Defend your investments from the eurocrisis
Most investors couldn't be blamed for feeling nervous. We consult the experts on where they should turn.
By Emma Wall
Published: 12:30PM BST 14 May 2010
Investors needed nerves of steel over the past week. Uncertainty over who would take over at No 10 and a euro crisis have given the British and global stock markets the jitters.
The FTSE 100 lost more than 10pc of its value, down to 5,123 last Friday, only to pile the points back on again on Monday morning, even though many expected shares to fall in value.
Markets continued to hold steady, but fund managers are warning investors not to be complacent in light of the coalition Government – uncertainty prevails in Europe and a sovereignty crisis looms, and that's where danger lies.
The European Central Bank is steadying itself for further contagion effects of the Greek crash, Italy's banks are looking unstable and Germany is suffering a crisis of confidence as a recent regional vote undermined Angela Merkel's government.
"Eurozone uncertainty is having a much greater impact on the markets than British politics," said Tom Ewing, manager of Fidelity's UK Growth fund.
To avoid the ramifications of the Eurozone difficulties you do not have to flee the country for opportunities overseas – simply pick domestic stocks or British funds with global exposure.
"The UK market is a global market," Mr Ewing said. "Two thirds of the FTSE 100's earnings come from outside of the UK and the 20 biggest companies, the megacaps, have the minority of their business here.
"Very few of these larger-cap companies are UK focused, Tesco and Centrica remain Britain-centric but the FTSE is not UK plc"
Public perception may be influenced by the businesses that we are aware of in our everyday lives, such as Punch Taverns and M & S, but many British businesses generate the lion's share of their earnings from outside the country.
What's more, the prospect for dividend growth on British companies is looking brighter. According to Capita Registrars, more companies are paying out. Some 186 companies paid a dividend between January and March, up from 161 a year ago. Furthermore, the number of companies increasing payouts outnumbered those who cut. While 56 companies cut or cancelled their dividends, 30 held them unchanged and 102 increased or reinstated their payments.
Cash is doing nothing and gilts are paying 1pc or 2pc, but traditionally defensive stocks, such as Vodafone, Imperial Tobacco and BP are paying at least 5pc.
As you can see from our graphic, only 13pc of Vodafone's 2009 revenue came from Britain. British American Tobacco gained 23pc of its earnings from the Asia-Pacific region, nearly half of AstraZeneca's earnings are from North America and 100pc of Antofagasta's revenue is from three mines in Chile.
The FTSE megacaps seem to offer the best of both worlds. Mr Ewing said: "I am bearish on the UK, but UK stocks offer better corporate governance, better accounting and I can more easily engage with the management. At the same time I can easily tilt my UK stock picks to get exposure to China, India and the rest of Asia."
The British market has shown significant recovery from the low of 3,460 in March last year. Despite setbacks recently and in February this year, we are now nearly 2,000 points higher a year on.
Nigel Thomas, the UK Select Opportunities manager at AXA Framlington, believes this has been an industrial recovery, rather than a consumer one.
"The recovery in the market is due to urbanisation, the introduction of infrastructure and developments in the transport and energy sectors. The VAT increase was helped too, but I don't think consumers are spending over here."
In emerging markets, however, both phenomenons are occurring. As the middle classes expand, consumers are buying more – white goods, electricals and branded food and drinks. GlaxoSmithKline, for example, has moved its focus from the Western world to the developing one, selling toothbrushes, vaccines and Lucozade to India, China and Brazil.
Mr Thomas cites Andrew Whittington, at Glaxo, as prominent in this move and also notes competitor Unilever is doing the same.
There are some areas to avoid when picking megacap stocks. Commodities, in particular, draw criticism from Mr Ewing. "I would stay out of commodities, they are very volatile," he said.
Utilities come under scrutiny from Mr Thomas – he fears that Bank Rate might soon start to tick up and is concerned about the consequences.
"If interest rates go up, utilities, which are linked to gilts, will be hit," he said. "The sector is heavily regulated and, apart from National Grid and maybe some water companies, I would give them a wide berth for a while."
Of course, individual stock picking is always tricky unless you are a hardened day trader. Rather than building up a portfolio of megacaps yourself, why not leave it to the experts? There are plenty of funds that specialise in this sector – both for British and US companies that draw earnings from less-developed economies, and they spread the risk within their holdings, so you don't have to.
Brian Dennehy, of independent advisers DWC, said: "The UK economy and most developed economies have some years of pain ahead as sovereign debt and persistent deficits are tackled. The obvious call to avoid this is to focus on funds invested into UK companies with the bulk of earnings overseas, Newton Higher Income and Psigma Income both have this kind of focus."
Mick Gilligan, of Killik & Co, tips Invesco Perpetual Income, which holds Tesco, Imperial Tobacco, and AstraZeneca, among others. He also highlights Mr Thomas's Axa Framlington UK Select Opportunities fund and Artemis Income, which has stakes in HSBC, Vodafone and GlaxoSmithKline. BlackRock UK Dynamic is also on his list, with holdings in Compass Group, British American Tobacco, and Rio Tinto.
If there are particular stocks you want exposure to, check funds' holdings lists. A fund's fact sheet showing its 10 largest holdings is available from websites such as www.trustnet.co.uk and www.citywire.co.uk
http://www.telegraph.co.uk/finance/personalfinance/investing/shares-and-stock-tips/7722489/Defend-your-investments-from
Tuesday, 18 May 2010
But the original problem - too much debt - hasn't gone away. It has just been transferred to government balance sheets.
Time to give up debt addiction
GREG HOFFMAN
May 17, 2010 - 2:12PM
The first week of May's panicked trading on world financial markets was eerily reminiscent of the post-Lehman chaos of September 2008. Equity markets plummeted, debt markets froze and inter-bank lending rates skyrocketed.
The question is not whether Greece can or cannot pay its debts (without dramatic cuts to government spending, it looks nigh on impossible), but which country is next.
