The MAM Blog – Project Heather: The Relaunch of a Scottish Stock Exchange

Ross Middleton Senior Investment Manager, Murray Asset Management
Ross Middleton – Senior Investment Manager

A Scottish Stock Exchange was originally launched in the 1960’s, lasting 11 years until it was merged with the London Stock Exchange in 1973. However, the re-establishment of a Scottish Stock Exchange has moved a step closer through an initiative known as Project Heather.

Headquartered in St Andrews Square in Edinburgh the plan is also to have offices in Glasgow and Aberdeen. Approximately 45 jobs will be created from the new venture and following an initial investment package announced in March, the founders have also secured a £750,000 grant through Scottish Enterprise.

The new exchange is aiming to focus on those companies wishing to raise capital that are making a measurable and positive social and environmental impact. This will be measured through meeting certain criteria prior to listing and also by achieving ongoing targets. Those leading the project are hoping to use their connections with entrepreneurs and firms within a number of sectors including renewables and construction.

The objective is for the exchange to be complimentary to other existing exchanges with the founders emphasising their plan is to attract new investment rather than encouraging established firms to move their current listing.

The exchange has partnered with Euronext, Euroclear and European Central Counterparty in order to provide leading technology and market infrastructure.

The new initiative will be more cost effective for listing than other stock exchanges and the aim is for the exchange to be launched by the end of 2019.

The MAM Blog – Decline of Government Bond Yields

Stuart Ralph Investment Manager, Murray Asset Management
Stuart Ralph – Investment Manager

From the interest rate lows of 0.25% under Ben Bernanke and Janet Yellen, the benchmark rate of the US Federal Reserve[“the Fed”] began to rise from December 2015 as historically low levels of unemployment and tight labour markets prompted fears that inflation would spike higher. Following President Trump’s appointment of Jerome Powell as Fed Chair, the rhetoric continued to point towards further rate rises, such that by December 2018, the rate had increased to 2.5% – where it currently stands today. In addition to further rate rises, the Fed also signalled its intent to reduce the $4 trillion of Quantitative Easing (QE) debt held on its books, a legacy of the Financial Crisis. In effect, to begin a slow reversal of the stimulative monetary policy put in place following the financial crisis.

While cautionary tales of fighting the Fed are plentiful, the market became increasingly rattled with their intent, citing policy mistake and highlighting associated economic risks. These and other concerns prompted a deterioration of investor confidence and the sharp decline of equity markets over the 4th Quarter 2018. Combined with President Trump’s criticism of its monetary policy, the Fed has since moderated its language and tone. US-Chinese trade tensions, benign wage growth and contained inflationary pressures have allowed the Fed to signal that it will keep rates at 2.5% until 2021 and hint that it may lower the rate if economic conditions deteriorate.

Since the start of the year, yields have steadily fallen, resulting in a lower and flatter yield curve. In the illustration below, we can see that in the past few days, the yield on the 10 year US Treasury Benchmark Bond has fallen markedly below the Fed Funds rate of 2.5%.

A similar dynamic has been played out in the UK, with the UK 10 Year Gilt having fallen below the Bank of England Base Rate of 0.75%

The graphs above indicate renewed concern and suggest that financial markets anticipate a Fed forced to cut interest rates as growth disappoints and inflationary forces fail to materialise. In the UK, the market believes further rate rises unlikely.

There is little doubt that global Central Banks have recently re-appraised economic conditions and tempered plans to reverse the monetary policy of the QE era and there are times the Fed (and others) have been behind the curve, and eventually moved towards the market view. However, there is clearly a risk that markets are putting too much store in a weak US growth scenario, by expecting an aggressive rate cut to 2.0% (a reduction of 0.5% points). In other words, Government Bond Yields may have overshot the mark, particularly given tentative signs of a fragile de-escalation in trade tensions between the US and China.

With the recent reassessment of monetary policy, investors should gain some comfort that Central Banks are positioned to support growth if and when required, and such action should help underpin financial markets over the medium term.

The MAM Blog – The Discontented Consumer


Amanda Forsyth – Investment Manager & Business Development

The most recent data from the Office for National Statistics shows the unemployment in the UK continues to hit new lows – only 3.8% of the workforce is, we are to understand, without a job.


 

Why, then, is the story from the high street so markedly different? Thanks to comparisons with the period when the Beast from the East kept shoppers away, the month of March saw a sharp year-on-year rise in retail sales; but the underlying picture is less rosy, with 23,000 stores expected to close during the course of 2019. The high-profile collapse of Debenhams has been accompanied by a litany of other retailers announcing that they are calling in administrators – fashion chains like Pretty Green and LK Bennett, the bathroom suite distributor Better Bathrooms and Patisserie Valerie are all on the list of failures in the first quarter.

