Ishrc � Discussion Threads

[simon gordon] 31/5/2008 19:14

Hi Jon,

I agree about Africa.

I am investing in Africa via BATE who are based in South Africa - forward p/e is 5.6x. BATE have been de-rated due to poor project execution. New management can hopefully re-build confidence.

I will have a good look at AOF - cheers!

[jonwig] 31/5/2008 16:34

Hi, Simon.
Yes, I enjoy reading her columns, but what is the Next Big Thing??

How about Africa?
Space (for food and biofuels), resources, you name it.
Short-term worries, especially South Africa, of course.
A ten-year view, maybe.

Both Lonrho and LonZim look overvalued, but there's the New Star Heart of Africa Fund (an OEIC) and the Africa Opportunities Fund (AIM: AOF). I've taken a small stake in both of these.

[simon gordon] 31/5/2008 10:50

FT - 31/5/08:

Merryn Somerset Webb: In these uncertain times, it pays to hold on to gold

When gold was going for $300 an ounce and oil for $25 a barrel, it was easy to know where to put your money.

The fast growth of the emerging world made it clear that demand for commodities of every kind was going to soar and a quick look at pretty much any part of this sector – whether precious metals or palm oil – left little doubt that supply wasn't going to be there to meet it.

So I started being bullish on precious metals, industrial metals and any kind of fossil fuel seven years ago.

Then, three years ago, I started my love affair with soft commodities as I began to understand how people's eating habits would change as incomes rise and, of course, as global governments decided that biofuels were the silver bullet that would kill off global warming.

Over the same period of time, it seemed obvious that the housing bubble and the consumer boom it was driving couldn't go on for ever, something that would hit growth in the west hard.

I was far too early with much of this (I started trying to sell my own flat in 2003 – luckily no one bought it until mid-2007).

But still, when the time came, I wasn't holding any houses, housebuilders, commercial property or retail stocks, either here or in the US. I've been very clear on all sorts of other things, too.

Sometimes, I've been right (recommending Brazil for example) and sometimes completely wrong (buying uranium just as it tanked). But the point is this: it has been an easy time to have big opinions and I've had lots of them.

That's not the case any more.

Sure, I still wouldn't touch anything to do with property or western consumption with a bargepole. That bit is easy. And I wouldn't buy most physical commodities right now, either – as oil starts to pull back from its mini bubble, other things will too.

On the other hand, I remain convinced that the commodities supercycle has many years to run as the Chinese and the Indians keep buying cars and building highways. Not being a trader, I'm not prepared to sell all my long term holdings in big oil and mining shares, either.

Then, there are stock markets themselves. Look at the numbers in isolation and they seem pretty cheap: the FTSE 100 trades on a price/earnings (p/e) ratio of a mere 11.5 times and yields 4.5 per cent.

That's not bad. Until you think about how bad the economy might get as house prices keep falling, consumers stop spending and unemployment rises. If that means earnings don't rise, 11.5 times is a high price to pay for equities. And then there's inflation – now rampant everywhere.

There is an idea that equities are a good thing to hold in inflationary times – because they are a "real" asset they are supposed to hold their value. But it didn't quite work out like that in the 1970s.

Instead, according to Barclays Capital, between 1969 and 1979 the average annual real return for UK equities was -2.3 per cent.

That's better than bonds, but not exactly the kind of return that would have you rushing out to put your name on the list for one of Burberry's £11,000 alligator skin handbags.

Thinking about inflation is confusing too: will prices still be rising next year?

Five years ago, it was easy to place your bets on inflation. Interest rates were low, money supply was rising far too fast around the world, commodity prices were beginning to break out, and it was already clear that the prices of jeans and DVD players imported from China couldn't actually fall indefinitely.

So the fact that inflation is on the up everywhere shouldn't come as too much of a surprise.

But if – as I think we can expect – the credit crunch really gathers pace and recession takes hold might we not see the return of deflation instead?