With Spain, Portugal and Ireland in the firing line, it's no wonder banks are reluctant to lend to each other. It's also no surprise that the European Union (EU) and International Monetary Fund (IMF) have orchestrated a 750 billion euros ($1 trillion) rescue package.
The Europeans, being European, took their time. But, not surprisingly for students of human nature or politics, they've taken the easy option and kicked the can down the road. For now, another crisis has been avoided.
In hock
For more than a decade, Western consumers borrowed too much money, ably assisted by financial institutions creating financial products they themselves didn't understand. When the consumers couldn't pay and the banks were about to collapse, governments bailed them out. Remember the calls for a "global stimulus package"'?
Well, it worked in as far as we're not looking down the barrel of another Great Depression. Amongst the recent chaos, statisticians announced that the US economy generated an astonishing 290,000 jobs in April.
But the original problem - too much debt - hasn't gone away. It has just been transferred to government balance sheets. Now, one of those governments can't meet its obligations. So what do we do? We just transfer the problem onto bigger balance sheets. In this case, they're the ones owned by the EU and the IMF.
The buck, however, can't get passed any further. Europe and the US are not too big to fail, but they are too big to bail. It is going to hurt but eventually, eventually, the Western world needs to reduce the overall leverage in the system. And what form might that take?
How to deleverage
McKinsey and Co, a consulting company, recently produced an insightful analysis of 45 prior episodes of deleveraging, 32 of which followed financial crises. The authors conclude that there are four ways to deleverage an economy, and only two of those options are available to the West today.
The two options are inflation and "belt tightening". The latter has been the most common tonic to a bout of indebtedness (16 of the 32 post-crisis deleveraging episodes).
This means cutting back on government spending in order to bring spiralling foreign debt balances under control and the result, in all cases, was a substantial reduction in economic growth.
Inflation might seem like a far more palatable solution and, for creditors, there's no doubt it is. Perhaps best described as "default by stealth", inflation erodes the value of debts and, if you're the supposed recipient of those debts, the value of your assets.
Inflation also reduces the value of all other assets in an economy, creates substantial frictional costs and destroys a country's ability to borrow in its own currency again.
It might be the most palatable option for a leveraged electorate, but for the owners of capital, inflation is a disaster. And once the inflation genie is out of the bottle it can be very difficult to get it back in.
As investors, we should be preparing for one or both of these factors to have a substantial impact on our portfolios over the coming decade. In many ways, however, we should welcome it. It's in everyone's interests to unwind imbalances in global trade and fiscal budgets and so begin the process of Western deleveraging. Otherwise we run the risk of a crisis so big it might portend another Great Depression. From my perspective, the sooner the better.
This article contains general investment advice only (under AFSL 282288).
Greg Hoffman is research director of The Intelligent Investor
http://www.smh.com.au/business/time-to-give-up-debt-addiction-20100517-v84t.html
GREG HOFFMAN
May 17, 2010 - 2:12PM
The first week of May's panicked trading on world financial markets was eerily reminiscent of the post-Lehman chaos of September 2008. Equity markets plummeted, debt markets froze and inter-bank lending rates skyrocketed.
The question is not whether Greece can or cannot pay its debts (without dramatic cuts to government spending, it looks nigh on impossible), but which country is next.
With Spain, Portugal and Ireland in the firing line, it's no wonder banks are reluctant to lend to each other. It's also no surprise that the European Union (EU) and International Monetary Fund (IMF) have orchestrated a 750 billion euros ($1 trillion) rescue package.
The Europeans, being European, took their time. But, not surprisingly for students of human nature or politics, they've taken the easy option and kicked the can down the road. For now, another crisis has been avoided.
In hock
For more than a decade, Western consumers borrowed too much money, ably assisted by financial institutions creating financial products they themselves didn't understand. When the consumers couldn't pay and the banks were about to collapse, governments bailed them out. Remember the calls for a "global stimulus package"'?
Well, it worked in as far as we're not looking down the barrel of another Great Depression. Amongst the recent chaos, statisticians announced that the US economy generated an astonishing 290,000 jobs in April.
But the original problem - too much debt - hasn't gone away. It has just been transferred to government balance sheets. Now, one of those governments can't meet its obligations. So what do we do? We just transfer the problem onto bigger balance sheets. In this case, they're the ones owned by the EU and the IMF.
The buck, however, can't get passed any further. Europe and the US are not too big to fail, but they are too big to bail. It is going to hurt but eventually, eventually, the Western world needs to reduce the overall leverage in the system. And what form might that take?
How to deleverage
McKinsey and Co, a consulting company, recently produced an insightful analysis of 45 prior episodes of deleveraging, 32 of which followed financial crises. The authors conclude that there are four ways to deleverage an economy, and only two of those options are available to the West today.
The two options are inflation and "belt tightening". The latter has been the most common tonic to a bout of indebtedness (16 of the 32 post-crisis deleveraging episodes).
This means cutting back on government spending in order to bring spiralling foreign debt balances under control and the result, in all cases, was a substantial reduction in economic growth.
Inflation might seem like a far more palatable solution and, for creditors, there's no doubt it is. Perhaps best described as "default by stealth", inflation erodes the value of debts and, if you're the supposed recipient of those debts, the value of your assets.
Inflation also reduces the value of all other assets in an economy, creates substantial frictional costs and destroys a country's ability to borrow in its own currency again.
It might be the most palatable option for a leveraged electorate, but for the owners of capital, inflation is a disaster. And once the inflation genie is out of the bottle it can be very difficult to get it back in.
As investors, we should be preparing for one or both of these factors to have a substantial impact on our portfolios over the coming decade. In many ways, however, we should welcome it. It's in everyone's interests to unwind imbalances in global trade and fiscal budgets and so begin the process of Western deleveraging. Otherwise we run the risk of a crisis so big it might portend another Great Depression. From my perspective, the sooner the better.
This article contains general investment advice only (under AFSL 282288).