Nor is the blame entirely to be laid at the door of the online onslaught. Online retailers Wine Direct and Miss Shoes also suspended trading, the latter citing intense competition among their reasons for failure.

 

There is certainly a fierce battle for the attention of the UK consumer, but one would have thought that with so many in work, there should be enough retail spend to go around. The devil, though, is in some of the detail of the unemployment data. The growth in zero-hours contracts means that a worker can be regarded as employed, while still failing to secure any earnings; and the result of that has been a fall in productivity and consumer confidence.

The challenge, therefore, is to overlay on the rosy employment picture a realistic assessment of the shopper’s wallet, and both high street and online retailers must work hard to retain a share of that slim purse.

 

The MAM Blog – Reviewing a fund

Charles Robertson Senior Investment Manager, Murray Asset Management
Charles Robertson – Senior Investment Manager

I was recently asked by a client to provide some comments in relation a recently launched Investment Trust because they were considering purchasing shares. The following is a summary of my reply and it provides a useful insight into how we review a fund.

The launch of the fund involved was incredibly popular and as a result it raised far more money than was expected (roughly 3x more). Generally, Murray Asset Management do not participate in fund launches which attract such a level of support because:-

• Too much hype – triumph of marketing
• Too much support from retail investors
• Tend to involve a ‘star’ fund manager with a long and successful track record based on a particular investment style

Retail investors may not fully appreciate the characteristics/risks of the fund they are supporting and may quickly become disillusioned if short-term performance is disappointing. Typically, if this leads to a lack of demand for the shares then the share price may move lower (and independently to the Net Asset Value performance). Investment styles may go in and out of favour – marketing typically focuses on a ‘here is what you could have won approach’ if you had only invested five years ago in the fund. However, you could not invest in the fund five years ago and so we treat any such performance claims with a healthy degree of cynicism.

However, the fund involved has a number of attractive features, but again some of these require further consideration:-

• A focus on global small and mid-sized companies (good) – but really not that small with the average investment being in a company with a market capitalization of approx. £7 billion
• A long term investment approach (good)
• A focus on quality (good) – particularly if economic headwinds are starting to build
• A concentrated portfolio (good – but adds to risk)
• A clearly defined investment strategy (good).

Typically, we favour managers who have the experience of being ‘through an investment cycle’ – i.e. through both good times and bad. There are other factors to take into account when reviewing a fund, for example costs and the investment opportunity relating to the asset class involved. Finally, given it is an investment trust the share price needs to be considered in relation to the Net Asset Value.

It would be wrong for me to provide details of the recommendation we made, but hopefully the comments are a useful insight into how we begin to construct a recommendation.

The MAM Blog – What does Compliance actually do for clients?


Lisa Hamer – Compliance Director

One of the few times I have heard compliance discussed with any real enthusiasm (aside from with other Compliance professionals) was when ‘Comply or Die’ won the Grand National in 2008! Compliance is the reason we have to issue so much information to clients, and obtain so much from them in return – it is just a burden! Or is it?

Actually, Compliance is your champion and protector. In conjunction with MAM’s Management Board, it ensures that the firm meets all regulatory requirements – everything from financial solvency to suitability of advice.

Suitability is the reason that we need to ask for so much information from clients, both at the outset of our relationship and periodically thereafter. We need to ensure that our services, investment decisions and advice are suitable; that our clients understand any risks involved and have the financial capacity to bear these. We need to regularly review our clients’ circumstances to ensure any changes are considered in our on-going advice and investment decisions. In order to do this, we need a lot of information.

What may seem to be intrusive questions are extremely important. Would you trust a medical diagnosis based on your answers to a few simple questions, or would you trust the one based on a comprehensive and detailed review of your current and past history? Similarly, which analysis of your financial needs would you trust if done on the same criteria?

Yes, we have compliance obligations but primarily we want to do the very best for our clients, and this means asking for quite detailed information in order to undertake a comprehensive analysis of needs and so propose suitable, effective and tailor made solutions.

So, rather than being intrusive or inconvenient, our requests for information are the foundation for suitability.

The MAM Blog – Tapered Annual Allowance


Richard Johnston – Financial Planning Director

The Annual Allowance (AA) restricts the value of pension contributions that can be made by an individual in a given year and, for some years now, the standard AA has stood at £40,000.

Since April 2016, however, the AA has been tapered for those with high levels of income and the rules relating to it can lead to complex calculations being required to determine the AA that is to apply. Typically, the taper applies when income exceeds £150,000, but that is further complicated by the fact that employer contributions are also deemed to be income, and there is a get out of jail card which can be played if income, according to an alternative definition, is below £110,000.

At worst, the taper reduces the AA to £10,000, which is typically achieved once income reaches £210,000, as £1 is lost for each £2 of income above £150,000.

