Storm Clouds

‘Acknowledging the risks but mindful of the opportunities’

Last week Storm Imogen caused chaos across Britain. However a storm appears to be hitting global financial markets at the moment, with gusts of wind coming from everywhere. These gusts are uprooting trees in certain regions around the globe and within the banking sector. This has been a global phenomenon however, European banks have been particularly harshly hit due to concerns about further debt default and a slowing global economy. The fear of a further financial crisis has naturally unnerved markets. Unlike the Met office, no one has given the current correction a name – yet!

When a storm hits all trees are going to get blown around, but it is not the size or the age of the tree that matters but more those that are favourably positioned, have been well maintained and with the strongest roots that survive. Which leads us into our core overriding investment principle. Those businesses with the strongest cash flow and balance sheets will weather the storm and potentially come out stronger. Whilst not immune from global financial short-term volatility, they remain better placed to withstand adverse conditions and deliver growth in their business and increasing shareholder returns, notably dividends.

Never a quiet day in the office

BREXIT, Zika virus, China, currency devaluation, European migration crisis, interest rates, global banking sector risk and oil and commodity volatility, just to name a few recent challenges for investors. We have to remain alert.

We are risk conscious and continually assess all our investments. Each day we review global macro-economic developments and the implications for regions, markets and sectors down to an individual company level.

We are not slaves to indices but are sector aware. For example we have been significantly underweight both the oil and mining sectors which were the big losers of 2015. In 2016, the global banking sector has been hit by concerns about debt default in a slowing global economy together with the introduction of negative interest rates in Japan. We are underweight the banking sector, but have focused typically on those UK banks serving the domestic consumer and housing market.

GCHQ

Not unlike the war on terror, we are constantly researching and analysing. We monitor our investments very closely. When it comes to companies we also consider competitors and customers looking for clues or warnings of a change in trading conditions. We have avoided many of the oil service and oil/mining related engineering businesses which have been exposed to capital spending cuts by the global commodity groups. Likewise, we meet with many fund managers and absolute return fund managers. We know what they are buying, selling and shorting! This all contributes to our central intelligence gathering system.

Being small and nimble means we can react quickly to potential developments.

Cash remains king

Our main focus is on company financials. The stronger the Balance Sheet and cash flow the better. Cash flow means dividend security in a market where more dividend cuts are possible.

Thematic investing

We like long-term thematic trends, whether this is driven by ageing population (healthcare), technology (smartphones, internet of things) or legislation (car safety). Recent themes include cybercrime, the pickup in Russian submarine activity and the change in China’s birth control policy.

We’ve never had it so good

Employment is picking up, wages are improving, food prices are low as are energy costs. Headline disposable incomes have increased as a result. In real terms, UK consumers have never had it so good. We continue to favour UK facing consumer businesses, but spending on big ticket items might be impacted by short-term consumer caution concerning the implications of Brexit. We are alert to those that could be challenged by Brexit and Sterling weakness.

Every Little Helps

Many of our companies are taking advantage of current conditions to grow by acquisition. We have participated (where client investment objectives allow) in a number of secondary share placings to fund deals at a discount to the current share price.

Takeovers

We don’t buy things in the hope they might be taken over. Instead, we buy businesses with good long-term growth potential and cash flow characteristics, which will be of interest to a bigger player one day. We expect a pick-up in takeover activity given the recent market correction.

Time to fish for ideas

A bit like a visit to the beach, we are constantly turning over stones to look for new ideas. A market correction is throwing up plenty of opportunities, but we are being disciplined on possible entry points.

What we are avoiding

Emerging markets and China, highly leveraged investments, vulnerable businesses or those exposed to oil and mining capital spending cuts, weak currencies, vulnerable dividends and global banks notably those with Asian exposure. We are also mindful of Brexit risk.

Is it the end of the world?

No. The global growth outlook is more challenging, but it is not a disaster. Short-term there has been an increase in risk aversion but central bankers remain supportive and low oil prices will boost consumer spending in many countries. Concerns over the wellbeing of banks isn’t a new risk. Much progress has been made since 2008 in de-risking their balance sheets, but the current headwinds they are experiencing need addressing. Markets are seeking reassurances. For many of our companies, conditions remain tricky but they are providing positive growth. It will make for an interesting 2016 company reporting season.

Where are we now?

We feel well positioned for the current climate. Where possible we’ve taken risk off the table but have kept faith with equities. The BG:Shell merger gives us the opportunity to reweight/review our oil exposure. We remain nervous of miners and given potential balance sheet issues and the likelihood of further dividend cuts.

Against many challenges in 2015, we typically performed well, outperforming indices and benchmarks. So far 2016 has been challenging for investors and banks appear to be pricing in another financial crisis. However, while we cannot be immune from bouts of market volatility, at times like these there is usually a flight to quality.

We take comfort from the fact that our risk driven investment process has ensured that we are invested in a wide range of soundly financed and well run businesses.

Further information about Alpha Portfolio Management, our products and services, please visit www.alpha-pm.co.uk or email info@alpha-pm.co.uk.  Alternatively, you can call us on 0117 203 3460.

This publication is for informational purposes only and should not be relied upon. The opinions expressed here represent analysis by an Alpha Portfolio Management representative at the time of preparation and should not be interpreted as investment advice.

You should seek professional advice before making any investment decisions. The past is not necessarily a guide to future performance. The value of shares and the income from them can fall as well as rise and investors may get back less than they originally invested. The sender does not accept legal responsibility for any errors or omissions, in the context of this message, which arise as a result of internet transmission or as a result of changes made to this document after it was sent.

Alpha Portfolio Management is a trading name of R C Brown Investment Management PLC which is authorised and regulated by the FCA.
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