Philip O'Sullivan's Market Musings

Financial analysis from Dublin, Ireland

Posts Tagged ‘UK economy

Market Musings 19/12/11

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Earlier this year when I kicked off this blog one of the first themes that appeared on it was the fragility of UK retail. I wrote quite a bit about the structural and cyclical pressures facing HMV in particular. This morning the music and games retailer issued grim H1 results. Within the statement, management revealed that net cash flow pre-disposals was -£29.6m, while HMV Retail’s like-for-like sales were -11.9%. With underlying net debt of £163.7m (it would have been £200m had the £36.6m proceeds from the sale of Waterstone’s and HMV Canada not come through during the period) and heavy losses (H1 EBITDA was -£30.0m) this is not one for me. As a postscript, I note that legendary retail guru Nick Bubb has tweeted the following:


HMV said that “The Inbetweeners” DVD will be their best seller of all time! And they will sell 2m headphones this year


They’ll need to sell a lot more headphones to fix their balance sheet!


Apart from HMV shares, another thing that’s not for me is UK property. Rightmove says that house prices in England and Wales have fallen a remarkable 2.7% this month, while it sees a “challenging” 2012.


(Disclaimer: I am a shareholder in Bank of Ireland plc) I was pleased to read another positive update from Bank of Ireland this morning. The group has sold part of its UK and American loanbook (Burdale) to Wells Fargo for a minimal haircut (0.8% of Burdale’s drawn down balances), while it also announced that “loan redemptions and repayments remain in line with our expectations and deposits have increased since 31 October 2011“. The point on deposits is particularly encouraging as I would have imagined that recent Eurozone turmoil would have seen some outflows. Elsewhere within the statement Bank of Ireland says that in terms of the deleveraging completed to date and what’s yet to complete under the 2011 PLAR/PCAR, it sees this being done “within the overall base case discount assumptions used as part of the 2011 PCAR”, which has positive implications for the Bank’s capital position.


I have been tracking the Irish financials for some time, encouraged by positive noises on NIM and deposit trends. While acknowledging that the risks to the euro make this sector a highly speculative one, based on recent improving signs from the Irish banks and my gut feeling that the ECB will ultimately have to deploy its bazooka to save the euro (as all other options will, I believe, result in political bottlenecks) I am happy to increase my exposure to it. Hence, this morning I have quintupled my shareholding in Bank of Ireland (note that this takes its share of the portfolio to nearly 2%, so it’s still a relatively small position).


Switching to the political arena, following the recent EU summit much media attention focused, bizarrely, on how ‘isolated‘ the UK was following its decision to opt out of plans for further fiscal consolidation. I say ‘bizarrely’ because, outside of the political sphere (and even on that, support for the Tories has risen to its highest level in 18 months), it’s hard to see much evidence of downside for the UK arising from this. Sterling has strengthened against the euro to levels last seen in the first quarter of this year, while the performance of the FTSE 350 index, which is a much better guide for UK companies than the resource-heavy FTSE 100, looks to be tracking in-line with the Eurostoxx indices. Another bizarre aspect of the media coverage the UK’s decision has received is that many journalists appear to have completely missed the fact that most European countries are already significantly in breach of the Eurozone’s fiscal rules, as this handy graphic shows. So, the EU can propose as many fiscal rules as it likes, but when a majority of its members are significantly in breach of them, why should they be taken seriously?


In the US, I’m giddy with excitement to hear that Ron Paul is opening up a decent lead over his rivals in Iowa. A victory for Paul would put his policies of fiscal responsibility and sound money into the centre-stage where they belong. Speaking of giddiness, if you’ve 20 minutes to spare, why not watch this video of Ron Paul’s recent appearance on Jay Leno’s Tonight Show – from the standing ovation that greeted him when he came on stage to the cheers that all of his policy suggestions received, you can see why one American commentator was moved to write The passion for Ron Paul is reminiscent of the excitement then candidate Barack Obama was able to generate in 2008.

