AJBell Youinvest Shares Magazine 28 July 2022 by Shares Magazine

VO L 2 4 / I S S U E 2 9 / 2 8 J U LY 2 02 2 / £ 4 .4 9

INFLATION

IS THE WORST OVER? Why we may soon get relief from rising prices

TESLA

The key takeaways from its latest results

Value with a difference A unique proposition for global equity investing

Asset Value Investors (AVI) has managed the c.£1.3* bn AVI Global Trust since 1985. The strategy over that period has been to buy quality companies held through unconventional structures and trading at a discount; the strategy is global in scope and we believe that attractive risk-adjusted returns can be earned through detailed research with a long-term mind-set. The companies we invest in include family-controlled holding companies, property companies, closed-end funds and, most recently, cash-rich Japanese companies. The approach is benchmark-agnostic, with no preference for a particular geography or sector. AVI has a well-defined, robust investment philosophy in place to guide investment decisions. An emphasis is placed on three key factors: (1) companies with attractive assets, where there is potential for growth in value over

Discover AGT at www.aviglobal.co.uk

time; (2) a sum-of-the-parts discount to a fair net asset value; and (3) an identifiable catalyst for value realisation. A concentrated core portfolio of c. 26± investments allows for detailed, in-depth research which forms the cornerstone of our active approach. Once an investment has been made, we seek to establish a good relationship and actively engage with the managers, board directors and, often, families behind the company. Our aim is to be a constructive, stable partner and to bring our expertise – garnered over three decades of investing in asset-backed companies–for the benefit of all. AGT’s long-term track record bears witness to the success of this approach, with a NAV total return well in excess of its benchmark. We believe that this strategy remains as appealing as ever, and continue to find plenty of exciting opportunities in which to deploy the trust’s capital. @AVIGlobalTrust

*As at 31 January 2022 ±As at 31 January 2022, holdings >1% of NAV

Past performance should not be seen as an indication of future performance. The value of your investment may go down as well as up and you may not get back the full amount invested. Issued by Asset Value Investors Ltd who are authorised and regulated by the Financial Conduct Authority.

AVIGlobalTrust

Contents EDITOR’S

05 VIEW

It could be good news fund managers are sitting on most cash in 20 years

06 NEWS

Why athleisure is holding up but demand for fast fashion is fading / Pressure mounts on Vodafone to find acquisition fix for growth conundrum / Coca-Cola provides new demonstration of its pricing power in Q2 / Abcam deals big blow to UK investors in battle to list growth companies / Link report reveals 40% UK dividend growth for Q2 but also concentration risk

GREAT IDEAS

New: Hays / Aberforth UK Smaller Companies Updates: Moneysupermarket / Darktrace

FEATURE

Inflation: Is the worst over? Why we may soon get relief from rising prices

20 FEATURE

Tesla’s undoubted progress still unlikely to change the minds of fans or sceptics

24 RUSS MOULD

What is top of the agenda in the latest US earnings season?

27 FEATURE

Why Johnnie Walker-owner Diageo is a wonderful stock to own

ETFS INVESTMENT

35 TRUST

EMERGING

Discover three dividend ETFs for straightforward and low-cost access to income Going cheap: investment trusts trading on wider than normal discounts

38 MARKETS

Find out which sectors in emerging markets are the cheapest

40 ASK TOM

Does the state pension count as earnings when considering tax relief?

PERSONAL FINANCE

43 INDEX

Using a dealing account? You could be better off with an ISA or SIPP Shares, funds, ETFs and investment trusts in this issue

DISCLAIMER IMPORTANT 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. 1. In keeping with the existing practice, reporters who intend to write about any

securities, derivatives or positions with spread betting organisations that they have an interest in should first clear their writing with the editor. If the editor agrees that the reporter can write about the interest, it should be disclosed to readers at the end of the story. Holdings by third parties including families, trusts, self-select pension funds, self select ISAs and PEPs and nominee accounts are included in such interests. 2. Reporters will inform the editor on any occasion that they transact shares, derivatives or spread betting positions. This will overcome situations when the interests they are considering might conflict with reports by other writers in the magazine. This notification should be confirmed by e-mail. 3. Reporters are required to hold a full personal interest register. The whereabouts of this register should be revealed to the editor. 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.

28 July 2022 | SHARES |

SIPPs | ISAs | Funds | Shares

RETIREMENT YOUR WAY?

Open our low-cost Self-Invested Personal Pension for total flexibility and control over your retirement with free drawdown. youinvest.co.uk

Capital at risk. Pension rules apply.

EDITOR’S VIEW

It could be good news fund managers are sitting on most cash in 20 years Things often feel at their blackest just before they improve and the same could be true today

f the darkest hour is just before the dawn then brighter skies cannot be too far away. When you consider the events of the last two decades, let alone the last six months, it’s no surprise investors are feeling pretty gloomy. A dot-com crash, a Great Financial Crisis, a pandemic and the largest conflict in mainland Europe in a generation or more would be enough to turn even the world’s greatest optimist glum. And the current inflationary spiral has seen many investors, both ordinary and institutional, take fright. According to Bank of America’s latest survey of fund managers, covering 293 managers who between them steer more than $800 billion in assets, average cash levels have, at 6.1%, reached their highest level in 20 years. While this is a clear indication of how cautious the markets are right now, it may also suggest some strategic thinking on the part of the professionals who reckon a sell-off may be coming and want to have capacity to snap up any opportunities which may arise. This is something you could consider with your own portfolios. Take a good hard look at your investments. If there’s anything which no longer adds up – not just because its value has fallen but because the investment case has changed in some way – then

cashing out and waiting for a chance to put this money to work when markets are volatile could be a good strategy. When there are waves of selling, people tend to be fairly indiscriminate and exit stocks which, on a long-term view, continue to have plenty of potential. We’ve already seen examples of this and no doubt we will see quite a few more in the coming months, Shares will certainly be looking to seize these moments when they arrive. Equally, if you have time on your side, sitting tight is not a bad policy as, even if there is more pain to endure, you don’t want to miss out on any recovery when it comes. But, returning to the wider point, if people are overtly bleak about the outlook then it probably bodes well for stock markets. As we discuss in our main feature this week, there are reasons to believe that, globally at least, inflation may be close to or even past its peak. There is no room for complacency but equally a bit of perspective and at least a small dose of optimism can’t hurt.

By Tom Sieber Deputy Editor

28 July 2022 | SHARES |

NEWS

Why athleisure is holding up but demand for fast fashion is fading Frasers and JD Sports are kicking on but challenges mount for beleaguered ASOS and Boohoo

ccording to the latest ONS data (22 July), UK retail sales volumes fell by 0.1% in June following a 0.8% decline in May 2022 as soaring inflation and the cost-of-living crisis put the squeeze on consumers. However, two sector constituents shrugging off the wider malaise are Sports Direct owner Frasers (FRAS) and JD Sports Fashion (JD.), with sales of sportswear and athleisure holding up well amid the deteriorating economic climate. Mike Ashley-controlled Frasers’ shares dashed ahead after the retail conglomerate behind House of Fraser, FLANNELS and Evans Cycles shrugged off inflationary pressures and supply chain challenges to report (21 July) a swing from losses of £39.9 million to forecast-beating adjusted pre-tax profits of £344.8 million for the year to 24 April 2022, buoyed by a strong reopening of physical stores. Frasers also upgraded pre-tax profit guidance for 2023 to between £450 million and £500 million with CEO Michael Murray insisting it is ‘clear that our elevation strategy is working’ and that his charge is building ‘incredible momentum with new store openings, digital capabilities and deeper brand partnerships across all of our divisions’. Sportswear rival JD Sports expressed confidence (22 July) headline profit before tax and exceptional items for the year to January 2023 will match last year’s record £947.2 million haul after delivering 5% like-for-like sales growth in the first five months of its new fiscal year. JD Sports’ positive performance demonstrates athleisure is still in demand and younger customers, who may live at home or rent from a landlord picking up some of the slack from rising bills, can still find the money for must-have sneakers or essential gym kit.

| SHARES | 28 July 2022

ONLINE PLAYERS UNDER PRESSURE ONS data revealed the proportion of retail sales online fell to 25.3% in June, its lowest proportion since March 2020’s 22.8%. Like JD Sports and Sports Direct, pure-play online fashion purveyors ASOS (ASC) and Boohoo (BOO:AIM) also target youthful consumers, but their growth is slowing as cash-strapped shoppers cut spending on nonessential clothing amid rising inflation and growing recession risks. Margins are also being impacted by surging product returns. Costly and complex to handle, returns have long been a margin-eroding menace for the online-only clothing industry, which is why Boohoo quietly introduced a returns charge in early July in a bid to eradicate bad shopper behaviour. How much this will deter shoppers and hit market share is yet to be seen. As for ASOS, suppliers have complained to the Daily Mail about orders cancelled at short notice as the retailer adjusts to weaker demand, though the company reassured the newspaper these were ‘postponements’ not cancellations and they are running at normal levels for this time of the year. Worryingly, suppliers seem to fear these are in fact cancellations from ASOS and that more may follow. [JC]

NEWS

Pressure mounts on Vodafone to find acquisition fix for growth conundrum Mobile network widely expected to emerge with a bid for rival Three as its tries to end years of underperformance

verseas roaming price hikes have helped reverse years of lacklustre growth in the UK for mobile network Vodafone (VOD) in the first three months of its financial year to 31 March 2023. But while squeezing Brits abroad helped offset declines in its biggest market Germany, as new regulation had an impact, it will do little to lift the pressure on Vodafone chief executive Nick Read. Vodafone issued a largely in-line trading update for the first quarter to 30 June 2022 showing overall revenue nudging 2.7% to €11.28 billion, most of which was due to mobile price rises in the UK as rules on roaming charges were lifted following Brexit. This was illustrated by organic services revenue growth in the UK in the quarter hitting 6.7%, compared to a range of between 0.6% growth and 2% declines across its major markets in Germany, Italy and Spain. Investors continue to hope that Read will be able to use mergers and takeovers to spice up years of lacklustre financial performance from Vodafone, and equally flat shareholder returns. In the second half to March 2022 Vodafone reported revenues and EBITDA (earnings before interest, tax, depreciation and amortisation) of £2.88 billion and £636 million respectively, versus £2.51 billion and £582 million in the second six months of 2009, report analysts at Megabuyte. ‘This was somewhat of an underlying decline given that Vodafone acquired Cable & Wireless Worldwide in 2012, which added about £2.1 billion in annual revenues and £370 million of EBITDA,’ said Megabuyte’s Philip Carse. Vodafone shares have handed shareholders an average 2.65% a year return, including dividends, over the past decade, lagging even the FTSE 100’s

fairly modest 6.86% annualised total return. Vodafone has recently been linked to possible acquisitions of rival mobile network Three UK and broadband, home phone and mobile provider TalkTalk, which left the UK stock market in a take private deal orchestrated by Charles Dunstone, the company’s joint founder and, at the time, largest shareholder.

