AJ Bell Shares magazine 15 February 2024 by Shares Magazine

VOL 26 / ISSUE 06 / 15 FEBRUARY 2024 / £4.49

Hear from

10+ FUND MANAGERS

e on the Chines market

THE BIG CHINA DEBATE Can the world’s second largest economy recover its roar in the Year of the Dragon?

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Contents NEWS 06 S&P 500 surpasses 5,000 milestone and chip design firm ARM almost doubles in a week

07 Big banks expected to report largely benign

fourth quarter earnings

08 Consolidation in commercial property market shows no signs of slowing

09 Global data services specialist Experian continues to deliver positive news

09 Shares in specialty chemical maker Victrex hit fresh multi-year lows

10 BAE Systems riding high ahead of its full year results

11 Will Nvidia deliver more knockout earnings? 12 Focus on GDP and Fed meeting minutes after

big inflation numbers

GREAT IDEAS 14 Why investors should access the high-quality growth on offer at Judges Scientific

16 Buy ICG Enterprise Trust at a 40% discount while you still can

UPDATES 17 Unilever reassures investors with return to

volume growth

FEATURES 18 COVER STORY

The big China debate Can the world’s second largest economy recover its roar in the Year of the Dragon?

26 FUNDS

Meet the only UK fund to deliver double-digit gains five years in a row: Argonaut Absolute Return

30 UNDER THE BONNET

Is MicroStrategy more than just a proxy for Bitcoin?

33 EDITOR’S VIEW

Proposed listing rule changes are rightly drawing fire from overseas investors

34 EDUCATION

Three common investing myths busted for you

36 FINANCE

Why investors are dumping funds which invest in UK stocks

39 DANIEL COATSWORTH

Stock market crash four years on: why the recovery has been patchy

43 ASK RACHEL

Help: I’ve just started thinking about pension planning and I’m not sure where to start

45 INDEX Shares, funds, ETFs and investment trusts in this issue

15 February 2024 | SHARES | 03

Contents

Three important things in this week’s magazine Daniel Co

atsworth : Covid

Stock m crash fo arket on: why ur years recoverythe be e n pa ha s tchy

TH BIG CHEI N DE BATEA

Can the w or largest ld’s second recover it economy s roar in Year of th th e Dragon? e

ack in the summer of the Chines 2021, we on techno e government’s clam suggested especia log lly in fina involvement y companies and pdown Since then, ncial services. it accused its deeper in the priv sen of risked cau having been ‘hijack ate sector – which second largest timent towards the economy sing an exo world’s the marke has con dus of fore ed by capital’ – We also t investors losing more than $6 tinued to sour wit investmentput forward a list of ign investment. hav h Asia com its econom e fled while Beijing trillion in value as -Pacific panies so investo y and dea rs could red with low exposu sec l with a cris struggles to revive tor. re to China, their money uce their is in its pro To put tha perty big demogr in the region and risk but still keep ben more than t in perspective, US such as the aphic and structural efit from the of 2021, me$5 trillion in value stocks have gained class and emergence of a newchanges in chain, sinc the increas trillion big aning their marke e the summer ed use of , moneyed middle t ger mobile tec Kong marke than that of the cap is now $38 hnology, Chinese and 18 | SHARES according ts put together, a | 15 February new all-tim Hong to Bloomber 2023 e record g.

What does the Year of the Dragon hold for Chinese stocks? After nearly three years of losses, Shares asks emerging market and specialist managers their take on where the Chinese stock market goes this year.

Funds: Ar gonaut Ab solute Re turn

laggards

Hundred s below the of companies are knocked point where the still trading pandem equities ic for six

hares in hun companies dreds of UK and USthe Covid-1 have not fully recove listed world are 9 pandem red since thr sto ic and Germa iving – France’s CAC though mo ck market crash in triggered a global ny’s DAX is 40 is 27% Feb Any trad ahead above tha st major market ind ruary 2020, eve n equityone looking at the ing 25% higher. t leve ices are now perform indices mig According l. trading to ShareP ht think Cov ance of these the minds FTSE 350 ad id data, and large groupof management tea is now a blip in trading bel 149 stocks in the 196 stocks in the ms of . Howeve laggard to be the years ago ow the day before S&P 500 are still root cause s implies Covid con r, the markets cra (21 Februa most countr of many pro tinues ry 2020). shed four In contras post-Covid ies having emerged blems despite higher wh t, the FTSE 350 is normality. into a new now trading ile greater retu the S&P 500 has achieved 0.3% WHY sign FTSE 100 rns, up 50%. On a is broader bas ificantly There HAVE SO MANY FAI index in the trading 3% ahead are is, LED the mu while the US is up 65% prices hav ltiple reasons wh TO RECOVER? Nasdaq e . Even oth y and failed languished over the so many share er parts of FTSE 35 to the 0 gains made fully recover. For past few years som brought forwduring the pandem e, financial demand mo ard earnings gro ic effectively wth and this 4,000 making it mentum has now har fizz earnings gro der for these com led away, panies to wth. sustain Builders’ 3,500 to be one merchant Travis Per of as home impthe companies nur kins (TPK) looks important rovement project sing a hangover s 3,000 for work. as more people go become less The ‘do it bac for me’ sce k to the office lockdown as spruce up homeowners wa ne boomed after 2019 nted tradesm their houses 2020 since lost and flat en to 2021 mo 2022 5 year data suffered frommentum and Tra s. This trend has 2023 to 9 Febr 2024 vis Perkin uary 2024 a downtu Chart: Shar s has also ma rke rn es magazine t led by in the • Source: LSEG Supply cha weaker new-build construction fired up infl in problems during housing. atio the pandem n and 38 | SHARES exacerbat ic | 15 February ed the situ Russia’s invasion of 2024 ation, leadin Ukr g to a rap aine id

Four years on from the Covid sell-off, why has the recovery been so patchy? Despite a recovery in the FTSE 100 index, hundreds of UK stocks continue to trade below their pre-pandemic levels.

Meet the double -d only UK fund to row: Arg igit gains five y deliver o n a ut A e What inv bsolute ars in a estors ca n expertis Return e – includ learn from mana ing on ger Ba

stocks to

avoid

rry Norri

s’

ut of more investment than 3,500 regulated Argonaut funds in the UK ind position is Absolute ustry VT stocks as when a fund manag the only onesays to ‘the best of Return (B7FT1K7) the its short pos y believe it will go er buys a stock or for the last to have delivered knowledge’ it is itio double-dig five a stock, bor n is when a fund up in the future. A it returns The fund’s years in a row. manager bets against them and rowing shares wit particularl performance ove h the then buying y r lower pric them bac aim of selling to investo eye-catching, retu the past year is e. k later at a rs. Since lau rning more The achieved a return of nch in 2009 the fun than 30% holdin fund has 32 long holdings 227.3%. d has gs as While pas fund has maof 31 January 202 and 40 short future, the t performance is not 4. short boo de 2% in its long So far this year the Norris is a se returns mean fun a guide to the book and k. ma 3% from its Norris say had that opp n worth listenin d manager Barry g to and ortunity to the two stra s there are advant recently. do just tha this author age t face-to-face two goes tegies the first one s of combining at stock-p being tha icki t ‘you get Second, he ng’. adds: ‘By A LONG/S pro duc com ea bin HORT STR ATEGY market butreturn that not onl ing the two we can The fund’s y the marke crucially delivers at outperforms the ‘short’ pos strategy involves tak t itions in sto ing we are pro and therefore mo contrasting times cks. As a remboth ‘long’ and st ud oth abo er funds. Wh to ut our per value of our inder a lon form ilst g 26 | SHARES diversificati returns to investo ance record, the | 15 February rs see on is our uni 2024 que selling king proper point.’

Meet the only manager with five years of double-digit returns Many investors may not have heard of Argonaut Absolute Return, so Shares sat down with manager Barry Norris to learn the secrets of his success.

Visit our website for more articles Did you know that we publish daily news stories on our website as bonus content? These articles do not appear in the magazine so make sure you keep abreast of market activities by visiting our website on a regular basis. Over the past week we’ve written a variety of news stories online that do not appear in this magazine, including:

TUI delivers record performance but all eyes on London de-listing vote

JPMorgan Global Growth & Income to issue new shares at a premium

Frasers launches fresh £80 million buyback and boosts N Brown stake

04 | SHARES 15 February 2024

Beware the lurking threat after Arm’s stunning run

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News

S&P 500 surpasses 5,000 milestone and chip design firm ARM almost doubles in a week S&P 500 US index is already way above many analysts’ December 2024 forecasts

he S&P 500 hit another historic high on 9 February, closing above 5,000 for the first time. This milestone comes as no surprise for those investors paying close attention to the index. The S&P 500 has been on a general uptick since last October, rising 21% since the of that month. And the reason for this new record? Strong earnings from its main constituents including Meta Platforms (META:NASDAQ), which not only reported impressive fourth quarter earnings but issued its maiden dividend – year-to-date the shares are up 32.2%. Then there is microchip technology firm Nvidia (NVDA:NASDAQ) whose shares are up 45.7% year-to-date. Nivida is due to report fourth-quarter earnings on 21 February with analysts expecting revenue of more than $20.2 billion, a more than three-fold increase on last year due to surging Best-performing big Best-performing big US US stocks stocks in in demand for AI (artificial intelligence).

Best-performing big US stocks in 2024 2024 Best-performing big US stocks in 2024 2024 Year-to-date Year-to-date Company Company Company Nvidia Nvidia Company Nvidia

Meta Meta Platforms Platforms Nvidia Meta Platforms Eli Eli Lilly Lilly & & Co Co Meta Platforms Eli Lilly & CoMicro Devices Advanced Advanced Micro Devices Eli Lilly & Co Advanced Micro Devices Netflix Netflix Advanced Micro Devices Netflix Merck Merck & & Co Co Netflix Merck & Co Broadcom Broadcom Merck & Co Broadcom Amazon.com Amazon.com Broadcom Amazon.com AbbVie AbbVie Amazon.com AbbVie Microsoft Microsoft AbbVie Microsoft

change Year-to-date change (%) (%) change (%) Year-to-date 45.7 45.7 change45.7 (%) 32.2 32.2 45.7 32.2 26.7 26.7 32.2 26.7 17.0 17.0 26.7 17.0 15.3 15.3 17.0 15.3 15.1 15.1 15.3 15.1 15.0 15.0 15.1 15.0 14.8 14.8 15.0 14.8 12.3 12.3 14.8 12.3 11.8 11.8 12.3 11.8

Note: includes Note: includes S&P S&P 500 500 companies companies with with market market caps caps of of $200 $200 Microsoft 11.8 billion or more. billion or more. Note: includes S&P 500 companies with market caps of $200 Table: Shares billion more.magazine Table:or Shares magazine •• Source: Source: Sharepad, Sharepad, 12 12 February February 2024 2024 Note: includes S&P 500 companies with market caps of $200 Table: Shares magazine • Source: Sharepad, 12 February 2024 billion or more. Shares magazine • Source: Sharepad, 12 February 2024 06Table: | SHARES | 15 February 2024

4,000 2,000 0 1970

1980

1990

2000

2010

2020

Chart: Shares magazine • Source: LSEG

Other companies which have buoyed the US index include global streaming giant Netflix (NFLX:NASDAQ) and software and services firm Microsoft (MSFT:NASDAQ). These mega caps were also the drivers of most of the index’s 24% gain in 2023. However, it isn’t just technology stocks which have lifted the index recent US economic data such as job numbers and consumer spending point to a surprisingly resilient economy in the face of record interest rate hikes. In the healthcare sector, shares in Eli Lilly (LLY:NYSE) have scaled fresh heights this year after the diabetes and weight-loss drug maker reported fourth-quarter sales and earnings above analysts’ estimates. Over the last five years, Eli Lilly shares have gained 489% taking the company’s market value to $669 billion, overtaking EV (electric vehicle) maker and former market darling Tesla (TSLA:NASDAQ) on the way and making it the 10th largest S&P 500 constituent. Elsewhere, hotly-anticipated new listing ARM (ARM:NASDAQ) has not disappointed, posting better-than-expected results and a strong outlook, sending its shares up nearly 50% in a single trading session and 98% over five trading days to take its market cap to more than $150 billion. The Cambridge-headquartered chip design firm reported a better-than-forecast 14% revenue increase in its December quarter revenue and now projects sales will rise as much as 20% for the financial year to March 2024. There is considerable excitement about its growth in the AI sphere. [SG]