Written by Philip O'Sullivan

December 19, 2011 at 10:44 am

Market Musings 25/10/11

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Thankfully, with my articles submitted to Business & Finance and an exam safely negotiated, a choke point in terms of demands on my time has been overcome, at least for another few weeks! Outside of these especially pressing demands on my time, I’ve also been distracted by the folly that is Ireland’s Presidential election (where all 7 candidates have done a great job in advertising why the office should be abolished), the Rugby World Cup final (payback for the Rainbow Warrior!) and this week’s two referendums in Ireland, which I believe will have negative consequences for our freedoms if passed.


So what has been going on in terms of the markets? The Eurozone crisis continues to rumble on. Last weekend saw a meeting in Brussels which was touted as a “make-or-break” summit, but which degenerated, like all other EU meetings, into having a meeting about having… several more meetings. It is incredible that Europe’s political leadership continues to fiddle while the currency union burns.


Speaking of areas with weak economic governance, I was unsurprised to read Merrill Lynch predict that the United States will lose its AAA rating from a second ratings agency before the year end. You might recall a few months ago there was a political flap over raising the federal debt ceiling to above $14.25 trillion. Just six months on, the US federal government’s debt is now $14.9 trillion. On top of that, at a State level you’ll find a further $4 trillion in debt. While President Obama’s profligacy is beyond question, it is sad to see that the only GOP primary candidate willing to address the deficit, Ron Paul, is struggling to even get into double-digits in the latest polls. To me this indicates that, regardless of the result of next year’s election, the US credit rating will continue to decline.


Speaking of public finances, in terms of a top-down view of the global debt crisis, this is worth a read.


Elsewhere, David Smith is one of my favourite economics commentators. He writes an excellent Sunday Times column which I’m an avid follower of. A couple of days ago he wrote an excellent piece comparing the UK to Ireland on his blog which is worth a read. To me what it illustrates is the success of the competitive devaluation in recent years here (something I’ve mentioned before), which has helped narrow the gap between “rip-off Ireland” and its peers. While the UK has been quick to blame “imported inflation” for its spiraling CPI, this is, as I’ve previously noted, simply the inevitable consequence of the BOE turning sterling into toilet roll.


Another thing I’ve previously noted is how dubious Argentina’s official economic statistics are. These statistics are regularly touted by default advocates here as an example of the “success” we’ll experience if we stiff our creditors. This article illustrates why you shouldn’t believe everything you read about Argentina’s “economic success”. And if you’re still not convinced, have a read of this one too. Having been to Argentina earlier this year and having seen at first hand the grinding poverty many (40%, according to one estimate) of its people endure, and also watched how many passengers on the ferry from Buenos Aires to Montevideo carry their savings out of Argentina to deposit it in Uruguayan banks, such is their limited faith in their supposedly “successful” economy, I have to say that I am unmoved by the argument that Ireland should emulate our Latin American friends.


(Disclaimer: I am a shareholder in Glanbia plc) Turning to corporate newsflow, I was interested to read an interview with Glanbia CEO John Moloney in which he guided that the group could spend up to €200m next year on strengthening its nutritionals division. I think Glanbia has done a super job on this unit, which it has taken from a US focused business at the time of acquisition into an internationally diversified operation – just by way of an anecdote I saw an entire wall of a healthfood store in a shopping mall in Dubai taken up with Glanbia’s Optimum Nutrition product range on my honeymoon earlier this year. On a more quantitative measure, Glanbia’s 2010 annual report reveals that the percentage of group revenues coming from outside of its core markets of Ireland, the US and UK rose from 16% in 2009 to 18.5% in 2010. You can read a little more about Glanbia’s nutritionals business here.


