Indeed, one consequence of the financial market turmoil and the rise in economic risk is that the future monetary policy pursued by the world's leading central bankers is likely to be far more dovish. Frankly, I would be flabbergasted if the governing council of the European Central Bank (ECB) doesn't ratchet up its monetary policy easing programmes by a notch or two when its members next meet in Frankfurt on Thursday, 10 March 2016. Minutes from the January meeting suggest this is firmly on the agenda given that "the bank's governing council was unanimous in concluding that its already aggressive policy stance needed to be reviewed and possibly reconsidered". The weak inflation backdrop is certainly supportive of such a move; the final reading for the eurozone's annual inflation rate for January edged up to 0.3 per cent from 0.2 per cent in December, but this is well below the 0.4 per cent initial estimate, and miles off the ECB's target of just under 2 per cent.
US recessionary risk
I also feel that recessionary risk facing the US economy has increased markedly this year. Analyst David Santschi of TrimTabs Investment Research points out that "real growth in US income and employment taxes has been decelerating since last autumn, and it turned flat in recent weeks. If the trend persists, it would be consistent with a recession". The firm is the only independent research service that publishes detailed daily coverage of US stock market liquidity and weekly withheld income and employment tax collections data.
TrimTabs uses the income and employment taxes withheld from the salaries of 141m US workers as a proxy for wage and salary growth. The US Treasury reports this data every business day on its website. It's worth noting that withholdings declined by 0.2 per cent year on year in real terms in the four weeks to Thursday, 18 February 2016. This fall compares with growth of 2 per cent year on year in December and 3 per cent year on year in January. Of course, withholdings can be volatile from month to month at this time of year due to the timing of year-end bonus payments. However, the decelerating trend is clear. This is not the only indicator signalling signs of economic weakness. The TrimTabs Macroeconomic Index, a correlation weighted composite index of weekly leading indicators, recently hit an 18-month low. Also, credit markets are flashing warning signals about growth, and a wide range of data points to contraction in manufacturing, points I raised in last week's bear market feature.
It also seems inconceivable that the Bank of England will contemplate tightening monetary policy anytime soon given that domestic indicators point to a slowing of private sector wage growth. Oil and energy prices have fallen sharply since the autumn so proving a drag on inflation, and there is the little matter of the up and coming Brexit referendum on Thursday, 23 June to decide the fate of the UK's membership to the EU. In fact, money markets have pushed out the date of the first rise in UK base rate well into next year.
Bond market watch
Market participants in the bond markets have reacted to these developments in no uncertain terms which is why low-grade corporate debt has sold off savagely, and investors have been pushing up the prices of high-quality sovereign bonds. Government bond yields have fallen sharply across the board since the start of the year with the yield on the UK 10-year gilt falling to 1.39 per cent, an astonishing move given that it was yielding 2 per cent at the end of 2015; yields on US Treasuries with the same maturity have contracted from 2.29 per cent to 1.72 per cent in the same two-month period; while yields on German 10-year Bunds have fallen from 0.63 per cent to 0.16 per cent.
Clearly, central bankers don't have a wand to magic away the raft of economic risks the global economy is now facing, but they do have the mandate to try to ease monetary conditions when the economic conditions are deteriorating. And that's why I expect the Federal Open Market Committee (FOMC), the rate-setting committee of the US central bank, to take a far more dovish policy stance at next month's meeting on 16 March than the one adopted at the time of the interest rate hike in mid-December last year.
Clearly, investors are betting on the possibility of concerted central bank action. Let's hope they are not disappointed because I believe this is the primary reason why equity markets have rallied hard off the lows hit earlier this month, albeit they were heavily oversold at the time and were overdue a bounce of sorts. I raised this real possibility in my earlier article ('Bear market signals', 25 January 2016), noting that research from my colleagues at the Financial Times indicates that the FTSE 100 has posted a modest positive return over the next quarter after first entering bear territory using market data from the past three decades. And that's one reason why I believe it's worth exploiting short-term market rallies even though I still feel cautious on the market outlook generally in light of the issues I raised in my bear market articles.
I will, of course, monitor the market internals to determine whether the current bounceback rally can morph into something more substantial. That's only a sensible thing to do as it was the combination of investors' rising appetite for risk, and the actions of central banks to drive down yields and force investors up the yield curve that has generated the positive wealth effect across a multitude of assets since the last bull market started in 2009.