News

Big banks expected to report largely benign fourth quarter earnings Lloyds may be at risk from probe into commission-led car loans

he publication of full-year results by the big four UK high-street banks is imminent and there will inevitably be a good deal of scrutiny of their margins and provisions for bad loans. If last week’s update from Virgin Money UK (VMUK) is any guide, net interest margins should be fairly steady although that will depend on how keen the major players have been to expand their loan books. Virgin itself was fairly conservative, showing a slightly lower balance of mortgage lending as it took what it called a ‘disciplined’ approach and went for quality over quantity. The ‘challenger lender’ noted that on the whole credit quality was good, and that it had seen an uptick in sentiment among home buyers now it seems interest rates have peaked. That improvement in consumer sentiment was also picked out by Barratt Developments (BDEV) and Redrow (RDW) in their trading statements, which were slightly overshadowed by the news of the all-share takeover by Barratt of Redrow. According to the latest Bank of England credit conditions survey, there was a small uptick in mortgage and consumer loan defaults last quarter, and expectations are for these to continue into the current quarter along with rising defaults by small businesses, but in each case we are still talking about historically low levels and provisions are ample. Also, while lower rates this year may mean less income on loans, UK swap rates have fallen in advance of interest rates so the banks’ cost of funding is lower. If there is one fly in the ointment it is the review by the FCA (Financial Conduct Authority) of discretionary commission deals in car finance. According to Jefferies bank analyst Joseph

Dickerson, in a worst-case scenario, claims could reach £13 billion with Lloyds (LLOY) alone potentially on the hook for up to £1.8 billion. NatWest (NWG) is the first to report earnings on 16 February, followed by Barclays (BARC) on 20 February then HSBC (HSBA) and Lloyds on 21 February. In terms of conviction, Dickerson rates HSBC as his number one pick based on its proven return on tangible equity and dividend yield. Among the UK domestic players, Barclays is his preferred choice due to its high level of pre-provision profitability, gearing to lower interest rates, capital return – which is around 40% of its market cap when adding together dividends and buybacks – and what he calls the ‘asymmetric payoff potential’ given the shares trade on just 0.4 times tangible book value. Notably Barclays has just agreed a £600 million deal with Tesco (TSCO) to acquire the latter’s retail banking business. [IC]

FTSE 350 Banks 3,800 3,600 3,400 3,200 3,000

2023

2024

Chart: Shares magazine • Source: LSEG

15 February 2024 | SHARES | 07

News

Consolidation in commercial property market shows no signs of slowing Takeover of UK Commercial Property would create a £6 billion giant

he recent wave of takeovers and mergers in the quoted UK commercial real estate sector has continued this week with the proposed all-share takeover of UK Commercial Property (UKCM) by Tritax Big Box (BBOX). The deal, which values UKCM at 71.1p per share or a 10.8% premium to the previous day’s closing price, would create the UK’s fourth-largest REIT (real estate investment trust) by market cap with a combined portfolio valued at around £6.3 billion, and has the blessing of UKCM’s two biggest shareholders. In November 2023, UKCM was approached by smaller rival Picton Property Income (PCTN) with a view to merging, but that deal was sunk by lack of support from UKCM’s largest shareholder Phoenix Life, which owns 43% of the company’s shares. Since then, Custodian Property Income (CREI) and abrdn Property Income (API) have agreed an all-share deal with Custodian paying a 29% premium for API shares to create a company with around £1 billion in assets. While the API deal makes obvious sense – both firms have an income focus as well as a similar strategy of investing in regional, subinstitutional sized assets with strong rental growth potential – there were few who predicted a tie-up between Tritax Big Box and UKCM. The firms argue there is a ‘compelling strategic and financial rationale’ for the combination given both have logistics-oriented portfolios, but UKCM has just 60% exposure to the industrial warehouse sector and its property sizes are smaller while the rest of its holdings comprise retail, office and leisure assets, including a Hyatt hotel under construction in Leeds. ‘As one of the largest funds in the peer group and with its shares trading at a tighter discount than many of its closest peers, UKCM was not the most obvious takeover candidate. In addition, due to its specialist industrial & logistics sector focus, BBOX was perhaps not the most obvious acquirer’,

08 | SHARES | 15 February 2024

commented Winterflood’s investment trust specialist Emma Bird. Bird also observes, ‘some shareholders will have owned UKCM for its diversified portfolio and its relatively low risk profile, which will not be maintained post-merger given Tritax Big Box’s specialist strategy, higher leverage (32% LTV as at 31 December) and notable development exposure (7% of portfolio)’. There may be a less obvious reason for the deal, however: asset manager abrdn (ABDN), which manages UKCM, also owns 60% of Tritax Management, and is actively trying to reduce overlap between its funds and trusts, which it has already done in the Japanese and Asian markets. January’s takeover of API by Custodian and this week’s proposed deal could therefore represent further [IC] investment Many‘housekeeping’. UK real estate

Many UK real estate investment trusts arereal stillestate trading on wide Many UK investment trusts are still trading on wide discounts trusts are still trading on wide discounts discounts

Investment trust Investment trust

Investment trust Regional REIT Regional REIT Regional REITREIT Life Science Life Science REIT Life Science REIT abrdn Property Income Trust abrdn Property Income abrdn Property Income Trust Trust Schroder Real Estate Schroder RealEstate Estate Schroder Real Custodian Property Income REIT Custodian Property Custodian Property Income REIT Income REIT Balanced Commercial Balanced Commercial Property Balanced Commercial Property Property Supermarket Income REIT Supermarket Income REIT Supermarket Income REIT Alternative Income REIT Alternative Income REIT Alternative Income REIT LXI REIT LXI REIT LXI REIT

Last price Last Last price

price 22.3p 22.3p 22.3p 51.8p 51.8p 51.8p 52.5p 52.5p 52.5p 43.1p 43.1p 43.1p 69.3p 69.3p 69.3p 76.7p

76.7p 76.7p

75.9p 75.9p 67.8p 67.8p 67.8p 100.1p 100.1p 100.1p 75.9p

Discount to NAV Discount Discount to NAV

to NAV71% 71% 71%43% 43%43% 37% 37%37% 34% 34%34% 26% 26%26% 30%

30%30%

22% 22% 18% 18% 18% 10% 10% 10% 22%

Discounts calculatedusing usinglatest latest declared NAVs Discounts calculated declared NAVs

Table: Shares magazineusing • Source: AIC, data to NAVs 12 February 2023 Discounts calculated latest declared Table: Shares magazine • Source: AIC, data to 12 February 2023 Table: Shares magazine • Source: AIC, data to 12 February 2023

News

Global data services specialist Experian continues to deliver positive news Shares up 8% in the past month as the firm enjoys growing demand

2 February. The good news continued with the company’s third-quarter trading update last month, with chief Shares in global data services executive Ben Cassin reporting the specialist Experian (EXPN) are on a company had delivered growth ‘at roll after the firm reported another the upper end of expectations.’ strong set of results lifted by strong Cassin said for the full year 2024, global demand. the global data services specialist In November, the group reported a expects organic top-line growth to be 5% increase in revenue on an organic between 5-6% ‘with modest margin basis to $3.42 billion for the six accretion, all at constant exchange months ending 30 September 2023 rates and on an ongoing basis’. driven by demand at both its ‘Bright sparks’ in the third B2B (business-to-business) quarter were Latin America, Moving and consumer divisions. where group revenue was up It also announced its first HIGHER 15%, and the UK and Ireland interim dividend of $0.18, group where revenue was payable to shareholders on up 12%.

Shares in specialty chemical maker Victrex hit fresh multi-year lows Latest trading update provides little relief for long-suffering investors

last week it reported a 22% drop in quarterly revenue which it blamed on order phasing and destocking in some markets and a ‘prolonged High-performance polymer-maker downturn’ in others including Victrex (VCT) delivered a downbeat electronics, energy and industrial. assessment of the outlook for the Victrex shares enjoyed a moment current financial year last week in the sun in 2021 thanks to firm citing weakness in demand in end-markets and investor several end-markets. interest in the sector, but The update caused the shares to aside from that they have fall almost 15% to a new multi-year been on a downward low of £11.52 before clawing their slope ever since peaking way back gradually to the in 2018 and last week’s £13.40 level. sell-off took them In December, the firm close to decade lows. warned it was seeing a The firm did say it had DOWN slow start to the year, with seen an improvement in its in the volumes even lower than monthly run-rate since the dumps the seasonal norm, and start of 2024, with January

Experian (p) 3,000 2,500 Oct 2023

Jan 2024

Chart: Shares magazine • Source: LSEG

Over the past month the shares have gained 8% to a new 12-month high of £33.60, not far off their late 2022 record levels, as the company continues to strike a chord with businesses and consumers worldwide. [SG]

Victrex (p) 1,800 1,600 1,400 Apr 2023

Jul

Oct

Jan 2024

Chart: Shares magazine • Source: LSEG

trading ‘slightly ahead of the prior year’, but it also said it was ‘mindful of the limited visibility of an uptick in several markets’ and first-half sales and earnings would be down on last year. The chief executive admitted a continuation of the current macro-economic conditions ‘makes achieving a profit growth outcome for the year more challenging and requires a further step up in run rates for the remainder of FY 2024’. [IC] 15 February 2024 | SHARES | 09

News: Week Ahead

BAE Systems riding high ahead of its full year results

BAE Systems BAE Systems Systems BAE (p) (p) (p) 1,200

1,200 1,000 1,200 1,000 800 1,000 800 600 800 600 600

Apr 2022 Apr Apr 2022 2022

Jul Jul Jul

Oct Oct Oct

Jan 2023 Jan Jan 2023 2023

Apr Apr Apr

Jul Jul Jul

Chart: Shares magazine • Source: LSEG Chart: Shares magazine • Source: LSEG Chart: Shares magazine • Source: LSEG

Oct Oct Oct

Jan 2024 Jan Jan 2024 2024

The shares have had an extremely strong run leaving little margin for error

UPDATES OVER THE NEXT 7 DAYS FULL-YEAR RESULTS 16 February: NatWest, Segro 19 February: Moneysupermarket 20 February: InterContinental Hotels Group, Antofagasta, Barclays, Plus500 21 February: HSBC, Rio Tinto, Glencore, BAE Systems 22 February: Jupiter Fund Management, Indivior, Anglo American, Morgan Sindall, Mondi, Rolls Royce, WPP, Lloyds Banking Group, Hikma Pharmaceuticals FIRST-HALF RESULTS 19 February: Wilmington 20 February: Springfield Properties 22 February: Hargreaves Lansdown, Genus, Pantheon International TRADING ANNOUNCEMENTS 22 February: Hays

10 | SHARES | 15 February 2024

It has been a stellar two years for defence business BAE Systems (BA.), among the very best periods in the company’s history. The war in Ukraine and other tensions around the world have acted as a spur for global governments to invest in their military capability and BAE has positioned itself in the right areas to take advantage. This has been rewarded by the market and means there is little margin for error when the company reports its full year results on 21 February. At £12.17 the shares trade on 18.1 times consensus 2024 earnings. Investment bank Berenberg had pretty high hopes for these numbers when it previewed them just before Christmas, analyst George McWhirter expecting a strong outcome after the upgrade to guidance the company delivered at the half-year stage. He thinks this will be sustained by a robust showing in its maritime division.

