General Election and the Stock Market Impact

We finally have a possible resolution of the impasse in Parliament as a General Election is to be held on December 12th. That’s after the Speaker (not Bercow needless to say) rejected two wrecking amendments to a simple Bill authorising the election. My spirits were elated by this news because it finally means that the uncertainty over Brexit (will we or won’t we depart) may soon be resolved. That uncertainty has been damaging to UK business as their plans were put on hold, and has caused a fall in the pound as the world saw that we were in a political crisis and there was a risk of a hard Brexit. It also meant little other business was getting done in Parliament as the Government had no overall majority.

Now we have the situation that with a large Conservative lead in the opinion polls it seems likely that Boris Johnson will be returned with a Commons majority and will be able to push through his Brexit Withdrawal Bill. That Bill does seem reasonable to me in many regards, as a Brexit supporter. It avoids a “hard”, no-deal Brexit which was certainly going to have some impact on business, although not as much as some people claimed. It also seems likely that the marxist ambitions of Jeremy Corbyn and the Labour Party will be a dead letter for at least a few years.  I expected that the stock market would be lifted by this news but it has not happened. Why?

Perhaps some risks are still perceived. One is that the Brexit Party will split the right-wing vote in individual constituencies thus allowing other parties to win them. Or there could be mix of parties in the resulting Parliament with no overall majority which would put us back at square one. The key is the stance of the Brexit Party where Nigel Farage is opposed to the Withdrawal Agreement as he basically thinks it concedes too much to the EU (over fisheries, future trade, future regulatory alignment, etc). But if he wants to be certain of obtaining Brexit he has to think again and form a pact with the Conservatives. The Brexit Party has already been targeting Labour seats and that is surely a good focus for them leaving the Conservatives to target marginals and traditional Tory seats. As a relatively new Party, the Brexit Party probably does not have the resources to fight all the constituencies effectively in any case. Better to focus on a few. That way the Brexit Party could achieve some seats in Parliament for the first time and have a longer-term future with some say in Government and the future negotiations with the EU. The latter still leaves a lot to be settled under the “Political Declaration” so there is much to be decided.  Otherwise the Brexit Party surely has no future other than as sheep in the wilderness.

But all this complexity is probably lost on most investors, particularly overseas ones who dominate the UK stock market. They probably will not be convinced that the UK has returned to some sanity until a clear election result appears.

But as always I am optimistic. I am betting it will be resolved in a satisfactory way as most voters are fed up with the political gyrations and many of the worse MPs have been destroying their own reputations by repeated “about-faces”. Boris Johnson has to clean out the Augean Stables that are the Houses of Parliament.  To quote: “For the fifth labour, Eurystheus ordered Hercules to clean up King Augeas’ stables. Hercules knew this job would mean getting dirty and smelly, but sometimes even a hero has to do these things”. That’s politics in essence.

For those opposed to Brexit and still clutching at straws, the National Institute of Social Research (NIESR) has reported that they expect UK GDP to be 3.5% lower in ten years’ time under the proposed deal. But the Treasury and the Governor of the Bank of England do not agree. It depends on the terms of any free trade agreement that is negotiated with the EU. I am sceptical that there is likely to be any negative impact. Economic forecasts of just one or two years ahead are notoriously unreliable. Ten-year forecasts are simply incredible. The latter cannot take account of unexpected events and economic trends, and tend to ignore the adaptability of businesses. I suspect a more positive outlook for the country might stimulate more confidence in business and investment therein and offset any minor other impacts. In essence a Government with a good majority and a unity of purpose is the key. Perhaps readers should consider tactical voting to ensure that happens.

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

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Population Trends and Productivity

One of the key factors that affects the wealth of the population of the UK is labour productivity. It also has a big influence on the value of UK companies in which many of my readers have a strong interest.  Only by improving productivity can we become richer in essence. But even the Government recognises that this country has a big problem at present because productivity is not improving, unlike in some of our competitors.

Some relevant information on this issue recently came to light in the pages of the FT. First the Office of National Statistics (ONS) reported that population growth is slowing due to worsening life expectancy. But it’s still expected to grow by 3 million to 69.4 million by mid-2028. It also concludes that it is migration that is driving UK population growth and as the post-war baby boomers die that impact will strengthen.

Of the UK countries, England is expected to grow population more rapidly, rising by 10.3% to 2043, and I can guess where most of that will settle – London and the South-East no doubt based on recent past trends.

