to rank the list of tax benefits to disappear in the next tax year, this has to be near the top.

VCTs get the green light from the Treasury

Find out all about the tax break investment funds which look to be here to stay

If you pick up a newspaper this month, you are almost guaranteed to read about the taxes the new chancellor is planning to hike, or the tax reliefs she is looking to axe. But one set of tax reliefs we know is here to stay are those supporting venture capital trusts.

The Treasury has just confirmed the VCT scheme will now run until at least 2035 in order to support small British businesses. Many investors will have heard of VCTs but might not know too much about them, so here’s a lowdown on the key features to help you decide if they’re worth considering.

WHAT ARE VCTS?

VCTs are investment funds, run by a professional fund manager, which come with attractive tax breaks attached. They invest in very small companies, which either aren’t listed on a stock exchange at all or are listed on London’s junior market (AIM), so they come with high risks attached. They are most often used by experienced, adventurous investors, especially those with large tax bills who have perhaps used up their pension and ISA allowances.

WHAT ARE THE TAX BENEFITS OF VCTS?

VCTs come with a very generous tax treatment.

Investors who buy VCTs on the primary market can claim a 30% tax rebate on investments of up to £200,000 in each tax year. So potentially an investor could reduce their annual income tax bill by up to £60,000. You can’t reclaim more tax than you are liable for though, so if you’ve paid or are liable for £20,000 of income tax in a given tax year, that’s the maximum relief you can claim by investing in VCTs. It’s important to factor into your calculations any other reductions to your income tax liability, for instance pension contributions and charitable donations, which may reduce the amount you can reclaim via VCTs.

Once you’ve invested in a VCT at issue, you also need to hold the VCT for more than five years to stop the tax relief being claimed back. As well as the 30% upfront income tax relief, growth is free from capital gains tax, and dividends are free from income tax too. In order to qualify for the tax breaks, you must also buy newly issued VCT shares, which means buying from the VCT manager or a broker when the VCT is fund-raising. VCTs are structured as investment trusts, and so they can be bought and sold on the secondary market, but any such purchases do not attract the same tax benefits.

VCT shares form part of your estate on death, so they are potentially liable to inheritance tax. This is

Personal Finance: VCTs

Available and upcoming VCT offers

in contrast to investing directly in qualifying private companies or AIM shares, which are normally free from inheritance tax if held for at least two years before death. However, it’s practically very difficult to invest directly in private companies, unless you set up and run a business yourself. It is possible to invest directly in AIM companies, but then of course, investors don’t get the 30% up front tax relief offered by VCT investment.

HOW DO I GET RETURNS FROM VCTS?

Returns from VCTs can come from capital growth in the value of the underlying portfolio, stemming from portfolio revaluations as the businesses grow, or share price rises for companies listed on AIM, or from exits where the VCT manager is able to sell on holdings at a profit. Of course, within any portfolio there can be expected to be holdings which are loss-making as well as profit-making. VCT managers often use cash raised from exits to pay dividends to shareholders, which can be a welcome source of returns without having to encash shares in the VCT.

WHAT ARE THE RISKS OF VCTS?

VCTs invest in small, often private companies, usually with unproven business models. Small companies which prosper can deliver exceptional returns, but that can take a long time. Some won’t make it to profitability and could ultimately end up being worthless. The companies in question aren’t usually very liquid, so buying and selling can’t be done at the drop of a hat, or perhaps at the price investors would like. It’s also fair to say that the valuation placed on private companies, which in

the end determines the price of some VCT shares, is more subjective than tradeable stocks, where an active market tells you what price other investors are willing to pay for the shares.

The VCTs themselves may also not be easy to sell on the secondary market, because not surprisingly most investors choose to buy newly issued shares, to benefit from the tax relief. This may mean if and when you sell, you might do so at a discount to the net asset value of the VCT. Some VCT providers offer share buyback schemes, where the VCT manager will buy back shares from investors, and these might offer shareholders a way to exit their VCT holding at closer to the net asset value of the underlying portfolio.

WHAT ABOUT CHARGES?

The charges for VCTs can be high relative to other actively managed funds. Typically, annual charges are around 2%, whereas most actively managed funds will charge 1% or less. Performance fees are also commonplace for VCTs, whereby the manager takes a slice of the profits if they do well. VCTs often come with initial charges too, though these may be discounted if you buy through a broker. Investors need to assess the charges of any VCTs they are thinking about buying, and evaluate whether the extra costs are worth it, considering the tax relief and the risks and potential rewards of investing in the underlying companies.