McWhirter is also positive on the medium-term future for the business: ‘We think BAE is well placed to deliver 10% earnings per share compound annual growth over the mid-term. ‘The building blocks are a combination of mid-to-high singledigit organic revenue growth, steady margin expansion and low singledigit accretion from the ongoing share buyback.’ Commentary on the extent to which rising military budgets are feeding into contract awards could well hold the key to the market’s reaction to BAE’s looming update. [TS]

What the market expects of BAE Systems EPS

Revenue

2023

62.4p

£24.6bn

2024

67.7p

£26.8bn

Table: Shares magazine • Source: Stockopedia

News: Week Ahead

Will Nvidia deliver more knockout earnings? Wall Street consensus aligns for more exciting and sustained growth Can AI (artificial intelligence) chip leader Nvidia (NVDA:NASDAQ) keep putting forecasts to the sword? The Santa Clara-based design business has blown past expectations in each of the past four quarters and skipping a soggy third quarter for earnings in 2022, it’s a forecastthumping record that stretches back to 2019. Last year saw half a dozen upgrades to estimates, a run that triggered a 240%-odd stock rally, but investor excitement remains undiminished – the share price has jumped 50% already in 2024 for a market cap that is now closing fast on $2 trillion. This leaves fourth quarter 2024 (to

What the market expects of What the the market market expects expects of of Nvidia What Nvidia Nvidia Q4 forecast Q4 forecast Q4 forecast

$4.51 $4.51 $4.51

Revenue Revenue Revenue

$20.18bn $20.18bn $20.18bn

Table: Shares magazine • Source: Zacks Table: Shares magazine • Source: Zacks Table: Shares magazine • Source: Zacks

31 Jan) consensus estimates calling for earnings of $4.54 per share on $20.3 billion of revenue. This time a year ago the company reported $0.88 on $6.05 billion of revenue. Yet the powerful AI growth engine is increasingly believed to be a structural technology shift not seen since the internet was invented. Analysts see earnings and sales ballooning 68% and 56% respectively in the new fiscal year to January 2025 and recent speculation of talks between Nvidia top brass and many of its biggest clients, Apple (AAPL:NASDAQ) and Amazon (AMZN:NASDAQ) among them, about bespoke AI chips looks likely to fuel the buying frenzy for now. [SF]

Nvidia Nvidia ($) ($)

600 600 400 400 200 200 0 0

EPS EPS EPS

Apr Apr 2023 2023

Jul Jul

Oct Oct

US UPDATES OVER THE NEXT 7 DAYS QUARTERLY RESULTS 16 February: Arbor, Treehouse Foods, Cinemark, Barnes 19 February: Helix, Unisys 20 February: Walmart, Home Depot, Medtronic, Public Storage, Realty Income, CoStar, SolarEdge Technologies 21 February: Nvidia, Exelon, Synopsys, Verisk, Garmin

Jan Jan 2024 2024

Chart: Shares magazine • Source: LSEG Chart: Shares magazine • Source: LSEG

22 February: Intuit, Booking, Autodesk, Moderna

15 February 2024 | SHARES | 11

News: Week Ahead

Focus on GDP and Fed meeting minutes after big inflation numbers Markets will hope to avoid any negative surprises After an uneventful few days over the tail end of last week and the beginning of this week, the economic calendar moves into high gear with the all-important US and UK January consumer price indices due for release just before Shares goes to print. Markets often go up during quiet periods, and the last week has been no exception with the S&P 500 index in the US hitting/approaching the

Macro diary 15 February to 22 Macro diary 15 February to 22 February February Date

Date

Economic Event

15-Feb

UK Q4 GDP

15-Feb

UK UKDecember Q4 GDP Construction Output UK December US February Output Construction Philadelphia Fed US February Index Manufacturing Philadelphia Fed US January Industrial Manufacturing Index Production US January Industrial US January Retail Sales Production

16-Feb

UK USJanuary JanuaryRetail RetailSales Sales

Previous Month Previous Month −0.1%

−0.1% 0.9% 0.9% −10.6%

−10.6% 1.0%

1.0% 5.6% −3.2% 5.6%

US UKJanuary JanuaryProducer Retail Sales −3.2% 1.0% Prices US January Producer 1.0% UK February Rightmove Prices 19-Feb −0.7% House Prices UK February Rightmove 19-Feb −0.7% US January Leading House Prices 20-Feb −0.1% Index Next Central Bank Meetings & US January Leading 20-Feb −0.1% US FederalRates Reserve Current Interest Index 21-Feb meeting minutes US Federal Reserve Date Previous 21-Feb UKEvent January Public meeting minutes £6.85bn Sector Net Borrowing European Central 07-Mar 4.5% UKBank January Public £6.85bn UK February CBI Sector Net Borrowing 22-Feb −30.0% Industrial Trends Orders 20-Mar US Federal Reserve 5.5% UKBank February CBI 21-Mar of England 5.25% −30.0% Eurozone January 22-Feb 2.8% Industrial Trends Orders Consmuer Price Index Table: Shares magazine • Source: Morningstar, Eurozone January central bank websites 2.8% Consmuer Price Index

16-Feb

12 | SHARES | 15 February 2024

Next Central Bank Meetings & Next Central Bank Meetings & Current Interest Rates Next Central Bank Meetings & Current Interest Rates Current Interest Rates Date Date Date 07-Mar

Event Event European Event Central

Previous Previous Previous 4.5%

Bank European Central 07-Mar 4.5% Bank European Central 07-Mar 4.5% 20-Mar US Federal Reserve 5.5% Bank 20-Mar US Federal Reserve 5.5% 21-Mar Bank of England 5.25% 20-Mar US Federal Reserve 5.5% 21-Mar Bank of England 5.25% 21-Mar Bank of England 5.25% Table: Shares magazine • Source: Morningstar, central bank websites Table: Shares magazine • Source: Morningstar, central bank websites Table: Shares magazine • Source: Morningstar, central bank websites

5,000-point level for the very first time although the FTSE 100 was held back by a few disappointing large-cap earnings reports. Goods inflation has been falling steadily thanks to easing supply chains and energy disinflation, but we are coming to the point where base effects could make further progress rather slow. Service inflation was a lot slower to start falling, which it now is, but it needs to keep declining for the headline figure to move towards the central banks’ targets and with wages being a big part of service costs this is likely to be the area the market focuses on. Aside from the inflation figures, which will be in the rear-view mirror by now, there is UK fourthquarter GDP which the ONS (Office for National Statistics) forecasts was just 0.1% after zero growth in the third quarter. On an annual basis, and taking into account the rate of inflation, real GDP is expected to have grown by just 0.6% last year against 4.3% in 2022, and is seen growing by 0.7% this year as ‘squeezed real wages, higher interest rates and unwinding government support all weigh on economic activity’ according to the OBR’s November 2023 economic and fiscal outlook. The GDP figures are followed by UK January retail sales, which should show an improvement from December’s disastrous number: currently the consensus expects a 1.5% month-on-month rise in the headline figure and a 1.7% rise in core sales. Next week sees the release of the Rightmove house price index and public sector net borrowing in the UK and, much more significantly, the minutes of the Federal Reserve's latest meeting. Investors will be hunting for clues on the future trajectory of interest rates across the Atlantic. [IC]

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Great Ideas: Investments to make today

Why investors should access the high-quality growth on offer at Judges Scientific This company has been running the buy and build model the right way for years

Judges Scientific (JDG:AIM) £98.82 Market cap: £655 million

cience kit manufacturer Judges Scientific (JDG:AIM) has built up a loyal fan base over the years, both ordinary and professional investors. We continue to see the stock as a core smaller company growth holding that will gradually build value for portfolios, while letting you sleep comfortably at night. Over the past 10 years, the stock as recorded a 16.2% total return yearly. In other words, £1,000 invested in 2014 would be worth nearly £4,500 today including dividends.

A FOCUSED AND HIGH-QUALITY COMPANY Judges is a focused and high-quality company that runs a portfolio of niche science-based businesses. It has often been seen as a smaller version of Halma (HLMA), the FTSE 100 health, safety, and environmental equipment designer, which is high praise. In a similar vein to its larger peer, Judges likes to hand its portfolio businesses a level of independence, letting local management operate with a certain level of autonomy. Its activities span a range of interests tapping engineering, technology and advanced sciences that are helping to create the modern world around us, such as nanotechnology, chemical engineering, fibre optic testing, advanced materials research, LED and x-ray technology, and much else. It has won multiple Queens’ 14 | SHARES | 15 February 2024

Judges Scientific (p) 10,000 8,000 6,000 4,000 2,000

2019

2020

2021

2022

2023

2024

Chart: Shares magazine • Source: LSEG

Awards for innovation. What each portfolio business has in common are established products, international customers and scope for sustainable growth, profits, and cash flows. Targets tend to be small, sometimes underfunded specialists well known to the Judges team, which helps de-risk integration and lays a firm foundation for future growth potential without losing entrepreneurial spirit culture, a crucial element of its success over the years. AN EYE FOR A BARGAIN Judges’ eye for a bargain also means it seldom pays large premiums for target companies, which are typically funded from existing cash resources or borrowings, which means shareholder dilution is minimal. Equally important, the company is not afraid to walk away from negotiations if the deal is not right, which can lead to occasional dry years for acquisitions. Higher interest rates over the past couple of years has increased borrowing costs yet there is

Great Ideas: Investments to make today no question of the company overstretching its balance sheet. ‘Based on its covenant structures, we estimate Judges has £80 million of firepower for full year 2024 (to 31 Dec), affording it significant M&A optionality’, Berenberg analysts recently wrote in a note to clients. Berenberg’s detailed analysis of various M&A strategies Judges could employ leads it to see potential for an extra 20p per share of earnings being added to current forecasts for 2025. The underlying business continues to grow organically, with the backcloth becoming more encouraging. In the first half of 2023, Judges posted organic revenue growth of 16.5%, with organic orders up 14%. Organic revenue excludes contributions from all acquisitions in the 12 months before the start of the period under review, so going back to January 2022 in its 2023 first half. Profit and cash flow continue to impress. Pre-tax profit adjusted for recent acquisitions, jumped 33% to £12 8 million in the half year, while cash thrown off by the business was up 40% at £11.5 million. Net debt for the full year is expected to be about £44 million, barely 40% of shareholders’ equity. A growing stream of income remains a key part of the package and first half dividends were upped 23% in June to 27p per share. Berenberg is JUDGES’ BUSINESS MODEL

REPAY DEBT AND REINVEST PROFITS IN NEW ACQUISITIONS

CREATE ENVIRONMENT WHERE BUSINESSES CAN THRIVE Source: Judges Scientific

LEVERAGE EXPERTISE AND CAPITAL

ACCUMULATE SUSTAINABLE, ESTABLISHED BUSINESSES

Key data points Compound average growth rate (earnings past six years)

24.5%

Operating margin

11.8%

Return on capital

10.2%

Return on equity

13.5%

Table: Shares magazine • Source: Stockopedia

estimating about 93p per share for the full year, so the dividend yield is limited at around 1%. THREATS COULD EMERGE Potential threats could emerge with Brexit making life less easy for trade with Europe, while a significantly stronger pound might crimp demand. M&A opportunities could also dry up, in theory. That seems unlikely given the vast fragmentation of its target markets, while a mainly fixed cost base is something that the company can control. Helped by the firm’s already widespread revenue sources, when rate cuts do eventually come, potentially in the second half of this year, we would expect it help provide a meaningful catalyst for the company. Judges’ shares have frequently traded on a price-to-earnings (PE) multiple of above 20 to 25, sometimes higher, and a 2024 PE of 25 is in line with larger peer Halma. That said, the valuation factors in no M&A. This leads us to believe that estimates will prove low as the year ticks by, and we would expect the share price to steadily track higher as 2024 progresses. [SF] 15 February 2024 | SHARES | 15

Great Ideas: Investments to make today

Buy ICG Enterprise Trust at a 40% discount while you still can This underappreciated private equity fund offers exposure to defensive growth in the US and Europe

ICG Enterprise Trust (ICG) Price: £11.66 Market cap: £783 million

40.5% discount to NAV (net asset value) on ICG Enterprise Trust (ICGT) looks a compelling value opportunity for investors seeking exposure to a private equity portfolio with a history of delivering resilient sales and earnings growth. While the nature of the unquoted investments made by the trust means some discount is almost inevitable, the current level seems overly severe considering ICG Enterprise’s long-term record of generating attractive returns. Shares sees potential for a re-rating now that interest rates have peaked, credit markets are easing and with 2024 expected to see a pick-up in mergers and acquisitions (M&A). Historically, periods of higher private equity transaction volumes have helped support valuations and driven NAV growth for a trust which is also returning capital to shareholders through dividends and buybacks. Managed by Intermediate Capital Group’s (ICP) Colm Walsh and Oliver Gardey, the FTSE 250 trust invests in profitable, cash-generative private companies in the US and Europe with the aim of generating long-term defensive growth. An investor in unquoted companies directly and through specialist funds, ICG Enterprise is differentiated from peers in being the only UK-listed private equity investor focused exclusively on buyouts in developed markets, since the managers believe they offer the best risk/reward profile for shareholders over the medium to long term. A bias towards mid-market and large deals which are viewed as more defensive than smaller deals