Société Générale's number one bear Albert Edwards thinks so. He's expecting the next few years to offer us a sample of Japanese-style deflation accompanied by a brutal bear market. Nasty.

I think I'm more inclined to expect stagflation than deflation, given how entrenched easy money policies are in the US. But, either way, there doesn't seem to be a good reason to buy much in the way of western equities.

Now the good news. My ongoing confusion about the current state of our markets tells me one simple thing – that I should hang on to my gold.

The price of gold has already fallen 14 per cent since its peak of $1,033 back in March, and it also had a bad week as the dollar rose.

But, in uncertain environments, what we all need most is insurance. And gold is the best financial insurance you can get over the long term.

There is a perfectly reasonable fundamental case to be made for holding gold: supply is limited and demand high. However, the real point is that the future is very uncertain and not in a good way.

We could see an inflationary recession. We could see a deflationary recession. But what I think we can be pretty sure we won't see, over the next few years, is stable growth with stable prices.

Tim Price of PFG Wealth puts the case nicely. "There are few things you can count on in a full-blown economic and financial crisis," he says.

"Not central banks, politicians or Wall Street banks, and not paper currencies – the dollar lost 98 per cent of its purchasing power during the 20th century."

"But several thousand years of world history point to an alternative store of value, in the form of this iconic, shiny yellow metal, whose very scarcity is its abiding strength."

You can get exposure to said iconic metal by buying the ETFS Physical Gold ETF (PHAU).

[insipiens] 29/5/2008 18:57

jonwig.

Indeed, it may not turn out to be better than your 0.4% for cash :0

I hold mine in a SIPP but had assumed that as these are equities they would be liable to normal dividend and income tax due as such.

[jonwig] 28/5/2008 14:21

Kiwi ... sorry, didn't see your post as cooking lunch!

My holding was in my ISA, the theory being that corporate bonds are paid gross, but subject to 20% tax which can (still) be reclaimed within a ISA.
Since I'm not presently a holder, I can't test that!

The quarterly distribution will change as the underlying portfolio changes, and this is governed by pretty strict rules, I believe.

Insipiens - a good point ... the price will rise over the quarter to reflect accumulating income, but one can make a rough calculation of about 2.5p per day for that.

My intention (as I mentioned before) is to compensate for poor cash interest (0.4% net) in my ISA.
The purchase of SLXX @ ~£121 did achieve that for a while, but the outlook for inflation and financials is getting cloudy again!

[kiwi2007] 28/5/2008 12:51

Excuse the questions but;

Are the dividends paid nett or gross of tax?
Can you elect to reinvest them automatically?
The dividend ammount seems to vary each quarter but totalling £7.825 over the last year - is this ammount fixed (providing they don't switch the underlying bonds)?
Many of the underlying bonds are issued by overseas companies - I presume they are all sterling bonds though?

Thanks.

Edited after research.

From Ishares "The dividends paid to iShares investors will not be automatically reinvested in more iShares. "

and

Tax Treatment of Dividends
Shareholders in iShares may be subject to taxation in their home jurisdiction on distributions (and undistributed income) arising from their investment in iShares funds. Whether or not a shareholder is subject to taxation in relation to distributions (and undistributed income) from their investment in iShares funds is primarily, but not exclusively, dependent upon their country of residency/domicile and legal status. No Irish withholding tax is currently levied on distributions from iShares

But, from that, I'm still not sure whether divis are paid nett or gross?

[insipiens] 28/5/2008 12:36

It'll accrue the next div over this quarter anyway....

£117? Depends if there's another little shock or not. Am inclined to agree that sub 120 is an opportunity - depends on the make up of the bonds involved of course.

[jonwig] 28/5/2008 12:18

Ex-div today (218.29p) but the fall is lots more than that.
Running yield is about 7%.
Am inclined to look for 7.5% (say £117) but I doubt it will fall so far!