Greg Hoffman is research director of The Intelligent Investor
http://www.smh.com.au/business/time-to-give-up-debt-addiction-20100517-v84t.html
Financial success? Debt-free
Many Americans have redefined the meaning of financial success in the post recession era, to be debt-free.
Big returns come from small caps
Big returns come from small caps
John Collett asks the experts for their top investment tips among our smaller companies.
The accounts of our biggest listed companies are pored over endlessly by an army of analysts, which makes it unlikely that investors are going to come across hidden value among these giants.
Smaller medium-sized companies, on the other hand, are usually less visible so they provide potential to uncover hidden value and big capital gains. For investors who are patient and prepared to invest over the long term, smaller companies can add some zing to share portfolios.
Money asked leading small-cap fund managers and analysts for their tips from among those market minnows with well-established track records and a history of paying reliable dividends. Like any sharemarket investments, there are always risks. And smaller companies come with more risks than large companies. Their earnings tend to be the most responsive to economic conditions - both good and bad.
Shares should never be held in isolation but in a diversified portfolio. Many investors may find a better way to get exposure to smaller companies is to invest with a specialist smaller companies fund manager. Professional fund managers run portfolios holding dozens of smaller companies, providing small investors with instant diversification.
The stocks nominated by fund managers and analysts cover the spectrum of the Australian economy - retailers, financial services, technology - but there are no resources stocks. Smaller resources stocks may be terrific investments but are too speculative for novice investors.
TURNAROUND STORY
The managing director of Perennial Value Management, John Murray, nominates OrotonGroup, which designs and makes luxury handbags, leather goods and accessories. Murray is a fan of the managing director, Sally Macdonald, who since her appointment in 2006 has turned the struggling retailer around. The company has expanded product lines and refocused on key brands including Polo Ralph Lauren and Oroton. Murray still has the Oroton briefcase he bought in 1991 and says the brand is "classic value fashion" - quality fashion that is not too expensive.
"We are believers in Oroton and growth will be driven by new stores and product lines like lingerie and menswear," Murray says. Perennial first bought Oroton shares for $3 each in 2007. The shares are now trading at about $7. As a luxury fashion retailer, the company's sales are vulnerable to down-turns in the economy. A little over a year ago, towards the tail-end of the GFC, Oroton shares dipped to $2.80 and in the year since, Oroton's share price has increased 250 per cent.
Before it will invest, Perennial has to be convinced of the strength of a company's balance sheet. And Oroton has good financial strength with low debt, Murray says. On a share price-to-earnings multiple of 11 times, Oroton shares are not cheap but they are still reasonable value, he says.
PIPING HOT
Reece Australia, a plumbing supplier, has many of the attributes the small companies fund manager and chief investment officer of Celeste Funds Management, Frank Villante, likes to see. House prices are rising and spending on renovation is healthy, which means Reece is "fantastically positioned" to take advantage of the trend.
Reece is a conservatively managed company, owned by the same family since the 1930s, and family interests own about 70 per cent of Reece shares. Australian corporate history is littered with examples of majority owners treating minority shareholders shabbily. However Villante says the Reece family has a long history of treating such investors well.
The company has a market capitalisation of about $2.5 billion, which puts it just inside top-100 companies. The company owns about $250 million of land and buildings and Reece's management takes the view that property in the right areas can be an attractive long-term investment. Reece is No.1 in terms of revenue, number of stores and on just about every measure Villante can find. Reece has no debt on its balance sheet; it is carrying about $60 million in cash. Villante is expecting earnings to grow at more than 15 per cent a year between 2011 and 2014.
WEB WONDER
The co-founder of Smallco Investment Manager, Rob Hopkins, is excited about the prospects of the internet sector.
Hopkins particularly likes the well-established internet employment website, Seek, which he says has a "very impressive" management team led by the Bassat brothers who, together with Matthew Rockman, founded Seek in 1997. Rockman left the company in 2006.
Seek expanded into New Zealand and has investments in employment websites in China, Brazil and Malaysia. It owns more than 40 per cent in Zhaopin, one of China's three leading online employment sites.
Seek shares have had a big run. A couple of years ago the stock was $2; it is now $8 and is on a price-to-earnings multiple of 23 times, which is expensive, Hopkins says. With a market capitalisation of $2.8 billion, it is not a market minnow and is just inside the top-100 companies but still has plenty of growth potential. "We expect earnings-per-share growth of more than 40 per cent over the next year," Hopkins says. In internet commerce there is not much room for No.2 and No.3 players. "People looking for a job go to a site where they know all of the jobs are advertised," Hopkins says, adding that the internet sector has plenty of examples where the No.1 player makes very good returns, while the No.2 player is just profitable and the third-placed player loses money.
GRIM REAPER
Fortune favours the grave with InvoCare Limited, which provides funeral homes, burial services, cemeteries and crematoria around Australia and in Singapore. Invocare operates two national brands, White Lady Funerals and Simplicity, and is the only funeral services provider that has a national reach.
InvoCare listed in 2003, having been built up during the 1990s under the ownership of a US funeral services operator and private equity investors that have since sold their shares in the company.
"It's amazing, what we call the death-care industry," says Brian Eley, co-founder of Eley Griffiths Group.
"The number of deaths is rising as the population increases and ages. You have that demographic trend, which is positive for the stock."
InvoCare has been a very good performer, Eley says: The stock is not "super cheap" and it never will be because people know that it's such as good business. The fragmented nature of the market presents plenty of opportunities for the company to grow through acquisitions, he says.
As people become wealthier they tend to spend more on their relatives' funerals, Eley says, and a growing part of the business is pre-paid funerals. He also says the funeral care industry has a lot of pricing power, which means the industry can increase prices by a bit more than inflation with little resistance from customers.
InvoCare has prices that are in the mid-range, which benefits the company as the mid-range is where most of the market is, Eley says.
TICKET CLIPPER
Funds management is a wonderful business because it is so scalable. Taking a percentage of funds under management - clipping the ticket, as it is known - has been the source of riches for banks and insurances.