Vodafone (%) 20 10 0 −10 Oct 2021

Jan 2022

Apr

Jul

Chart: Shares magazine • Source: Refinitiv

Reports earlier this month said that TalkTalk is in talks with Vodafone rival Virgin Media O2 over a possible £3 billion merger, which if true, would leave Three its only realistic UK-based target. So far, Vodafone’s strategic rethink has included spinning off mobile masts business Vantage Towers (VTWR:ETR) as a standalone business, refocusing the portfolio through a range of disposals, and positioning the company for ever-greater consumption of data. But without more dramatic activity, investors may become concerned about the sustainability of Vodafone’s dividend, one of its chief reasons to own the shares. Last year it paid €2.47 billion in dividends to shareholders from €2.62 billion post tax net income. [SF] 28 July 2022 | SHARES |

NEWS

Coca-Cola provides new demonstration of its pricing power in Q2 Latest numbers sees the soft drink manufacturer materially increase its 2022 growth forecast

oft drinks manufacturer Coca-Cola (KO:NYSE) once again demonstrated its ability to offset surging input costs with price increases in its second quarter results (26 July). The company raised its full-year revenue growth forecast by a material amount despite increased costs for aluminium cans and corn syrup. Coca-Cola now expects organic revenue to increase 12% to 13% in 2022 compared with previous expectations for a 7% to 8% increase. The latest quarter saw net revenue rise 12% to $11.3 billion compared with the $10.55 billion pencilled in by analysts.

Unlike big ticket items, which are proving difficult to shift given cost of living pressures, it seems people are far less likely to cut back on impulse purchases like a can of Coke, even if they have to pay a bit more. The appeal of Coke’s core brands with consumers also means they are far less likely to trade down to cheaper alternatives. The resilience of the business has been reflected in its share price performance so far in 2022. Its shares are up nearly 5% year-to-date compared with a fall of more than 17% for the S&P 500. Based on consensus forecasts, the shares trade on a forward price to earnings multiple of a little more than 24 times. [TS]

Abcam deals big blow to UK investors in battle to list growth companies The UK government is trying to promote London, Cambridge and Oxford as a global life sciences hubx The AIM market looks set to lose its largest listed company after life science research tools supplier Abcam (ABC:AIM) said (20 July) it intends to cancel its UK listing to focus on a sole US listing. Abcam said it will put the proposal to a shareholder vote later this year. Although only 10% of the company’s shares trade on Nasdaq, volumes have doubled since listing in October 2020, and now represent

| SHARES | 28 July 2022

a quarter of total liquidity. The company revolutionised the way that research scientists can source and purchase antibodies online and strong growth of the business has turned it into one of AIM’s biggest success stories. Despite the shares trading around a fifth below all-time highs, shareholders have been richly rewarded over the years, with the shares increasing around 29-fold

from their listing price in 2005. This represents a compound annual growth rate of 22% a year excluding dividends paid along the way. Before the company suspended them during the pandemic, dividends had grown by nearly 25% a year since 2006. If shareholders vote through the delisting, Abcam will become the latest example of the battle between the world’s largest exchanges to attract the best growth companies. A fellow Cambridge success story, computer chip designer ARM was due to return to the London stock market before its current owner Softbank put the deal on ice due to political uncertainty. [MGam]

NEWS

Link report reveals 40% UK dividend growth for Q2 but also concentration risk Dividend increases have mainly come from three sectors – oil & gas, mining and banks

he second quarter Link UK Dividend Monitor has revealed the high concentration risk facing UK income investors. Three quarters of the dividend growth in the second quarter came from the mining, oil and bank sectors. Looking forward mining dividends, which have been the most significant driver of dividend growth during the last two years, may well have peaked. UK dividends have also benefited from sterling weakness. UK dividends had a very good second quarter. The headline total jumped 38.6% year-on-year to £37 billion. Large one-off special payments were a key driver, but the underlying picture was strong. Underlying dividends, which exclude volatile special dividend payments, jumped by 27% to £32 billion. This was the second-largest quarterly total on record, for both headline and underlying figures, just shy of the all-time record reached in the second quarter of 2019. STERLING WEAKNESS LIFTS DIVIDEND RETURNS It is important to note that UK dividend performance was boosted by the weak pound.

In the second quarter, two fifths of the total dividends paid were denominated in US dollars, generating an exchange rate boost of £1.4 billion to their sterling value. For the full year, the pound’s weakness is set to add £3.5 billion to £4.5 billion to the total. In a recent in-house interview David Smith, manager of the Henderson High Income Trust (HHI), outlined the fund’s strategy. The £266 million trust which is currently trading on a 1.5% discount to net asset value (NAV), invests in a prudently diversified selection of both larger and smaller companies. It aims to provide investors with a high dividend income stream (the trust currently yields 9.08%), whilst also maintaining the prospect of capital growth. The trust has the ability to own bonds and as Smith highlights ‘companies have to look after bond holders over equity holders’ which means bond coupons are more resilient than equity dividends. Commenting on the Link report Smith said: ‘Although economic headwinds are building, UK companies generally have robust balance sheets while the rebasing of dividends during the pandemic has resulted in better dividend cover, hence companies are in stronger financial health to weather any potential slowdown, making current dividend levels for the UK market more sustainable.’ [MGar]

Billions

UK dividends (full year basis) £120 £110 £100 £90 £80 £70 £60 £50 £40 £30

2007

Source: Link Group

2008

2009

2010

Regular dividends

2011

2012

2013

2014

2015

2016

2017

2018

2019

Special dividends

2020

2021

2022 forecast

28 July 2022 | SHARES |

Headhunter Hays has ambitious growth plans for the next five years Shareholders are set to benefit from increasing cash flows and dividends

lobal recruitment firm Hays (HAS) is one of those rare stocks which offers something for all types of investor. For growth fans, the company is consistently delivering double-digit increases in net fee income and smashing country records quarter after quarter. For income investors, it is paying out a growing stream of surplus cash in the form of special dividends and buybacks, despite continuing to invest heavily in future growth. Yet the price for all this is just 13 times this year’s consensus earnings forecast of 9.6p per share, which will no doubt increase after the firm beat estimates with its fourth quarter growth, creating appeal for value investors into the bargain. GROWTH POTENTIAL Hays has always used its prodigious shortterm cash flow to invest in long-term growth opportunities, not just in terms of new markets but in terms of its people, its technology and its brand. The firm now offers recruitment services across 20 sectors in more than 30 countries worldwide

Growth in global demand for technology jobs (Million) 67.1 7.1 6

6 69.8 9.8

72.6 7 2.6

75.5 5.5 7

62.0 62.0

6 64.5 4.5

2022E

2023E

2024E

2025E

2026E

2027E

Chart: Shares magazine • Source: Hays

| SHARES | 28 July 2022

HAYS

 BUY

(HAS) 123.5p Market cap: £2 billion

and is expected to generate in the region of £1.25 billion in net fees this year, before upgrades. That is still only a third of the net fees generated last year by Swiss rival Adecco (ADEN:SWX) and Dutch firm Randstad (RAND:AMS), but Hays has an aggressive five-year growth plan which it outlined at its investor day in April. One of its aims is to double net fee income from its ‘enterprise client’ business, which is those firms who outsource their temporary and permanent white-collar recruitment to Hays, from £300 million to £600 million annually. Of the group’s 400 top clients, who all spend over £250,000 annually, so far only 150 are ‘enterprise clients’. Below the top 400, there are another 800 clients who spend between £100,000 and £250,000 annually, meaning there are over 1,000 firms representing ‘major upsell opportunities’ just among current clients. The market for outsourced staffing is around $200 billion per year and according to Everest Group & Staffing Industry Analysts is growing at twice the rate of the wider $600 billion per year staffing market. As clients face an increasing battle to recruit and retain quality staff, which is leading to rapid wage inflation, the pressure to hand the reins to an outside expert is only going to continue growing. Clients who outsource their recruitment

Hays' consensus forecasts June 2022E

June 2023E

June 2024E

Earnings per share

8.67p

9.54p

11.2p

Price to earnings*

14.2x

12.9x

11x

Dividends per share**

4.45p

5.29p

Dividend yield**

3.6%

4.3%

6.5%

Net cash

£295 million

£230 million

£227 million

Table: Shares magazine • Source: Hays, Stockopedia, Sharepad. Data correct as of 26 July 2022. * Based on 123.5p share price. **Excludes special dividends

tend to need additional HR (human resources) services from their providers such as coaching, development and assessment and re-skilling. TECHNOLOGY FOCUS Another big plank of Hays’ growth strategy is to take net fees in the technology space from £300 million to £500 million by 2027. The global technology staffing market has grown four times faster than the broader jobs market over the last 20 years, and over the last decade Hays has consistently grown its fees from the sector by more than the market. Looking ahead, between 2022 and 2027 the number of global technology jobs is expected to rise more than 20% from 62 million to 75.5 million, according to company estimates. The group’s strongest disciplines at the moment are project and change management, devops (development and operations) and cloud, and software development, but it plans to expand its core competence into data and analytics, cloud development and cyber services. The firm’s US cyber security recruitment arm already accounts for more than half of its cyber fees, and revenues are growing exponentially. Demand for cyber staff worldwide is close to seven million people, whereas the current available workforce is only 4.2 million people, meaning there

is a persistent deficit of talent, leading to higher wages and therefore higher fees. The total global spend on cyber staff is expected to grow by close to 15% per year between now and 2027 to reach $300 billion according to the firm’s research. IMPROVING RETURNS Net fee income for the final quarter to the end of June grew by 23% against analyst estimates ranging from 15% to 22%, with 15 countries setting new all-time fee records. As a result, the firm raised its guidance for full year operating earnings to £210 million, at the top end of its previous range of expectations. Fees and activity were ‘stable at high levels through the quarter, driven by good client and candidate confidence’ said chief executive Alistair Cox. ‘While macroeconomic uncertainties are increasing, we have a clear strategy and our key markets continue to be characterised by skill shortages’, said Cox, adding ‘fee growth is also supported by improved margins and wage inflation globally.’ Faster fee growth and higher margins means more money to hand back to shareholders, with the firm sitting on close to £300 million of cash at the end of June despite buying back £18 million of its shares. The firm has promised to return ‘significant cash’ to investors over and above its £100 million cash buffer and any unused cash from its buyback programme. By our calculations, that means Hays could be on track to distribute up to £138 million or 8.4p per share in special dividends this year based on the most recent share count. [IC]

Hays (p) 150

100

Oct 2021

Jan 2022

Apr

Jul

Chart: Shares magazine • Source: FE Analytics

28 July 2022 | SHARES |

Aberforth Smaller Companies offers growth and income with a margin of safety This value-focused trust buys small caps selling below intrinsic value and should fare well in a rising rate environment

hares acknowledges there levels and then sell out. ABERFORTH SMALLER could be further volatility ‘Over the years this pragmatic COMPANIES TRUST to come from small caps, approach has seen the team roll into an asset class hit by indiscriminate and out of companies, building up  BUY selling as investors fret over surging knowledge and experience which (ASL) £12.44 inflation, rising rates and a likely can sometimes rival that of the Market cap: £1.1 billion recession in 2023. companies’ management teams Yet with much bad news already themselves,’ says Kepler. priced in, taking advantage of the stock-picking skills of a proven small cap-focused INCOME ATTRACTIONS fund manager could pay off for the patient investor. The trust also aims to increase dividends in real We like Aberforth Smaller Companies (ASL), a terms and its value discipline leads the managers value-focused investment trust trading at a wide to stocks with higher than average yields. Aberforth 12.5% discount to net asset value (NAV). That Smaller Companies raised the dividend in 2020 represents a compelling entry point for investors, and 2021, despite the impact of the Covid crisis on with a decent 2.8% yield offering additional corporate payouts, and also sits on an extensive downside protection. revenue reserve. With the UK market still cheap compared with overseas peers, Aberforth Smaller Companies ABOUT ABERFORTH SMALLER CO’S continues to benefit from takeover interest in Investment trust research firm Kepler points portfolio companies, with the likes of FirstGroup out that Aberforth Smaller Companies is ‘one of (FGP), Go-Ahead (GOG), Rathbones (RAT) and relatively few options for value investing in the UK Euromoney Institutional Investor (ERM) having small cap space’ and the trust has benefited since received bids. value staged a comeback. As of 30 June, the fund was diversified across Yes, it has suffered a negative one year 14.6% 76 holdings. [JC] net asset value (NAV) total return amid the more recent small caps carnage, yet annualised NAV total returns over 10 years are a robust 10.25% Aberforth Smaller Companies Trust and the trust is well positioned for a rising interest (p) rate environment, since value has typically 1,600 outperformed growth during previous hiking cycles. 1,400 The £1.1 billion cap is managed by a sevenstrong team at value investor Aberforth. 1,200 It buys shares in companies it calculates are Oct Jan Apr Jul selling below their intrinsic value; the aim is 2021 2022 to spot companies trading at low valuations, preferably when their earnings are at cyclical Chart: Shares magazine • Source: FE Analytics lows too, hold them until valuations reach fairer

| SHARES | 28 July 2022

Our Moneysupermarket tip is up 30% in three months, find out why A strong first half update has helped get the share price moving in the right direction

