Chocolat Melting, Fevertree Losing Fizz, Paypoint Results and PM Choice

The share price of Hotel Chocolat (HOTC) collapsed yesterday after posting a trading update. It was not that chocolate sales had fallen in the heat wave as one might expect. The temperature nudged 40 degrees C in the leafy Chislehurst suburbs yesterday and I cancelled a trip into the City which was probably a wise move.

HOTC said “While the Board anticipates underlying FY22 profit before tax will be in line with market consensus, statutory reported profit for FY22 is
expected to be a loss, being affected by the outcomes of an internal business review, predominantly as a result of non-cash impairment provisions and costs arising from discontinued activities including the closure of retail stores in the USA”. It’s a loss however you look at it.

The share price of HOTC peaked at about 530p last November and it’s now about 130p. Investors who signed up for the placing at 355p last July must be kicking themselves.

I must admit to a certain scepticism about “comfort” food sellers particularly those targeting the luxury end of the market. The history of chocolate and ice cream sellers is very poor and I would extend that to premium alcohol brands such as gin and wine. Likewise premium mixer seller Fevertree (FEVR) whose shares fell by 30% last Friday after warning on margin erosion due to higher glass and freight costs combined with labour shortages. These kinds of companies depend on aggressive marketing to grow sales but their products and marketing can be imitated. When consumers become price sensitive they may quickly switch to cheaper brands.

Needless to say, I do not hold the stocks mentioned above.

One share I do hold is Paypoint (PAY) who issued a positive trading statement this morning. It included this statement:

“Q1 Progress: Good progress against our ESG programme, including commitment to ensure all employees are paid a minimum of the Real Living Wage delivered in July 2022; and Inaugural Pride Month programme launched in June 2022, as part of our ‘Welcoming Everyone’ activities, providing educational content, further meetings of our LBGTQ+ network and events to bring colleagues together, building on our commitments to diversity, equity and inclusion and supporting our vision to create a dynamic place to work”.

They have clearly become enamoured of the need to support lesbian, gay, bisexual and transgender (LGBT) individuals but I am not personally convinced that this is an area in which companies should be interfering. Next thing we know they’ll be promoting religion and holding prayer meetings.

One of the last three candidates for Prime Minister, Penny Mordaunt, has been criticised for calling that old TV series of “It Ain’t Half Hot Mum” as being misogynistic and homophobic. It certainly was but it was also comic as the characters were true of their era. Likewise in Dad’s Army written by the same authors which could also be criticised for being prejudiced. But as my father served in the Home Guard and kept a diary during the war years, I think it was a good representation of reality. He skived off a lot apparently and considered it a waste of his time.

Will Penny Mordaunt beat Liz Truss to make the final poll? I hope so as I don’t think Truss could win a General Election for the Conservatives. Simply not enough charisma.  I still think Rishi Sunak is the best candidate.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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How to Choose the Next Prime Minister

I have watched the debates of the candidates for the next leader of the Conservative Party, and hence for the position of Prime Minister. I am not a Conservative Party member so will not get a vote but for such an important job it is worth stating how I might decide who I would prefer.

I do not think it is worth deciding on the basis of their stated policies. They all believe in tax cuts, but some sooner than later. None of them talked about how they would cut Government expenditure to maintain a balanced budget and allow room for tax cuts. They all believe in the net zero carbon emissions policy although within what is affordable and achievable.

But policies advocated by politicians tend to change after they get elected and get faced with the realities of advice from civil servants, the Bank of England and opinion polls.

There is a simple way to decide who to support. Who would you wish to work for if offered a job as a cabinet member in their administration? Who is a leader you could follow and have some trust in? Who appears confident and decisive, requirements for any natural leader? Who has the charisma to win over colleagues in your party to your adopted policies and in due course the general public so you can win the next general election?

On that basis I think there are only two candidates who pass those hurdles – Rishi Sunak and Tom Tugendhat. But Penny Mordaunt and Liz Truss seem less confident while Kemi Badenoch is an unknown quantity to many voters. Unfortunately ladies who wish to get elected need to be forceful and exude confidence like Margaret Thatcher always did but the three now standing do not. They are not obviously born leaders who could unite a divided Conservative Party which always has a tendency to fragment.