16 | SHARES | 15 February 2024

ICG Enterprise Trust (p) 1,200 1,000 800 600 400 2019

2020

2021

2022

2023

2024

Chart: Shares magazine • Source: LSEG

reduces risk, as does the emphasis on defensive growth companies in sectors with non-cyclical growth drivers such as technology and software in particular, together with healthcare, businesses services and education. The focus is very much on firms with strong market positions, pricing power and structurally high margins. 2023 was a quiet year for M&A activity in general, but the quality of ICG Enterprise’s portfolio meant the trust’s realisation rate stood up well against its peers, and the trust, which has the balance sheet firepower for further deals, continues to execute on new investments to fuel future NAV growth. For the third quarter ended 31 October 2023, the portfolio generated positive cash flow and generated an NAV per share total return of 3.3%, along with 12 full exits at an uplift of 33.7% to their carrying value. ICG Enterprise has said it plans to pay total dividends of ‘at least’ 32p per share for the year to January 2024, up from 30p in full year 2023. The portfolio offers exposure to an array of successful companies ranging from fire protection systems supplier Minimax to pet products purveyor PetSmart, ice cream maker and distributor Froneri, premium campsites-to-holiday parks play European Camping Group, not to mention business management software firm Visma. Reflecting the complexity of managing a portfolio like this ongoing charges are relatively high at 1.48%. [JC]

Great Ideas Updates

Unilever reassures investors with return to volume growth Changes to unlock increased shareholder returns are on the way at the Marmite-to-Magnum maker

Unilever (ULVR) Price: £39.93

Unilever

Gain to date: 4.6%

4,400

We suggested investors buy fast-moving consumer goods goliath Unilever (ULVR) at £38.19 in January 2024 on the grounds the Marmite-to-Hellmann’s maker’s intrinsic strengths were underappreciated by the market. Poor sentiment reflected market share losses for some key brands amid cost-ofliving squeeze-induced consumer downtrading, and there had been an underwhelming reaction to new chief executive Hein Schumacher’s plan to ‘drive growth’ and ‘unlock potential’. WHAT HAS HAPPENED TO SINCE WE SAID TO BUY? Shares in the Comfort fabric conditioner-toCornetto ice cream supplier rallied on full year results (8 February) showing a return to volume growth and improved margins for the year to December 2023, and with free cash flow up by €1.9 billion to €7.1 billion last year, Unilever felt confident enough to announce a fresh €1.5 billion share buyback. That said, we were disappointed by fourth quarter underlying sales growth of 4.7%, which came in a smidgeon below consensus and turning this super-tanker of a business round will take time; Schumacher conceded Unilever’s competitiveness remains ‘disappointing’ and performance ‘needs to improve’. WHAT SHOULD INVESTORS DO NOW? Stick with Unilever. The much-needed return to volume growth should drive improved sentiment towards the stock and Schumacher is

(p)

4,200

4,000

3,800

Apr 2023

Jul

Oct

Jan 2024

Chart: Shares magazine • Source: LSEG

implementing his plan at pace, as demonstrated by a step-up in investment behind Unilever’s 30 ‘Power Brands’. In the wake of the results, Berenberg observed potential earnings upgrades as 2024 unfolds should not be ruled out. The broker sees potential for Unilever to improve organic sales growth ‘and narrow the gross margin gap to peers through disposal of the non-core brands. Although management did not commit to quickly divest or sell brands outside the top 30, we believe this remains an option’. Consumers trading down to cheaper private label brands will remain a headwind for Unilever until interest rates start to fall and consumers have more money in their pockets, but Shares remains excited by the potential in its diversified brand portfolio and the long-run growth opportunity in developing markets. [JC] 15 February 2024 | SHARES | 17

THE BIG CHINA DEBATE Can the world’s second largest economy recover its roar in the Year of the Dragon?

ack in the summer of 2021, we suggested the Chinese government’s clampdown on technology companies and its deeper involvement in the private sector – which it accused of having been ‘hijacked by capital’ – risked causing an exodus of foreign investment. We also put forward a list of Asia-Pacific investment companies with low exposure to China, so investors could reduce their risk but still keep their money in the region and benefit from the big demographic and structural changes in chain, such as the emergence of a new, moneyed middle class and the increased use of mobile technology,

18 | SHARES | 15 February 2023

especially in financial services. Since then, sentiment towards the world’s second largest economy has continued to sour with the market losing more than $6 trillion in value as investors have fled while Beijing struggles to revive its economy and deal with a crisis in its property sector. To put that in perspective, US stocks have gained more than $5 trillion in value since the summer of 2021, meaning their market cap is now $38 trillion bigger than that of the Chinese and Hong Kong markets put together, a new all-time record according to Bloomberg.

Rebased to 100 160 150 140 130 120 110 100 MSCI Emerging Markets

90 80 70

MSCI China

60 50 2020

2021

2022

2023

2024

Chart: Shares Magazine • Source: LSEG

CONFIDENCE IS KEY The Chinese authorities tried to restore investor confidence last month with a reduction in the RRR (reserve ratio requirement) for domestic banks, which is meant to encourage them to lend more, as well as the introduction of a ban on short selling of stocks. At the start of this month the country’s vicepremier called for ‘more forceful and effective measures to stabilise markets’, yet foreign investors remain wary with the Financial Times reporting that more than 40% of those attending a recent Goldman Sachs conference in Hong Kong describing China as ‘uninvestable’. Goldman’s chief equity strategist for Asia-Pacific, Timothy Moe, was reported as confirmed investors’ aversion, saying ‘the global investors we spoke to

are by and large out of China’. There is no question valuations for many Chinese companies are now at rock bottom, but valuations in and of themselves aren’t enough of a reason to buy. Reports last week that China’s sovereign wealth fund would step up share purchases in an attempt to put a ‘floor’ under sliding share prices did prompt a short, sharp rally, but for investors to see the market as anything more than a quick trade they need to see a change in the fundamentals. So, as we enter the Year of the Dragon – which is traditionally seen as auspicious, bringing with it change and opportunity – we asked a group of Asian investment experts what they thought of China as an investment proposition. 15 February 2024 | SHARES | 19

MIXED VIEWS AMONG GLOBAL EMERGING MARKET MANAGERS Global emerging market funds & trusts

Assets £m

China/HK weighting

Other markets %

Top holdings

£460

26.7%

Taiwan 19.1, Korea 10.2

TSMC, Samsung, Bank Rakyat

JPMorgan Emerging Markets (JMG)

£1,332

26.4%

India 25, Taiwan 15.1

TSMC, HDFC Bank, Tata Consult

JPMorgan Emerging Markets Fund (B1YX4S7)

£2,150

24.7%

India 16.3, Taiwan 13.3

TSMC, Samsung, HDFC Bank

Templeton Emerging Markets (TEM)

£1,930

24.2%

Korea 19.8, Taiwan 15.1

TSMC, Samsung, ICICI Bank

Fidelity Emerging Markets Fund (BJVDYV9)

£2,565

19.4%

India 22.2, Taiwan 14.1

TSMC, Samsung, HDFC Bank

Fidelity Emerging Markets (FEML)

£628

18.8%

India 21.2, Brazil 11.4

TSMC, HDFC Bank, Samsung

Mobius Inv Trust (MMIT)

£165

3.7%

Taiwan 25.3, India 18.8

Leeno, EPAM, Totvs

JPMorgan EM Income (JEMI)

Benchmark: MSCI Emerging Market Index

26.5%

TSMC, Samsung, Tencent

Table: Shares magazine • Source: Company factsheets, data correct as of 31 December 2023

or our article we polled managers of global emerging markets funds and trusts, where the MSCI benchmark gives China a 26.5% weight, and managers of Asia-Pacific funds and trusts, where the MSCI benchmark gives the country a 30.7% weighting. Judging by their exposure, which in each instance we have taken from their latest fund factsheets, most global emerging markets managers are still reasonably positive on China, although for many it isn’t their top choice. Instead, India seems to be the most popular country, followed for the most part by Taiwan, Korea and Brazil, while at a stock level the most popular three holdings by far are Taiwanese chipmaker TSMC (2330:TPE), Korean electronics giant Samsung (005930:KRX) and Indian financial firm HDFC Bank (HDFCBANK:NSE). Big Chinese companies such as multimedia firm Tencent (700:HKG) and ecommerce group Alibaba

20 | SHARES | 15 February 2023

(9988:HKG) tend to be some way down the pecking order for most managers. UNDERESTIMATING IMPACT OF PRO-GROWTH STANCE Omar Negyal, manager of the JPMorgan Global Emerging Markets Income Trust (JEMI), has a neutral weighting in China, although it still represents his biggest country exposure. ‘Although China’s near-term growth is less vigorous than before the pandemic, we think its GDP (gross domestic product) is likely to grow more rapidly than most developed economies. We also believe investors are underestimating the impact from the Chinese authorities’ pro-growth stance,’ says Negyal. ‘Taking a long-term view, China is well-positioned to maintain its role as an important positive driver of activity and markets within Asia and further afield,’ he adds.

John Citron, manager of the larger JPMorgan Emerging Markets Fund (JMG), is neutrally weighted on China but sees upside for stocks this year. ‘We believe China is focused on a sustainable growth trajectory, including removing tail risks from the real-estate sector. We also think Chinese consumption should gradually recover over the coming year which, in turn, is supportive for earnings. ‘China’s economy continues to grow, though slower than expected. Valuations – currently around their long-term averages – are reasonable, and emerging market earnings offer upside potential.’ Templeton Emerging Markets (TEM) is both one of the largest and oldest trusts in the global sector and lead manager Chetan Sehgal also has an in-line weighting in the Chinese market. ‘China has remained the only major emerging market which has disappointed, it’s been a drag on the overall index for several years. We hoped 2023 would see the country recover, but it does face some long-term challenges. ‘While government policy has become more supportive, more substantive policies and a rebound in consumer activity is required for a sustained improvement in Chinese equities. We do still see some upside in China; in particular the internet sector which has adjusted to the new operating environment as China has eased its regulatory crackdown on the sector. We expect future returns for the sector to be driven more by steady cash flow generation and corporate actions.’ Seghal believes Chinese stocks could benefit from a renaissance of interest from local investors as well as foreign money. ‘The locals remain cash-rich following the pandemic, they have the savings, assets in China are currently looking reasonable and cheap, and we’ve witnessed companies buying back shares. China has a good chance of returning to higher EPS (earnings per share) growth this year, which in turn means good prospects of returning to positive returns on an absolute basis.’ The trust recently added to its holding in Tencent after its shares had declined on new draft rules for video games which have since been abandoned.

‘Ongoing challenges such as the authorities’ intervention in the economy, coupled with lower corporate governance standards among Chinese companies compared to their Asian EM counterparts, have steered us away from direct investment in China. ‘We rarely find the level of governance, fundamental quality and innovation that would meet our investment criteria. Instead, we prefer to access the Chinese market indirectly through countries such as Taiwan and South Korea.’ For example, the portfolio includes Elite Material (2383:TPE), a Taiwanese company specialising in components for the semiconductor industry. The company operates manufacturing facilities across China and generates a significant proportion of its revenues in the country while offering Taiwanese standards of governance and transparency, says von Hardenberg. The manager admits investors can’t afford to ignore the world’s second largest economy, and he continues to scour the market for exciting companies that meet his quality investment criteria, but he doesn’t see a quick fix to the country’s troubles. ‘Structural challenges such as problems in the property sector, overcapacity, slowing FDI (foreign direct investment) flows and weak consumer sentiment, with around 70% of household wealth tied up in property, are weighing on investor sentiment.’