[simon gordon] 17/5/2008 09:33

FT - 17/5/08:

The start of the nasty decade?

"For the time being at least, the nice decade is behind us," said Bank of England governor Mervyn King this week, as he announced some of the gloomiest UK inflation forecasts in recent years. The "nice" decade – for non-inflationary continuous expansion – may be behind us, but the question is whether a nasty economic decade lies ahead.

The data this week were unrelentingly bad. Consumer prices rose by 3 per cent in the year to April, but a much faster rise in the price of goods leaving factories, plus ever higher commodity prices, means it is all but certain to rise further. Weak retail sales, low business confidence and the collapse in house sales suggest that growth will be slow in the next few years as well.

There will always be slowdowns in the economic cycle. But there are also reasons to think that the next economic decade will be difficult for the UK – and maybe even as difficult as the past decade was good.

Since recovering from recession in the early 1990s, the UK has benefited from a favourable world economy. Commodity prices have been low, and sterling strong. Globalisation, in particular China's entry into the international trading system, has pushed down manufactured goods prices, a sector the UK had all but abandoned in the 1980s.

The results for the economy were twofold. First, a positive shift in the terms of trade, as the sale of expensive financial services in exchange for cheap manufactures made Britons richer. Second, the steady fall in Chinese prices kept inflation down, and made economic management much simpler.

The final part of the story is the independence of the Bank of England in 1997, and a spectacular increase in public spending, starting in 2000. The result: a nice decade.

Most of those forces are now absent. China is starting to cause inflation as it sucks in commodities and its people increase their own consumption. Sterling has slumped. Capacity for further public spending is exhausted. In the next decade, growth will have to be earned through higher productivity, and inflation will be harder to control.

The UK economy is hardly doomed. Growth in China, India, and Russia will create opportunities and cheaper sterling will make it easier for exporters to exploit them. Nor is there any sign that the pace of technological change, which is the ultimate source of economic growth, is slowing down.

But compared with importing cheap Chinese goods, this kind of growth will involve hard work, to make British workers more productive. The government can do a lot. Rather than boast about its economic record, it should make life easier for business, and reform the public sector to improve productivity. The economy may have to rebalance a little away from financial services. But nothing is likely to make the 2010s as pleasant for the economy as the nice decade.

[insipiens] 15/5/2008 11:10

I unloaded a third of my holding.....will look to start accumulating again if it gets back down towards 120, if not lower if gilts fall too.

[jonwig] 15/5/2008 08:42

Yes, I thought that yesterday, and sold.
More uncertainty about banks, prolonged inflation and no interest rate cuts.
A pity really, as my ISA (provider: TDW) pays only 0.5% pa on cash.

[simon gordon] 15/5/2008 08:38

Looks like the SLXX rally is over.

It is getting tougher and tougher to find low risk high return bets.

[insipiens] 10/5/2008 15:40

Will be looking to sell over 130 as I expect further risk aversion to bite later this summer.....

[simon gordon] 07/5/2008 09:58

Washington Times - 7/5/08:

From riches to rags
By Arnaud de Borchgrave

Globalization was supposed to lift all boats, some faster than others. And the proliferation of democracies around the world would put the seal of good government on this peaceful process.

But globalization has also spawned multiple uncertainties. Players improvise the rules as they go along. Hedge funds and derivatives have left government regulators in the dust. And the middle classes see their standard of living heading south.

A plethora of books by geopolitical heavyweights is now ringing alarm bells. In "The Return of History and the End of Dreams," Robert Kagan says we are now back in a world of clashing national ambitions and interests, closer to the 19th century than to the 1990s Rapacious capitalist greed in the United States triggered the subprime mortgage fiasco, beginning almost a year ago, which rapidly hit most Western countries, and shredded the real estate value of millions. In Palm Beach, Fla., homes worth $10 million or more, have not lost value and go on selling.

