Some wise words this morning from one of the most exceptional and reliable performers on the UK market, Scottish Mortgage Investment Trust. In the long run, management writes in today’s half-year report, stock market returns are driven by “a small number of exceptional companies”.
They add: “The progress of such companies is rarely smooth or linear. They have breakthroughs and they have setbacks. Sentiment in the market exaggerates the peaks and troughs, driving price volatility that is commonly mistaken for risk. When we believe we have identified an exceptional company that is pursuing a large opportunity, we look beyond this cycle of feast and famine. With a longer timeframe, such oscillations matter less, and the picture of compounding growth becomes clearer. Many, if not most, investments won't turn out as we hope.
“However, for the companies that do succeed, the returns are transformational and they have a disproportionate impact on the portfolio. This is why we approach our task with optimism. It is more important to identify the factors that will allow a company to prosper than to enumerate the potential pitfalls along the way.”
SMT’s net asset value per share with debt at fair value (NAV) rose by 76 per cent over the last 6 months, compared to a 24 per cent increase for the FTSE All-World Index. Over the last ten years, they’re up 674 per cent vs 191 per cent for the index. Management concludes the update optimistically: Opportunities for investing in companies building the future of the economy with capital and patience “remain plentiful”. They also note that investors should treat “confident pronouncements” about the future with “scepticism”. Amen to that.
UK Company Announcements
| RSA (RSA) | The insurer's board says it is "minded to recommend" a bid proposal from a consortium of international peers. The all-cash offer, for a total of £7.2bn, is not yet formal but landed at a near-50 per cent premium to the FTSE 100 firm's undisturbed price. |
| easyJet (EZJ) | easyJet now only expects to operate a fifth of its usual capacity for the first quarter of its financial year, following the announcement of new UK government restrictions. The airline has conducted another sale and leaseback of aircraft, raising £131m through the sale of 11 aircraft. |
| Mears (MER) | The group has struck an agreement to sell planning solutions business TerraQuest to private equity for £72m. The disposal requires shareholder approval and chief executive David Miles says the deal “materially strengthens the Mears Group balance sheet and completes our strategic programme to focus on our core activities of specialist Housing services to local and central government clients”. Pro forma net debt would drop from £62m to £11m. |
| James Fisher (FSJ) | The group says that trading in the third quarter did not improve as it had hoped. Revenue in marine support continued to be impacted by project delays and the cancellation of subsea projects by renewables and oil and gas customers. Underlying operating profit for the year to 31 December is now expected to be £35m-40m, down from £66m in 2019. |
| Equiniti (EQN) | Underlying cash profits for the year to 31 December are guided to come in between £93m-£97m, down from £136m in 2019. While non-discretionary, long-term contracts have remained resilient, discretionary revenue is continuing to be impacted by disruption to capital markets and lower interest rates. Excluding renewals, Equiniti’s order intake is ahead of last year by a third. |
| Redrow (RDW) | Homes turnover for the 18 weeks to the end of October was up by almost half compared with the prior year, while the order book had risen by 10 per cent to a record £1.5bn. However, ongoing planning delays are affecting the rate at which outlets are coming on-stream, which management expects to stand at an average 118 for the year compared with 125 in 2019. |
| Urban and Civic (UANC) | The board and the Wellcome Trust have agreed terms for a takeover offer, which values the group at £506m, resulting in shareholders receiving 345p a share. The price represents a 64 per cent premium to yesterday's closing price and is broadly in line with the group's EPRA net asset value at the end of September. |
| Beazley (BEZ) | Third quarter gross premiums of $2.5bn were 16 per cent up on the 2019 equivalent period and ahead of the insurer's expectations. Rates are also up and - perhaps most importantly for recently-burned investors - the Covid-19 first party loss estimate is unchanged at $340m. |
Investors moved to consolidate gains early on Friday after a very decent bump up in stocks over the last week, with European bourses in the red in the first hour of trade. The Stoxx 600 is on course to rise 7 per cent for the week, whilst US markets have posted similar gains as technology has risen strongly. The Nasdaq is up 9 per cent for the week and the S&P 500 has risen 7 per cent in four sessions. Futures indicate a weaker open in the US. The dollar has retreated to its weakest in over two months, whilst gold broke out to $1,950.
Votes continue to be counted in a number of key battleground states and whilst Donald Trump is pursuing legal avenues, his chances of getting anywhere appear slim. So far courts have thrown out his appeals. Moreover, Joe Biden is closing the gap in those states still counting and these last bastions of hope for the President could also flip. We appear set for a Biden presidency and Republican Senate, which should mean less stimulus, less infrastructure spending and less uncertainty over regulation and taxes, which equals a positive situation for Growth stocks over Value and the big tech names that have dominated the US market for years.
The Fed left rates on hold and made no changes to the pace of asset purchases as chairman Jay Powell warned of the downside risks to the economy. In truth the Fed was never going to do anything at this point and no one expected it to rock any boats. Nonfarm payrolls today but these are increasingly irrelevant against the backdrop of the pandemic, stimulus and the weekly claims numbers, but the release could still move the market at 13:30 GMT.
Bitcoin blitzed through $15,000 for the first time since the beginning of 2018 and came close to taking out $16,000 as investors rode a momentum trade that has been building up a head of steam ever since PayPal announced it would let users buy, sell and hold a variety of major cryptocurrencies. Bitcoin futures broke above $16,000. Two big things seem to be at work that are interconnected. Increasingly millennial investors are favouring Bitcoin within their portfolios as a diversification holding similar to people own gold. Given the scale of the gold market ($2.6tn in bars and coins + $240bn in ETFs) only a modest rotation out of gold would imply a significant increase in prices for Bitcoin from here. PayPal’s move has been super important. The more that businesses and payment processors, card providers and so on accept cryptocurrencies, the higher their value as a utility as a means of payment.
Reflation trade unwinding…maybe not. The dollar sank to the bottom of the recent range where the support has just about held. Bears will be eyeing a test of the September lows at 91.70.
Gold broke free from the descending trend line to the $1,950 area with a positive MACD crossover backing the move.
Neil Wilson is chief markets analyst at Markets.com