By Laith Khalaf AJ Bell Head of Investment Analysis

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Ask Rachel: Your retirement questions answered

How will I be taxed when I start drawing income from a SIPP and my state pension?

Helping with a query for someone who has enjoyed a relatively simple set-up until now

During my working life, I have only ever had a single income stream, so tax has just been simple(ish) PAYE. However, that is about to change. I currently get an income from a defined benefit pension, then next year I will also get the state pension, then I will also start drawing-down income from my SIPP. I’ve already taken all the tax-free lump sums.

How can PAYE handle this? Do I get a tax code for a third of the £12,570 personal allowance for each pension? Or do I get different tax codes for each pension? Or does the taxman just guess, then correct it with tax deductions every year in arrears?

I’d really like to set it up so it’s just correct!

Thanks, Tim

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

When someone is receiving income from several different sources, paying tax can get quite complicated.

Let’s start off with the basics. Your pension provider will usually take off any tax you owe before they pay you under the PAYE system – so your income is paid net. State pension, however, is paid gross. But the tax code HMRC gives your pension provider takes into account your state pension. For someone on full state pension of about £11,500 this uses up most of their personal allowance, so only about £1,070 is left for other incomes.

When you start to receive a pension for the first time, HMRC is not able to work out your tax code until it has received some information from either you or your pension provider. You may have a P45 form to hand to your pension provider if, for example, you have just stopped working and

immediately afterwards start to take a pension.

But if you do not have a P45 form to hand, your pension provider will send details of your new pension direct to HMRC via the electronic PAYE system, to make sure they are making the correct deductions.

At the end of the tax year, you’ll get a P60 from your pension provider showing how much tax you’ve paid. You should get this by 31 May. This shows the total amount paid in the tax year, the tax deducted and the final tax code in operation.

EACH PENSION WILL NEED A TAX CODE

If your income only comes from one private pension source, then you’ll usually have one tax code. But if you have more than one private pension being paid – be it from an occupational or personal pension –then each pension (other than the state pension) will need its own tax code.

Usually, the first pension you start will have a tax code that reflects any remaining personal allowance after state pension (in your case the defined benefit scheme tax code will change once your state

Ask Rachel: Your retirement questions answered

pension starts). The tax code for a second private pension usually means all that income is taxed at one rate, with no personal allowance as it’s already been used elsewhere. Whether this is all at basic rate or all at higher or additional rate will depend on the income taken from the first pension. This isn’t perfect so corrections may need to be made at the end of the tax year.

Although you will have a separate code for each source, you should just get a single coding notice for all your sources of income that are taxed under PAYE. Pensioners may get coding notices more often than employees – for example, if you start to draw a new source of pension income to which PAYE is applied for the first time you will get a new single coding notice.

You need to make sure that you are not getting too many or too few allowances by looking at all of your tax codes for a tax year together –these should all be shown on the same PAYE coding notice.

EMERGENCY TAX RISK

There is one more thing to be aware of. If you take taxed income out of your drawdown pension, then you may initially be taxed on emergency tax rates.

The problem can affect anyone who takes a

taxable pension freedoms payment from age 55 – either through drawdown or through an ‘Uncrystallised Funds Pension Lump Sum’ (UFPLS) withdrawal. Where the pension saver cannot provide a current year tax code, HMRC requires their pension provider to use either an emergency tax code on a ‘Month 1’ basis, or if they have a current year P45 this is applied on the same basis. This means HMRC only gives them 1/12th of the usual tax allowances available on the withdrawal. If only one payment is taken in the tax year this results in many savers being severely overtaxed. If regular income is taken, although the first payment may be overtaxed this is usually corrected by the tax code used for subsequent payments in the tax year. (A current year tax code is usually only supplied by HMRC after the first payment is made.) Pension savers can, however, take action to get their money back quickly, hopefully within 30 days, by filling out one of three reclaim forms, which differ depending on whether you took all or only some of your pension pot and whether you’re still working.

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.

COMPANIES PRESENTING

ANEXO GROUP (ANX)

During the event and afterwards over drinks, investors will have the chance to:

• Discover new investment opportunities

• Get to know the companies better

• Talk with the company directors and other investors

A specialist integrated credit hire and legal services group focused on providing replacement vehicles and associated legal services to customers who have been involved in a non-fault accident.

ENSILICA (ENSI)

A leading fabless chipmaker focused on custom ASIC for OEMs and system houses, as well as IC design services for companies with their own design teams. EnSilica has world-class expertise in supplying custom RF, mmWave, mixed signal and digital ASICs to its international customers in the automotive, industrial, healthcare and communications markets.