IOOF, a funds management and investment platform administrator, is a very well-managed company, says Steve Black, a fund manager at Pengana Capital. It has a market capitalisation of about $1.3 billion, which puts it at the larger end of the small-cap companies. It pays out about 80 per cent of its profits as dividends and is yielding about 5.5 per cent, fully franked. "It has done very well but we still see very strong upside in it," Black says. "It is a stock that has not been well understood by analysts, which is why it is starting to perform now as more analysts start to recognise that these guys are delivering really good results."
IOOF, led by managing director Chris Kelaher, is one of the big-five platform providers. These are the administration platforms used by financial planners, which provide their clients with consolidated reports on portfolio performances and taxes and enable easy switching between investments. The platform owner levies a fee that is a percentage based on the assets. IOOF has been acquiring platforms and has its own financial planning network. IOOF is considered a possible takeover target by one of the big banks or insurers.
HEALTHY PERFORMER
Blackmores, the natural health remedies company, has very high returns on equity, which analysts say is a good thing because it shows a company is making good use of shareholder funds.
Whether it's arthritis, joint, bone and muscle pain or "brain health", Blackmores, which was started in 1938 by Maurice Blackmore, has a pill for everything.
Greg Canavan, a sharemarket analyst and editor of Sound Money. Sound Investments, a weekly report on the sharemarket, says Blackmores is a "nice little smaller cap" that is tapping into a growing market for natural remedies. It has a strong business in Australia and has established a presence in Thailand and Malaysia. The company distributes its products mainly through pharmacies and supermarkets.
Canavan says $23 a share is a little expensive and would prefer to buy at $20. "In 10 years' time, I think Blackmores will be a lot bigger company than it is now," he says.
http://www.smh.com.au/news/business/money/investment/big-returns-come-from-small-caps/2010/05/11/1273343328362.html?page=fullpage#contentSwap1
John Collett asks the experts for their top investment tips among our smaller companies.
The accounts of our biggest listed companies are pored over endlessly by an army of analysts, which makes it unlikely that investors are going to come across hidden value among these giants.
Smaller medium-sized companies, on the other hand, are usually less visible so they provide potential to uncover hidden value and big capital gains. For investors who are patient and prepared to invest over the long term, smaller companies can add some zing to share portfolios.
Money asked leading small-cap fund managers and analysts for their tips from among those market minnows with well-established track records and a history of paying reliable dividends. Like any sharemarket investments, there are always risks. And smaller companies come with more risks than large companies. Their earnings tend to be the most responsive to economic conditions - both good and bad.
Shares should never be held in isolation but in a diversified portfolio. Many investors may find a better way to get exposure to smaller companies is to invest with a specialist smaller companies fund manager. Professional fund managers run portfolios holding dozens of smaller companies, providing small investors with instant diversification.
The stocks nominated by fund managers and analysts cover the spectrum of the Australian economy - retailers, financial services, technology - but there are no resources stocks. Smaller resources stocks may be terrific investments but are too speculative for novice investors.
TURNAROUND STORY
The managing director of Perennial Value Management, John Murray, nominates OrotonGroup, which designs and makes luxury handbags, leather goods and accessories. Murray is a fan of the managing director, Sally Macdonald, who since her appointment in 2006 has turned the struggling retailer around. The company has expanded product lines and refocused on key brands including Polo Ralph Lauren and Oroton. Murray still has the Oroton briefcase he bought in 1991 and says the brand is "classic value fashion" - quality fashion that is not too expensive.
"We are believers in Oroton and growth will be driven by new stores and product lines like lingerie and menswear," Murray says. Perennial first bought Oroton shares for $3 each in 2007. The shares are now trading at about $7. As a luxury fashion retailer, the company's sales are vulnerable to down-turns in the economy. A little over a year ago, towards the tail-end of the GFC, Oroton shares dipped to $2.80 and in the year since, Oroton's share price has increased 250 per cent.
Before it will invest, Perennial has to be convinced of the strength of a company's balance sheet. And Oroton has good financial strength with low debt, Murray says. On a share price-to-earnings multiple of 11 times, Oroton shares are not cheap but they are still reasonable value, he says.
PIPING HOT
Reece Australia, a plumbing supplier, has many of the attributes the small companies fund manager and chief investment officer of Celeste Funds Management, Frank Villante, likes to see. House prices are rising and spending on renovation is healthy, which means Reece is "fantastically positioned" to take advantage of the trend.
Reece is a conservatively managed company, owned by the same family since the 1930s, and family interests own about 70 per cent of Reece shares. Australian corporate history is littered with examples of majority owners treating minority shareholders shabbily. However Villante says the Reece family has a long history of treating such investors well.
The company has a market capitalisation of about $2.5 billion, which puts it just inside top-100 companies. The company owns about $250 million of land and buildings and Reece's management takes the view that property in the right areas can be an attractive long-term investment. Reece is No.1 in terms of revenue, number of stores and on just about every measure Villante can find. Reece has no debt on its balance sheet; it is carrying about $60 million in cash. Villante is expecting earnings to grow at more than 15 per cent a year between 2011 and 2014.
WEB WONDER
The co-founder of Smallco Investment Manager, Rob Hopkins, is excited about the prospects of the internet sector.
Hopkins particularly likes the well-established internet employment website, Seek, which he says has a "very impressive" management team led by the Bassat brothers who, together with Matthew Rockman, founded Seek in 1997. Rockman left the company in 2006.
Seek expanded into New Zealand and has investments in employment websites in China, Brazil and Malaysia. It owns more than 40 per cent in Zhaopin, one of China's three leading online employment sites.
Seek shares have had a big run. A couple of years ago the stock was $2; it is now $8 and is on a price-to-earnings multiple of 23 times, which is expensive, Hopkins says. With a market capitalisation of $2.8 billion, it is not a market minnow and is just inside the top-100 companies but still has plenty of growth potential. "We expect earnings-per-share growth of more than 40 per cent over the next year," Hopkins says. In internet commerce there is not much room for No.2 and No.3 players. "People looking for a job go to a site where they know all of the jobs are advertised," Hopkins says, adding that the internet sector has plenty of examples where the No.1 player makes very good returns, while the No.2 player is just profitable and the third-placed player loses money.