MONEYSUPERMARKET (MONY) 229.8p

Gain to date: 32.1% We said Moneysupermarket (MONY) shares were just too cheap when flagging their appeal in early May 2022 and after a very strong set of first half numbers (21 July) it appears the market agrees with us. We also pointed out that price comparison sites could prove popular with households looking to save money as the cost of living crisis bites. WHAT’S HAPPENED SINCE WE SAID TO BUY In late June it was revealed chief financial officer Scilla Grimble was jumping ship to Deliveroo (ROO), although she will stick around until a successor is found (or at least until June 2023). However, more relevant to the performance of the shares were the results for the 12 months to 30 June. These were materially ahead of expectations, supported by stronger growth in travel-related business and ‘exceptional’ trading in its consumer finance ‘Money’ vertical. Revenue advanced 19% year-on-year to £193.2

million while EBITDA (earnings before interest, tax, depreciation and amortisation) was 10% higher at £56.6 million and there was a 14% advance in adjusted earnings per share (EPS). The profit numbers were around 15% ahead of analysts’ forecasts, with the availability of ‘attractive’ savings products driving a very strong 50% increase in revenue for the Money arm. This strong showing was delivered despite switching on energy prices having come to a virtual halt thanks to the absence of any attractive energy deals at a time when wholesale prices are surging and the energy price cap is set to go up again in October. WHAT SHOULD INVESTORS DO NEXT? Sit tight for now. In the wake of the results investment bank Berenberg upped its EPS forecasts for 2022, 2023 and 2024 by 8.8%, 6.4% and 7.1% respectively. It also noted that Moneysupermarket’s new guidance ‘remains conservative as it implies a meaningful sequential decline in revenue and profit in H2 2022, which is unlikely, in our view, given the momentum across its core channels’. Based on Berenberg’s upgraded forecasts the company trades on 17 times 2022 earnings falling to 14.3 times in 2023. [TS]

Moneysupermarket (p) 300 200 100

Oct 2021

Jan 2022

Apr

Jul

Chart: Shares magazine • Source: FE Analytics

28 July 2022 | SHARES |

Darktrace’s digital defences are in high demand amid heightened cyber risks The company continues to beat forecasts and the shares should reflect that in time

DARKTRACE (DARK) 366.5p

Loss to date: 2.3% Enterprise cybersecurity company Darktrace (DARK), which we said to buy on 21 April 2022, continues to defy stock market Cassandras after raising full-year revenue and profit guidance for the sixth time in succession. WHAT’S HAPPENED SINCE WE SAID TO BUY? The Cambridge-founded business told investors that it anticipates full-year revenues to be up ‘at least’ 48% to $417 million, beating an already upgraded range of between 45.5% to 47%. But this is not growth at any price, Darktrace is becoming increasingly profitable. Adjusted EBITDA margin (earnings before interest, tax, depreciation and amortisation) expanded from 12.5% to 19.5%, also beating prior expectations. Analysts predict adjusted EBITDA to more than double to $62 million after 2021’s (to 30 June) $29.7 million. The news went down extremely well with investors following the firm’s fourth-quarter trading update on 19 July. Darktrace shares jumped more than 8% on the day. Emerging as one of the world’s most innovative cybersecurity companies, Darktrace uses artificial intelligence and behavioural analysis to detect the 14

| SHARES | 28 July 2022

early signs of a cyberattack on a network, shut the digital door, and provide technological fixes. It added 500 new global clients to its roster in the fourth quarter, a 32% jump year-on-year, bolstering annualised recurring revenue at full-year constant currency rates to at least $513 million. ‘We are delighted to report strong operating and financial performance for full year 2022, where we saw demand for our products continuing to grow as organisations seek to protect themselves from growing cyber threats,’ said Poppy Gustafsson, chief executive. Gustafsson also anticipates business momentum to continue into the year to 30 June 2023. Darktrace predicted strong revenue growth and an adjusted EBITDA margin for the full year 2023 but did warn that sales trends exiting fiscal 2022 ‘must be balanced against the uncertainties inherent in the current global economic environment’. WHAT SHOULD INVESTORS DO NEXT? It’s obviously disappointing that the shares have yet to move up but we remain convinced that it is only a matter of time before the company’s outstanding progress and improving quality starts to be reflected in the share price. Still a buy. [SF]

Darktrace (p) 1,000 500 0

Oct 2021

Jan 2022

Chart: Shares magazine • Source: FE Analytics

Apr

Jul

MON£Y & MARKET$ LISTEN TO OUR WEEKLY PODCAST Recent episodes include: It’s all about inflation as UK CPI hits another 40-year high Best deals on cash, how Ruffer protected investors’ money and cracks in the inflation story What’s hitting the new Chancellor’s to-do list, UK growth fears, pound falls and outlook for UK banks

Listen on Shares’ website here You can download and subscribe to ‘AJ Bell Money & Markets’ by visiting the Apple iTunes Podcast Store, Amazon Music, Google Podcast or Spotify and searching for ‘AJ Bell’. The podcast is also available on Podbean.

INFLATION

IS THE WORST OVER? Why we may soon get relief from rising prices

nflation is running at 40-year highs with June consumer prices increasing by more than 9% year-on-year on both sides of the Atlantic. Unsurprisingly it continues to grab headlines and keeps investors’ attention firmly fixed on central bank interest rate rises designed to cool the economy. Supply shortages created by the reopening of the world economy have been exacerbated by the war in Ukraine and China’s zero Covid policy. Meanwhile, financial sanctions against Russia have sent energy prices rocketing sky-high. The narrative has become firmly established. But Shares believes the investment focus will likely shift over coming months. That is because the key drivers of inflation are abating which suggests investors would be better served by ignoring the scary headlines. The key reasons are explored shortly. One point to note is that even if inflation does cool there is still a lot of uncertainty about how

| SHARES | 28 July 2022

By Martin Gamble Education Editor

fast it might fall back towards central bank policy targets. So, it is likely that companies with pricing power will remain in demand with investors.

REASON 1 COOLING COMPONENTS Beneath the headline data key components which have been driving inflation higher appear to be softening. Brent crude prices have moved sharply lower since the end of June falling by a fifth while natural gas prices off by almost a third. A part of this weakness may reflect fear of a growth

slowdown or recession as higher energy prices destroy demand. The idea is that consumers spend less on discretionary items because energy costs are taking a higher share of wallet. Food prices look like they peaked in May with wheat prices down almost 40% while all commodities across the spectrum have been soft in recent weeks. Prices are likely to remain under pressure following an agreement reached (22 July) in Istanbul which allows a resumption of Ukrainian shipment of grain and other agricultural products through the Black Sea to world markets.

REASON 2 INFLATION WILL SLOW MATHEMATICALLY

The so-called inflation base effect relates to the effect of the corresponding prior year period. From June 2022 onwards the inflation data series will reflect a true like-for-like comparison of the economy for the first time since the pandemic. Weak inflation data from the prior year will drop out of the series which means even an absolute increase in prices will show a lower yearover-year rate of inflation.

REASON 3 INFLATION EXPECTATIONS NOT EMBEDDED

The agreement also allows Russia to export grain and fertilisers, easing worries over global food security. A control centre will be set-up in Istanbul which oversees exports. It will be run by staff from the United Nations, Turkey, Russia, and Ukraine. Commodities across the board have been softening, with the broad-based S&P GSCI Commodity Index down by nearly a fifth since early June. Meanwhile supply chain stresses have eased, reducing the soaring shipping costs which have been a major drag for certain companies.

The reason the Federal Reserve and to some extent the Bank of England have been so aggressive in hiking interest rates is because they are afraid that expectations of higher inflation have become embedded in the consumer psyche. It was undoubtedly a relief therefore, when the University of Michigan’s consumer confidence survey (15 July) showed households’ inflation expectations in five years’ time falling to 2.8% from 3.1% in the prior month.

US five-year forward inflation expectations (%) 2.8 2.6 2.4

S&P GSCI Commodity Total Return

2.2

4,000

2.0 1.8

2,000

1.6 1.4

0 2018

2019

2020

Chart: Shares magazine • Source: Refinitiv

2021

2022

2021

2022

Chart: Shares magazine • Source: Refinitiv

28 July 2022 | SHARES |

Consumer expectations for inflation are consistent with the bond market’s view of where inflation will be in five years’ time, currently around 2%, down from 2.6% in late April according to the St Louis Federal Reserve. Consumers and bond investors are not alone. The latest Bank of America fund manager survey (19 July) revealed that 76% of respondents expected inflation to fall next year, the most since the financial crisis in 2008. The survey also indicated that investor optimism on global growth hit all-time lows, while those expecting a recession next year shot to the highest level since May 2020. There is no certainty that inflation will slow, but the growing evidence suggests actions by the US Federal Reserve and other central banks are having a cooling effect on economic growth, alleviating some inflationary pressures. One other interesting aspect to be revealed by the fund manager survey is a clear investor preference for corporates to shore up their balance sheets rather than spend cash on capital expenditures or share buybacks. The problem is the act of hoarding cash instead of investing for growth could exacerbate the growth slowdown and tip the economy into a recession.

have performed very well in 2022. Oil giants BP (BP.), Shell (SHEL) and Drax (DRX) are showing gains of 17%, 27% and 22% respectively. Slowing growth expectations are dampening industrial metals prices. This was confirmed by Rio Tinto’s (RIO) latest production report when the company said, ‘Prices for our commodities decreased in the quarter, amidst growing recession fears and a decline in consumer confidence.

WINNERS AND LOSERS Investors will get a better understanding of the impact of higher rates and inflation over coming weeks as the second quarter reporting season gathers pace. With the inflation tide potentially turning the biggest beneficiaries of tight energy markets over the last few months look the most vulnerable to an easing in prices. In other words, investors should consider taking profits in the oil and energy sectors which

Shell 2,000 1,000 0 2018

2019

2020

Chart: Shares magazine • Source: Refinitiv

| SHARES | 28 July 2022

2021

2022

‘The economic outlook is weakening due to the Russia-Ukraine war, tighter monetary policy to curb rising inflation, and targeted Covid-19 restrictions in China.’ Miners’ profits are directly linked to metals prices, so it is perhaps unsurprising that analysts have already begun to lower their earnings estimates in recent weeks. Forecast 2022 earnings per share for Rio have dropped by around 18% since the middle of May. A combination of escalating claims inflation and declining volumes sparked profit warnings from Sabre (SBRE) and Direct Line (DLG) in July. Increased parts costs and longer repair times due to labour shortages have caught the insurers by surprise.