Boris Johnson had the required profile which is why he was successful at winning elections, but fell down on other personal qualities and clearly won’t be invited to join the next administration as he is now a political liability.

As between Rishi and Tom, the former has more ministerial experience and should have a stronger financial background so I would tend to go for the former. Wealthy people tend to be a political liability in the UK where the politics of envy is so pervasive but I think Rishi has the personal charisma to overcome such prejudices and he certainly delivers good speeches.

How Conservative Party Members and MPs view these issues will soon be revealed but I hope they follow the same chain of thought.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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Grant Shapps for Prime Minister?

Transport Minister Grant Shapps has announced his candidacy for the position of Prime Minister and with two others yesterday the field is getting quite crowded.

But Shapps has a very poor record as Transport Minister. Among his negative contributions has been the promotion of Low Traffic Neighbourhoods (LTNs) to tackle the Covid epidemic – a totally misconceived policy and implemented without local consultations; support for HS2 – an enormous white elephant; a rewrite of the Highway Code which makes some people more equal than others on the road; a £2 billion investment in cycling and walking to promote “active travel” and “behaviour change” and he keeps bailing out Transport for London (TfL) allowing Sadiq Khan to continue to run an uneconomic service instead of reforming it. His response to the national rail strikes has also been to line up for a fight with the unions while committing £1 billion to “modernisation” of the railways; basically throwing more money at an uneconomic and outdated transport technology.

Meanwhile the road transport network gets ever more congested and drivers pay ever more in taxes and road charges such as in CAZ and ULEZ schemes.

I certainly would not support Shapps for Prime Minister. But what of the other candidates? A number wish to cut taxes. A laudable policy but to be able to do that without increasing public borrowing means a reduction in public expenditure. None seem to be promising that (for example Shapps wants to spend considerably more on defence).

We would all like a cut in the price of diesel/petrol which might help to stimulate the economy as high prices impact the delivery of goods and services. But most of the increase of late has come from the market price of oil not from taxes (Fuel Duty rates have actually been reduced recently).

Rishi Sunak seems to be one of the few candidates who is wisely not promising hand-outs to the electorate if he gets the job.

But no doubt we will learn more about the other candidates over the next few weeks. As in previous Conservative Party elections, it may be a case of who avoids the most gaffs and who is least disliked by MPs that wins the day. Boris Johnson only got the job because he seemed likely to break the deadlock over Brexit but there should surely be no rush to appoint a replacement.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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Energy Security Bill and the Next Prime Minister

Yesterday the Government introduced the Energy Security Bill into Parliament. It is good to see that the Government continues to function after the recent political upheavals, but would it not be good to get back to some normality as opposed to the recent dramas?

The new Bill aims to:

  • Boost Britain’s energy independence and security.
  • Attract private investment, reindustrialise our economy and create jobs through new clean technologies, as well as protect consumers.
  • Introduce new powers to help prevent disruption to fuel supply because of industrial action, malicious protests and on grounds of national security (comment: surely to be welcomed).

See https://www.gov.uk/government/news/plans-to-bolster-uk-energy-security-set-to-become-law for details.

It includes new powers which will enable the extension of the energy price cap beyond 2023, shielding millions of customers across the country from being charged “unfair” prices as they call it. Or to put it another way – to protect consumers from the real world of market prices and hence making it uneconomic for some companies to operate in this sector. This is surely not a very “conservative” approach!  There are better ways to subsidise household fuel bills.

The clear objective is to reduce reliance on imported oil and gas and encourage offshore wind farms, nuclear power generation and other infrastructure that we need to achieve carbon reductions although the growth of nuclear is still at a snail’s pace. It is certainly worth reading the document on the Bill’s contents and the associated British Energy Security Strategy mentioned in it.

Let us hope that any new Prime Minister does not get the job by promising more tax cuts. It’s clear that Government expenditure is rising by commitments in the Energy Security Bill for example and in many other areas when what is really needed is reducing the amount of our wealth that is spent by the Government. In the last couple of years we have had a quasi-socialist economy with more willingness to interfere in the economy by the Government. But civil servants consistently back the wrong horses.