Now you may have concerns about that in terms of the “liveability” of the area. It will worsen the pressure on the public transport network and congestion on the road network. It will also increase air pollution substantially as air pollution directly relates to the business and travel activity of the population and the number of homes. But a letter from Professor Nicholas Oulton in the same FT pointed out that the growth of hours worked in the UK, largely fueled by migration, has reduced our productivity growth to near zero. He says the flip side of the UK’s job miracle is the productivity disaster [unemployment is at record lows].

This is not just a debate for economists though, because Brexit will enable the UK to restrict immigration from Europe which is currently unrestrained and has led to 18% of the workforce now being foreign born. That ready supply of both skilled and unskilled labour provides a disincentive for UK companies to invest in more machinery or IT systems and explains both the poor productivity growth and lack of capital investment. We have just been creating a lot of low-paid jobs.

The recent uncertainty over Brexit has also created difficulties for many businesses who are generally horrified by yet more delays in Parliament over concluding the matter. This is becoming an even more important issue than whether it is a hard or soft Brexit. So what should the Prime Minister do now that his Bill debate timetable was voted down thus making it very difficult to achieve his desired exit on October the 31st? I suggest he needs to either agree a very short delay with the EU together with some agreement from the Labour Party and others that wrecking amendments will not proliferate – I do not consider it totally unreasonable that more time was required to debate the Brexit Biill. Or he needs to get a General Election agreed. It seems that may just be possible.

But it is important to get Brexit completed if the UK is to tackle the problem of low productivity and hence low wages driven by excessive immigration.

It is the low and poor growth in wages for most of the population that is also driving the social unrest in the country which is an issue that cannot be ignored.

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

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Woodford and Hargreaves Lansdown, Rosslyn Data AGM and Brexit

To follow up on my previous blog post over the collapse of Woodford Investment Management and how to avoid dud managers, the focus has now turned in the national media upon Hargreaves Lansdown (HL.). Investors who have lost a lot of money, and now won’t be able to get their cash out for some time, are looking for who to blame. Neil Woodford is one of course, but what about investment platforms such HL?

The Woodford Equity Income Fund was on the HL “best buy” list for a long time – indeed long after its poor performance was evident. They claimed at a Treasury Committee that Woodford had displayed similar underperformance in the past and had bounced back. But that was when he had a very different investment strategy so far as one can deduce.

The big issue though that the Financial Conduct Authority (FCA) should be looking at is the issue of platforms favouring funds that give financial incentives – in this case via providing a discount to investors and hence possibly generating more revenue when better performing funds such as Fundsmith refused to do so. HL have not recommended Fundsmith in the past, despite it being one of the top performing funds.

It is surely not sensible for fund platforms to be recommending funds unless they have no financial interest in the matter whatsoever. Indeed I would suggest the simple solution is for platforms to be banned from recommending any funds or trusts, thus forcing the investor to both get educated and make up their own minds. Such a rule might spawn a new group of independent retail investor advisors which would be surely to the good.

Today I attended the Annual General Meeting of Rosslyn  Data Technologies (RDT). This is an IT company that I bought a few shares in a couple of years ago as an EIS investment. It was loss-making then, and still is but is getting near break-even.

There were only about half a dozen shareholders present, but they had lots of questions. I only cover the important ones here. New Chairman James Appleby chaired the meeting reasonably well, but left most of the question answering to others.

Why did company founder Charles Clark step down (as announced today)? Reason given was that he had set up another company where there was  a potential conflict of interest.

I asked about the Landon acquisition that was announced in September. How much revenue would this add?  They are not sure but maybe £0.5 million. Bearing in mind they only paid £48,750 for the assets and client list from the administrator, that seems to be me a remarkably good deal. But it later transpired that they have outstanding contracts (pre-paid) which they have to finish so that might be another £250,000 of costs. However, that’s still cheap and by rationalising some of the costs they should quickly turn Langdon profitable. It was suggested that Langdon had been mismanaged with over-expansion and too many staff which is why it went bust – only a few of the staff have been taken on. Note that the impact of this acquisition is not yet in broker’s forecasts.

It was noted that RDT is currently broadly on track for analysts forecasts but it has been a slow start to the year. Deals are slipping into the second half. Decision timescales in major corporates seem to be stretching out at present.

One shareholder, who said “I am talking too much – a daft old man”, which it is difficult to disagree with as he asked numerous questions, some not very intelligent, asked whether they were charging enough for their services. There was a long debate on that issue, but it was explained that competitors were charging less.

There were also concerns about the slow rate of revenue growth (only 8.3% last year). Comment: this company is clearly not operating in a hot, high-growth sector of the market. But it does seem to be competently managed and if they can do acquisitions like Langdon that are complementary then profits should grow.

Altogether a useful AGM.