Greed is also behind the unfolding global food crisis and its devastating impact on human security. Crop land displaced for fuel crops shrunk bountiful U.S. agricultural surpluses for the world's hungry. One tank of ethanol for the average SUV requires enough grain to feed a person for a year.

Over the last nine months, global food prices (through March 2008) are up 40 percent, leaving reserves at a 30-year low. USAID is scaling back food aid to some of the world's poorest countries. Food riots in widely scattered parts of the developing world are just a harbinger of worse to come.

At one end of the global spectrum are America's 10 biggest yearly executive compensation packages, ranging from $83.1 million to $26.6 million (according to a USA Today's data derived from Salary.com). At the other end are the world's failed and failing states. Mostly in Africa but also in Asia, these failures have cascaded in the almost two decades since the end of the Cold War. Between 40 and 60 nations, home to nearly 2 billion people, are either sliding backward and teetering on the brink of implosion or have already collapsed.

This is the data in "Fixing Failed States," published this week by Oxford University Press and now in Sen. Barack Obama's hands. Clear, taut language makes it accessible at almost any level of education.

Co-authored by Afghan-born Ashraf Ghani, a finalist for both the jobs of U.N. secretary-general and president of the World Bank, and Clare Lockhart, a British lawyer who spent four years in Afghanistan and played the key role in developing that ravaged country's reconstruction efforts, "Fixing" is a roadmap to a groundbreaking new solution to this most pressing of global crises.

Why is it that Singapore, once a malarial swampland, has managed to emerge as one of the world's most prosperous countries, where ministers and senior civil servants are paid more than $1 million a year to remove the principal reason for corruption in the developing world? Mr. Ghani and Ms. Lockhart cite chapter and verse on their investigations among failing and failed states. They argue only an integrated state-building approach can reverse the decline, with a strategy that assigns responsibility equally between the international community, national leaders and the citizenry.

The authors answer why half of the globe has created an almost seamless web of political, financial and technological connections that underpin democratic states and market-based economies while "the other half is blocked from political stability and participation in global wealth." And within these countries, extremist groups, along with "vicious networks of criminality, violence and drugs feed on disenfranchised populations and uncontrolled territory." These collapsed and collapsing states are unable to provide even the most basic services for their citizens and are now "at the heart of a worldwide systemic crisis that constitutes the most serious challenge to global stability in the new millennium." The global food crisis threatens to push borderline cases into bankruptcy.

The authors say even if it were desirable, it is neither credible nor feasible to impose order from the top down. While the legitimate use of force is an important criterion in defining states, it is no longer the sole criterion. Rather, "the solution must come through establishing legitimacy in the eyes of the international community and a country's citizens. It does not make sense to conceive of sovereignty as an untrammeled right, divorced from obligations both to the population governed and to the international community of states." Neglected, failing states quickly become breeding grounds for terror. A U.S. government paper for internal use said, "The more anarchic and anomic the nation-state, the more nonstate actors and the forces of terror can take opportunistic advantage of a deteriorating internal security situation to mobilize adherents, train insurgents, gain control of resources, launder funds, purchase arms and ready themselves for assault on world order.

Failed, failing and weak states that harbor the incubus of failure run the gamut from Zimbabwe, where a defeated neo-Marxist president defied election results, to Somalia, where government exists only in tables of organization, to Afghanistan where government writ barely extends beyond central Kabul.

Congo and Sudan are two African countries - each a third the size of the United States - whose sovereignty is in question daily: U.N. observers in the eastern Congo speak of "atrocities beyond words." Sudan carries the bloody stigma of Darfur. But Ashraf Ghani and Clare Lockhart argue forcefully these failed states can now be fixed.

Arnaud de Borchgrave is editor at large of The Washington Times and of United Press International.

[simon gordon] 06/5/2008 19:21

Insipiens, I didn't buy any. I continue to be fixated on Small Caps. Digging into BATE right now.

Good fortune!