(Disclaimer: I am a shareholder in BP plc) I was also pleased to see BP report a solid set of results earlier this morning. The company has upped its target for disposals by 50% to $45bn, which provides it with a substantial warchest. I was pleased to see management mention higher dividends and share buybacks, which should help bolster the share price. I like BP a lot. It’s very cheap, with the share price at the time of writing putting it trading on just 6.3x next year’s earnings, it has a strong balance sheet (net debt/equity was only 19% at the end of Q3) and for income investors it offers a 4.2% prospective yield. I also see clear potential for positive “surprises” in the shape of compensation from more of its partners for Macondo, while reports suggest that the company will receive a decent rebate from the fund it has established to make good the economic damage the Deepwater Horizon well caused.


Finally, congratulations to New Zealand on winning the Rugby World Cup, and for helping me relieve my bookmaker of a tidy sum after I backed them at 1/5 early in the second half!

Market Musings 19/10/11

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Since my last update, we have seen even more troubling economic newsflow. Japan cut its economic growth forecasts, chiefly due to concerns about the world economy. Portugal reports that its budget deficit is running at €3.4bn worse than expectedChina’s economy grew 9.1% year-on-year in Q3, the slowest pace since 2009. Moody’s warned on its AAA rating for France. Belgian government bonds traded at a record discount to German debt – which prompted ascerbic Twitterer “Schaefdogschaef” to quip: “I still chuckle when I remember 7 days ago they said that taking 60% of Dexia’s balance sheet as a guarantee is no problem!“. UK inflation sky-rocketed – the RPI is at a 20 year high, CPI at a 3 year high. Which is precisely what you’d expect when your country’s central bank turns your country’s currency into toilet paper. The UK ‘misery’ index is now at a 19 year high, compared against the US which is at a 28 year high.


The disruptive effects of the internet continue to shine through – mall vacancies in the US stand at record levels. We all know what’s happened to music retailers, book shops, even some clothing companies. The structural trends have clear implications for commercial property and the retail industry.


(Disclaimer: I’m a shareholder in BP plc) Anadarko agreed to pay BP $4bn over the Macondo disaster. This is a clear positive for BP, and as I have noted before, settlements of this type can act as a catalyst for the share price.


Turning to Irish corporate newsflow, we saw a report in the FT that Etihad is considering a bid for the Irish government’s stake in Aer Lingus. I’m a little dubious about this story, and would echo a lot of the good points Joe Gill at Bloxham makes here. Elsewhere, the departure of Air France – KLM’s CEO should presumably knock speculation on the head that the carrier was considering a move for Aer Lingus. The intentions of IAG (British Airways and Iberia) remain unknown, but to me they seem like the most probable buyer of the government’s 25% stake (provided, one assumes, that Ryanair is willing to sell theirs too). Speaking of Ryanair’s attitude towards Aer Lingus, this morning it threatened to call an EGM and put forward a number of motions. One of those is that Aer Lingus pay a special dividend – it will be interesting to see how Ireland’s cash-strapped government votes if that goes ahead.


We also saw United Drug’s 50% UK home health jv partner Medco buy out the company’s shareholding. This is a shame as the jv has an enormous amount of potential given government drives for more people to be treated at home as opposed to in hospitals.


Elsewhere, C&C reported H1 results earlier today. The company has retained its full-year guidance despite a “tough second quarter”. Its CEO is also to step down, and be replaced by the CFO. I note that C&C’s H1 revenues were -7.2% yoy in constant currency terms (not a surprise given the weather and tough consumer backdrop), but good work on pricing (yes, this has some impact on revenues) saw operating margins rise by 3.1 percentage points.


I note the latest round of oil and gas exploration licences here failed to attract any bids from the supermajors. A lot of political “activists” and their cheerleaders in the media here like to claim that the Irish government is “giving away” our natural resources. If that is true (and I don’t for one second believe that it is), then why are the supermajors not interested?

Market Musings 6/9/11

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What an eventful 24 hours. We’ve seen the Swiss roll over, some outstanding research notes, M&A speculation, corporate results and a lionhearted performance by the Irish soccer team!