What the country really needs is a period of stability under a competent leader who everyone can support. That is the way forward for a good business environment which will instil confidence in investors, particularly ones overseas.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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What is the Purpose of a Public Company?

My previous blog post talked about the mania for kowtowing to ESG issues that seem to be creeping into public companies. What exactly is the purpose of a company? Is it to generate financial returns for shareholders or does it have wider responsibilities?

Section 172 of the Companies Act spells it out. Its primary duty is “to promote the success of the company” but the Act does recognise other responsibilities by saying also that:

A director of a company must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, and in doing so have regard (amongst other matters) to—

(a) the likely consequences of any decision in the long term,

(b) the interests of the company’s employees,

(c) the need to foster the company’s business relationships with suppliers, customers and others,

(d) the impact of the company’s operations on the community and the environment,

(e) the desirability of the company maintaining a reputation for high standards of business conduct, and

(f) the need to act fairly as between members of the company.

This clearly gives company directors wide discretion to support environmental or other ESG issues that may be influenced by the company’s operations. And it makes clear that employees and the wider community are stakeholders in a company.

There was no great opposition to this wording when the last Companies Act was passed in 2006 and I personally believe it is quite reasonable. But the balance between the financial interests of shareholders (members) and the wish by companies and their boards to dabble in politics has swung too far away from sound ethical principles. For example, some companies are intervening in the contentious issue of abortion in the USA. Is that in the interest of their employees? That’s basically a political or religious question that cannot easily be answered.

Clearly companies have to obey the law so if the Government mandates specific legislation on environmental or social issues then companies have to comply. But do they need to, or should they, promote policies that attempt to influence behaviour in the wider community?

For example, should Ben & Jerrys have stopped selling ice cream in Israel because they disagreed with the policies of the Israeli Government?

Companies always have conflicts of interests in their operations which they have to reconcile with the prime objective of promoting the success of the business. For example paying their employees more might be in the interest of the employees but might undermine the financial position of the company. The directors need to balance their responsibilities to the different stakeholders.

What they should not be doing is trying to win a popularity contest in the social media.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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Census Results – A Problem the Government is Ignoring

Yesterday the Office of National Statistics released the first results from the 2021 Census in the UK. The population of England and Wales rose to 59.6 million which is an increase of 6.3% since the last census 10 years ago.

This substantial change which directly affects our quality of life was barely covered in the national media. More people mean more stress on housing provision, more vehicles on our roads and a bigger demand for health services (particularly as the population has aged – there are more older people and they are living longer). Some of the age increase can be blamed on baby boomers growing old.

The population increase has been concentrated in London and the South-East but older people have tended to move out of London being replaced by young immigrants (not just from overseas but from within the UK). The census data might also have been distorted as people tended to move out of central London boroughs to the country during the pandemic.

England now has the highest population density of all major European countries.

One major impact of more population is degradation of the environment – more air pollution and more waste. Here’s a good quote from Sir David Attenborough that is very relevant: “All our environmental problems become easier to solve with fewer people, and harder – and ultimately impossible – to solve with ever more people”.

What is the Government doing to try and tackle this problem?  In essence very little apart from rather feebly trying to restrict immigration. The birth rate is forecast to fall, but there is as yet no sign of any reduction in the population growth. A growing population might mean a healthy economy but the shortage of housing, particularly in the South-East, has been a major factor in political unrest while the elderly are facing problems in getting medical treatment as the NHS is over-stretched to cope.

The Government is being distracted by many other issues at present in a reactive fashion. Such problems as food and energy security would not be a problem if the UK population was reduced.  

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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Train Strikes – What’s It All About?

The national rail strikes this week have been incredibly inconvenient for those who rely on trains to get to work or for essential trips such as visits to hospitals. In London the strike has also extended to the London Underground. Commuters have been badly affected although the ability to work from home (WFH) has softened the blow and reduced the impact.