BEARISH ON CHINA In contrast, Mobius Investment Trust (MMIT) manager Carlos von Hardenberg is extremely underweight China with just 3.7% exposure due to lack of transparency and regulatory risks. 15 February 2024 | SHARES | 21

REGIONAL MANAGERS ARE DIVIDED Asia-Pacific funds & trusts

Assets £m

China/HK weighting

Other markets %

Top holdings

Invesco Asia Trust (IAT)

£235

38.8%

Korea 17.8, Taiwan 16.5

TSMC, Samsung, Tencent

JPMorgan Asia Growth & Income (JAGI)

£330

37.0%

India 18.7, Taiwan 17.7

TSMC, Tencent, Samsung

Schroder AsiaPacific (SDP)

£785

31.0%

India 19.4, Taiwan 17.4

TSMC, Samsung, Tencent

Asia Dragon Trust (DGN)

£950

29.0%

India 19.1, Taiwan 14.7

TSMC, Samsung, Tencent

Pacific Horizon (PHI)

£535

28.0%

India 31, Korea 18

Samsung, Ramkrishna, Delhivery

JPMorgan Asia Pacific Equity Fund (B986V32)

$1,074

24.3%

Taiwan 17.1, Australia 16.6

TSMC, Samsung, Tencent

Henderson Far East Income (HFEL)

£400

24.0%

Australia 16, India 13.8

TSMC, Samsung, BHP

Schroder Oriental Income (SOI)

£630

22.1%

Taiwan 20, Australia 20

TSMC, Samsung, BHP

Schroder Asian Total Return (ATR)

£460

18.1%

Taiwan 23.1, Australia 14.1

TSMC, Samsung, HFDC Bank

Abrdn Asian Income (AAIF)

£405

13.3%

Taiwan 21.3, Australia 20.5

TSMC, Samsung, BHP

Pacific Assets Trust (PAC)

£465

12.0%

India 46.2, Taiwan 11.7

CC Power, Mahindra, Tube Investments

Jupiter Asian Income Fund (BZ2YND8)

£1,400

6.9%

Australia 26.4, India 18.1

Mediatek, ITC, TSMC

Benchmark: MSCI Asia ex-Japan Index

30.7%

TSMC, Samsung, Tencent

Table: Shares magazine • Source: Company factsheets, data correct as of 31 December 2023

oojeong Oh, manager of the abrdn Asian Income Fund (AAIF), is heavily underweight China and shares similar concerns to von Hardenberg. ‘First, the market is dominated by large internet companies which don’t pay dividends; and second, many of the high-yielding names are stateowned enterprises, in sectors such as banking and utilities, and the team is finding similar highyielding companies with better transparency and governance structures elsewhere in the Asia Pacific region.’ While she expects to remain underweight, the manager accepts there is ‘a disconnect between

22 | SHARES | 15 February 2023

market sentiment, as seen in valuations and headlines, versus the economic reality on the ground’. ‘With much of the negative headlines in China already priced in, a period of calm followed by some positive news could open the possibility of a market bounce,’ admits Oh.

OPPORTUNITIES TO BE FOUND Doug Ledingham, manager of Pacific Assets Trust (PAC), is underweight the market but believes there are opportunities for those who take a bottom-up view. ‘The trust now owns nine Chinese companies:

each has a private entrepreneur, family or steward behind it who we trust to continue their track record of treating minority investors fairly while building unique and enduring franchises,’ says the manager. He adds the following caveat, however: ‘If we were to see a deterioration in the industries in which our companies operate, greater political involvement or stretched valuations there should be no surprise if the trust’s exposure to China were to fall again.’ Henderson Far East Income (HFEL) has less than half the index weighting in Chinese stocks, but manager Sat Duhra acknowledges that despite being underweight the market for some time the trust’s exposure did it no favours last year. ‘Household debt has been increasing very sharply over the past ten years. So, people talk of savings rates being high but you also have to look at mortgages and other consumer debt such as auto-loans. Generally, 60% of household assets in China are held in property so with the recent collapse in property prices we have not really seen any return in spending. ‘Another concern we have is to do with local governments, whose indebtedness has increased year after year but their fiscal revenue has collapsed because no one is buying land from them. Property developers are in a tight spot, yet 40% of local government income lies with land sales.’ Duhra’s direct exposure is concentrated in infrastructure, technology (although not e-commerce companies) and what he calls domestic consumer champions. The rest of his exposure is indirect, through Australian miners, high-quality Hong Kong stocks and Taiwanese tech firms which have both Chinese and global growth potential. Pruksa lamthongthong, manager of Asia Dragon Trust (DGN), has an in-line weighting in China and believes a recovery is overdue. ‘Chinese stock markets have just come off an extremely tough 2023 and are now among the cheapest markets across the world. ‘We are still seeing weakness persist in mainland markets, but encouragingly fundamentals remain intact and we are expecting high single-digit earnings growth for the entire market. This, along with depressed valuations, lays the ground well for an eventual recovery, as the benefits of monetary and fiscal stimulus gain traction in 2024.’ The Schroder AsiaPacific Fund (SDP) is underweight China in terms of direct exposure, but manager Abbas Barkhordar says that over the past

year ‘the opportunity set has really widened for us’. ‘If you take the Chinese market as a whole, there isn’t enough focus on return on investment or on shareholders, so when companies talk about growth it rarely feeds through to the bottom line, which is why many investors struggle. ‘Companies which do generate high returns and look after shareholders used to be highly-rated, but in the last year they have become much more affordable so with selective stock-picking it’s now possible to capture those returns.’ FOCUSED ON LONG-TERM POTENTIAL Rob Lloyd, portfolio manager of JPMorgan Asia Growth & Income (JAGI), is also positive on the market with 37% of his portfolio in Chinese and Hong Kong stocks and a top three holding in Tencent (700:HK). ‘The Chinese economy is expected to grow around 4% this year, an enviable pace compared to western economies. China’s longer-term outlook is also positive given Asia’s structural and societal changes. For example, rising incomes, urbanisation, infrastructure investment and digitalisation,’ he offers. Fiona Yang, manager of Invesco Asia Trust (IAT), is equally bullish and is also overweight mainland Chinese stocks. ‘We are overweight China across the portfolios within the Asia and emerging markets equities team for two reasons: the valuations on offer are compelling, and expectations are undemanding at the stock level, meaning that the odds of beating consensus are higher than for example in the Indian market. ‘Our contrarian mindset leads us to be overweight China and underweight India, without relying on big macro calls as this positioning is backed by company analysis.’

15 February 2024 | SHARES | 23

WHAT DO COUNTRY SPECIALISTS THINK? China Country Funds & Trusts

Assets £m

Allianz China (BMG9ZY3)

£2,190

Kweichow, CITIC, China Merchants

Fidelity China Focus (B51RX72)

£2,160

Alibaba, Tencent, ICBC

Fidelity China Special Sits (FCSS)

£1,102

Tencent, PDD, Pony AI

Top Holdings

abrdn China (ACIC)

£215

Tencent, Kweichow, Alibaba

JPMorgan China Growth & Income (JCGI)

£215

Tencent, PDD, Alibaba

Baillie Gifford China Growth

£130

Bytedance, Alibaba, Tencent

Table: Shares magazine • Source: Company factsheets, data correct as of 31 December 2023

ebecca Jiang, portfolio manager of JPMorgan China Growth & Income (JCGI), sees significant potential in the Chinese equity market and believes most of the widely discussed negative news has been priced in. ‘We remain optimistic about China’s long-term prospects and the opportunities that will benefit patient investors. We are encouraged by recent shifts in government policies, designed to promote economic growth and boost consumer confidence. ‘We are also finding attractive investment opportunities provided by companies that offer superior earnings growth or are benefitting shareholders by introducing regular dividends’, says Jiang. ‘THE WORST IS OVER’ Investment trust Fidelity China Special Situations (FCSS), one of the ‘big beasts’ among the country specialists, is itself in a special situation this year after agreeing to take over abrdn China Investment Company (ACIC), with Dale Nicholls continuing as the portfolio manager. Nicholls believes there are better times to come for investors: ‘Unlike Europe or the US, inflation has not been a problem in China and the government is taking measures to stimulate investment and consumption to support the post-Covid recovery. ‘Consumer confidence remains soft, mainly due to a weakened property market, but the government is addressing this by implementing

24 | SHARES | 15 February 2023

various measures including lower mortgage requirements and support for property developers.’ Nicholls also notes Chinese households have accumulated substantial savings, which sets the stage for an upswing in consumer spending once confidence is restored. From the team’s discussions with companies on the ground, ‘we have the sense that the worst is behind us. Over the longer term, improving corporate earnings could be a key driver for investor confidence to come back.’ Meanwhile, he adds, valuations in the Chinese equity market ‘remain compelling both in historical terms and compared with some other major markets. Clearly, a lot of pessimism over the economy appears priced into valuations.’ DISCLAIMER: The author of this article has an investment in Henderson Far East Income.

ADVERTISING PROMOTION

Fidelity China Special Situations PLC

An AJ Bell Select List Investment Trust

Investing in China’s most compelling growth drivers Dale believes a vast and still expanding middle class is increasingly driving stock market returns in China.

If you want to take full advantage of the incredible growth of China’s middle classes and a seismic shift towards domestic consumption, you need real on-the-ground expertise.

“China is well established now as a major driver of growth and investment performance, not just in Asia, but in the wider world. The sheer size of China’s economy, its continued growth and ever-increasing global importance, should see investors increase their exposure to China as part of a balanced investment portfolio.”

Fidelity China Special Situations PLC, the UK’s largest China investment trust, looks to capitalise on an extensive, locally based analyst team to make site visits and attend company meetings. This helps us find the opportunities that make the most of the immense shifts in local consumer demand. China’s growth story Since its launch in 2010, the trust has offered direct exposure to China’s growth story; from tech giants right the way through to entrepreneurial medium and small-sized companies, and even new businesses which are yet to launch on the stock market. Portfolio manager Dale Nicholls looks to identify and invest in companies that are best placed to capitalise on China’s incredible transformation.

Past performance Jan 2019 Jan 2020

Jan 2020 Jan 2021

Jan 2021 Jan 2022

Jan 2022 Jan 2023

Jan 2023 Jan 2024

Net Asset Value

9.0%

75.9%

−26.2%

−1.2%

−31.0%

Share Price

13.2%

92.7%

−27.4%

−2.1%

−32.4%

MSCI China Index

5.6%

40.2%

−27.6%

−2.0%

−31.3%

Past performance a reliable of future returns. Past performance is notisanot reliable indicatorindicator of future returns Source: Morningstar as at 31.01.2024, bid-bid, net income reinvested. ©2024 Morningstar Inc. All rights reserved. The FTSE All Share Index is a comparative index of

Source: Morningstar the investment trust as at 31.01.2024, bid-bid, net income reinvested. ©2024 Morningstar Inc. All rights reserved. The MSCI China Index is a comparative index of the investment trust.

Important information The value of investments can go down as well as up and you may not get back the amount you invested. Overseas investments are subject to currency fluctuations. Investments in emerging markets can be more volatile than other more developed markets. The trust invests more heavily than others in smaller companies, which can carry a higher risk because their share prices may be more volatile than those of larger companies. The shares in the investment trust are listed on the London Stock Exchange and their price is affected by supply and demand. The Trust can use financial derivative instruments for investment purposes, which may expose it to a higher degree of risk and can cause investments to experience larger than average price fluctuations. The investment trust can gain additional exposure to the market, known as gearing, potentially increasing volatility. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser. The latest annual reports, key information documents (KID) and factsheets can be obtained from our website at www.fidelity.co.uk/its or by calling 0800 41 41 10. The full prospectus may also be obtained from Fidelity. The Alternative Investment Fund Manager (AIFM) of Fidelity Investment Trusts is FIL Investment Services (UK) Limited. Issued by FIL Investment Services (UK) Ltd, authorised and regulated by the Financial Conduct Authority. Fidelity, Fidelity International, the Fidelity International logo and F symbol are trademarks of FIL Limited. UKM0224/385993/SSO/0524

Funds: Argonaut Absolute Return

Meet the only UK fund to deliver double-digit gains five years in a row: Argonaut Absolute Return What investors can learn from manager Barry Norris’ expertise – including on stocks to avoid

ut of more than 3,500 regulated investment funds in the UK industry VT Argonaut Absolute Return (B7FT1K7) says to ‘the best of its knowledge’ it is the only one to have delivered double-digit returns for the last five years in a row. The fund’s performance over the past year is particularly eye-catching, returning more than 30% to investors. Since launch in 2009 the fund has achieved a return of 227.3%. While past performance is not a guide to the future, these returns mean fund manager Barry Norris is a man worth listening to and this author had that opportunity to do just that face-to-face recently. A LONG/SHORT STRATEGY The fund’s strategy involves taking both ‘long’ and ‘short’ positions in stocks. As a reminder a long

26 | SHARES | 15 February 2024

position is when a fund manager buys a stock or stocks as they believe it will go up in the future. A short position is when a fund manager bets against a stock, borrowing shares with the aim of selling them and then buying them back later at a lower price. The fund has 32 long holdings and 40 short holdings as of 31 January 2024. So far this year the fund has made 2% in its long book and 3% from its short book. Norris says there are advantages of combining the two strategies the first one being that ‘you get two goes at stock-picking’. Second, he adds: ‘By combining the two we can produce a return that not only outperforms the market but crucially delivers at contrasting times to the market and therefore most other funds. Whilst we are proud about our performance record, the value of our returns to investors seeking proper diversification is our unique selling point.’