I also strongly maintain that selective buying of special situations can generate a positive outcome irrespective of the market direction, assuming that a 'margin of safety' is built in to the valuation to start with. This strategy has paid off for me in my small-cap hunting ground in the nine months since the UK stock market peaked out in June 2015, and I see little reason why it shouldn't continue doing so. I will continue to hunt out anomalously priced investment opportunities for you to take advantage of using the same array of investment techniques that have served us so well over the years.
Exploiting moves in the yield curve
Bearing this in mind I think it pays to stay long of companies that are beneficiaries of the 'lower for longer' interest rate policy that's being adopted by the Bank of England, and also from the flattening of the UK government bond yield curve. Commercial property with a retail bias is likely to be one such beneficiary. That's because the contraction in risk-free government bond yields not only underpins the relative attractions of the asset class as the yield differential with risk-free low-yielding sovereign bonds widens, but a benign backdrop of ultra-low inflation and record low mortgage rates is supportive of consumers' net disposable income and their retail spending activity even if private sector wage growth appears to have peaked.
This is one reason why I advised buying shares in Leeds based shopping centre operator Town Centre Securities (TCSC:312p) at the end of last week ('Property income play with capital upside', 25 February 2016), it's also the reason why I believe there is a short-term trading opportunity in the shares of FTSE Small Cap constituent and shopping centre owner Capital & Regional (CAL:60.25p), ahead of its full-year results on Friday, 4 March.
Regular readers of my column will note that I recommended buying into the company's shares at exactly the same juncture last summer ahead of its half-year results, having spotted a similar short-term trading opportunity ('Hot property', 27 July 2015). The share price duly hit my 70p target price and I recommended running profits at 67p a month later ('Running bumper profits', 27 August 2015). I think we could be in for a similar re-rating.
What appeals to me right now is the fact that investors have completely overlooked a pre-close trading update that was released in mid-January during the equity market rout. The company revealed that like-for-like contracted rent across its portfolio of shopping centres, all bar one of which are located in London and the affluent south-east England, increased by almost 3 per cent to £69.7m last year, buoyed by 72 new lettings and 52 lease renewals that generated £7.9m of rental income. These lettings were agreed at an average increase of 18.5 per cent above estimated rental value (ERV), a performance that was driven by the conversion of less attractive or previously non-retail space into leisure.
Leisure lettings accounted for £2.2m of the £7.9m of new leases and renewals and included the creation of a new Travelodge at Wood Green, North London, which now has more than doubled in size to 78 rooms, and the extension of gyms at five of Capital & Regional's six Mall shopping centres in Blackburn, Ipswich, Luton, Maidstone and Wood Green. The sixth is located in Walthamstow, an East London property hotspot.
Hefty valuation uplifts
Reflecting this hive of lettings activity, occupancy rates across the entire £1bn property portfolio ended last year at 97.2 per cent, representing a year-on-year improvement of 1.1 per cent. In turn, the combination of lower voids and rising rents helped to drive up the portfolio value. The valuation of Capital & Regional's six wholly owned centres, encompassing 3.2m sq ft of floor space, increased by 4 per cent from £791m to £822.7m in the second half of 2015, based on a net initial yield of 5.9 per cent, and after capital spend of £6.9m in the period. Yield compression played a small part too, reflecting investor appetite for high quality assets with a blue-chip tenant mix. M&S, Next, H&M, Debenhams, Boots, Topshop and WH Smith are just some of the occupiers of the company's 900 retail outlets which attract 1.7m shopping visits each week. To put the valuation uplift of the Mall portfolio into some perspective, I reckon that it's worth 3.5p a share to the company's net asset value after accounting for the net capital expenditure.
There were valuation uplifts in the company's two other regional centres too. Capital & Regional has a 20 per cent interest in a joint venture with Oaktree Capital Management in the 900,000 sq ft Kingfisher shopping centre in Redditch, and a 50 per cent stake in the Buttermarket centre in Ipswich. The valuation of the Kingfisher Centre rose by £7.9m to £164.4m in the second half of 2015, based on a net initial yield of 6.25 per cent, and after factoring in capital expenditure of £2.3m. The valuation of the Buttermarket Centre performed even better, rising by £17.2m in the second half of 2015 to £27.9m, reflecting the rapid progress made in repositioning the centre as a mixed retail and leisure scheme and after factoring in capital expenditure of £7.1m. I reckon that these two uplifts add almost 1p a share in total to Capital & Regional's net asset value.