Why are RMT union members striking? It’s partly that they want a pay increase to offset the impact of inflation. But it’s also about whether rail management have the power to decide on jobs and working practices. For example, they wish to block any forced redundancies such as the closing of ticket offices. In London they are even intervening over the outsourcing of the contract for underground cleaning by TfL.

It should be a business decision as to whether ticket offices should be closed. There are now generally alternative ways to buy tickets although a few people might be inconvenienced. But if it saves money then management need to decide on a commercial basis whether to close offices.

National Rail Chief executive Andrew Haines said: “We cannot expect to take more than our fair share of public funds, and so we must modernise our industry to put it on a sound financial footing for the future. Failure to modernise will only lead to industry decline and more job losses in the long run.”

In reality the national railways have lost money for the last 100 years and have been massively subsidised by the Government (i.e. by you and me from our taxes). It’s exactly the same in London. With reduced passengers on all services due to the Covid epidemic and more WFH all rail services need to cut their costs to get revenue and costs more into balance.

The rail system is an enormously labour-intensive operation to maintain the track and signalling. Railways are also enormously expensive to build – just look at the cost of HS2 or Crossrail (about £100 billion and £19 billion respectively) – both projects are late and over budget.

The big problem is that railways use old technology and are operated using archaic working practices. The rail unions are trying to protect their pay, their jobs and working practices which is simply unjustifiable. They need to accept that passengers have alternatives and if they are unwilling to use the railways as much as they used to do then management has to retrench.

The unions need to face up to reality or they will go the way of the dinosaurs (like the coal miners did when faced with the Government being unwilling to subsidise perpetual losses).

But the core of the problem is a confrontational approach from both sides. There should be a consensus about how to run the railways profitably for the benefit of both the owners and the workers.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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Barton Biggs and Hedge Hogging, plus NHS Dysfunction

I managed to finish reading the book Hedge Hogging last week during my 7 days in hospital. Here is a longer review.

The author Barton Biggs spent 30 years at Morgan Stanley building up their investment management business. In 2003 he formed his own hedge fund named Traxis Partners which was wound up after his death in 2012. But this is no out of date history of past financial events as much of what it covers is topical and relevant to today’s stock markets.

It’s partly a journal of events in his life but with extensive diversions into the big issues most investors face particularly the psychological difficulties that you can face. Topics such as short-selling, private equity, emerging markets, market bubbles and investment cycles are covered – we certainly seem to be in a down cycle at present rather than a temporary correction. As an investment strategist over 30 years he obviously experienced a variety of market conditions. He covers the two main investment approaches – based on growth and value but in essence was agnostic.

He has some interesting comments on Ronald Reagan and Margaret Thatcher – the latter he met more than once. He explains the success of the Yale Endowment Fund under David Swensen and explains to an audience of tech stock fanatics that “the human emotions of fear and greed that drive the stock market to excess have not changed over the course of human history and remain as valid today as in the past. Busts are busts, booms are still booms, and bubbles always burst, but this was boring stuff, and the crowd stirred restlessly. The glitterati understandably had no interest in hearing about busts or bursting bubbles. On to the next IPO and salacious stock idea”.

A good paragraph that gives you an impression of his writing style is the following: “If you hang around the investment business long enough eventually you experience some mysterious, almost supernatural events because the stock market is a capricious beast, almost a force of nature like the sea or the arctic. It can be bountiful and loving in its embrace but also hard and cruel and sadistic. Making your living from the stock market is a strange, hazardous, yet beguiling occupation. It’s a little like being a ship’s captain back in the time of wind and sail. As the master of a whaler out of Nantucket in those days of yore, in good fair, you blissfully rode the ocean’s friendly currents. Then suddenly without warning, the sea would turn and you would find yourself driven helplessly toward some distant rocky shore by one of its fierce, irrational storms. Men and women who live at the mercy of the whims of the sea and weather are a superstitious lot”.

He ends with a review of the biography of John Maynard Keynes by Robert Skidelsky which I have lined up as my next book to read. In all Hedge Hogging is a fascinating look at the world of hedge funds but there are many lessons to be learned from it for ordinary investors.