ROME RESOURCES (RMR)

A natural resources company is being admitted to AIM following the acquisition of Rome Resources Limited in a reverse takeover. Rome Resources holds tin assets in the DRCongo with encouraging initial drilling results, situated only 8km from the highest grade tin mine in the world.

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.

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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.

ECORA RESOURCES Energy, renewables and resources

and, as such, are written by the companies in question and reproduced in good faith.

Introduction

Welcome to Spotlight, a bonus report which is distributed eight times a year alongside your digital copy of Shares.

It provides small caps with a platform to tell their stories in their own words.

This edition is dedicated to businesses powering the global economy, whether that be in mining, oil and gas, the renewables space, infrastructure or energy provision.

The company profiles are written by the businesses themselves rather than by Shares journalists.

They pay a fee to get their message across to both

existing shareholders and prospective investors.

These profiles are paidfor promotions and are not independent comment. As such, they cannot be considered unbiased. Equally, you are getting the inside track from the people who should best know the company and its strategy.

Some of the firms profiled in Spotlight will appear at our webinars and in-person events where you get to hear from management first hand.

Click here for details of upcoming events and how to register for free tickets.

Previous issues of Spotlight are available on our website.

Members of staff may hold shares in some of the securities written about in this publication. This could create a conflict of interest. Where such a conflict exists, it will be disclosed. This publication contains information and ideas which are of interest to investors. It does not provide advice in relation to investments or any other financial matters. Comments in this publication must not be relied upon by readers when they make their investment decisions. Investors who require advice should consult a properly qualified independent adviser. This publication, its staff and AJ Bell Media do not, under any circumstances, accept liability for losses suffered by readers as a result of their investment decisions.

What have been the bestperforming small-cap mining stocks in 2024?

Examining the resources minnows which have done best so far this year

In this article we discuss the best performing AIM-listed mining stocks so far this year. The data shows that small cap miners producing tin, tungsten, helium, and gold exploration companies have offered impressive returns to investors.

UP IN THE AIR

UK-based helium exploration and production company

Helium One Global (HE1:AIM) has seen shares gain an impressive 274%. These gains, albeit from a low base, are primarily due to the progress the company has made with its flagship project in Tanzania.

The company holds exploration licenses covering 4,512 square kilometres in the Rukwa Rift basin in Tanzania which may in the

future become a new helium province.

As an early-stage explorer in this field it is well-positioned to benefit from rising longterm helium demand and pricing.

Although Plymouth-based tungsten and tin miner Tungsten West (TUN) has seen share price gains of 120%, there have been a few wobbles this year including the abrupt departure of CEO Neil Gawthorpe in June.

In mid-August, the company appointed a new CEO Jeffery Court who has 30 years’ experience of the mineral resource sector.

DIGGING UP GAINS

Shares in lithium miner

Savanna Resources (SAV:AIM) jumped 15% on 20 June after it received a £16 million investment from AMG Critical Materials group – an Amsterdam-listed specialty metals group.

Over the past year shares have gained 92.9% as the company continues to grow and develop Europe’s first European lithium mine north of Portugal.

Gold, copper, silver, and precious metal company Anglo Asian mining (AAZ:AIM) has seen shares gain 50%.

On the 5 August, the company’s Azerbaijan subsidiary, Azerbaijan International Mining Company Limited (AIMC) was given the green light from the Azerbaijan government for the final phase of its tailings dam.

‘Confirmation was also received that the construction work will comply with all health and safety requirements,’ said the company.

Anglo Asian mining continues to prioritise the progression of its development portfolio, with the new Gilar mine expected to enter production in the fourth quarter of 2024.

OTHER SHINING LIGHTS

Other gainers this year are specialist metal supplier Uru Metals (URU) and an early-stage gold exploration company Oriole Resources (ORR:AIM). Uru Metals shares have gained 107% and Oriole Resources shares have gained 100%.

In January this year, Oriole Resources signed two agreements with BCM International in respect of the group’s Bibemi and Mbe projects.

On the 5 September, the company reported a pretax profit for the six months to 30 June of £1.15 million compared to a loss of £860,000 last year. Oriole has also been a beneficiary of a rising gold price.

Top performing mining small caps in 2024

Company Year-to-date performance

Ecora Resources, a company at the heart of the energy transition

With a portfolio focused on future facing commodities and the business model of providing funding to the mining sector, Ecora Resources (ECOR:LSE/TSX.