Brexit has of course made many UK companies nervous about new projects. At the time of writing the latest position appears to be that the EU and Boris have agreed a deal. Most Conservatives like it, but the DUP does not and Labour, LibDems and SNP will all seem likey to vote against it in Parliament. The last group all seem to be playing politics to get what they individually want, but not a general election which on current opinion polls might result in a big Conservative majority. Most people are very frustrated that this group are blocking support of Brexit so we can close down the issue and move on when there seems to be no overall public support for another referendum or cancelling Brexit altogether.

But even given this messy situation, I am hopeful that it will be resolved in one way or the other soon. But then I am the perpetual optimist. I am investing accordingly.

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

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Woodford Closure, Renishaw Trading, DotDigital Results, Accesso Technology Bids Disappearing and Probate Fees

The big news today was that the Woodford Equity Income Fund is to be wound-up after a decision by Link Fund Solutions, the fund administrator. Neil Woodford has made known his opposition to the move but it is something I have advocated for some time. Decisive action was required because a fund that nobody wants to buy into and with a name on it that puts investors off is going nowhere. Blackrock and PJT Partners will take over the fund immediately and wind it down although it seems likely to be some months before investors receive any cash return. That’s just from the liquid listed investments. Some of the illiquid or small cap holdings could take much longer and valuations are questionable. Neil Woodford surely needs to retire.

What’s the moral of this story? That investors should keep a close eye on their fund holdings and not put up with poor performance for more than a short period of time. They should not have absolute faith in star fund managers however good their past records, and they should be more sceptical about recommendations from their share platforms.

The other issues to be looked at are the EU regulations on liquidity and how Woodford ignored the rules by listing stocks in the Channel Islands. The Financial Conduct Authority does also need to tackle the problem of open-funded funds holding unlisted stocks or property.

Another favourite holding of private investors has been Renishaw (RSW) whose stock price has been falling of late. This morning a trading statement indicated a sharp fall in revenue for the first quarter. The share price is down by 11% at the time of writing. The company’s statement is full of negative phrases – “reduced demand for our products”, “challenging global macroeconomic environment” and “trading conditions are expected to remain challenging”. I am glad I sold my holding some time back. Has the market for the company’s products changed, particularly in the APAC region? I don’t know but shareholders need to ask some tough questions and perhaps it is time for a change of leadership.

Other bad news was from Accesso Technology (ACSO)  in which I still hold a few shares. This company had entered a formal sale process but it seems none of the offers received were considered good enough. The sale process is still on-going but the share price has fallen 15%.

But there was good news from DotDigital (DOTD) one of my “ten-baggers” which was first bought ten years ago. Sales and profits were ahead of expectations for the full year in a Final Results Statement. Revenues were up 19% and recurring revenues are now 86% of the total – the latter rose even higher in the first quarter of this year which “has started well” they say.

Investors Chronicle ran an article in last Friday’s edition on how to identify multibagger stocks. It focused particularly on pharmaceutical and resource stocks but these are very tricky sectors in reality. You might strike lucky with a blockbuster drug or exploration company but you can also lose a lot on failed projects. The better approach is simply to aim for companies that consistently grow revenues and profits like DotDigital. That company also meets the profile of the companies I like as documented in my recent book “Business Perspective Investing”.

DotDigital has strong IP, high customer loyalty, small transactions, diverse customers and high recurring revenue. What more do you want?

More good news from wealthy investors came as the Government announced it was to rethink the proposed change on probate fees – effectively scrap the major hike for large estates that was due to be imposed in April next year. The previous proposals generated a lot of criticism as it was seen as a new way to generate tax to go into Government coffers instead of an equitable fee to cover the cost of the work involved on larger estates.

I watched the Queen’s Speech yesterday for the first time live. The Queen has never been a great speech maker but she managed to turn what should be exciting announcements about future Government policies and programmes into a dull recital. Perhaps a change of management is required there also?

You can read her full text here: https://www.gov.uk/government/speeches/queens-speech-2019 , although there is little that might affect investors directly.

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

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Brexit Bounce, Green Accreditation, Security Issues and Hargreaves Lansdown AGM

The FTSE and my portfolio jumped up this morning on the hope of a Brexit Agreement after all. RBS is up 16% which seems to be a function of euphoria. I think I’ll wait and see the progress of discussions in the next few days before plunging in to buy some more stocks. But if an Agreement is reached then the market is likely to power ahead so keep that cash handy.

The London Stock Exchange (LSE) announced today a new “Green Accreditation” scheme which will recognize companies and funds that derive 50% or more of their revenues from products or services that contribute to the global green economy. One company that has promptly announced accreditation is Blancco Technology (BLTG) in which I hold a very few shares after a disappointing track record. How do they qualify for this award? They do so because they provided data erasure services thereby helping people to recycle and reuse hardware rather than scrap it. No doubt there will be other “virtue signalers” claiming this award but I doubt it will make a lot of difference to my investment choices.