Funds: Argonaut Absolute Return

Argonaut Absolute Return's performance leaves other absolute return funds in the shade One-year performance

Three-year performance

Five-year performance

VT Argonaut Absolute Return R Acc

31.3

48.4

105.9

WS Lancaster Absolute Return Ret Acc

−13.7

14.2

46.0

Thesis TM Tellworth UK Select A Acc

8.5

28.3

41.4

7IM Absolute Return Portfolio A Acc

3.6

31.1

36.8

Man GLG Absolute Value Professional CX Acc

11.9

21.0

34.1

VT Woodhill UK Equity Strategic Inc TR

17.9

30.1

25.4

BNY Mellon Multi-Asset Diversified Return B Acc

−4.0

3.1

25.2

Aviva Inv Multi Strategy Target Return 1

5.3

14.2

24.5

TM Fulcrum Diversified Absolute Return D Acc

2.2

12.6

24.1

EF Brunswick Growth Portfolio B Acc

−4.5

−5.5

21.2

Fund

Table: Shares magazine • Source: FE Analytics, data to 9 February 2024

‘The value of short selling is more easily identifiable in periods of market weakness. There were five negative market months in 2023 during which MSCI Europe delivered a negative return of 11%.’ ‘In those same months the fund delivered a positive return of 24%,’ said Norris in his latest Argonaut Absolute Return fund factsheet. WHAT ARE BARRY NORRIS’ RED FLAGS Even if you would never even consider short selling yourself, understanding Norris’ process in identifying shorting candidates could help you judge a prospective investment and avoid investing in a dud. While he is understandably guarded about his method, managers very rarely want to reveal their ‘secret sauce’, we did manage to glean some nuggets. ‘Generally, we look for expensive stocks where the market is overestimating estimating earnings potential,’ Norris says. ‘However, we characterise our shorts into three

main types: frauds (where management is misleading or stealing from shareholders), fads (growth stocks that will stop growing) and fades (value stocks that cannot be saved).’ Norris gives past examples of stocks that fall into these categories including: Wirecard – which falls into the fraud category, Cineworld – falls into the poor management category and Los Angeles-based producer of plant-based meat substitutes Beyond Meat (BYND:NASDAQ) – the over-hyped category along with Swedish alternative food company Oatly (OTLY:NASDAQ). Norris’ also looks for companies whose management are ‘overly promotional in their market communications’ or ‘overly reliant on capital markets, government subsidies or client concentration’. He also refers to companies which have a ‘poor cash conversion,’ have an ‘over reliance on serial acquisitions with no obvious synergies’. Finally, another ‘red flag’ is a company whose management buys or sells assets from friends and family and ‘insider sales’. 15 February 2024 | SHARES | 27

Funds: Argonaut Absolute Return

Argonaut Absolute Return's best performing investments - January 2024 Company

Performance (%)

Long Torm

17%

Ardmore

17%

Piraeus

17%

Rheinmetall

11%

Short

WHAT IS NORRIS BUYING AND SHORTING In January, Norris found ‘a happier hunting ground for shorts’ according to the fund’s factsheet. Top performing constituents of this part of the portfolio include Rolex seller Watches of Switzerland (WOSG) which fell 47%, owner of rehab centre The Priory Medical Properties Trust (MPW:NYSE) down 37% and electric vehicle seller Rivian Automotive (RIVN:NASDAQ) down 35%. Norris shorting Watches of Switzerland is of a piece with his negative view on the luxury sector which has fallen victim to a slowdown in the Chinese economy and a lack of demand from highnet-worth individuals cutting back on spending during the cost-of-living crisis. In relation to Norris’ long holdings, he has been looking closely at the shipping/tanking sector which could see higher rates as a result of the ongoing crisis in Red Sea and geopolitical tension between the Houthis, UK, and US. The funds top five long positions include: global tanker company Hafnia (1OQ:FRA), Danish shipping company Torm (TRMD-A:CPH), Texasbased building materials company Builders First Choice (BLDR:NYSE), global uranium company Cameco (CCJ:NYSE) and jewellery manufacturer Pandora (PNDORA:CPH). Norris says: ‘Whilst we are sceptical about the effect of this [Red Sea disruption] on oil prices, we think this Iranian proxy war is not easily resolved and has the potential to cause sustained disruption to Suez Canal transits, which would increase 28 | SHARES | 15 February 2024

Watches of Switzerland

−47%

Medical Properties Trust

−37%

Rivian

−35%

Table: Shares magazine • Source: Argonaut Capital

demand for ton-mileage.’ While the focus of the fund is not necessarily on income it does offer a 2.36% yield from its ‘long’ holdings. WHAT ARE THE FEES? The fund’s returns are undoubtedly impressive but are there any drawbacks? While performance has been strong of late and, in fairness, overall, it can be volatile and Norris’ approach means it will deviate significantly from the wider market – often to investors’ benefit but occasionally to their detriment. There is also a performance fee which according to the fund’s January factsheet his can be ‘20% of anything above the hurdle rate (5% per annum)’. Ongoing charges are 0.81%. When asked about these ongoing charges and performance fee, Norris says they are ‘justified’ considering the performance of the fund which has delivered during difficult macroeconomic times. By Sabuhi Gard Investment Writer

Under the Bonnet: Getting to grips with MicroStrategy

Is MicroStrategy more than just a proxy for Bitcoin? The company calls itself a business intelligence firm but the market sees it differently

s $11 billion US firm MicroStrategy (MSTR:NASDAQ) really the largest independent business intelligence company listed anywhere, as it claims, or merely a proxy for cryptocurrency Bitcoin, as many investors perceive it to be? On its website, MicroStrategy says it provides modern analytics on an open, enterprise platform used by many of the world’s most admired brands in the Fortune Global 500. It offers stories from well-known names like Sainsbury’s (SBRY), Pfizer (PFE:NYSE), Ebay (EBAY:NASDAQ), and Standard Chartered (STAN).

MICROSTRATEGY STORY MicroStrategy was founded 35 years ago as a data mining and analytics company. It went public in 30 | SHARES | 15 February 2024

1998, and its stock soared from its split-adjusted IPO (initial public offering) price of $60 to a record high of $3,130 near the apex of the dotcom bubble in early 2000. That bubble burst shortly after MicroStrategy’s stock peaked, and the stock’s decline was exacerbated by the unexpected restatement of its financial results for the previous two years. Those sudden revisions prompted the US SEC (Securities and Exchange Commission) to launch a probe into the company that eventually ended in a settlement. Over the two decades that followed, MicroStrategy divested itself of some of its businesses and expanded its software into the mobile and cloud markets. However, the aging software company faced fierce competition from higher-growth analytics companies like Salesforce (CRM:NYSE) as well as expanding cloud infrastructure giants like Amazon Web Services and Microsoft Azure.

Under the Bonnet: Getting to grips with MicroStrategy

Bitcoin returns vs other major asset classes BTC 2013 AGG

Bitcoin 2014 2015 2016 2017 S&P US Aggregate Bond Index

CMT 5516%

Dow Index 12%Jones Commodity 37% 119%

EM SPX

2018

2019

2020

2021

2022

2023

BTC

AGG

BTC

CMT

BTC

1300%

92%

302%

58%

20%

156%

Dow Markets Total AGGJones Emerging AGG HY EMRetrun Index HY

SPX

Gold

CMT

Gold

SPX

HY 26%

US5% High Yield0%Corporate Bond Index 17% 35%

29%

24%

30%

25%

SPX

S&P 500 Total Return Index

SPX

BTC

SPX

BTC

-1%

Bitcoin returms vs other major asset classes HY HY SPX EM SPX Gold EM 6%

2013

AGG BTC -1% 5516% EM SPX -3% 26% CMT HY -9% 6% Gold AGG -29% -1%

2014 EM SPX 1% 12% Gold AGG -3% 5% CMT HY -18% 2% BTC EM -58% 1%

-1%

2015 HY BTC -4% 37% Gold AGG -11% 0% EM SPX -14% -1% CMT HY -25% -4%

15%

2016 CMT BTC 14% 119% SPX HY 11% 17% Gold EM 7% 15% AGG CMT 2% 14%

18%

2017

Gold BTC 12% 1300% HY EM 7% 35% CMT SPX 6% 18% AGG Gold 3% 12%

EMShares magazine Gold • Source: GoldiShares, Visual SPX CapitalistHY Table:

-3%

21%

15%

29%

-11%

12%

2018

2019

2020

2021

2022

2023

CMT

AGG

SPX AGG -7% 0% CMT HY -9% -1% EM Gold -15% -3% BTC SPX -73% -7%

Gold BTC 18% 92% HY SPX 14% 29% CMT EM 10% 21% AGG Gold 8% 18%

EM BTC 14% 302% AGG Gold 7% 24% HY SPX 7% 15% CMT EM -3% 14%

HY BTC 5% 58% EM CMT 0% 30% AGG SPX -1% 29% Gold HY -6% 5%

AGG CMT -12% 20% EM Gold -18% 1% SPX HY -20% -11% BTC AGG -65% -12%

Gold BTC 12% 156% EM SPX 9% 25% AGG HY 5% 12% CMT Gold -2% 12%

-3%

-11%

11%

-9%

14%

-18%

CMT

Gold

CMT

AGG

SPX

AGG

-9%

-18%

-14%

-15%

10%

-1%

-20%

Gold

BTC

CMT

AGG

BTC

AGG

CMT

Gold

BTC

CMT

-29%

-58%

-25%

-73%

-3%

-6%

-65%

-2%

Table: Shares magazine • Source: iShares, Visual Capitalist

FROM A SOFTWARE MAKER MicroStrategy’s revenue rose by 6% to TO A BITCOIN HOARDER $511 million in 2021 as its software business From 2010 to 2020, MicroStrategy’s revenue only stabilised in a post-pandemic market. However, its grew at a compound annual rate of net loss widened from $7.5 million in 0.6%. It plunged into the red in 2020, 2020 to $535.5 million in 2021 as its chalking up a net loss of $7.5 million. Bitcoin impairment losses surged. The company’s That is why it might seem odd that its Bitcoin’s price peaked at more abrupt decision stock surged 172% in 2020. than $65,000 in November 2021. to hoard Bitcoin as That rally was completely But by the end of 2022, its price the cryptocurrency’s had dropped to about $16,000 as driven by the company’s abrupt decision to hoard Bitcoin as the inflation, rising interest rates, and price skyrocketed cryptocurrency’s price skyrocketed. It a market wide shift away from risk initially bought $250 million worth of assets crushed the cryptocurrency Bitcoin in August 2020 and continued to purchase market. However, MicroStrategy was still holding more over the following three years. 132,500 Bitcoin that it had acquired for an

”

15 February 2024 | SHARES | 31

Under the Bonnet: Getting to grips with MicroStrategy aggregate cost of $4 billion and at an average price of $30,100 per Bitcoin. In the meantime, MicroStrategy’s core software business stayed sluggish as declining product license and support revenues offset its rising subscription revenue. As a result, its revenue fell by 2% to $499 million in 2022 and its net loss widened to $1.47 billion. Most of that loss was attributed to its $1.29 billion in Bitcoin impairment charges.