At the same time a change in the regulations which prevents the insurers from automatically increasing premiums for existing customers has held back the ability to pass this on.

SUCCESSFULLY PASSING ON COSTS The paper and packaging industry has managed to absorb rising input costs by raising prices. DS Smith (SMDS) told investors at its annual results that price increases had offset significant cost inflation which had driven a strong improvement in profitability. However, despite the increase in profitability, the shares are down 26% year-to-date perhaps reflecting a normalisation of e-commerce trends as cash-strapped consumers cut back on online shopping. Mr Kipling cakes maker Premier Foods (PFD) said it was on track to meet full year expectations after successfully putting through price increases to offset cost inflation.

Premier Foods, whose other brands include Ambrosia and Lloyd Grossman claimed its good value meal proposition was proving popular as consumers grapple with a cost-of-living crisis. Instant service equipment company PhotoMe International (PHTM) increased prices in its photo booths by a third in the first half without impacting revenues, allowing it to mitigate inflationary pressures, demonstrating significant pricing power. US electric vehicle maker Tesla (TSLA:NASDAQ) managed to offset lower volume growth caused by supply issues by increasing pricing by around 5% since May noted investment bank Berenberg. US snacks and beverage giant PepsiCo (PEP:NYSE) raised full year guidance (12 July) after planning to increase prices in the coming

months. The Gatorade and Doritos maker said it had not seen any resistance to the price rises. It is worth pointing out that companies are not forced to raise prices to combat inflation and are free to choose to absorb the costs to drive volumes and market share gains. Premium mixers drinks maker FeverTree (FEVR:AIM) is a good example. The company surprised investors (15 July) after downgrading full year profit expectations by a whopping 36%. The company cited higher than expected glass and raw materials costs as reasons for a deterioration in margins. It also suffered delays in ramping up its US East Coast bottling facility which resulted in higher freight costs as UK production was needed to fulfil demand. A knock-on effect of lower inflation is that interest rates rises may also be close to peaking out. This could reduce pressure on high growth companies which have been heavily punished by higher rates, which lower the value of their future earnings. In other words, it could be a good time to reconsider growth companies which have good pricing power. Technology giant Apple (AAPL:NASDAQ) has consistently shown it has the ability to raise prices without affecting demand for its products.

28 July 2022 | SHARES |

FEATURE

Tesla’s undoubted progress still unlikely to change the minds of fans or sceptics Electric carmaker remains a marmite stock to most – you either love it or hate it

lon Musk has a lot on his plate these days. What with tangling with Twitter (TWTR:NYSE) over spambots, sending Starlink satellites into space and crusading on free speech. Yet the industrious entrepreneur’s primary passion project remains Tesla (TSLA:NASDAQ), and building it into the world’s most important carmaker. Millions of investors have been lured into the Tesla growth story by the billionaire’s sheer chutzpah, and they have largely been rewarded for their loyalty, with the share price having grown 10-fold in five years. Yet, like so many other growth companies, the stock has struggled this year as investors weigh the various impacts of soaring inflation, clogged supply chains, war in Ukraine and slowly economies worldwide.

Tesla vehicle deliveries (thousands) 2022 Q2

254.7

2022 Q1

310.05

2021 Q4

308.6

2021 Q3

241.3

2021 Q2

201.25

2021 Q1

184.8

2020 Q4

180.6

2020 Q3

139.3

2020 Q2

90.7

2020 Q1

88.4

2019 Q4

112

2019 Q3

2019 Q2

95.2

2019 Q1

Chart: Shares magazine • Source: Tesla, Statista

| SHARES | 28 July 2022

The shares have lost 33% in 2022 to date. So where do investors stand now, in the wake of last week’s (20 July) second quarter earnings? As usual, there’s lots to unpack, not least the sideshow that came after Tesla said it had sold $936 million worth of bitcoin, about 75% of its holding in the cryptocurrency, to shore up liquidity concerns. What the conference call did show is that Musk remains as finely attuned to Tesla’s travails as ever. He dived deep into manufacturing minutiae, supply chain snarl-ups, and vehicle demand, shying away from pontificating about semi-distant technologies (AI-powered robots, robotaxis et al) as he has done in the past. Sticking to the script is not something investors have come to expect from Musk but a more prosaic presentation was no bad thing. Despite numerous hurdles that have included Covid shutdowns at its Shanghai plant, global economic uncertainty and the constant hoopla that surrounds Musk, the world’s most valuable car company reported another solid quarter. SECOND QUARTER FORECASTS BEATEN Tesla topped second-quarter revenue and earnings estimates with $2.27 EPS (earnings per share) versus a $1.81 forecast, on revenue of $16.93 billion, more than $180 million more than Wall Street expected. Vehicle deliveries

FEATURE did fall compared to the prior quarter (about 254,700, down from 310,000), as did automotive gross margins, from 32.9% in Q1 to 27.9% in Q2, although that too beat analyst predictions, according to data collator ConsensusGuru. That said, automotive gross margins were 28.4% in Q2 2021, and Tesla faces substantial production ramping costs at its Berlin and Shanghai factories, recently called ‘gigantic money furnaces,’ by Musk, which will likely drag on profit margins for the rest of the year. The latest three-month period was a unique quarter for Tesla due to a prolonged shutdown of its Shanghai factory, Musk said but despite these challenges, it was one of the strongest quarters in Tesla’s relatively short history. Company officials said their pre-Shanghai shutdown goal of increasing vehicle output by 50% remains within reach, even after lockdowns in May slowed production. If anything, Tesla could benefit from more manufacturing capacity. Company executives swatted away questions about an inflation-driven decline in demand for Tesla vehicles, with Musk bluntly declaring that: ‘Tesla does not have a demand problem. We have a production problem.’

Tesla Q2 versus forecasts Percentage difference between reported number and consensus forecast Revenue

Adjusted EPS

25%

Free Cash Flow

−1%

PRESSURE ON TO DELIVER THE DREAM Eventually however, Musk will need to back up some of the grandiose talk and promises for Tesla’s next generation of ground-breaking products. Musk said Wednesday that he hopes to start delivering Tesla’s long-awaited Cybertruck in mid2023 having announced the vehicle in 2019, and he boasted that the company will ‘solve’ self-driving technology gremlins this year. But previous proclamations on both fronts haven’t materialised, and rival automakers are closing in on Tesla’s EV lead, with Chinese bid data company Baidu (BIDU:NASDAQ) now venturing into the EV space by unveiling an all-electric, autonomous robo-taxi that could hit cities by 2023. Musk often makes media waves for his off-thefactory-floor antics but Tesla’s Q2 was a decent performance given unprecedented obstacles, or so investors clearly thought, judging by the 10% share price jump in response. For now, there is little in the latest figures and commentary likely to queer the pitch for Tesla stock fans, but nor was there much to convince the sceptics either. By Steven Frazer News Editor

Chart: Shares magazine • Source: Tesla, ConsensusGuru

28 July 2022 | SHARES |

ADVERTISING FEATURE

European private equity: the road ahead Alan Gauld, Investment Manager, abrdn Private Equity Opportunities Trust plc • •

•

European private equity deals reached record highs in 2021 The trust celebrated its 20th anniversary in 2021 and changed its name to the abrdn Private Equity Opportunities Trust The immediate road ahead appears more challenging, but we are encouraged by the strength of the underlying companies

2021 was a strong year for European private equity. It was aided by a buoyant Initial Public Offering (IPO) market, and the technology sector in particular. However, against a more challenging backdrop, can the European private equity sector continue to make progress in 2022? The trust celebrated its 20th anniversary in 2021 and changed its name to the abrdn Private Equity Opportunities Trust (formerly Standard Life Private Equity Trust). The trust now has over £1 billion of assets and was promoted from the FTSE UK Small Cap Index to the FTSE 250 Index in March, which has brought it within the scope of a new set of investors. It is also helpful in terms of liquidity for existing shareholders. 2021 was a good year for technology IPOs in particular. In Europe, this has been mainstream technology, such as software businesses, but also consumer businesses with a digital component, such as Moonpig or Dr Marten’s. A shifting landscape However, we are aware that the landscape has changed since the start

of the year. The IPO and Mergers & Acquisitions (M&A) markets are less buoyant as inflation, higher interest rates and weakening economic growth bite. In our 21 years of operation, we have seen a variety of cycles – navigating the global financial crisis, the pandemic, inflation and now war in Ukraine. We’re no stranger to a difficult investing climate. We are encouraged by a number of factors. Current valuations are not ambitious and, in most cases, remain at a discount to public companies. However, far more important is the strength and quality of the underlying companies in the portfolio and the diversity of opportunity available in Europe. In terms of new investments, private equity typically thrives on opportunities that present themselves during times of market uncertainty and, over the longer term, companies are staying private for longer. Our strategy is focused on partnering with the best private equity managers in Europe. That includes some familiar names in the listed PE space, such as Hg and 3i, but over 80% of the trust’s portfolio is with managers that investors might otherwise find it difficult to access. In terms of the underlying companies, we strive to build a portfolio that has the right balance of defensive qualities and growth elements. For example, the tech companies that the trust typically invests in are business-to-business companies, whose products are non-discretionary and often mission critical to their customers, with the potential to generate high levels of recurring revenues. A good example is Visma, an ERP cloud software business that runs business critical processes, such as payroll, to

over a million small and medium-sized enterprise (SME) customers. The trust does have some business to consumer companies with certain characteristics that gives them a loyal customer following and therefore repeat sales. These are companies such as Action, a discount retailer with a differentiated offering that attracts repeat customer footfall. Originally based solely in the Netherlands, it has successfully grown its presence across continental Europe via new store openings. In terms of notable recent deployment, the trust invested in NAMSA, a contract research company, that works alongside medical device manufacturers to test their new products for them. Hence, it is a very important partner to large medical device companies when developing new products. We also invested in European Camping Group, an operator of camp sites across Europe, including Italy, France, Spain and Croatia, which is well placed to benefit from an increase in lower-cost holidays and the expected uptick in post-pandemic travel. Europe: a breadth of opportunity As it stands, 80% of the trust’s portfolio is in Europe, which is different from many of the other listed private equity trusts which are more weighted to North America. Europe is a heterogenous market, which makes local access very important. It can be a tougher market to crack given the different languages and cultures, different skills and different technical aspects (e.g. regulation, legislation) for each region. The trust is also focused on the midmarket – companies that are £100m to £1bn in size. Private equity has become focused on larger companies

ADVERTISING FEATURE

as more money has flowed into the sector. However, to our mind, this is not necessarily where the best opportunities lie. The mid-market has a rich supply of businesses where private equity firms can add significant value through organic initiatives, such as digitisation and ESG, or through M&A. Typically this size of business is less reliant on IPO as an exit route, compared to businesses >£1bn in size. In 2019, we started the trust’s coinvestment programme, making direct investments in private equity opportunities alongside other groups. For each of these businesses, we are partnering with managers over a long period of time: the investment trust structure gives us that long-term, committed capital. These opportunities allow us to target specific sectors where

we see long-term structural growth. It gives us greater control over how we construct the portfolio. At the moment, we continue to favour the healthcare and technology sectors. Our longer-term target is to raise these sectors to 50% of the portfolio (from a current level of just over 40%). In technology, for example, the transition to the cloud is a potential source of growth and we generally favour proven, Business-to-Business (B2B) software businesses that are cash generative. Healthcare is naturally resilient, and also has a number of fastgrowing niches. That said, the remainder of the trust’s portfolio will be well balanced across Consumer, Industrials and Financials, and we have made several investments that are well placed to benefit in a post-pandemic world,

Important Information Risk factors you should consider prior to investing: • • • •

•

• • • •

The value of investments, and the income from them, can go down as well as up and investors may get back less than the amount invested. Past performance is not a guide to future results. Investment in the Company may not be appropriate for investors who plan to withdraw their money within 5 years. The Company may borrow to finance further investment (gearing). The use of gearing is likely to lead to volatility in the Net Asset Value (NAV) meaning that any movement in the value of the company’s assets will result in a magnified movement in the NAV. The Company may accumulate investment positions which represent more than normal trading volumes which may make it difficult to realise investments and may lead to volatility in the market price of the Company’s shares. The Company may charge expenses to capital which may erode the capital value of the investment. The Company invests in smaller companies which are likely to carry a higher degree of risk than larger companies. Movements in exchange rates will impact on both the level of income received and the capital value of your investment. There is no guarantee that the market price of the Company’s shares will fully reflect their underlying Net Asset Value.