The taper is all the more relevant now because whilst AA rules may permit a person to carry forward unused AA from the previous three tax years, it is now the case that all of those years could be subject to the taper, so a separate calculation may be required for each.

The matter is even more complex for those with defined benefit pension schemes, because 1) a special formula is used to calculate AA usage and 2) it can be difficult to predict what AA usage will occur for a current tax year, in order to decide whether to make a top-up contribution to a personal pension.

It is, therefore, the case that the seemingly simple question of ‘How much can I contribute to my SIPP this year’ may, in fact, be a complex one that requires some time (and a good spreadsheet!) to calculate. For those who may be affected, it is important to assess the position sooner rather than later

The MAM Blog – US-China Trade Wars – What Price Services?


Simon Lloyd – Chief Investment Officer

As tensions remain high in the ongoing negotiations between representatives of President Xi Jinping of China and President Donald Trump of the US, all eyes are on the next deadline of March 2nd. If insufficient progress has been made by that stage, tariffs on $250bn worth of Chinese goods will rise from 10% to 25%, with impacts expected both in China and the US. At present, the expectation is that Mr Trump will stand by his Tweet from 24th February, delaying that punitive hike.

However much less attention is being paid to what are, arguably, at least as important to international business; the supplies of services. While automotive parts and food ingredients are tangible evidence of the two countries’ reliance on one another, there is arguably much greater value to be obtained for the US if access to banking and financial services was opened up. When China joined the WTO, it undertook to let in foreign electronic-payment services; however, Mastercard and Visa have both struggled to make any headway with the authorities. American Express was finally granted a license in late 2018, after agreeing to form a joint venture with Lianlian Group; while Mastercard may finally break a deadlock by linking up with Chinese clearing house Nets Union Clearing Corp.

At the same time, telecommunications services remain resolutely dominated by Beijing; freedoms promised are, eventually, shown to be only very narrowly defined, and permitted only at a pace that befits a nation of long history and long memory.

So, while the US soybean market continues to struggle, the stakes for service industries in the ongoing trade conflict are high enough to give both Mr Xi and Mr Trump vertigo, should either of them look down.

The MAM Blog – Smartphone sales as economic indicator


Stuart Ralph – Investment Manager

The stockmarket recently wiped $50bn off Apple’s stockmarket valuation following its news of slowing iPhone sales in China. The US tech giant now anticipates revenues of around $84bn for the latest financial quarter, a decrease of approximately 8% from earlier guidance. Since China accounts for 20% of all company revenues, and as weakness was specifically seen within iPhone sales, the decline indicates quite a sharp fall in demand. In the aftermath, commentators have also suggested that given the iPhone’s symbolism of affluence within China, declining sales is a worrying sign for Chinese consumer confidence and the wider global economic outlook.

While I agree that weaker sales in China is of concern to Apple (and its suppliers), I am reluctant to see this as a more widespread and worrying sign. It’s obvious that US – Sino relations are increasingly challenging, and incrementally damaged by the arrest of Huawei’s CFO in Canada on the request of US authorities in relation to Iranian Trade embargo matters. The fact that President Trump suggests a more widespread deal between the two countries could remedy the situation clearly masks the wider political intent.

However, the real problem is that companies such as Apple, Samsung and Huawei are victims of their own success. They have over recent years produced increasingly complex, technologically sophisticated and ultimately increasingly “must-have” devices that the populations of the world have embraced. However at the same time, their high-end devices have become ever more expensive.

As I look at my 4 year old iPhone 6 Plus and the images it can take, I can’t see a clear imperative to buy a new phone with an ever better camera or faster processor. It can do all the surfing, emailing, texting, video conferencing, ticket purchasing, music listening and media consuming activities that I could possibly need. I can even login into my work desktop should I wish and it’s a great sat-nav system at the weekends. While it doesn’t have some of the operating bells and whistles that newer devices have, the underlying functionality remains virtually identical.

My belief is that for the vast majority of people, once devices reached a certain point in technological evolutionary terms, the applications that can be run on them is key – new operating system updates / compatibility issues / and dare I say it, intentional obsolescence are the critical factors.

So the question is – if Consumers are happy with their amazing devices and not cajoled into upgrading, then the additional disposable income required to purchase a new device can be used to purchase a range of different products. In economic parlance, the marginal utility per unit of cost associated with a new device is less than the marginal utility per unit cost gained consuming a range or basket of alternative goods.

There will of course be new consumers that underpin future sales, but a combination of enhanced functionality and cost increases have resulted in the replacement cycle being pushed out. The higher the technological bar and cost, the further this cycle will be pushed out.

Growth in China is almost certainly slowing and a deeper economic downturn may yet be seen, but the truth is that no single data point should be regarded as a proxy for the overall performance of the Chinese economy.