Microstrategy and Bitcoin Rebased to 100 Microstrategy

Bitcoin

1,600 1,400 1,200

1,000 WHAT DOES BITCOIN’S REBOUND MEAN FOR MICROSTRATEGY? 800 MicroStrategy seemed to be on the ropes last year, 600 but Bitcoin’s recovery to above $50,000 is bringing back the bulls. As of January 2024, the company 400 was holding 189,150 Bitcoin at an average price 200 of $46,506 with a market value of $8.8 billion, according to data from Statista. That is more than 0 80% of company’s current $10.9 billion market cap. 2019 2020 2021 2022 2023 2024 On that basis, if Bitcoin continues to rally it would certainly drive MicroStrategy’s stock higher. It is up Chart: Shares magazine • Source: LSEG 9% so far in 2024. Its software business remains stuck in a rut. versus equity, stands at 98.7%, according to Revenue in 2023 came in at $496 million, modestly Stockopedia data, putting the company firmly at off 2022’s $499 million, although subscription the high-risk end of the spectrum, which could limit revenues in the fourth quarter rose share price progress going forward, especially if 23% to of $21.5 million year-on-year, helping to rates stay higher for longer. offset 11.4% declines in its product license and Whether these traditional valuations tools are support revenues of $39.9 million. helpful is a crucial part of any Bitcoin debate. The The company generated a fourth cryptocurrency use case is far from quarter net profit of $89.1 million, proven and given its highly volatile lifting net profits for the year of $429 journey to date, the store of value Owning million, but it continues to run up large argument is also in question. For MicroStrategy impairment charges on its Bitcoin investors, owning MicroStrategy shares holdings, running at around $2.27 billion shares might might be a convenient way to play be a convenient last year. As it stands, MicroStrategy’s Bitcoin, if you believe its value will rise, way to play Bitcoin holdings are valued at and you do not fancy investing directly $42.531.41 per token, versus an average Bitcoin through a crypto exchange. cost per bitcoin of approximately This is understandable in the wake $31,168. of the FTX debacle, and questions For full year 2024, analysts expect over other crypto exchanges like Binance and MicroStrategy’s revenue to barely budge, Coinbase (COIN:NASDAQ). But many will feel more forecasting $505 million, with net profits predicted comfortable avoiding the whole cryptocurrency to plunge again to just $1.41 million. universe completely, and in that case MicroStrategy shares are certainly not for you. VALUATION ISSUES If we use price to earnings multiples as a valuation metric, the stock looks inflated. Based on current By Steven Frazer News Editor forecasts for 2024, the PE stands at 342, 21.5-times projected sales. Net gearing, the level of debt

”

32 | SHARES | 15 February 2024

Editor’s View: Tom Sieber

Proposed listing rule changes are rightly drawing fire from overseas investors FTSE 100 left behind Attracting foreign capital is a key part of reviving the UK market’s fortunes

ust before Christmas we wrote about the FTSE 100’s 40th birthday which was coming up at the start of 2024. It felt too much of an open goal not to talk in terms of a mid-life crisis and life beginning at 40. The fear we expressed then and one which has been reinforced now is the London market, which obviously underpins the FTSE 100, would take drastic steps to feel young again and revive its fortunes. Nobody should be under any illusions about the challenges the UK stock market and FTSE 100 are facing. A chart comparing its performance to not just the S&P 500, which has benefited from an extraordinary period for US equities, but also its French and German counterparts, tells you everything. As does the desultory number of IPOs in recent times and an exodus of big names. There are still great businesses listed in this country but the list is shrinking and there is a real absence of fresh blood to replace those which have departed. It is notable, looking at the chart, that the gap between the FTSE and Germany’s DAX and France’s CAC 40 benchmarks really began to open up after the Brexit vote in 2016. Foreign money, put off by political instability, turned away and hasn’t come back in the volume needed to breath new life into the index. The response so far in terms of promised reforms to listings requirements looks like the wrong remedy for the market’s malaise. Voting rights and transparency are just two areas which could be undermined. Crucially, it seems many of the overseas investors which the UK needs to win over are just as unimpressed. The ICGN (International Corporate Governance Network), which is led by investors responsible for assets under management of around $77 trillion, has raised serious concerns about the proposals, which would weaken corporate

by global counterparts Rebased to 100 FTSE 100

S&P 500

CAC 40 (France)

DAX

(Germany)

200

100

2014

2016

2018

2020

2022

2024

Chart: Shares magazine • Source: LSEG

governance standards and shareholder protections. ICGN chief executive Kerrie Waring says: ‘Robust governance structures, high-quality corporate reporting and strong investor protections are essential to a competitive market which safeguards corporate resilience, long-term value creation and ensures economic growth.’ ICGN’s statement was co-signed by major investors and associations representing institutions around the world. Waring adds: ‘Far from being a barrier to growth, maintaining high standards of corporate governance and shareholder protection enables growth.’ UK governance rules are still held up as a gold standard across the globe – they should not be surrendered in a rush to attract businesses to the market at any cost. Instead, the people in charge need to hold their nerve and have faith that over time the attractions of London as a listing venue and a place to invest in great businesses return to the fore. Worryingly, the ICGN’s comments suggest the regulators at the FCA (Financial Conduct Authority) aren’t listening. One thing which could help, although unfortunately this is an area which relevant decision makers and rule makers cannot control, are calmer political waters domestically. [TS] 15 February 2024 | SHARES | 33

Education: Investing myths

Three common investing myths busted for you We look at a trio of popular misconceptions about the stock market

s investors we all like to think we can avoid the pitfalls that other people might suffer, but as many of us also know we can be our own worst enemy when it comes to choosing where to put our hardearned cash. Sometimes even things as basic as comparing share prices can lead us to the wrong conclusion, so here are three common mistakes and how to keep from making them.

1. LOW-PRICED SHARES ARE CHEAPER THAN HIGH-PRICED SHARES Possibly the most common misconception of all, and one that from time to time we are probably all guilty of when scanning the market for ideas. Say you have a choice of investing in two companies, A and B, which have the same market value and do exactly the same thing, but Company A’s shares are 30p while Company B’s shares are £30 each. Optically, Company A’s shares look cheaper, or 34 | SHARES | 15 February 2024

better value, than Company B’s shares, simply because they are 30p instead of £30. However, Company A has 10 million shares and Company B has 100,000 shares so both companies have a market cap of £3 million. True, you get 100 times more shares for your money in Company A, but that doesn’t make them cheaper or better value. If both companies earn the same profit and pay the same amount in dividends, it doesn’t matter which one you own shares in – the earnings per share for Company B may be 100 times those of Company A, but in pounds, shillings and pence they are the same and so is the price-toearnings multiple. Alternatively, if Company B makes twice as much money as Company A and pays twice as much in dividends, shares in Company B are actually half as expensive as shares in Company A and have double the yield to boot. Finally, low-priced shares aren’t safer than high-priced shares, if anything we would argue the opposite.

Education: Investing myths

WHEN SMALLER SHARE PRICES ARE RELEVANT If you want to invest relatively modest sums in individual stocks, for example through a regular investment instruction, a really large share price might render this impractical. Just because Company A’s shares are only 30p, it doesn’t mean you can’t lose money in them – in fact, as this investor can readily testify, it’s quite easy for a low-priced share to lose value without you really noticing. If Company A’s shares drift from 30p to 20p it’s unlikely to create a great deal of fanfare, but if Company B’s shares fall from £30 to £20 it is a lot more obvious because optically – and in reality – investors have lost £10 per share not 10p per share. However, in percentage terms there’s no difference.

2. SHARE SPLITS INCREASE THE VALUE OF YOUR HOLDING This is a nice idea but all that happens when companies have a stock split is your holding gets divided into a greater number of shares. Yes, you end up with more shares than you had before, but the market adjusts the price downward to take account of the increased share count so there is no net benefit and the value of the company remains the same. Nor does a stock split count as ‘compounding’, unfortunately – that would be the case if you received a bonus share instead of or on top of your regular dividend, as that extra share would then entitle you to more income the next time the dividend was due.

In fact, as we discussed some time ago, companies which split their shares tend not to do as well as companies which don’t, which rather neatly brings us back to the first point – low share prices don’t always mean something is a bargain or that the share price can’t go lower.

3. TIMING THE MARKET IS IMPORTANT IN INVESTING Timing the market is one of the most difficult things investors can try to do, and even some of the greatest names in the business admit they have no edge when it comes to knowing when markets will rise or fall. When it comes to trading, timing is certainly important as it can determine whether a trade makes or loses money, but when it comes to investing for the long term it actually makes little difference. Even if you had bought a FTSE 100 tracker fund at the very height of the tech bubble in 2000 you would still be in the money today, and the same applies if you had bought in 2007 before the global financial crisis or indeed in 2020 just days ahead of the pandemic. While there are often large sell-offs, being able to predict when they are going to happen is nighon impossible, and over the long term share prices tend to go up regardless as the companies which make up ‘the market’ increase their earnings. Time spent in the market is far more important, and the ability to ride out the sell-offs and still be there to take part in the rallies which follow is what marks out true long-term investors. By Ian Conway Deputy Editor

15 February 2024 | SHARES | 35

Personal Finance: Investors ditching UK funds

Why investors are dumping funds which invest in UK stocks Cost-of-living-pressures, weak performance and a push for global diversification have all played a part

he last two years have seen unprecedented levels of outflows from funds invested in UK equities. Across the course of 2022 and 2023, around £25 billion was withdrawn from these funds by retail investors. This isn’t a new phenomenon. UK funds have seen outflows every year since 2016, to the tune of £46 billion in total. This feels like a significant and longstanding shift in consumer behaviour, so what precisely is going on? COST OF LIVING PLAYS A PART Certainly, the cost-of-living crisis has played a part in the scale of the outflows seen in the last couple of years. With energy and food costs at uncomfortable levels, people’s discretionary income has been eroded, which has left them little to save and invest, and some people may even have had to withdraw savings and investments in order to cover their day-to-day expenditure. Higher interest rates have helped to lure some investors away from the stock market towards cash products too.

36 | SHARES | 15 February 2024

The UK may have had more than its fair share of quitters because it’s a high yielding market, and so favoured by income-seekers who might be vulnerable to the temptations of cash. But none of that really explains why UK funds have been hit so hard, or why they were so out of favour even before inflationary pressures started to build, and interest rates rose. PERFORMANCE ALSO A CONTRIBUTING FACTOR Performance undoubtedly has a part to play in weak investor sentiment towards the UK. As the chart below shows, the UK has underperformed the global stock market for eight of the last 10 years, and it’s started off this year in the same fashion. Absolute returns haven’t actually been too bad, with the FTSE All Share returning 68% in the ten years to the end of 2023. But of course, everything is relative. When investors have looked at their annual valuations, they have seen much larger gains from their global funds than from their UK

Personal Finance: Investors ditching UK funds

FTSE All-Share relative to MSCI World 8.2%

1.3%

−3.6%

−3.9%

−3.8%

−4.6%

−6.4% −10.0%

−8.9%

−10.3%

−11.5%

−20.0 −22.1% 2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

Chart: Shares magazine • Source: FE Analytics in GBP

ones. Little wonder they have plumped for the former over the latter. LOOKING FOR DIVERSIFICATION We have also seen investors unwinding their home bias, and this comes down to a more global way of thinking about portfolio construction, by financial advisers and DIY investors alike. UK equity funds accounted for 51% of all equity fund assets held by retail investors 2009, with the remainder made up by other regional and global equity funds. That has now shrunk to 27%. Clearly a large part of that shift can be attributed to weak UK performance relative to other areas, but fund flows have also been a factor, as investors have sought out overseas opportunities and also realigned their portfolios to take less regional risk by carrying such a large UK bias. The UK now makes up just 4% of the global developed stock market, so with an average of 27% invested in the UK, retail investors are still heavily overweight the domestic market. Worryingly, that might mean the trend to a more global way of investing money may spell further outflows from the UK.