•

• • •

the aforementioned European Camping Group being a good example. Ultimately, this year may be a tougher year, but we believe our portfolio holdings are well-placed to navigate a variety of economic conditions. European private equity markets offer a vast range of opportunities and private equity can often benefit on new investments made during periods of greater market uncertainty. At abrdn, we have the analytical resources and global reach to harness those opportunities wherever they emerge. Companies selected for illustrative purposes only to demonstrate the investment management style described herein and not as an investment recommendation or indication of future performance.

As with all stock exchange investments the value of the Company’s shares purchased will immediately fall by the difference between the buying and selling prices, the bid-offer spread. If trading volumes fall, the bid-offer spread can widen. The Company invests in emerging markets which tend to be more volatile than mature markets and the value of your investment could move sharply up or down. Specialist funds which invest in small markets or sectors of industry are likely to be more volatile than more diversified trusts. Yields are estimated figures and may fluctuate, there are no guarantees that future dividends will match or exceed historic dividends and certain investors may be subject to further tax on dividends.

Other important information: Issued by Aberdeen Asset Managers Limited, registered in Scotland (No. 108419), 10 Queen’s Terrace, Aberdeen AB10 1XL. Authorised and regulated by the Financial Conduct Authority in the UK. An investment trust should be considered only as part of a balanced portfolio. Find out more at www.abrdnpeot.co.uk or by registering for updates. You can also follow us on social media: Twitter and LinkedIn. GB-110522-174743-1

RUSS MOULD

AJ Bell Investment Director

What is top of the agenda in the latest US earnings season? As corporate reports start to stream in it's worth examining the wider context

he US second-quarter earnings season is about to reach full throttle. According to research from S&P Global’s Howard Silverblatt, at the time of wrting 31 members of the S&P 500 index have already reported earnings. Of those, 22 beat earnings expectations, while just nine missed and 21 did better at the top line as well as the bottom one. This might help to explain why the S&P 500 has rallied by almost 10% from its June low, especially as news of inflation, higher interest rates, war in Ukraine, lockdowns in China and supply chain disruption hardly count as ‘news’ anymore. Companies are pretty canny when it comes to managing expectations – Silverblatt’s research reveals that an average of 73% of the S&P 500’s members have beaten quarterly earnings forecasts since Q2 2013. Set a low enough bar and anything is possible. The attempted rally may therefore have bigger challenges to come, especially if the surging greenback crimps US exports and decreases the value of overseas sales once they are translated back into dollars (although there could be a benefit in the form of lowered import costs, too). This is because analysts are still forecasting increases for aggregate S&P 500 earnings in 2022 and 2023, despite economists’ gathering conviction that the US is heading into a recession. SLOWING DOWN It seems logical to assume that either the economists or the equity analysts are wrong. Consensus estimates are looking for earnings per share (EPS) from the S&P 500 to reach $223 in 2022 and $246 in 2023, compared to $208 in 2021. Investors could be forgiven for thinking that might be a stretch given the current economic

| SHARES | 28 July 2022

backdrop, even allowing for the relatively soft base for comparison offered by last year, which was still suffering from a large bout of Covid-19. Analysts are looking for healthy earnings growth from the S&P 500

Source: S&P Global, consensus forecasts

RUSS MOULD

AJ Bell Investment Director Analysts do seem to be having a few doubts. Earnings forecast momentum has ground to a halt. A marked change from the relentless upgrades witnessed over the past year. This is understandable, given gathering concerns over the trajectory of the US economy, considering clear signs of inventory build, as well as the dollar and input costs. After all, US corporate profit margins are already gently coming off their all-time highs, which begs the question of whether things really can get much better from here. US corporate profit margins are already at an all-time high …

Source: S&P Global

MEAN REVERSION Using another measure, US corporate profits stand at record highs not just in margin and absolute dollar terms, but also as a percentage of GDP. Even allowing for the efficiency with which US firms are run, the lesser protection offer to staff by unions and America’s remarkable ability to reinvent itself, investors with exposure to US equities could be forgiven for wondering whether this can continue, should the economy indeed start to slow. True believers in free markets will argue that it cannot possibly continue, on the basis that high returns on capital will attract more capital and as competition gathers returns on capital will decrease. In other words, returns will revert to the mean over time, especially if labour starts demanding, and getting, bigger pay increases. Doubters may also note the contribution made by massive fiscal and monetary stimulus to the latest upward leg in profits and margins.

… as are profits as a percentage of GDP

Source: FRED – St. Louis Federal Reserve database

It may not pay to overdo the bear case, either. Investors must remember that the economy is not the stock market and vice-versa. The S&P 500’s brief dip into bear market territory earlier this year would suggest that the market is, as one might expect, well ahead of both economists and analysts. Cynics might even expect share prices to be rising as they discount, or price in, the next upturn, by the time economists get round to declaring a recession and analysts take the knife to their estimates (should either need to take such action). A MATTER OF PRICE Portfolio builders must therefore step back from the noise of quarterly numbers and let valuation be their guide. If US equities are cheap enough, it may not matter how bad the news could be. But if valuations are extended then there may be less downside protection than ideal, especially if upside could be limited.

28 July 2022 | SHARES |

RUSS MOULD

AJ Bell Investment Director At around 4,000, the S&P 500 looks to trade around 18 times earnings for 2022 and 16 times for 2023. Neither is outlandish relative to US equity markets’ history, although neither multiple smacks of bargain basement territory either, and they do rely on those forecasts of earnings increases for each year. Shiller CAPE ratio still casts a potential cloud

Source: http://www.econ.yale.edu/~shiller/data.htm

Less encouraging is Professor Robert Shiller’s cyclically adjusted price earnings (CAPE) ratio, which does not rely on forecasts but rolling 10-year average historic earnings, adjusted for inflation. By the professor’s own admission, CAPE is not a tool for timing markets. But any time the CAPE ratio has stood at the current 29 times, subsequent 10-year compound returns from US equities have invariably been negative, which is something that long-term investors might need to consider.

READ MORE STORIES ON OUR WEBSITE Shares publishes news and features on its website in addition to content that appears in the weekly digital magazine.

THE LATEST STORIES INCLUDE: WALMART SHARES PLUNGE 9% ON WALL STREET AFTER RETAILER DELIVERS ANOTHER PROFIT WARNING

VESUSIUS SHARES ERUPT AS SURPRISING PRICING POWER PUTS ENGINEER ON TRACK FOR TOP OF RANGE FULL YEAR

SHARESMAGAZINE.CO.UK SIGN UP FOR OUR DAILY EMAIL 26 | SHARES | 28 July 2022 For the latest investment news delivered to your inbox

FEATURE

Why Johnnie Walkerowner Diageo is a wonderful stock to own From Guinness to Smirnoff, this drinks giant has a rich portfolio of brands and plenty of fans

hares in premium drinks maker Diageo (DGE) are down 8% year-to-date amid worries over a global recession and soaring raw material costs. Also weighing on the price have been fears that drinkers might trade down to cheaper beverages as inflation squeezes consumer budgets, at least in the short term. Yet over the long term, Diageo is ideally placed to prosper from growth in premium drinks. With Diageo scheduled to have published its full-year results on the day this article is published (28 July), now is a great time to distil the many competitive strengths of a quality business that generates a high return on equity.

Diageo (%) 400 200 0 2005

2010

2015

2020

Chart: Shares magazine • Source: FE Analytics

WHAT MAKES DIAGEO SPECIAL? It is home to some of the world’s most iconic alcoholic beverage names including Johnnie Walker, Smirnoff and Guinness. The £83.6 billion company boasts over 200 brands operating across 180 countries and has a worldwide distribution footprint and massive marketing clout. This unrivalled portfolio of brands confers pricing power on the business, crucial during inflationary periods, and underpin Diageo’s consistent profitability. A cash generative business model has enabled

the FTSE 100 group to establish an enviable dividend growth record, uninterrupted even by the pandemic, while investing in the organic growth opportunities and acquisitions and returning additional capital to shareholders through earnings-enhancing share buybacks. Another key competitive strength is Diageo’s global reach and dense distribution network which has cost advantages that allow the company to spend more on advertising and promotion, creating a virtuous circle. These strengths and its brandbuilding expertise also mean Diageo is an attractive home for upcoming brands looking for global reach and maximum promotion. Guided by CEO Ivan Menezes, Diageo has strong relationships with on-trade customers (pubs, bars, restaurants and hotels) and is also building its e-commerce and direct-to-consumer capabilities in order to further expand its sales reach to thirsty consumers. 28 July 2022 | SHARES |

FEATURE Diageo Year to June

Return on equity

Dividend per share

2017

28.8%

62.2p

2018

26.3%

65.3p

2019

34.5%

68.6p

2020

18.6%

69.9p

2021

38.9%

72.6p

Table: Shares magazine • Source: Stockopedia

BEVERAGES BRAND BUILDER Diageo is a top 10 holding in Sanford DeLand’s CFP SDL UK Buffettology Fund (BF0LDZ3). Sanford DeLand analyst Chloe Smith says the drinks giant ‘exhibits the attributes we look for in quality businesses, including high returns on equity, an enduring franchise with pricing power and consumer brand loyalty. The strategy to leverage its global brands whilst also nurturing local stars in individual markets has proven Diageo’s track record in brand building.’ The stock is also held in Troy Asset Managementsteered portfolios including the Trojan Income Fund (B01BP17) and investment trusts Personal Assets (PNL) and Troy Income & Growth (TIGT). Troy fund manager Blake Hutchins says Diageo owns ‘some of the world’s most desired spirits brands’ and stressed ‘they are just so rare, and when they are cultivated in the right way by good brand owners over many years, they are incredibly valuable. And the nice thing about spirits is it comes with quite a high price point.’ Since spirits aren’t that expensive to make, they generate high gross margins, explains Hutchins. The fact some of Diageo’s spirits are aged, notably the premium scotch range, creates a huge barrier to entry. Diageo has the distilleries and the maturing whisky stocks that smaller rivals have neither the capital nor the time to compete with. Johnnie Walker is a great example. Scotch can only be made in Scotland and has been distilled by people there for more than 500 years. After distillation, the spirit must be matured in oak casks (in Scotland) for a minimum of three years before it can be called Scotch whisky. 28

| SHARES | 28 July 2022

INFLATION BEATER Charismatic ‘buy and hold’ stock picker Nick Train owns Diageo in the Finsbury Growth & Income Trust (FGT) and doesn’t view Diageo and other portfolio holdings such as Unilever (ULVR) and RELX (REL) as just defensive investments if ‘defensive’ means that the only time to own them is if you fear that stock markets are likely to fall, or economies go into slowdown. Instead, Train believes such businesses offer the prospect of protection against monetary inflation and the likelihood of real earnings growth over time. ‘These are characteristics that make for fine long-term investments,’ he says. IS THERE GROWTH TO GO FOR? Despite decades of consistent growth, Diageo still only commands around 4% share of the global alcohol market. By 2030, management wants that share to rise by 50% to around 6% share, aided by the increased sales of spirits in emerging markets where penetration remains low.