ECRAF:OTCQX) is truly a company at the heart of the energy transition.

With many of the world‘s royalty companies focused on the precious metals space, Ecora has long been concentrating on the mining sector‘s primary thematic, positioning itself as the world’s leading royalty company focused on the critical minerals essential to renewable and low carbon electricity generation, as well as electricity’s subsequent transmission, storage, and consumption.

By focusing on building a diversified portfolio of royalties over low-cost projects backed by strong operators such as Vale (VALE:NSE), Capstone Copper (CS:TSE), BHP (BHP) amongst others, Ecora has built a strong platform for further growth and diversification.

Looking ahead, volume growth in 2024 and 2025 is expected from the operations

underpinning Ecora’s royalty portfolio, and its portfolio of royalties over a pipeline of high-quality development projects provides strong revenue growth potential thereafter.

RECENT TURNAROUND

However, this outlook was not always so clear-cut. Back in 2014, the business was entirely dependent on a single royalty over a steel making coal mine, Kestrel, and mining activities were not expected within the royalty area after 2030.

Cognizant of that overdependence, as well as the

energy transition’s potential to drive critical mineral demand growth over multiple decades, the company embarked on a journey to rebuild its portfolio and provide investors with a royalty company fully aligned with this trend.

In the brief time since, Ecora’s portfolio has evolved such that 85% of its NAV (net asset value) now comes from future-facing commodities including copper, nickel, cobalt, uranium, and rare earths, amongst others. Most of these assets are in OECD (organisation for economic co-operation and development) jurisdictions, over operations that can, or are expected to, generate strong cash flows throughout the highs and lows of commodity price cycles and operated by recognized, high quality partners.

CURRENT OPPORTUNITY

For investors, Ecora’s royalty portfolio provides a relatively de-risked way to invest in the metals and mining space given royalties are a function of the revenue generated by a mine operation, and not impacted directly by operating costs, with few royalty companies purely focused on investing in commodities driving the energy transition.

In the medium term, the portfolio has the potential to generate more than $100 million annually, primarily underpinned by a sector leading portfolio of royalties

over copper operations and high-quality development projects.

In addition to its current dividend yield of approximately 5%, Ecora shares offer substantial value, with the share price today less than the value of the producing portfolio, meaning that its portfolio of royalties over high quality development projects are not currently priced in, and provide pure upside for investors.

WHAT NEXT?

The capital that Ecora’s management has deployed

FUN FACTS ABOUT COPPER

DID YOU KNOW?

• Ecora has the leading copper growth pipeline in the royalty sector.

• One tonne of copper brings functionality to 40 cars, powers 100,000 mobile phones, enables operations in 400 computers and provides electricity to 30 homes.

• Demand could nearly double by 2035 and there will be a 20% shortfall from the supply level required for the netzero emissions by 2050 target.

has yielded a portfolio of royalties generating cashflow, as well as high quality projects that once in production, will become the cornerstones of the business for many decades to come. It is a strong platform to continue to grow Ecora’s royalty portfolio, which would benefit further from continued diversification.

Capital market conditions for the mining sector have been challenging of late, highlighting the merits of the royalty partnership as a source of capital, with royalty financing now a mainstream source of funding. Coupling the mining sector’s need for capital, and expectations of strong critical mineral demand growth trends, Ecora’s near and midterm growth prospects appear attractive.

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Ecora Resources (ECOR)

Marc Bishop Lafleche, CEO

Ecora’s strategy is to acquire royalties and streams over low-cost operations and projects with strong management teams, in well-established mining jurisdictions. Our portfolio has been reweighted to provide material exposure to this commodity basket and we have successfully transitioned from a coal orientated royalty business in 2014 to one that by 2026 will be materially coal free and comprised of over 90% exposure to commodities that support a sustainable future.

Empire Metals (EEE)

Shaun Bunn, Managing Director

Empire Metals (LON:EEE) is an exploration and resource development company focused on the Pitfield Project in Western Australia, a globally significant titanium project contained within a giant, sediment-hosted, hydrothermal mineral system.

Pathfinder Minerals Plc (PFP)

Paul Barrett, CEO

Pathfinder Minerals Plc (PFP) is a natural resources company is being admitted to AIM following the acquisition of Rome Resources Limited in a reverse takeover. Rome Resources holds tin assets in the DRCongo with encouraging initial drilling results, situated only 8km from the highest grade tin mine in the world.

Databank – Commodity price performance 2021-2024

Source: Refinitiv. *Data to 23 September.