Lastly let me say about a few words about my stay in an NHS hospital, which was not for the first time. The popularity of the NHS is falling and quite rightly. It is a dysfunctional organisation that does not compare well with the systems in other countries (bar the USA).

I cannot complain about the treatment I had but the big problem is the culture. Treating patients as children to be organised and disciplined, not as people. It was also very wasteful, keeping me in bed when I was only “walking wounded” as the army might say when I could have been treated at home for most of the time at less cost. How do you reform the culture of an organisation? With great difficulty is the answer. Easier to start from scratch.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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Is the Investment World Changing?

With the war in Ukraine continuing and inflation hitting over 6% (and likely to go higher), it seems a good time to review one’s investment strategy. My thoughts on this were prompted by watching the panel discussion at the Mello Trusts and Funds webinar on Tuesday. Some members argued that now is the time to move into commodities and out of the high growth technology stocks that have been such winners in the last few years. Is growth going to go out of fashion?

It’s certainly very clear that high inflation in basic commodities such as food (likely affected by the war in Ukraine who are a major producer) and oil/gas (also affected by the war and the associated sanctions on Russia) will have a big impact on consumers in the UK in the coming year. We are already seeing this in the shops and in on-line stores from my brief shopping experience yesterday.

As the Chancellor’s Spring Statement indicated yesterday, the UK is facing its biggest drop in living standards on record as wages fail to keep pace with rising prices. His measures to relieve this by raising the National Insurance threshold and cutting fuel duty will help a few people but not the retired or those not in work. The basic rate of income tax will fall slightly in 2024 in time for the next general election but the country will remain a high tax environment. Perhaps the Chancellor has decided he cannot protect people from the world economy which is undoubtedly true so he has just made a few gestures.

Economies might grow less rapidly or recessions hit as a result of these adverse economic winds, or we might see the dreaded “stagflation” return to the UK. But does this mean I should change focus on the types of companies I invest in?

I don’t think so and I shall repeat what Investment Manager of Smithson Investment Trust (SSON) said in their Annual Report which I was reading today: “One might then ask, if interest rates are so obviously on the rise, and this so obviously creates a more favourable environment for value companies rather than quality or growth companies, shouldn’t we adapt our strategy to buy the companies which stand to benefit? Well, no. Owning high quality companies with sustainable growth is a winning strategy over the long term, has been shown to work through several economic cycles, and is one which we know we can execute successfully. Whilst other managers may be able to run a value strategy, we believe it is inherently more difficult, as you cannot hold value companies for the long term if all you are doing is owning a poor quality company at a low price, which you hope will re-rate in the future. If this does happen (there is no guarantee), you then have to sell the company to find another such investment, and so on. This means that unlike our strategy, time is not your friend, because the longer you are holding the company and waiting for it to re-rate, the lower your annualised returns become, and if you’re particularly unlucky, the worse the company becomes. On the other hand, it matters less if it takes more time for the market to appreciate the value of the type of companies we hold in our strategy, because the highest quality companies are constantly getting better, or at the very least bigger, owing to their growth. So, once we have found the right companies, all we have to do is wait. We think that patience is one of our competitive advantages, because with the strategy we employ, it tends to pay off”.

Commodity companies go in an out of popularity as their profits depend on the commodity demand and prices. But the production of most commodities responds to price changes so in a year or two the boom is over and the bust follows as over-capacity has been created. Chasing these rotations requires a large amount of time and effort when I prefer to purchase companies that one can stick with for many years.  

The impact of high inflation does mean that one has to be careful in selecting companies with high margins and pricing power, i.e. the ability to raise selling prices when their costs rise. But that is a truism in all economic circumstances. Those are two factors that differentiate quality companies from the pedestrian ones.

Companies that have index-linked contracts with their customers might be worth looking at now that inflation is heading to 10%. That applies to many infrastructure investment companies for example and another sector is property companies who often have inflation linked rent reviews. I hold a few shares in Value and Indexed Property Income Trust (VIP) which is one such company.