DIAGEO OWNS Johnnie Walker, the world’s best-selling Scotch whisky established back in 1820 and Smirnoff Vodka, as well as iconic stout Guinness, Baileys cream liqueur, Captain Morgan rum and Tanqueray premium gin. It also owns ‘Local stars’ such as Crown Royal, Buchanan’s and Chinese white spirit Shui Jing Fang and a ‘Reserve’ portfolio of global luxury market-focused labels including Ketel One and Cîroc vodka and acquired tequila brands Don Julio and Casamigos, the latter purchased from actor George Clooney. Diageo has also made some strategic disposals over the years, including the sale of its main US wine businesses in 2016 and 19 US brands in 2018.

FEATURE Greater China has the largest and fastest-growing super premium spirits segment in the world and Diageo is well placed to prosper in the Middle Kingdom via popular brands including Johnnie Walker, Talisker and The Singleton. In the second half of 2021, Diageo shrugged off global supply chain constraints and rising cost inflation to serve up operating margin expansion and organic net sales growth of 20%. This was thanks to continued recovery in the global on-trade and resilient consumer demand in the off-trade (sales through supermarkets and other shops). Growth was broad-based across most categories, with Diageo enjoying particularly strong performance in scotch, tequila and beer.

Guinness Storehouse in Dublin, which remains one of the Irish capital’s most visited tourist attractions,’ says Smith.

WHICH BRANDS ARE SPEARHEADING GROWTH? Sanford DeLand’s Chloe Smith says Diageo’s portfolio spans the price range, but growth opportunities are really being embraced in premium spirits, where the market continues to outpace the total spirits category. Consumers are increasingly looking for quality over quantity and ‘drinking better, not more’, she says. ‘This is driven by a range of factors from more health-conscious younger generations and a burgeoning middle-class population in regions such as China, which continues to be one of the world’s largest premium-and-above markets for spirits.’ Smith explains that Diageo has taken advantage of this trend by taking heritage brands like Johnnie Walker and introducing premium labels, such as its Blue Label and through younger brands such as Don Julio and Casamigos in the fast-growing tequila category. Diageo is also tapping into the low or no alcohol market, with investments in the likes of the alcohol-free spirit brand Seedlip and offering a 0% alcohol version of Guinness.

‘Overall, Diageo has a very diversified beverage portfolio, with its ultimate earnings driver being its continued investment in brands and ability to forge a healthy volume and price mix, with a good portion of this, I expect, coming from the continued growth in its premium labels.’

IS GUINNESS STILL RELEVANT TO DIAGEO? Investors often ask Diageo’s management about the rationale for continuing to own Guinness, yet the brand continues to demonstrate its relevance and importance to the group. While Guinness suffered from pandemic-induced on-trade restrictions, there are signs of this growth coming back. ‘Confidence in the Guinness story can be seen with Diageo’s recent investment in a new micro-brewery in London’s Covent Garden, expected to open in 2023, after the success of its

TASTY TIPPLE The consensus analyst forecast for the financial year to June 2023 points to robust organic net sales growth of 6.3% and organic operating profit growth of 7.1%, giving earnings per share of 162.8p. That places Diageo on a prospective price to earnings multiple of 22.7, demanding for a lesser company perhaps, but a palatable rating as this is a discount to a 2021 peak of 37.3 times, according to Stockopedia. Nick Train recently said he finds Diageo’s share price weakness to be ‘perplexing’. He commented: ‘There can be few companies in the world that offer greater certainty of inflation protection and access to secular real growth. ‘We know that some analysts believe Diageo is expensive. We disagree. Instead, we concur with US stock market scholar Jeremy Siegel – author of the classic Stocks for the Long Run – who concludes “stocks with steady growth records are worth 30, 40 and more times earnings”. On this basis Diageo is given away.’ By James Crux Funds and Investment Trusts Editor

28 July 2022 | SHARES |

SHARPEN YOUR INVESTING SKILLS WITH

A SUBSCRIPTION TO SHARES HELPS YOU TO: • • • • • •

Learn how the markets work Discover our best investment ideas Monitor stocks with our customisable watchlists Enjoy our guides to sectors and themes Get the inside track on company strategies Find out how fund managers make money

Digital magazine

Online toolkit

Investment ideas

Discover three dividend ETFs for straightforward and low-cost access to income Shares has identified three products with yields above 4% and with maximum annual charges of 0.4%

surge in global inflation has forced central bankers to start raising interest rates. However this has not yet translated into significantly higher returns on cash deposits for savers. Investors continue to inhabit a world characterised by abnormally low interest rates, which poses a conundrum for those looking to generate an income from their money. High-dividend ETFs or exchange-traded funds, offer income-seeking investors a low cost way of achieving this goal. To help with idea generation Shares discusses three dividends ETFs that offer yields above 4%, with maximum ongoing charges of 0.4% Our trio of trackers are iShares UK Dividend ETF (IUKD), Wisdom Tree UK Equity Income ETF (WUKD), and SPDR UK Dividend Aristocrats (UKDV). ISHARES UK DIVIDEND ETF A notable and appealing feature of the iShares UK Dividend ETF is its 6.6% yield. This is marginally higher than the 6.4% yield offered by Wisdom Tree UK Equity Income ETF, but noticeably more generous than the 4% yield provided by the SPDR UK Dividend Aristocrats ETF – though the latter also captures dividend growth. The £879 million fund has delivered a return of 6.75% over one year and an 11.7% return over a three-year period. It tracks the FTSE UK Dividend+ index, which is drawn from a universe of the top 250 companies by market capitalisation from the FTSE 350. 50 stocks with leading dividend yields are selected by ranking them in descending order using a combination of one-year historic, and one-year

forecast dividend yields. A risk with a product which purely tracks high-yielding stocks is that a high yield can be a signal that a pay-out is vulnerable to being cancelled or cut. However, no stock can have a weighting of more than 5% in the index – which helps reduce the risk of performance being badly affected by one constituent cutting their dividend. SECTOR BREAKDOWN AND KEY EQUITY HOLDINGS The financials and consumer staples sectors together constitute nearly 50% of the fund’s exposure. The former comprises a little below 30% and the latter a touch shy of 20%. The high consumer staples weighting differentiates the fund from its peers and is reflected in the fund’s list of top holdings, specifically the 5% and 4.78% respective weightings in tobacco stocks British American Tobacco (BATS) and Imperial Brands (IMB). Year to date both BATS and Imperial Brands have performed strongly, rising by 23.9% and 28 July 2022 | SHARES |

13.9% respectively. Neither of the aforementioned tobacco stocks feature in the top holdings list of either the Wisdom Tree UK Income ETF or the SPDR UK Aristocrats ETF. The strong performance of tobacco stocks has in part been due to their ability to raise prices. This is a powerful attribute in the current period of rampant inflation. There are two reasons for this. First, tobacco is addictive which makes it hard for customers to quit. Consequently demand for cigarettes tends to be inelastic, meaning that the demand for the product doesn’t change in response to an increase in price. Another explanation for the industry’s ability to raise prices lies in its market structure. Consolidation in the sector has created three dominant players in Altria (MO:NYSE), Philip Morris (PM:NYSE) and British American Tobacco. WISDOM TREE UK EQUITY INCOME ETF The appeal of the 6.4% dividend on offer from the Wisdom Tree UK Equity Income ETF has not been matched by its recent performance. The fund has recorded an uninspiring one-

year performance of -2.51% and a three-year performance of -7.3%. It tracks the Wisdom Tree UK Equity Income index. The index is comprised of the highest dividend yield UK companies using an equal weighting quality and momentum risk filtering scoring system. Specifically companies are selected that have dividend yields in the top 33% within the UK market. Companies that pay higher dividends are more heavily weighted.

Sector exposures for dividend ETFs Sector iShares UK Dividend ETF

Wisdom Tree UK Equity Income ETF

SPDR UK Dividend Aristocrats

Table: Shares magazine • Source: JustETF, 21 July 2022

| SHARES | 28 July 2022

Weighting (%)

Financials

29.3%

Consumer staples

16.9%

Basic Materials

10.8%

Financials

23.4%

Basic Materials

16.4%

Utilities

15.9%

Financials

28.3%

Industrials

19.2%

Consumer staples

15.7%

Performance and fees for dividend ETFs One-year performance

Three-year performance

Ongoing charges

iShares UK Dividend ETF

6.8%

11.7%

0.4%

Wisdom Tree UK Equity Income ETF

−2.5%

−7.3%

0.3%

SPDR UK Dividend Aristocrats

0.1%

7.4%

0.3%

ETF

Table: Shares magazine • Source: Just ETF, 21 July 2022

MATERIAL MINING EXPOSURE The fund’s relatively high exposure to the basic materials sector (16.7%) is a key point of difference versus its peers. The Wisdom Tree UK Equity Income ETF has a 16.7% weighting to the basic materials sector. The iShares ETF for example has a 10.6% basic materials weighting, and the SPDR UK Dividend Aristocrats has a 6.3% weighting. The two key equity holdings in the ETF are Anglo American (AAL) and Rio Tinto (RIO) with weightings of 4.1% and 3.97% respectively. Both of these stocks have encountered selling pressure in recent six months, falling by 25.4% and 14.8% respectively on a six-month view. SPDR S&P UK DIVIDEND ARISTOCRATS ETF The performance of the SPDR UK Dividend Aristocrats ETF is ahead of Wisdom Tree’s ETF, but behind the iShares UK Dividend ETF.

On a one-year basis it is broadly flat, and on a three-year basis it is up 7.35%. The fund offers a current dividend yield of 4.03% with ongoing charges of 0.3%. The ETF tracks the S&P UK High Yield Dividend Aristocrats index, which measures the performance of the UK’s 40 highest dividend-yielding companies within the S&P Europe Broad Market Index (BMI) that have also raised or maintained the shareholder reward for at least the last seven consecutive years From a sector exposure perspective the SPDR ETF and the iShares ETF are similar in that they have both have significant exposures to the financial sector. The former has a 29.3% weighting and the latter 28.3%. By Mark Gardner Senior Reporter

28 July 2022 | SHARES |

WEBINAR

WATCH RECENT PRESENTATION WEBINARS City of London Investment Trust Job Curtis, Portfolio Manager City of London Investment Trust is renowned for its record-setting annual dividend increases since 1966, the City of London Investment targets long-term income and capital growth. With a conservative management style the Trust invests mainly in UK equities with a bias towards large, multinational companies.