GRIM REAPER
Fortune favours the grave with InvoCare Limited, which provides funeral homes, burial services, cemeteries and crematoria around Australia and in Singapore. Invocare operates two national brands, White Lady Funerals and Simplicity, and is the only funeral services provider that has a national reach.
InvoCare listed in 2003, having been built up during the 1990s under the ownership of a US funeral services operator and private equity investors that have since sold their shares in the company.
"It's amazing, what we call the death-care industry," says Brian Eley, co-founder of Eley Griffiths Group.
"The number of deaths is rising as the population increases and ages. You have that demographic trend, which is positive for the stock."
InvoCare has been a very good performer, Eley says: The stock is not "super cheap" and it never will be because people know that it's such as good business. The fragmented nature of the market presents plenty of opportunities for the company to grow through acquisitions, he says.
As people become wealthier they tend to spend more on their relatives' funerals, Eley says, and a growing part of the business is pre-paid funerals. He also says the funeral care industry has a lot of pricing power, which means the industry can increase prices by a bit more than inflation with little resistance from customers.
InvoCare has prices that are in the mid-range, which benefits the company as the mid-range is where most of the market is, Eley says.
TICKET CLIPPER
Funds management is a wonderful business because it is so scalable. Taking a percentage of funds under management - clipping the ticket, as it is known - has been the source of riches for banks and insurances.
IOOF, a funds management and investment platform administrator, is a very well-managed company, says Steve Black, a fund manager at Pengana Capital. It has a market capitalisation of about $1.3 billion, which puts it at the larger end of the small-cap companies. It pays out about 80 per cent of its profits as dividends and is yielding about 5.5 per cent, fully franked. "It has done very well but we still see very strong upside in it," Black says. "It is a stock that has not been well understood by analysts, which is why it is starting to perform now as more analysts start to recognise that these guys are delivering really good results."
IOOF, led by managing director Chris Kelaher, is one of the big-five platform providers. These are the administration platforms used by financial planners, which provide their clients with consolidated reports on portfolio performances and taxes and enable easy switching between investments. The platform owner levies a fee that is a percentage based on the assets. IOOF has been acquiring platforms and has its own financial planning network. IOOF is considered a possible takeover target by one of the big banks or insurers.
HEALTHY PERFORMER
Blackmores, the natural health remedies company, has very high returns on equity, which analysts say is a good thing because it shows a company is making good use of shareholder funds.
Whether it's arthritis, joint, bone and muscle pain or "brain health", Blackmores, which was started in 1938 by Maurice Blackmore, has a pill for everything.
Greg Canavan, a sharemarket analyst and editor of Sound Money. Sound Investments, a weekly report on the sharemarket, says Blackmores is a "nice little smaller cap" that is tapping into a growing market for natural remedies. It has a strong business in Australia and has established a presence in Thailand and Malaysia. The company distributes its products mainly through pharmacies and supermarkets.
Canavan says $23 a share is a little expensive and would prefer to buy at $20. "In 10 years' time, I think Blackmores will be a lot bigger company than it is now," he says.
http://www.smh.com.au/news/business/money/investment/big-returns-come-from-small-caps/2010/05/11/1273343328362.html?page=fullpage#contentSwap1
Credit Suisse says HLB's offer price for EON Cap too low
Tuesday May 18, 2010
Credit Suisse says HLB's offer price for EON Cap too low
By RISEN JAYASEELAN
PETALING JAYA: Credit Suisse Securities (M) Sdn Bhd has deemed Hong Leong Bank Bhd's (HLB) offer price for the assets and liabilities of EON Capital Bhd (EON Cap) too low.
This has put the board of directors of EON Cap in a quandary, sources said. EON Cap's board met yesterday to discuss Credit Suisse's opinion on the offer.
The board had requested for its shares to be suspended from trading, pending an announcement related to the offer.
EON Cap said late yesterday evening that its board meeting had been adjourned “pending further clarification from independent financial adviser Credit Suisse.”
But a party familiar with the deal said with Credit Suisse telling the board that the offer was too low, the board has been put in a tough spot as to what to tell shareholders.
“The board had already said it was going to present the offer to shareholders. Does it now also tell shareholders not to accept the offer?” Sources say the situation is tenuous because HLB has no intention of raising its bid.
From its due diligence of EON Cap, HLB may be inclined to ask EON Cap to make some additional provisioning as a condition to the deal, stemming from what it (HLB) deems as unrecoverable loans.
This could mean that the price HLB is willing to pay for EON Cap may be lower than the RM7.20 per share it last made.
EON Cap is said to be disappointed that HLB has not recognised certain deferred tax assets in its valuation of the former, sources say.
HLB's offer is also priced at around 1.4 times the book value of EON Bank, which some analysts deem as low in light of other banking merger and acquisitions done at higher multiples.
The bottom line is that at present, HLB's offer is the only one on the table for EON Cap's shareholders.
Current market conditions are likely to make it difficult for other bidders, such as Affin Bank Bhd, to raise funds to acquire EON Cap.
If this deal falls through, the next bidder for EON Cap may no longer have the luxury of having a lower threshold of shareholder approval for the deal to go through.
http://biz.thestar.com.my/news/story.asp?file=/2010/5/18/business/6282935&sec=business
Related:
Comparative analysis of Malaysian Banking Stocks (16.5.2010)
Credit Suisse says HLB's offer price for EON Cap too low
By RISEN JAYASEELAN
PETALING JAYA: Credit Suisse Securities (M) Sdn Bhd has deemed Hong Leong Bank Bhd's (HLB) offer price for the assets and liabilities of EON Capital Bhd (EON Cap) too low.