Obviously, the main news today is that the Swiss National Bank has taken aggressive action to pare the franc’s ascent. The Swissie had benefited from huge inflows from risk averse investors looking to park money in one of the world’s few remaining political and economic safe havens, but this was at the expense of making its exports uncompetitive. Hence, today’s statement came as no surprise (the Swiss had been sabre-rattling in recent weeks).


There is an important lesson from this for investors here. Irish investors have been buying non-eurozone bonds in Switzerland, Norway, Canada and Australia to diversify their assets and/or (let’s be honest) keep surplus funds out of the banks, but not all of these investors have been doing so without being fully appraised of all of the risks. With my usual flawless sense of market timing (!), I dealt with this theme in an article in the current issue of Business & Finance, which you can read here. Note carefully the advice given about currency risk by NCB’s Aengus Wilson, who is one of the most astute private wealth advisers in Dublin.


There have been some excellent research notes doing the rounds over the past day or so. Tullett Prebon published a very damning report on the UK economy – ‘Thinking the unthinkable – might there be no way out for Britain?’ It warns:


Britain’s debts are unsupportable without sustained economic growth…the economy, as currently configured, is aligned against growth


Another great note is from UBS. In a report titled ‘Euro break-up – The consequences”, they examine the financial costs for countries exiting the union. Their view is:


“Our base case with an overwhelming probability is that the Euro moves slowly (and painfully) towards some kind of fiscal integration. The risk case, of break up, is considerably more costly and close to zero probability”


UBS also mentions the following:


“It is also worth observing that almost no modern fiat currency monetary unions have broken up without some form of authoritarian or military government, or civil war”




So what else has been going on?


(Disclaimer: I am a shareholder in Total Produce plc) We had solid results from Total Produce earlier today. Management reiterated FY earnings guidance of 6.5-7.5c per share. The company has made  €14m worth of “bolt-on” acquisitions since the end of H1, and also says that further share buybacks (it bought back 22m shares last November, or about 6.25% of the shares in issue at that time) remain an option. I really like Total Produce. It’s cheap (taking the midpoint of its guidance it’s on less than 5.5x earnings), it has got a strong balance sheet (net debt/EBITDA was 0.8x at end-2010), it has a stable business model (it is the biggest distributor of fruit and vegetables in Europe, with a reach that enables it to supply multiples across different countries), it has a decent dividend yield (circa 4.5%) and it is spitting out cash (free cash flow for the twelve months ended 30 June 2011 amounted to €29.0m – that’s nearly a quarter of the group’s market cap).


Remember the short-selling ban on European financials?


Reports suggest that CRH may be about to buy a 75% stake in a cement business owned by a Russian oligarch. While we’ll have to wait and see if this comes to anything, it would dovetail with CRH’s growing presence in emerging markets. In addition, it would also help reduce (albeit modestly) its reliance on the fragile Western economies that account for the overwhelming majority of its business. As Goodbody point out, CRH has more than enough firepower for a deal of the scale mentioned in the report.


This evening Ireland’s Finance Minister, Michael Noonan, indicated that GDP forecasts will be cut. Some people on social media sites took this as a sign that he’s softening the public up for a stuffing in this year’s budget, but this is a very shallow analysis that takes no account of the clear deterioration in the economic position of most of Ireland’s biggest trading partners in recent months.


Finally, on a happier note the Irish football team somehow managed to secure a nil-all draw in Russia despite ferocious pressure from the home team. This leaves us on track for a play-off position for the Euro 2012 championships. Richard Dunne and Shay Given were absolutely magnificent in helping to save the team’s bacon (not for the first time), and I think Richard in particular will be pleased by this tweet from Paul McGrath:


“Richard Dunne congratulations The Best performance I have seen from any Irish centre half and that includes myself”

Market Musings 12/04/11

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Since my last installment we’ve seen further concerning news about the health of the UK economy, coupled with wobbles in the commodity market and further evidence that M&A activity is on the way back – in the more defensive sectors at least.