AN UNLOVED MARKET What seems clear is the UK is currently very unloved by fund investors, and for what seems like a long time now, market commentators have been talking about a stock revival that hasn’t materialised. For those still holding UK funds, disappointment may be starting to turn into frustration. But performance can be a fickle beast, and the prevailing winds can shift pretty quickly when they do change direction. Whether there will be some catalyst in 2024 for a resurgence in the UK stock market on the global stage remains to be seen. But a positive spin on negative sentiment is that at least when UK investors look down, there isn’t that far to fall. In the meantime, the one good thing about the UK stock market is many companies pay a handsome dividend, and so there is something to tide investors over while they wait for a turnaround in fortunes. By Laith Khalaf AJ Bell Head of Investment Analysis

15 February 2024 | SHARES | 37

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Daniel Coatsworth: Covid laggards

Stock market crash four years on: why the recovery has been patchy Hundreds of companies are still trading below the point where the pandemic knocked equities for six

hares in hundreds of UK and US-listed companies have not fully recovered since the Covid-19 pandemic triggered a global stock market crash in February 2020, even though most major market indices are now trading above that level. According to SharePad data, 196 stocks in the FTSE 350 and 149 stocks in the S&P 500 are still trading below the day before markets crashed four years ago (21 February 2020). In contrast, the FTSE 350 is now trading 0.3% higher while the S&P 500 has achieved significantly greater returns, up 50%. On a broader basis, the FTSE 100 is trading 3% ahead while the Nasdaq index in the US is up 65%. Even other parts of the

FTSE 350 4,000

3,500

3,000

2019

2020

2021

5 year data to 9 February 2024 Chart: Shares magazine • Source: LSEG

2022

2023

2024

world are thriving – France’s CAC 40 is 27% ahead and Germany’s DAX is trading 25% higher. Anyone looking at the performance of these equity indices might think Covid is now a blip in the minds of management teams. However, the large group of laggards implies Covid continues to be the root cause of many problems despite most countries having emerged into a new post-Covid normality. WHY HAVE SO MANY FAILED TO RECOVER? There are multiple reasons why so many share prices have languished over the past few years and failed to fully recover. For some, financial gains made during the pandemic effectively brought forward earnings growth and this demand momentum has now fizzled away, making it harder for these companies to sustain earnings growth. Builders’ merchant Travis Perkins (TPK) looks to be one of the companies nursing a hangover as home improvement projects become less important as more people go back to the office for work. The ‘do it for me’ scene boomed after lockdown as homeowners wanted tradesmen to spruce up their houses and flats. This trend has since lost momentum and Travis Perkins has also suffered from a downturn in the construction market led by weaker new-build housing. Supply chain problems during the pandemic fired up inflation and Russia’s invasion of Ukraine exacerbated the situation, leading to a rapid 15 February 2024 | SHARES | 39

Daniel Coatsworth: Covid laggards

How major indices have performed since the Covid global market crash 65.0% 50.0%

50.0%

27.0%

NASDAQ (US)

S&P 500 (US)

CAC 40 (France)

25.0%

DAX Xetra (Germany)

3.0%

0.3%

FTSE 100 (UK)

FTSE 350 (UK)

Data 21 February 2020 market close to 9 February 2024 Chart: Shares magazine • Source: SharePad

increase in interest rates. Companies had to take on extra debt during the pandemic and the subsequent action by central banks on interest rates has put pressure on corporate finances. Those having to refinance over the past few years, or those on floating rates, have really felt the pain as the cost of servicing borrowings has shot up. Higher labour and energy costs have eaten into profit margins, particularly for companies lacking the strength to fully pass on these extra costs to customers. Inflation combined with other negative factors created a cocktail of problems, just as Direct Line (DLG) experienced. Having already felt the pressure of high inflation making it expensive to fix cars damaged in accidents, a higher-than-expected amount of insurance claims weighed on Direct Line and left its balance sheet weaker which prompted management to cancel its dividend. These factors pulled down the stock price, explaining why its shares are trading well below pre-Covid levels. NEGATIVE IMPACT OF ISSUING NEW SHARES Companies had to raise new money during the pandemic if they were unsure how long their funds would last. A reduction or complete absence of income meant relying on cash savings and/or debt would weaken their balance sheets and so it became common for companies to issue new shares to raise additional cash. Doing so increased the share count which effectively watered down an existing investor’s ownership. SSP (SSPG) was among the companies to have issued new stock during the pandemic and it is still trading below its pre-Covid levels. The average share count for the travel hub food and drink 40 | SHARES | 15 February 2024

seller went from 458 million in the year ending September 2019 to 697 million two years later. The travel industry has had a lumpy recovery over the past few years. While demand has certainly bounced back, cost pressures have weighed on earnings and certain companies in the sector such as TUI are still trying to pay down large debts amassed during the pandemic. Certain drug companies prospered from the pandemic thanks to developing vaccines. They managed to keep the momentum going until last year when it became clear that income from Covid-related treatments was not the golden goose previously thought. UP AND THEN DOWN Pfizer (PFE:NYSE) and Moderna (MRNA:NASDAQ) have both said in recent months that sales from Covid treatments would be much less in 2024 than in previous years. Shares in Pfizer are now trading below the lowest point in the February/ March 2020 global market crash. As for Moderna, its share price rallied hard for a year after unveiling its Covid vaccine in 2020 but the bulk of those gains have faded away. Nonetheless, its shares still trade above pre-Covid levels. Interestingly, the pharmaceutical sector is experiencing divergent fortunes. While Pfizer and Moderna are in the doldrums, companies with exposure to weight-loss treatments have enjoyed a share price rally. There might be more similarities with the pandemic than you think. Investors initially scrambled to own stocks exposed to Covid treatments in the belief that earnings would soar. The same is now being applied to weight-loss treatments.

Daniel Coatsworth: Covid laggards

Examples of FTSE 350 stocks that haven't recovered from Covid global market crash Company

Examples of S&P 500 stocks that haven't recovered from Covid global market crash

Share price change since the 2020 crash

Company

Share price change since the 2020 crash

Harbour Energy

−87%

VF Corp

−82%

Aston Martin Lagonda

−82%

Warner Bros Discovery

−66%

Mobico

−81%

AT&T

−56%

TUI

−80%

Walgreens Boots Alliance

−56%

Jupiter Fund Management

−80%

Boston Properties

−55%

Hammerson

−75%

PayPal

−53%

Close Brothers

−68%

Match Group

−52%

Marshalls

−66%

Illumina

−52%

International Consolidated Airlines

−65%

American Airlines

−46%

Currys

−65%

Hasbro

−44%

Wood Group

−64%

−41%

Pennon

−63%

Estee Lauder

−33%

Carnival

−63%

Tyson Foods

−31%

Workspace

−61%

Citigroup

−29%

Great Portland Estates

−60%

Bristol Myers Squibb

−26%

SSP

−59%

Whirlpool

−25%

Vodafone

−59%

Pfizer

−23%

Ashmore

−58%

Walt Disney

−20%

Essentra

−58%

Brown Forman

−19%

C&C

−58%

Dollar General

−19%

Data 21 February 2020 market close to 9 February 2024 Table: Shares magazine • Source: SharePad

Elsewhere, spare a thought for asset managers as inflation and the sharp increase in interest rates have created choppy market conditions since the onset of Covid for equity and bondholders. Investors taking money out of investment funds and parking it in cash also created significant outflows for asset managers. The likes of Jupiter (JUP) and Ashmore (ASHM) are nowhere near reclaiming all the share price

territory lost since the start of the Covid market crash. A wider rally in the markets would be helpful to these stocks but otherwise they still face considerable headwinds as sentiment remains poor towards the sector. By Daniel Coatsworth AJ Bell Editor in Chief and Investment Analyst

15 February 2024 | SHARES | 41

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Ask Rachel: Your retirement questions answered

Help: I’ve just started thinking about pension planning and I’m not sure where to start Dealing with a question about working out how much you will need for retirement I have only recently started thinking seriously about my retirement. However, I am paying the maximum I can into my employer’s pension to get matching contributions, and I also pay into my SIPP each month. I am 48 years old and am trying to figure out how much more I need to pay into my SIPP to retire. I have also built up investment ISAs and I have 10 years more to pay off the mortgage on my house. David

Retirement can often seem like a long way off, and planning can naturally feel challenging. But when trying to take on a big task, often the easiest way to solve the problem, is to break the question down into smaller parts. People may want to start by considering when and how they want to stop working. For example, if they want to completely stop at a certain age, or if they would like to ‘run down’ into retirement, possibly by moving to a less stressful job, or working part-time on a consultancy basis.

difficult to work out. Fortunately, help is at hand. The PLSA (Pensions and Lifetime Savings Association) have put together a set of Retirement Living Standards to show people what life in retirement looks like. There are three different levels showing how much money is needed (after tax) to afford a given living standard. The aim of these standards is to build awareness, to help people picture their future and what it costs. The figures are based around a basket of goods and services, for example including the costs of maintaining a house, not just the energy bills, but new furniture, decorating, or employing a cleaner or gardener. The budget also considers how often someone would eat out, if they were running a car, and other things, such as holidays or new clothes. For example, the costs for someone on a moderate retirement living standard include a Tesco food shop with 50% branded products, an £8 bottle of wine each week, a three-star European summer holiday plus a UK weekend break. Whereas those on a comfortable retirement would be upgraded to a Sainsbury’s food shop, a £10 bottle of wine each week, a four-star European summer holiday with additional spending money and three weekend breaks.

WORKING OUT HOW MUCH YOU NEED Once someone knows when, another question is often ‘how much money will I need?’. This can be

WHAT CAN YOU REALISTICALLY EXPECT? The next question is where someone could expect to land on that scale. To work that out people need

Rachel Vahey, AJ Bell Head of Public Policy, says:

RETIREMENT LIVING STANDARDS

MINIMUM

(Covers all your needs, with some left over for fun)

MODERATE

(more financial security and flexibility)

COMFORTABLE

(more financial freedom, some luxuries)

SINGLE

£14,400

London £15,700

£31,300

London £32,800

£43,100

London £45,000

COUPLE

£22,400

London £24,500

£43,100

London £44,900

£59,000

London £61,200

Source: Retirement Living Standards latest report, Pensions and Lifetime Savings Association

15 February 2024 | SHARES | 43

Ask Rachel: Your retirement questions answered

to know any defined benefit pension income they expect to receive plus the total pension pot from defined contribution plans. State pension should always be added in as that is often the bedrock of people’s financial income (£11,500 for this tax year). However, some may want to stop working – or work less – before age 67 or 68 when the state pension kicks in. So some other income may be needed to fill that gap. That could be from other investments, or tax-free cash taken from pensions. The PLSA assume a couple would each need a pension pot of between £280,000 to £450,000 to provide the comfortable standard, between £150,000 to £250,000 each for the moderate standard. But nothing extra for a couple on the minimum standard. (That’s because the figures assume each receive a full state pension, which may not be the case.) Obviously, cashing in other investments will reduce the size of the pension pots required. If someone doesn’t like the look of what they

could expect in retirement, they may want to do something about it. Paying in additional contributions could be a solution, and there are various pension calculators available that help figure out what that could achieve. Finally, this is a tricky area, so a regulated financial adviser will be able to help build a personalised cash flow model and plan.

DO YOU HAVE A QUESTION ON RETIREMENT ISSUES? Send an email to askrachel@ajbell.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.

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44 | SHARES | 15 February 2024

Index Main Market

Beyond Meat

Investment Trusts abrdn Asian Income Fund

abrdn China Investment Company

Eli Lilly

abrdn Property Income

Elite Material

Asia Dragon Trust

Direct Line

Hafnia

JPMorgan China Growth & Income

Experian

Medical Properties Trust

Custodian Property Income

JPMorgan Emerging Markets Fund

Halma

Meta Platforms

Microsoft

JPMorgan Global Emerging Markets Income Trust

HSBC

Fidelity China Special Situations

Jupiter

MicroStrategy

Henderson Far East Income

Mobius Investment Trust

Lloyds

Moderna

ICG Enterprise Trust

Pacific Assets Trust

NatWest

Netflix

Invesco Asia Trust

Picton Property Income

Redrow

JPMorgan Asia Growth & Income

Schroder AsiaPacific Fund

6, 11

Sainsbury's

Nvidia

SSP

Oatly

Templeton Emerging Markets

Tesco

Pandora

Tritax Big Box

Travis Perkins

Pfizer

30, 39

UK Commercial Property

Unilever

Rivian Automotive

Victrex

Salesforce

Virgin Money

Samsung

Watches of Switzerland

Standard Chartered

Tencent

Tesla

Torm

TSMC

abrdn

Builders First Choice

Ashmore

Cameco

BAE Systems

Ebay

Barclays

Barratt Developments

AIM Judges Scientific

Overseas shares Alibaba

Amazon

Apple

ARM

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DISCLAIMER 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, selfselect 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.

15 February 2024 | SHARES | 45