In other words, after factoring in the first-half performance, I expect Capital & Regional's net asset value per share to have risen by almost 20 per cent to 71p last year. So with the shares trading on a bid-offer spread of 60p-60.25p, the share price discount to book value is around 15 per cent.
Target price
I also feel that a 5 per cent dividend yield is likely to attract investors. The company became a real estate investment trust (Reit) last year with a view to offering a substantial income stream to its shareholders. And that's what the board's doing as guidance suggests the declaration of "a 2015 final dividend of at least 1.5p per share which will result in a total dividend for the year of at least 3p per share". It can afford to do so because annual net rental income covers interest costs more than three times over and should easily fund the £21m cash cost of a 3p a share annual payout to shareholders based on the contribution from its portfolio of shopping centres.
In my opinion, the combination of a sharp rise in book value per share, positive news on lettings, a rising dividend, scope for development upside in the existing portfolio and from acquisitions make for a fairly strong investment case. In fact, Capital & Regional has just acquired The Marlowes Shopping Centre in Hemel Hempstead for £35.5m on an initial yield of 7 per cent and funded with bank borrowings on a loan-to-value of 50 per cent. That conservative funding arrangement is indicative of how the board run the company as borrowings are financed through a five-year debt facility fixed at an attractive interest rate of 3.36 per cent, and the last reported loan-to-value ratio was around 43 per cent.
Needless to say, I expect investors to warm to the forthcoming results and rate Capital & Regional shares a short-term trading buy at 60.25p. My target price is a range between 66.5p to 70p, based on fundamentals and the technical set-up on the chart. If my analysis proves on the money, then this could be reached in short order. Trading buy.
MORE FROM SIMON THOMPSON...
I have written articles on the following 80 companies since the start of this year:
■ Grainger: Buy at 243.5p, target 280p; Dart: Take profits at 580p; Crystal Amber: Hold at 159p; Redde: Take profits at 203p; Burford Capital: Run profits at 196.5p; Renew Holdings: Run profits at 404p; Plethora Solutions: Speculative buy at 4.5p ('Stock check', 5 Jan 2016)
■ Elegant Hotels: Buy at 118p, target price 130p to 135p ('Check in for a profitable stay', 6 Jan 2016)
■ Safestyle: Run profits at 272p ahead of pre-close statement on 25 Jan 2016 ('Clear cut gains', 6 Jan 2016)
■ Epwin: Run profits at 143p, new target 170p ('Epwin on the acquisition trail', 6 Jan 2016)
■ GLI Finance: Recovery buy at 37.5p ('GLI shelves fundraise and its chief executive', 6 Jan 2016)
■ LXB Retail Properties: Buy at 97.5p, new six-month target 120p; Urban&Civic: Buy at 286.5p, target 325p; Conygar: Buy at 172p, target 200p ('Hot property, 7 Jan 2015)
■ Somero Enterprises: Buy at 139p, target 185p; 1pm: Buy at 70p, target 82p; First Property: Run profits at 53p; Avation: Buy at 145p, target 200p ('Small-cap value plays', 11 Jan 2016)
■ 32Red: Run profits at 147p; Netplay TV: Buy at 7p ('Chipping in', 12 Jan 2016)
■ Cambria Automobiles: Buy at 87p, new target 95p; Vertu Motors: Buy at 76p, target range 85p to 90p ('Motoring ahead', 12 Jan 2016)
■ Global Energy Development: Hold at 24p ('Cash rich, but unloved', 12 Jan 2016)
■ KBC Advanced Technologies: Bank profits and sell in the market at 183p ('Tech watch, 13 Jan 2015)
■ Sanderson: Buy at 75p, target range 85p to 90p ('Tech watch, 13 Jan 2015)
■ Trakm8: Buy at 300p, new target 400p ('Tech watch, 13 Jan 2015)
■ Amino Technologies: Buy at 120p, new target range 155p to 160p ('Amino has the ammunition', 14 Jan 2015)