Incidentally Smithson noted they had sold their holding in Abcam (ABC) which I also commented on negatively recently. They are concerned about the uncertain paybacks on the investments being made which I completely agree with.

Changing my investment strategy which has developed over the last twenty years and has made me an ISA millionaire does not seem to be wise. There was an interesting article published today in the Daily Telegraph on ISA millionaires of which there are apparently over 2000 in the country now according to HMRC. There may be more than that as Hargreaves Lansdown alone claim to have 973. See article here: https://www.telegraph.co.uk/investing/isas/meet-millionaires-made-fortune-using-isas/

The average age of ISA millionaires is apparently 71 and the article reports that the top three stocks favoured by these investors are pharmaceutical company AstraZeneca, insurer Aviva and oil giant BP. Popular funds include Artemis Income, Fidelity Global Special Situations and Fundsmith Equity. That tells you that you don’t need to be a speculator to become an ISA millionaire. You just have to invest the maximum possible every year in a diverse portfolio and stick with it.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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Should Evraz Have Been Suspended?

The listing of shares in Evraz (EVR) have been suspended so all trading is barred. They were not suspended at the request of the company which is the more common circumstance but at the behest of the Financial Conduct Authority. The suggestion is that this was to protect investors pending clarification of the impact of the UK sanctions.

But the suspension of shares should in my view be an action of last resort. The suspension of shares is enormously damaging to investors because they are then locked in, and such suspensions can last a very long time. Investors may have borrowed cash to purchase the shares and then can’t get out.

Similar problems are affecting other Russia-linked firms such as Polymetal, Petropavlovsk and Raven Property as they are deleted from FTSE indexes and it is reported that brokers are refusing to trade their shares.

EVRAZ is a vertically integrated steel, mining and vanadium business with operations in Russia, the United States, Canada, the Czech Republic and Kazakhstan. EVRAZ is one of the top steel producers in the world based on crude steel production of 13.6 million tonnes in 2020. Picture above is of one of their steel mills from their annual report.

It is a UK registered company but Roman Abramovich owns 29% of the shares and allegedly has close links with Vladimir Putin, although he denies that. The BBC recently ran a programme which did a hatchet job on his reputation and alleged he acquired his wealth by fraud. Without going into the accuracy of those reports, it does seem to me that sanctions are being imposed on political grounds in an extra judicial process.

I think few people might question the imposition of sanctions on individuals who are linked to the Russian regime. But the problem is Evraz has a wide shareholder base. That includes many private shareholders. According to an Investors Chronicle article, they said AJ Bell had revealed that shares in Evraz and Polymetal were its two most bought shares over the past week. With both stocks plunging more than 80% year to date, this has led some to buy in as an opportunity to reap dividend payments potentially higher than the cost of the shares. However dividends have been suspended at Evraz.

The suspension of shares in Evraz might harm Abramovitch and his Russian friends but it will also damage the interests of other innocent people. This is not reasonable.

Evraz is clearly in a difficult financial position as the company will suffer from sanctions and all the non-executive directors have now resigned. Is that justification for halting trading in the shares? I am not convinced it is.

Companies can rightly, in my view, request suspension of their shares when past accounts are shown to be dubious – for example because of discovered frauds. This is to give time for the company to report what it knows and ensure all shareholders are aware of the issue before the listing is reinstated.

But simple doubts about the future prospects of the company should not be a sufficient justification for suspending a listing. I recall the example of Northern Rock where it got into financial difficulties and there was a run on the bank. It was running out of cash and there was a threat of nationalisation, but the shares were not suspended. It was only delisted when nationalisation took place.

It does seem to me that ShareSoc, which represents private shareholders, should take up this issue and request that the listing be reinstated as soon as possible. And the FCA should establish clear rules about when a listing should be suspended.

A suspended share listing can create enormous problems for investors. For example, if they have borrowed to buy the shares, or are trying to act as executor for an investor. Valuing the shares for probate is very difficult and there is no way to realise the value to pay IHT.

Mixing politics (the attack on all things Russian) with finance is a very bad idea.

For the avoidance of doubt, please note I have no interest in the shares of Evraz or any other Russian linked companies.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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