This has put the board of directors of EON Cap in a quandary, sources said. EON Cap's board met yesterday to discuss Credit Suisse's opinion on the offer.
The board had requested for its shares to be suspended from trading, pending an announcement related to the offer.
EON Cap said late yesterday evening that its board meeting had been adjourned “pending further clarification from independent financial adviser Credit Suisse.”
But a party familiar with the deal said with Credit Suisse telling the board that the offer was too low, the board has been put in a tough spot as to what to tell shareholders.
“The board had already said it was going to present the offer to shareholders. Does it now also tell shareholders not to accept the offer?” Sources say the situation is tenuous because HLB has no intention of raising its bid.
From its due diligence of EON Cap, HLB may be inclined to ask EON Cap to make some additional provisioning as a condition to the deal, stemming from what it (HLB) deems as unrecoverable loans.
This could mean that the price HLB is willing to pay for EON Cap may be lower than the RM7.20 per share it last made.
EON Cap is said to be disappointed that HLB has not recognised certain deferred tax assets in its valuation of the former, sources say.
HLB's offer is also priced at around 1.4 times the book value of EON Bank, which some analysts deem as low in light of other banking merger and acquisitions done at higher multiples.
The bottom line is that at present, HLB's offer is the only one on the table for EON Cap's shareholders.
Current market conditions are likely to make it difficult for other bidders, such as Affin Bank Bhd, to raise funds to acquire EON Cap.
If this deal falls through, the next bidder for EON Cap may no longer have the luxury of having a lower threshold of shareholder approval for the deal to go through.
http://biz.thestar.com.my/news/story.asp?file=/2010/5/18/business/6282935&sec=business
Related:
Comparative analysis of Malaysian Banking Stocks (16.5.2010)
Monday, 17 May 2010
Comparative Industry and Company Financial Ratios
Just looking at a single ratio does not really tell you much about a company. You also need a standard of comparison, a benchmark. There are three principal benchmarks used in ratio analysis.
Financial ratios can be compared to the:
1. Historical comparison.
The first useful benchmark is history.
2. Competitor comparison.
The second useful ratio benchmark is comparing a specific company ratio with that of a competitor.
3. Industry comparison.
The third type of benchmark is an industry-wide comparison.
Note that there can be large differences in ratio values between industries and companies.
Review the chart. What do the ratios tell us about companies and industries?
Financial ratios can be compared to the:
- ratios of the company in prior years,
- ratios of another company, and
- industry average ratios.
1. Historical comparison.
The first useful benchmark is history.
- How has the ratio changed over time?
- Are things getting better or worse for the company?
- Is gross margin going down, indicating that costs are rising faster than prices can be increased?
- Are receivable days lengthening, indicating there are payment problems?
2. Competitor comparison.
The second useful ratio benchmark is comparing a specific company ratio with that of a competitor.
- For example, if a company has a significantly higher return on assets than a competitor, it strongly suggests that the company manages its resources better.
3. Industry comparison.
The third type of benchmark is an industry-wide comparison.
- Industry-wide average ratios are published and can give an analyst a good starting point in assessing a particular company's financial performance. Click here for a chart showing various ratios for a variety of companies in different industries:
Note that there can be large differences in ratio values between industries and companies.
Review the chart. What do the ratios tell us about companies and industries?
Comparative analysis of Malaysian Banking Stocks (16.5.2010)
Comparative analysis of Malaysian Banking Stocks
A quick look at Malaysian Banking Stocks (16.5.2010)
http://spreadsheets.google.com/pub?key=t3v2VY0rD9DcGSjmVkAV-gQ&output=html
A quick look at Malaysian Banking Stocks (16.5.2010)
http://spreadsheets.google.com/pub?key=t3v2VY0rD9DcGSjmVkAV-gQ&output=html
Sunday, 16 May 2010
A quick look at BIMB (15.5.2010)
A quick look at BIMB (15.5.2010)
http://spreadsheets.google.com/pub?key=t3svj1f7qc6pJcqKn-FNG6A&output=html
A quick look at Affin Holdings (15.5.2010)
A quick look at Affin Holdings (15.5.2010)
http://spreadsheets.google.com/pub?key=thaNOxyHlsOChhginG8Bq2Q&output=html
A quick look at Alliance Financial Group (15.5.2010)
A quick look at Alliance Financial Group (15.5.2010)
http://spreadsheets.google.com/pub?key=txT0pF1TSK-OQtTDi3QdDdw&output=html
A quick look at Hong Leong Bank (15.5.2010)
A quick look at Hong Leong Bank (15.5.2010)
http://spreadsheets.google.com/pub?key=tycFD1BTkA-RNW-zclpXrIw&output=html
Investor's Checklist: Banks
1. The business model of banks can be summed up as the management of three types of risk:
3. Different components of banks' income statements can show volatile swings depending on a number of factors such as the interest rate and credit environment. However, well-run banks should generally show steady net income growth through varying environments. Investors are well served to seek out firms with a good track record.
4. Well-run banks focus heavily on matching the duration of assets with the duration of liabilities. For instance, banks should fund long-term loans with liabilities such as long-term debt or deposits, not short-term funding. Avoid lenders that don't.
5. Banks have numerous competitive advantages. They can borrow money at rates lower than even the federal government. There are large economies of scale in this business derived from having an established distribution network. The capital-intensive nature of banking deters new competitors. Customer-switching costs are high, and there are limited barriers to exit money-losing endeavors.
6. Investors should seek out banks with
The Five Rules for Successful Stock Investing
by Pat Dorsey
- credit,
- liquidity and
- interest rate.
3. Different components of banks' income statements can show volatile swings depending on a number of factors such as the interest rate and credit environment. However, well-run banks should generally show steady net income growth through varying environments. Investors are well served to seek out firms with a good track record.
4. Well-run banks focus heavily on matching the duration of assets with the duration of liabilities. For instance, banks should fund long-term loans with liabilities such as long-term debt or deposits, not short-term funding. Avoid lenders that don't.