A series of updates from UK consumer oriented firms continued to support my caution around that market. Recruiter Michael Page said that market conditions “remain tough”, with public sector hiring demand “difficult”, while plant hire group Speedy Hire said that it remains cautious about the prospects for a short-term recovery. The BRC said that UK retail sales plunged by the most on record in March,


As I recently discussed in an article in Business & Finance magazine, one area that continues to benefit from positive commodity trends is agriculture. On this front, Carr’s Milling, a peer of Ireland’s Origin Enterprises, released an update which has a bullish read-across for Origin. Elsewhere, cocoa prices plunged after French special forces seized Laurent Gbagbo in the Ivory Coast, which should hopefully lead to a new chapter in that State’s troubled history. Hard commodities such as oil wobbled today after Goldmans cooled its view on them.


(Disclaimer: I am a shareholder in AIB plc). AIB released 2010 results earlier this morning, that showed the bank lost €10.2bn last year. The group says that: “business and market conditions remain challenging and the environment for operating income generation remains difficult”. While deposit outflows had been flagged last year, I still raised an eyebrow at the confirmation that customer deposits decreased by €22 billion in 2010 to €52 billion. The deposit outflow was most acute in capital markets (corporate deposits), where deposits were -65% vs -10% in AIB ROI & -24% in AIB UK. AIB’s LDR widened to 165% at end-2010 vs 123% at end-2009. In terms of the quality of the loan book, AIB’s “criticised loans” are now at 30.2% of total loans, while impaired loans are at 13.4% of total loans. On funding, at end-2010, AIB had ECB drawings of €25.2bn & another €11.4bn from Ireland’s central bank, a combined €36.6bn or 25% of the balance sheet. However, the Polish disposal and Anglo deposit acquisition will have cut that somewhat since the start of the year. All in all things look very grave for the bank, which is effectively on life support from the State for now.


On the M&A front, we had denials from both BHP Billiton and Woodside that they were in discussions over a $49bn deal, while Schneider Electric was rumoured to be planning a deal for Tyco (market cap $23bn) . There has been a lot of speculation about BP’s intentions for its troublesome TNK-BP operation, and I was interested in this article about it. In terms of deals that are going ahead, post AT&T/T-Mobile USA & Vivendi/SFR I had wondered if more telco M&A would come. Then Level 3 paid $3bn for Global Crossing. Elsewhere, Flowers Foods paid $165m for Tasty Baking, which continues the narrative of consolidation in the North American bakery market, a process which Ireland’s Aryzta has been very active in.


There was a bit of military newsflow that caught my eye this week. Firstly, data was released that show global military spending continues to rise, with the world’s biggest spender, the US, having raised its expenditure by 81% since 2001. The US Navy conducted its first test of a laser weapon at sea. Speaking of weapons, watch this video.


I do hope that I’m ultimately proven wrong, but the government here looks to be dithering every bit as much as its predecessor when it comes to pushing through reforms and fiscal consolidation. And reform is urgently needed. One example of this came in the shape of a recent Irish Times article which revealed that despite the failings in governance in many areas of the public sector in recent years, a mere 1 of the 300 external candidates for senior civil service positions in the past 3-and-a-half years was successful. Opening recruitment in the public sector to further outside competition can only be a positive in terms of incentivising better delivery of services. On the spending front, the government announced yet another “review” which simply wastes more time and thus will result in even more debt being loaded onto our battered economy. Speaking of our battered economy, Bank of Ireland became the latest forecaster to cut its estimates for GDP growth.


I’m rather sceptical on the BRIC economies at the moment, for reasons that deserve a blog all of its own. A couple of pieces of news caught my eye in this space which reinforced my suspicions. Firstly, George Soros said that inflation in China is “somewhat out of control“. This chart by Bloomberg economist Michael McDonough also tells a lot about the inflationary issues affecting these emerging markets. Finally, one of the biggest holders of US Treasurys is of course the People’s Bank of China, and I was interested in reading that a former PBOC official has described the US Treasury market as “a giant Ponzi scheme. Elsewhere, Australian housing data looks to be turning negative – this is a trend worth keeping an eye on.

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