Cake Box David Forth, CFO & Chay Watkins, Marketing Director The company generates revenue from the sale of goods and services. Geographically, it derives revenue from the United Kingdom. All of our products are 100% egg free. The founders of Eggfree Cake Box follow a strict lacto vegetarian diet, and that is how they came up with idea for the company.

NextEnergy Capital Ross Grier, Managing Director, UK NextEnergy Solar Fund Limited (NESF) is a specialist renewable energy investment company that invests in operating solar power plants and battery storage assets. NESF’s investment objective is to provide ordinary shareholders with attractive risk-adjusted returns and is targeting a dividend yield of 7.52p for the current financial year.

Visit the Shares website for the latest company presentations, market commentary, fund manager interviews and explore our extensive video archive.

CLICK TO PLAY EACH VIDEO

SPOTLIGHT

www.sharesmagazine.co.uk/videos

Going cheap: investment trusts trading on wider than normal discounts Mid and small cap trusts are among the parts of the market offering bargains

his year’s market turmoil has caused many investment trusts to trade below their average discount to net asset value. It means investors can often buy £1 worth of assets for 90p or thereabouts. A popular trading strategy is to find investment trusts on wider than normal discounts and buy them in the hope the discount narrows. The trick is to understand which trusts have become cheaper due to a one-off factor or whether something has shifted in the market which could keep them cheaper for longer. MID CAP MAHEM UK mid-caps fell out of favour with investors earlier this year on fears that inflation and a potential recession would hurt earnings for companies, particularly consumer-facing ones. The FTSE 250 index of mid cap stocks has fallen by 18% in value year-to-date, significantly underperforming the FTSE 100 index of largecap stocks which have been propped up by lots of companies that benefit from higher inflation including oil producers. Mercantile (MRC) and Schroder UK Mid Cap (SCP) fish for opportunities in the FTSE 250 index. Both have seen the discount to the value of their underlying assets widen to 15.5% from a 12-month average of 12.5% and 11.1% respectively,

according to data from Winterflood. So much potential bad news is now priced into mid cap stocks and we saw earlier in July that it doesn’t take much good news to prompt a big share price recovery. For example, Frasers (FRAS) soared by more than 20% on 21 July after saying everything was going well with its sports retailing business. Mercantile’s portfolio includes stocks such as Watches of Switzerland (WOS) and Dunelm (DNLM), both of whom have recently issued positive news. The Schroder trust also invests in Dunelm as well as Telecom Plus (TEP) which in June 2022 reported record results. SMALL CAP PAIN Smaller company investment trusts have also seen wider discounts to net asset value, both in the UK and elsewhere in the world. For example, Montanaro UK Smaller Companies’ (MTU) discount has doubled to 10% from a 12-month average of 5.1%. Abrdn Smaller Companies Income (ASCI) is now trading 21.2% below the value of its underlying assets versus a 14.5% one-year average discount.

Montanaro UK Smaller Companies Net asset value (p)

Share price (p)

200 150 100 50 0 2020

2021

2022

Chart: Shares magazine • Source: Refinitiv

28 July 2022 | SHARES |

The small cap space has been hammered by investors panicking at the market correction earlier this year, then open-ended small cap funds being hit by redemptions. When someone asks for their money back, open-ended funds must sell some holdings to raise cash, which is then handed back to the investor. Therefore, you’ve seen a double hit of selling among smaller companies. Closed-ended investment trusts are impacted by what happens with open-ended funds because they often invest in the same stocks. Making matters worse is the fact that small cap stocks are often illiquid, so selling pressures can pull down the share price by a significant amount. Fundsmith-managed Smithson Investment Trust (SSON) says it invests in smaller companies, but its investments are more comparative in size to UK mid-caps. Smithson’s shares have typically traded at a premium to the value of its assets since launch in 2018 yet this year they’ve plunged to a discount of 7.5%. That can be explained by some of its stocks having traded on premium ratings and investors this year being less willing to pay a high price to own growth stocks, so elements of Smithson’s portfolio have suffered a derating which in turn has seen the share price fall. A good illustration is portfolio company Verisk Analytics (VRSK:NASDAQ), which was trading on more than 50 times earnings in late 2021 and which has now derated to just under 30 times earnings. Its share price is down 17% year-to-date.

Verisk Analytics PE ratio 50

0 2010

2012

2014

2016

2018

2020

2022

Chart: Shares magazine • Source: Refinitiv

PRIVATE EQUITY MARKDOWNS Private equity trusts have recently been in the spotlight as investors speculated the value of their unquoted assets would have to be marked down. 36

| SHARES | 28 July 2022

These types of investment trusts typically trade on a discount to the value of their assets to reflect the illiquid nature of their holdings – i.e. they can’t quickly sell investments. Yet discounts have certainly widened this year, particularly for companies with holdings in the broader technology space. Chrysalis Investments (CHRY) was the talk of the town last year with its large stake in buy now, pay later group Klarna. This year Klarna’s valuation has dropped significantly, causing Chrysalis’ share price to dive, and its discount to net asset value to widen.

Chrysalis Investments 200 100 0 2019

2020

2021

2022

Chart: Shares magazine • Source: Refinitiv

Investors have speculated that some of its other holdings will need their valuations written down. Some shareholders have even given up, with orders to sell their shares forcing down the value of the trust as buyers have been thin. The effect on Chrysalis has been remarkable. Having seen a 12-month average discount to net asset value of 14.8%, the shares now trade at a 53.8% discount. That suggests investors have little faith in the stated value of its assets. Also noteworthy in the private equity space is HgCapital Trust (HGT) which is now trading at a 20.7% discount versus a 12-month average of 4.1%. This trust invests in private companies in the software and business services sector in Europe and North America. It also looks to have been caught up in the negative market sentiment towards unquoted technology investments. LOOKING FOR BARGAINS Ironically, for a vehicle which seeks to take advantage of market inefficiencies in investment trusts, MIGO Opportunities Trust (MIGO) has seen a widening of its discount to 5.1% versus a

Examples of investment trusts trading on wider than normal discounts to net asset value 12-MONTH AVERAGE DISCOUNT

LATEST DISCOUNT

TRUST

SECTOR

Scottish Mortgage

Global

−1.7%

−4.8%

Diverse Income Trust

UK Equity Income

−0.6%

−3.2%

Mercantile

UK Mid Cap

−12.5%

−15.5%

Schroder UK Mid Cap

UK Mid Cap

−11.1%

−15.5%

Abrdn Smaller Cos Income

UK Smaller Cos

−14.5%

−21.2%

European Opportunities

Europe

−12.2%

−16.3%

Baillie Gifford US Growth

North America

−5.3%

−13.4%

Baillie Gifford Japan

Japan

−1.9%

−6.8%

Jupiter Green

Environmental

−8.9%

−20.1%

Allianz Technology

Technology

−8.0%

−12.5%

Table: Shares magazine • Source: Winterflood, 21 July 2022

12-month average of 0.8%. In April, research group Kepler said MIGO’s discount had averaged 1.2% over the previous five years. Trusts in its portfolio tend to trade on much larger discounts. ‘When we met up with (co-manager) Nick Greenwood recently, he commented that with the average discount of the top 12 holdings approaching c. 25%, discounts have rarely been wider,’ added Kepler. MIGO’s biggest holding is investment trust VinaCapital Vietnam Opportunity Fund (VOF) which at the time of writing was trading on an 18.8% discount. Recent additions to MIGO’s portfolio include Amedeo Air Four Plus (AA4), currently on a 53.2% discount to the value of its assets. ‘Demand for air travel has increased at a time when both Airbus and Boeing have faced

challenges in delivering new wide-bodied planes. The Amedeo trust leases A380 planes to Emirates. Not only are many of them now back in service, they may well be needed for many years as their intended replacements are unlikely to be delivered by the manufacturers for some time,’ said MIGO. DISCLAIMER: The author owns shares in Smithson. By Daniel Coatsworth Editor

28 July 2022 | SHARES |

EMERGING MARKETS OUTLOOK SPONSORED BY TEMPLETON EMERGING MARKETS INVESTMENT TRUST

Find out which sectors in emerging markets are the cheapest A tough start to 2022 has put pressure on stocks in developing economies

combination of factors, including a strong US dollar, have held back emerging markets in the first half of 2022. For several reasons a stronger dollar is not typically good news for emerging markets. When the US currency strengthens, money invested in other parts of the world, including developing economies, often finds its way back to the relative safe haven of the US. Second, and perhaps more importantly, many emerging markets have dollardenominated debts which become more expensive to service as the relative value of their domestic currencies drops. With many commodities priced in dollars, these become more expensive to import, contributing to inflation. Though in the case of net commodity exporters like South Africa, Saudi Arabia, Brazil and Indonesia this can have a beneficial impact. The difficult backdrop has been reflected in falling market valuations, but which sectors are particularly cheap? A look at the MSCI Emerging Markets Value index provides some insights. The index includes stocks which meet certain criteria based on book (or net asset) value to price, the multiple of forecast earnings

| SHARES | 28 July 2022

and dividend yield. As at 30 June 2022 this collection of 806 stocks offered a yield of 4.6% and traded on a forward price to earnings ratio of 8.2 times compared with the wider MSCI Emerging Markets

index where the corresponding figures were 3.1% and 10.9 times respectively. Financials is the largest sector in terms of weighting, followed by information technology and consumer discretionary.

MSCI Emerging Markets Value – sector weightings Real estate 2.95% (3.0%)

Health care (2.2%)

Utilities (3.8%) Consumer staples (4.1%) Financials (29.3%)

Industrials (5.6%)

Communication services (5.8%)

Energy (8.1%)

Information technology (13.8%)

Materials(10.6%)

Consumer discretionary (13.6%) Chart: Shares magazine • Source: MSCI, data to 30 June 2022

This outlook is part of a series being sponsored by Templeton Emerging Markets Investment Trust. For more information on the trust, visit here

EMERGING MARKETS OUTLOOK SPONSORED BY TEMPLETON EMERGING MARKETS INVESTMENT TRUST

Emerging markets: Views from the experts Three things the Franklin Templeton Emerging Markets Equity team are thinking about today

Chinese equities, as represented by the MSCI China index, rebounded from May 2022 lows on optimism the economy should rebound as Covid-19 restrictions are eased. China’s closed-loop system for factories has helped to partially mitigate the negative consequences of restrictions on movement. This has had a positive effect on high value-added industries, including semiconductor and vehicle manufacturing, which have been able to operate throughout the recent Covid-19 outbreaks. Leading indicators, including the Caixin China General Services PMI (purchasing managers’ index), rebounded in May, and are expected to continue to recover in the coming months. Consensus expectations are for further interest-rate cuts, which in combination with potential further weakness in the renminbi could ease financial conditions and support a recovery in gross domestic product growth toward the government’s target of 5.5%.

to tip into negative territory, it could be a negative signal for the economy and global markets. Factors we are monitoring that could influence the future shape of the US yield curve include US interest rates, oil price trends and financial conditions.

The upcoming earnings season is expected to show weak earnings growth in the first half of 2022 in emerging markets. However, we believe markets have already

discounted this outcome and the primary focus is expected to be on guidance for the second half of 2022 and 2023. Consensus expectations are for 9% growth in emerging market earnings in 2023, in line with where forecasts were at the start of the year. Rising borrowing costs and increasing inflation are a risk to earnings, but healthy consumer balance sheets and a robust labour market signal demand and, in turn, future earnings growth may prove to be resilient.