5. Banks have numerous competitive advantages. They can borrow money at rates lower than even the federal government. There are large economies of scale in this business derived from having an established distribution network. The capital-intensive nature of banking deters new competitors. Customer-switching costs are high, and there are limited barriers to exit money-losing endeavors.
6. Investors should seek out banks with
- a strong equity base,
- consistently solid ROEs and ROAs, and
- an ability to grow revenues at a steady pace.
The Five Rules for Successful Stock Investing
by Pat Dorsey
Click here for more discussion on this topic:
Market status of countries 'fall' into three categories: Frontier, Emerging and Developed
Received this interesting globe map in my email. TQ
What we are interested in and would like to discover for ourselves are the Frontier Markets. Vietnam, Sri Lanka and Croatia to name a few. Let's discover Vietnam!
If we let the market status of countries 'fall' into three categories i.e. Frontier, Emerging and Developed, it would look exactly like the one on the left. According to FTSE Group a provider of economic and financial data, this is done on the basis of their economic size, wealth, quality of markets, depth and breadth of markets.
What we are interested in and would like to discover for ourselves are the Frontier Markets. Vietnam, Sri Lanka and Croatia to name a few. Let's discover Vietnam!
A quick look at Eon Capital (15.5.2010)
A quick look at Eon Capital (15.5.2010)
http://spreadsheets.google.com/pub?key=tSgfLNvcIzSMhLmOD_nYDcQ&output=html
Saturday, 15 May 2010
Understanding Leverage
Leverage is easily expressed as a ratio: assets/equity
Most banks equity:asset ratio is around 8% to 9%. Thus, the average bank has a leverage ratio in the range of 12 to 1 or so, compared to 2 to 1 or 3 to 1 for the average company.
Given the size of the average bank's asset base relative to equity, it's not difficult to imagine a doomsday scenario.
Leverage isn't evil. It can enhance returns, but there are inherent dangers.
For example, if you buy a $100,000 home with $8,000 down, your equity is 8%. In other words, you're leveraged 12.5 to 1, which is pretty typical for a bank. Now, if something atypical happens and the value of your home suddenly drops to $90,000 (just 10%), your equity is gone. You still owe the lender $92,000 but the house isn't worth that much. You could walk away from the house $8,000 poorer and still owe $2,000. Highly leveraged businesses put themselves in a similar situation.
This doesn't mean all leverage is bad. As a rule, the more liquid a company's balance sheet, the more the company can be leveraged because its assets can be quickly converted to cash at a fair price.
Most banks equity:asset ratio is around 8% to 9%. Thus, the average bank has a leverage ratio in the range of 12 to 1 or so, compared to 2 to 1 or 3 to 1 for the average company.
Given the size of the average bank's asset base relative to equity, it's not difficult to imagine a doomsday scenario.
- Earnings serve as the first layer of protection against credit losses.
- If losses in a given period exceed earnings, a reserve account on the balance sheet serves as a second layer of protection. Banks must have a pool of reserves to protect shareholders, who hold only a small stake in the company because of the leverage employed.
- If losses in a period exceed reserves, the difference comes directly from shareholders' equity. When losses at a bank start destroying equity, turn out the lights.
Leverage isn't evil. It can enhance returns, but there are inherent dangers.
For example, if you buy a $100,000 home with $8,000 down, your equity is 8%. In other words, you're leveraged 12.5 to 1, which is pretty typical for a bank. Now, if something atypical happens and the value of your home suddenly drops to $90,000 (just 10%), your equity is gone. You still owe the lender $92,000 but the house isn't worth that much. You could walk away from the house $8,000 poorer and still owe $2,000. Highly leveraged businesses put themselves in a similar situation.
This doesn't mean all leverage is bad. As a rule, the more liquid a company's balance sheet, the more the company can be leveraged because its assets can be quickly converted to cash at a fair price.
What should investors look for when investing in banks and other financiers?
What should investors look for when investing in banks and other financiers?
Because their entire business - their strengths and their opportunities - is built on risk, it's a good idea to focus on conservatively managed institutions that consistently deliver solid - but not knockout - profits. Here's a list of some major metrics to consider.
Strong Capital Base
A strong capital base is the number one issue to consider before investing in a lender. Investors can look at several metrics.
These ratios vary depending on the type of lending an institution does, as well as the point of the business cycle in which they are taken.
Return on Equity and Return on Assets
These metrics are the de facto standards for gauging bank profitability.
Investors should look for banks that can consistently generate mid- to high- teen returns on equity.
Ironically, investors should be concerned if a bank earns a level not only too far below this industry benchmark, but also too far above it. After all, many fast-growing lenders have thrown off 30% or more ROEs, just by provisioning too little for loan losses. Remember, it can be very easy to boost bank's earnings in the short term by under-provisioning or leveraging up the balance sheet, but this can be unduly risky over the long term. For this reason, it's good to see a high level of return on assets, as well.
For banks, a top ROA would be in the 1.2 % to 1.4% range.
Efficiency Ratios
The efficiency ratio measures non-interest expense, or operating costs, as a percentage of net revenues.
Basically, it tells you how efficiently the bank is managed. Many good banks have efficiency ratios under 55% (lower is better).
Look for banks with strong efficiency ratios as evidence that costs are being kept in check.
Net Interest Margins
Net interest margin looks at net interest income as a percentage of average earning assets.
Virtually all banks report net interest margins because it measures lending profitability.
You'll see a wide variety of net interest margins depending on the type of lending a bank engages in, but most banks' margins fall into the 3% to 4% range.
Track margins over time to get a feel for the trend - if margins are rising, check to see what's been happening with interest rates. (Falling rates generally push up net interest margins.)
In addition, examine the bank's loan categories to see whether the bank has been moving into different lending areas. For example, credit card loans typically carry much higher interest rates than residential mortgages, but credit card lending is also riskier than lending money secured by a house.