■ easyHotels: Buy at 89p, initial target 100p ('easyHotels ramps up expansion', 14 Jan 2015)
■ Stanley Gibbons: Hold at 58p ('Stanley Gibbons fundraise', 14 Jan 2015)
■ Miton: Buy at 28p, target 35p; Moss Bros: Buy at 97p, target 120p to 130p; Bioquell: Buy at 140p, minimum target 170p; UTV Media: Trading buy at 184p ('An awesome foursome', 18 Jan 2015)
■ Equity market strategy ('Bear Market signals', 25 Jan 2015)
■ STM: Buy at 47p, target 80p; Stadium: Trading buy at 103p; Fairpoint: Run profits at 150p, target range 200p to 220p ('Exploiting market anomalies', 1 Feb 2015)
■ Character: Buy at 505p, target 600p; 1pm: Buy at 67p, target 82p; and Entu: Hold at 68p ('A trio of small-cap plays', 2 Feb 2016)
■ Inland: Buy at 83p; Henry Boot: Buy at 220p, target 260p; FTSE 350 housebuilding sector: Trading buy ('Playing the housing market', 3 Feb 2016)
■ Flowtech Fluidpower: Buy at 109p ('Undervalued and ripe for a re-rating', 4 Feb 2016)
■ Safestyle: Run profits at 253p ('Awaiting news on a cash return', 4 Feb 2016)
■ Bowleven; Volvere; French Connection; Bioquell; Juridica; Mind + Machines; Oakley Capital; Gresham House; Gresham House Strategic; Walker Crips ('Bargain shares', 4 Feb 2016)
■ AB Dynamics; Inspired Capital; H&T; Netplay TV; Mountview Estates; Crystal Amber; Arbuthnot Banking; Record; Pittards; Stanley Gibbons ('How the 2015 Bargain share portfolio fared', 4 Feb 2016)
■ IS Solutions: Buy at 120p, target 150p ('Big data, big profits', 8 February 2016)
■ 32Red: Run profits at 133p, easyHotel: Run profits at 99p; Burford Capital: Run profits at 230p; Bilby: Buy at 136.5p ('Hitting record highs', 9 February 2016)
■ BP Marsh & Partners : Buy at 157p, new target 190p ('Primed for investment gains', 10 February 2016)
■ Gama Aviation: Hold at 270p ('Gama hits guidance', 10 February 2016)
■ Bloomsbury Publishing: Buy at 150p, target range 175p to 185p ('Book into a trading play', 11 February 2016)
■ PV Crystalox Solar: Speculative buy at 8.2p ('Lights brighten at PV Crystalox Solar', 11 February 2016)
■ Alpha Real Trust: Buy at 80p, target 105p ('High yield property play', 15 February 2016)
■ LMS Capital: Buy at 68p; Leaf Clean Energy: Await news on Invenergy; Eurovestech: Sell at 7p ('Investment company watch', 16 February 2016)
■ GLI Finance: Buy at 31p ('GLI Finance review offers potential for gains', 17 February 2016)
■ Trifast: Buy at 112p, target 140p ('Engineered for a higher rating', 17 February 2016)
■ 600 Group: Sell at 10p ('600 Group warns', 17 February 2016)
■ Marwyn Value Investors: Buy at 190p ('Undervalued, cash rich investment, 18 February 2016)
■ Henry Boot: Buy at 220p; Moss Bros: Buy at 102p, target range 120p to 130p; Creston: Sell at 103p; Minds + Machines: Buy at 8.5p ('Changing places', 22 February 2016)
■ CareTech: Buy at 245p, target price 300p ('Asset backed, lowly rated property play', 23 February 2016)
■ WH Ireland: Buy at 90p, medium-term target 120p ('WH Ireland hit by FCA fine', 23 February 2016)
■ Stanley Gibbons: Sell at 44p ('Stanley Gibbons rescue equity raise', 23 February 2016)
■ Gresham House: Buy at 325p ('Gresham House spruces up forestry deal', 24 February 2016)
■ Avation: Buy at 140p ('Aircraft deliveries mask Avation's lift off', 24 February 2016)
■ Tristel: Take profits at 125p ('Investors spooked by bugbuster's sales slowdown', 24 February 2016)
■ Town Centre Securities: Buy at 305p, target price 350p ('Property income play with capital upside', 25 February 2016)
■ Capital & Regional: Buy at 60.25p, target 66.5p to 70p ('Short-term trading buy', 29 February 2016)
■ Simon Thompson's book Stock Picking for Profit can be purchased online at www.ypdbooks.com, or by telephoning YPDBooks on 01904 431 213 and is being sold through no other source. It is priced at £14.99, plus £2.95 postage and packaging. Simon has published an article outlining the content: 'Secrets to successful stockpicking