TEMPLETON EMERGING MARKETS INVESTMENT TRUST (TEMIT)

Porfolio Managers

The shape of a yield curve is often viewed as an economic growth proxy. A steep yield curve indicates optimism over the growth outlook and a flat or inverted curve indicates pessimism. The US yield curve has recently flattened; if it were

Chetan Sehgal Singapore

Andrew Ness Edinburgh

TEMIT is the UK’s largest and oldest emerging markets investment trust seeking long-term capital appreciation.

28 July 2022 | SHARES |

Does the state pension count as earnings when considering tax relief? Helping with a query about contributions to a retirement pot and what you are entitled to If I receive the state pension and have no other earnings, is it possible to pay money into a private pension and receive tax relief? Does the state pension count as earnings for tax relief? William Tom Selby, AJ Bell Head of Retirement Policy says:

Provided you are aged below 75 and a UK resident, you are entitled to pay into a pension and receive tax relief on your contributions. The amount you can personally contribute each year and receive tax relief is limited to 100% of your ‘relevant earnings’ (we’ll come back to this). So, if your relevant earnings are £30,000, then you can contribute up to £30,000 to a pension (inclusive of tax relief). There is also an overall annual limit on contributions you can make in a tax year (the ‘annual allowance’) set at £40,000. This limit includes personal contributions, employer contributions and tax relief. Your annual allowance will be lower than £40,000 if you have flexibly accessed taxable 40

| SHARES | 28 July 2022

income from your pension. This triggers the ‘money purchase annual allowance’, reducing the amount you can contribute each year to £4,000. Your annual allowance could also be lower if you have very high earnings and are affected by the annual allowance ‘taper’. You can read more about how the taper works here. CAN A NON-EARNER CONTRIBUTE TO A PENSION AND RECEIVE TAX RELIEF? Firstly, let’s tackle the question of what counts as relevant earnings for the purposes of tax-relievable pension contributions. Relevant earnings in this context includes employment income (things like salary, bonuses and commission), any redundancy payments over the £30,000 tax exempt threshold and taxable ‘benefits in kind’. Relevant earnings does not include income from a buy-tolet property or pensions, either state or private. However, if you don’t have earnings deemed ‘relevant’ by HMRC, provided you are under 75 and a UK resident you can still contribute up to £3,600, inclusive of tax relief, to a pension each year.

There are no rules dictating where this contribution can or can’t come from, so if all you have is state pension income then you can contribute this to a pension and benefit from basic-rate tax relief. In terms of the mechanics, if you paid £80 of state pension income into a SIPP, this would be topped up to £100 automatically by basic-rate tax relief. You could then access the money as and when you wish, with 25% available tax-free and the rest taxed in the same way as income. This means you could pay a maximum of £2,880 into a SIPP personally, with the remaining £720 coming via upfront tax relief.

DO YOU HAVE A QUESTION ON RETIREMENT ISSUES? Send an email to asktom@sharesmagazine.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.

PERSONAL FINANCE

Using a dealing account? You could be better off with an ISA or SIPP It makes sense to take advantage of the tax perks available to you when you invest

he surge in online brokers means that more and more people have opened trading accounts. But lots of newcomers to investing have opened the wrong account type that’s costing them hundreds (or even thousands) in tax that they could avoid. Many people who use online trading platforms will just opt for the standard account, often called a dealing account or general investment account. Many might think this is an obvious starting point for their investing journey. But actually, they could be far better off in a tax-efficient account that protects their investments from two different types of tax. WHAT IS A DEALING ACCOUNT? A dealing account is a basic investment account that most UK residents can open. There is usually a wide range of investment options available and there are no restrictions on how much you can invest or how often. You can even open a dealing account for a child, where a parent or grandparent is the trustee. You just open a dealing account, can transfer money in from your bank or debit card and then start investing in whatever you pick. Alternatively, you can transfer money into the account from other accounts you already have open. One of the big appeals is that there are no limits on when you can take out the money.

WHY ISN’T IT ALWAYS SO GREAT? Dealing accounts have no specialist tax perks, which means you’ll have to potentially pay two different taxes on the money. If your investments pay out dividends then you could be liable to pay dividend tax. Everyone gets a £2,000 dividend tax free allowance each tax year, meaning they can earn dividends up to that level before they have to pay tax. After that point you’ll pay tax at 8.75% for basic-rate payers, 33.75% for higher rate payers and 39.35% for additional rate payers. The next tax you could be liable for is capital gains tax. This is a tax on the growth of your investments, and is only paid when you sell that investment (which is called realising the gain). Again, there is a tax-free allowance, whereby you can generate up to £12,300 of gains on your investments each tax year before you have to pay capital gains tax. After that you’ll pay it at 10% for basic-rate taxpayers and 20% for higher and additional rate payers. With most providers you’ll get a tax statement after the end of the tax year stating how much you’ve generated in dividends and capital gains tax, which you can then use for your tax return. 28 July 2022 | SHARES |

PERSONAL FINANCE WHAT ARE MY OTHER OPTIONS? Both ISAs and pensions have tax perks, meaning that they could be a better option if you haven’t maxed them out already. With both you pay no dividend tax and no capital gains tax. The tax on withdrawals differs a bit between the two: with an ISA you pay no tax, but with a pension you can take 25% of the pot tax free and the remainder of the withdrawals are subject to income tax. Let’s tackle the Stocks and Shares ISA first: it has the same investment range as a dealing account, with the same wide range of options. It’s also easy-access, meaning that you can take money

out whenever you want without penalty. The only restriction is on the amount you can pay in – which is limited to £20,000 per tax year per person. If you’re using a dealing account for a child you could use a Junior ISA instead. It has the same tax perks as the adult version and has the same investment range but has a limit of £9,000 a year that you can pay in, per child. The money will be tied up until they are 18 years old, at which point it’s theirs to use or keep invested. Let’s cover pensions and SIPPs too. A SIPP has more differences to a dealing account as the money is tied up for a long time. Any money paid into a pension can’t be withdrawn until retirement age, which is currently 55 but is rising to 57. However, it comes with an extra juicy tax perk. As well as no dividend tax or capital gains tax being due, you will get tax relief on the money paid in. It means you get a 20% top-up to your contributions. Find out more of the nitty gritty detail in this article. By Laura Suter AJ Bell Head of Personal Finance

HOW MUCH WILL THE TAXES REALLY COST ME? It really depends on how much you’re investing, the level of dividends you’re getting from your investments and how large your gains are. But let’s look at a couple of scenarios. You generate £5,000 of dividends: An investors would pay dividend tax on £3,000 of this (with the other £2,000 covered by their tax-free allowance), which for a basic-rate payer is £262.50 and for a higher-rate payer is £1,012.50. An additional rate payer will be hit with a £1,181.55 tax bill. With an ISA this tax bill would be zero. You generate £15,000 of gains: You’d pay tax on £2,700 of your gains, with the rest covered by your annual tax free allowance. For a basic-rate taxpayer this would result in £270 of tax, while for a higher or additional rate payer it would be £540. Again, with an ISA you’d pay no tax.

| SHARES | 28 July 2022

INDEX Main Market Anglo American

Overseas shares 33

Adecco

ASOS

Altria

Boohoo

Baidu

Coca-Cola

British American Tobacco

PepsiCo

Philip Morris

Darktrace

Randstad

Diageo

Tesla

Direct Line

19, 20

Drax

DS Smith

Dunelm

Euromoney Institutional Investor

Twitter

Verisk Analytics

FeverTree

FirstGroup

Frasers

6, 35

Go-Ahead

Hays

Imperial Brands

JD Sports Fashion

Photo-Me International

Premier Foods

Rathbones

RELX

Rio Tinto

18, 33

Sabre

Shell

Telecom Plus

Unilever

Vodafone

Watches of Switzerland

ETFs iShares UK Dividend ETF

SPDR UK Dividend Aristocrats

Wisdom Tree UK Equity Income

AIM

Moneysupermarket

Funds

Abcam

KEY ANNOUNCEMENTS OVER THE NEXT WEEK Full-year results: 3 August: Van Elle. 4 August: Revolution Beauty. 5 August: Hargreaves Lansdown. Half-year results: 29 July: AIB, Croda, HarbourVest Global Private Equity, Intertek, Jupiter Fund Management, Morgan Advanced Materials, NatWest, Rightmove. 1 August: Globaldata, Hutchmed (China), RHI Magnesita, Spectris. 2 August: BP, Fresnillo, Greggs, Keller, Rotork, Standard Chartered Travis Perkins. 3 August: Endeavour Mining, Ferrexpo, IP Group, LSL Property Services, Taylor Wimpey. 4 August: Coca-Cola Europacific Partners, Convatec, Evraz, Glencore, The Gym Group, Hikma Pharmaceuticals, Mears, Mondi, Morgan Sindall, Spirent Communications. 5 August: FBD, WPP. Trading updates 4 August: Next, Sanderson Design. 5 August: Pets at Home.

Investment Trusts Aberforth Smaller Companies

Abrdn Smaller Companies Income

Amadeo Air Four Plus

Chrysalis Investments

Finsbury Growth & Income

Henderson High Income Trust

9 36

Mercantile

MIGO Opportunites Trust

Montanaro UK Smaller Companies

Personal Assets

Schroder UK Mid Cap

Smithson Investment Trust

36 28

Troy Income & Growth

Trojan Income Fund

VinaCapital Vietnam Opportunity Fund

DEPUTY EDITOR:

NEWS EDITOR:

Tom Sieber @SharesMagTom

Steven Frazer @SharesMagSteve

EDUCATION EDITOR

CONTRIBUTORS

Martin Gamble @Chilligg

Danni Hewson Laith Khalaf Russ Mould Tom Selby Laura Suter

EDITOR:

Daniel Coatsworth @Dan_Coatsworth FUNDS AND INVESTMENT TRUSTS EDITOR:

James Crux @SharesMagJames

SENIOR REPORTER:

Mark Gardner

COMPANIES EDITOR

Hg Capital Trust

SDL UK Buffettology Fund

WHO WE ARE

Ian Conway @SharesMagIan

ADVERTISING Senior Sales Executive Nick Frankland 020 7378 4592 nick.frankland@sharesmagazine.co.uk

PRODUCTION Head of Design Darren Rapley

Designers Rebecca Bodi Kevin Sharpe

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.

Website: sharesmagazine.co.uk Twitter: @sharesmag

Reproduction in whole or part is not permitted without written permission from the editor.

All Shares material is copyright.

28 July 2022 | SHARES |

AJBell Youinvest Shares Magazine 28 July 2022

Articles inside

PERSONAL FINANCE Using a dealing account? You could be better off with an ISA or SIPP

ASK TOM Does the state pension count as earnings when considering tax relief?

EMERGING MARKETS Find out which sectors in emerging markets are the cheapest

EDITOR’S VIEW It could be good news fund managers are sitting on most cash in 20 years

FEATURE Why Johnnie Walker-owner Diageo is a wonderful stock to own

RUSS MOULD What is top of the agenda in the latest US earnings season?

ETFS Discover three dividend ETFs for straightforward and low-cost access to income

INVESTMENT TRUST Going cheap: investment trusts trading on wider than normal discounts

FEATURE Tesla’s undoubted progress still unlikely to change the minds of fans or sceptics

NEWS