Strong Revenues
Historically, many of the best-performing bank investments have been those that have proven capable of above-average revenue growth. Wide margins have generally been elusive in a commodity industry that competes on service quality. But, some of the most successful banks have been able to cross-sell new services, which adds to fee income, or pay a slightly lower rate on deposits and charge a slightly higher rate on loans.
Keep an eye on three major metrics:
(1) net interest margin,
(2) fee income as a percent of total revenues, and
(3) fee income growth.
The net interest margin can vary widely depending on economic factors, the interest rate environment, and the type of business the lender focuses on, so it's best to compare the bank you're interested in to other similar institutions. Fee income made up 42% of bank industry revenue in 2001 and has grown at an 11.6% compound annual rate over the past two decades. As always, examine the number over a period of time to get a sense of the trend.
Price to Book
Because banks' balance sheets consist mostly of financial assets with varying degrees of liquidity, book value is a good proxy for the value of a banking stock.
Typically, big banks have traded in the two or three times book range over the past decade; regionals have often traded for less than that.
A solid bank trading at less than two times book value is often worth a closer look. Remember, there is almost always a reason the bank is selling at a discount, so be sure you understand the risks. On the other hand, some banks are worth three times book value or more, but we would exercise caution before paying that much.
The Five Rules for Successful Stock Investing
by Pat Dorsey
Summary:
Equity to assets ratio (capital ratio): 8% to 9% or greater
Loan loss reserve: High level of loan loss reserve relative to nonperforming assets.
ROE: mid- to high- teen ROE
ROA: 1.2% to 1.4% or higher
Efficiency ratios = (noninterest expense or operating costs)/(net revenues): < 55% (lower is better)
Net Interest Margins = net interest income / average earning assets: 3% to 4% range
Strong above-average Revenue growth: Look at net interest margin + fee income as percentage of total revenue + fee income growth
Price-to-Book: Big banks often trade at P/B 2 x to 3 x range.
Because their entire business - their strengths and their opportunities - is built on risk, it's a good idea to focus on conservatively managed institutions that consistently deliver solid - but not knockout - profits. Here's a list of some major metrics to consider.
Strong Capital Base
A strong capital base is the number one issue to consider before investing in a lender. Investors can look at several metrics.
- The simplest is the equity to assets ratio; the higher, the better. The level of capital should vary with each institution based on a number of factors including the riskiness of its loans. Most of the bigger banks have capital ratios in the 8% to 9% range.
- Also look for a high level of loan loss reserve relative to nonperforming assets.
These ratios vary depending on the type of lending an institution does, as well as the point of the business cycle in which they are taken.
Return on Equity and Return on Assets
These metrics are the de facto standards for gauging bank profitability.
Investors should look for banks that can consistently generate mid- to high- teen returns on equity.
Ironically, investors should be concerned if a bank earns a level not only too far below this industry benchmark, but also too far above it. After all, many fast-growing lenders have thrown off 30% or more ROEs, just by provisioning too little for loan losses. Remember, it can be very easy to boost bank's earnings in the short term by under-provisioning or leveraging up the balance sheet, but this can be unduly risky over the long term. For this reason, it's good to see a high level of return on assets, as well.
For banks, a top ROA would be in the 1.2 % to 1.4% range.
Efficiency Ratios
The efficiency ratio measures non-interest expense, or operating costs, as a percentage of net revenues.
Basically, it tells you how efficiently the bank is managed. Many good banks have efficiency ratios under 55% (lower is better).
Look for banks with strong efficiency ratios as evidence that costs are being kept in check.
Net Interest Margins
Net interest margin looks at net interest income as a percentage of average earning assets.
Virtually all banks report net interest margins because it measures lending profitability.
You'll see a wide variety of net interest margins depending on the type of lending a bank engages in, but most banks' margins fall into the 3% to 4% range.
Track margins over time to get a feel for the trend - if margins are rising, check to see what's been happening with interest rates. (Falling rates generally push up net interest margins.)
In addition, examine the bank's loan categories to see whether the bank has been moving into different lending areas. For example, credit card loans typically carry much higher interest rates than residential mortgages, but credit card lending is also riskier than lending money secured by a house.
Strong Revenues
Historically, many of the best-performing bank investments have been those that have proven capable of above-average revenue growth. Wide margins have generally been elusive in a commodity industry that competes on service quality. But, some of the most successful banks have been able to cross-sell new services, which adds to fee income, or pay a slightly lower rate on deposits and charge a slightly higher rate on loans.
Keep an eye on three major metrics:
(1) net interest margin,
(2) fee income as a percent of total revenues, and
(3) fee income growth.
The net interest margin can vary widely depending on economic factors, the interest rate environment, and the type of business the lender focuses on, so it's best to compare the bank you're interested in to other similar institutions. Fee income made up 42% of bank industry revenue in 2001 and has grown at an 11.6% compound annual rate over the past two decades. As always, examine the number over a period of time to get a sense of the trend.
Price to Book
Because banks' balance sheets consist mostly of financial assets with varying degrees of liquidity, book value is a good proxy for the value of a banking stock.
Typically, big banks have traded in the two or three times book range over the past decade; regionals have often traded for less than that.
A solid bank trading at less than two times book value is often worth a closer look. Remember, there is almost always a reason the bank is selling at a discount, so be sure you understand the risks. On the other hand, some banks are worth three times book value or more, but we would exercise caution before paying that much.
The Five Rules for Successful Stock Investing
by Pat Dorsey
Summary:
Equity to assets ratio (capital ratio): 8% to 9% or greater
Loan loss reserve: High level of loan loss reserve relative to nonperforming assets.
ROE: mid- to high- teen ROE
ROA: 1.2% to 1.4% or higher
Efficiency ratios = (noninterest expense or operating costs)/(net revenues): < 55% (lower is better)
Net Interest Margins = net interest income / average earning assets: 3% to 4% range
Strong above-average Revenue growth: Look at net interest margin + fee income as percentage of total revenue + fee income growth
Price-to-Book: Big banks often trade at P/B 2 x to 3 x range.
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