[insipiens] 06/5/2008 13:45

Simon, I've stopped accumulating these for now.

[simon gordon] 24/4/2008 12:11

Hi jon,

I agree they are safer.

It is just a matter of whether you believe in inflation or deflation.

I sense that Britain will experience a hard landing but input inflation and a falling pound will constrain interest rate cuts.

Some call it slowflation.

[jonwig] 24/4/2008 11:36

O/T again, sorry!

If the banks recapitalise via rights issues, that should improve the safety of their corporate bond issues.
Given that SLXX is heavily weighted toward financials (70% iirc) there should be some strength here.

[insipiens] 24/4/2008 09:10

Simon,

Different Del Monte - Asil Nadir ran a fruit business from Cyprus licensed under the name Del Monte. I worked at the Juice maker - the ones who made the advert "man from Del Monte".

Originally all Del Monte were part of the Nabisco group until broken up and sold as 7 different segmental businesses.

I'm not sure who the Juice bit is owned by now but they were sold to various outfits in my time and no doubt thereafter.

experimental, looks like you made the right decision. However holding it all in gilts for a very long time (27 years) might erode value due to inflation. Depends when the market finds a base as to when you might want to get back out of gilts.

[simon gordon] 23/4/2008 13:35

Property Week - 11/4/08:

Mortgage malaise must bite property by Giles Barrie

'What have been built across Britain aren't just one-bedroom apartments. They are one-bedroom apartments for people with no possessions.'

These were the words of one of Manchester's top advisers at a breakfast hosted by Argent and chaired by Property Week at MIPIM last month.

When the ailing housing market prompted the prime minister to appear on the 10 O'Clock News on Tuesday, it became clear that there is little hope for much of the vacant residential property across Britain today.

What, though, are the implications for commercial property as the credit crunch forces residential to follow it into freefall?

For property investors, they are serious. Retail parks will be the worst hit: vacancy rates are already nearing 10%, and are likely to rise further as DIY and home improvement come to a standstill. Shopping centres and high street shops will be battered, too, as spending fuelled by equity withdrawals stalls.

But even more serious problems will arise as the retail sector as a whole – which is one of Britain's biggest employers – begins to lay people off. Economists say these people are less well placed to find other employment, creating a vicious circle where retail sales will continue to fall. The result: voids.

For developers, the housing market's rapid slowdown has serious implications too. It is now virtually impossible to raise residential development finance in all but the most prime central London locations, leaving developers to ponder moving into more secure prospects such as student accommodation.

But do they have the skills? It is one thing paying a fortune for a site, hiring an architect to cram in as many flats as possible, creating a glossy sales brochure and knocking out units to buy-to-let clubs. It's quite another challenge to create real neighbourhoods. Of the big residential developers, only Berkeley has mastered this. Others have created wastelands that are becoming the ghettos of today.

Commercial developers will also need to reappraise their new passion for 'mixed use'. More family homes are needed, rather than the flats above offices above shops that many have planned. And local authorities and development agencies will need to reassess their regeneration plans across the UK.

Still, at MIPIM, apartment-led schemes aimed at first-time buyers filled the aisles, and their promoters were seemingly oblivious to what was round the corner: the fact that in the last week, for hundreds of thousands of people trying to get on the housing ladder, the money ran out. The extraction of mortgage cash from this world would be fascinating if its implications weren't so gruesome for property to behold.

[jonwig] 22/4/2008 09:18

Simon G - I seem to remember you mentioning that you were looking at Housebuilders.
Me, too.
I'm putting up info on my new BKG thread.
Haven't bought any yet, and am in no great hurry.
BKG, BVS and PSN would be my picks, and I'd avoid any with high gearing.

[experiment] 21/4/2008 11:13

Thanks Jonwig. The transfer fees are 60 GBP, so quite low. I'm likely to move the whole lot, seeing as the BoE are now using these to support the Banks, and therefore devalue gilts. Unless I care to save the banks?