The takeover of Cobham (COB) has run into a lot of criticism about the threat to national security. The founding family have raised concerns and the Government has decided to intervene. On a personal note should I be worried that our new home security system based on Hikvision technology leaves us open to being hacked? Not only that but I also have a Huawei smartwatch. Both companies have been banned by the US due to their links to the Chinese Government. Hikvision have 1.3 million cameras installed in the UK, often in NHS facilities. This is surely an issue where the Government should be providing some advice. Why do we now have cameras all around our house? Not because of worries that my views on Brexit might stimulate some demonstrators but because the home of two Asian families in our street were recently burgled. Apparently such families are particularly at threat of such attacks because they often keep gold at home. Readers can be assured that there are no gold bars in our house. The burglaries that did take place were to houses with non-functioning alarm systems but my wife was somewhat concerned.

There was an interesting report in the Financial Times on the Hargreaves Lansdown (HL.) Annual General Meeting (I do not hold the shares). It sounds like it was a lively affair. Apparently some shareholders were not happy with the reaction of HL to the Woodford Equity Income Fund suspension after HL had promoted the fund. One shareholder said the reopening of the fund “has been postponed more often than Brexit” and suggested that HL should push for Woodford to liquidate the fund immediately. Comment: liquidating the fund abruptly would be easier said than done due to the nature of its holdings, but I agree that more vigorous action could have been taken. The fact that Neil Woodford is still running the fund when it will clearly be every unlikely to recover rapidly if at all is far from ideal.

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

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Next Results, Brexit Politics and Statpro Offer

Retailer Next (NXT) published their interim results on Thursday (19th Sept). This is a good example of a retailer making a successful transition from shops to internet sales. Earnings per share were up 8.8% with some impact from a change to adopt IFRS16 (lease accounting) and share buy-backs. Overall revenue was up 3.7% with online sales up 12.6% but retail sales down 5.5% and now less than the online figure. One has to ask, if Next can do this why could not M&S who recently got booted out of the FTSE-100? I suggest management is what makes the difference.

This what the CEO had to say in a detailed analysis of performance last year, under “Direction of Travel”: We are often asked: “What will the high street look like in 10 years’ time?”  The only honest answer to this question is that we do not know; we can see the general direction of travel but can predict neither the speed nor endpoint for the changes that lie ahead. Our approach is to build as much flexibility into our operations and cost base as is possible to minimise the negative effects of falling Retail sales and maximise opportunities for growth Online.  This means a constant process of reinvention and experimentation within our business, whilst preserving the integrity of our brand, the calibre of our people, quality of the operations and the profitability of the Group.  The task remains extremely challenging, but with more than half of our sales now coming from our Online and Finance businesses, it feels like we are moving in the right direction”.

CEO Lord Wolfson said that they would cut prices by 2% if the UK leaves with a Brexit deal. This is due to the government’s temporary tariff regime for a No Deal Brexit, which aims to minimise costs to businesses and consumers while protecting vulnerable industries. But he would prefer to see a deal done.

It was interesting watching Lord Pannick performing in the Supreme Court over the challenge to the prorogation of Parliament which is undoubtedly being motivated by opposition to Brexit (I simply don’t believe the motivation is otherwise – Parliament has had plenty of time to debate Brexit issues and will still have more time). As the Government’s lawyer said in court, if MPs don’t like what the Prime Minister is doing they can always call a “no confidence” vote.

Lord Pannick is a very clear speaker and a good advocate of any case. I recall him representing the Northern Rock shareholders over the nationalisation of that company without compensation and actually congratulated him on his performance at the end of the case. He lost that one though. I suspect he may lose this latest, or the result will be inconclusive but we will no doubt hear in a couple of days. It does seem to me though that it is time the UK adopted a written constitution to avoid such legal challenges and not have lawyers debating political issues. More clarity is required on what is permissible and what is not, and what the powers of the executive have versus Parliament. The role of the Prime Minister and other Ministers is being undermined by MPs trying to dictate day-to-day matters such as foreign relations with the EU which undermines their historic responsibilities.

Meanwhile the Financial Times ran with a headline today saying the Labour Party’s plans to expropriate 10% of shares would cost pension funds £31 billion. It might also cost readers of this blog who invest directly in shares or in funds a very large amount. Thankfully the chance of the Labour Party winning any general election seems low as not only is the Party in some disarray over their Brexit policy but they are dropping in the opinion polls. This is of course why Jeremy Corbyn refuses to support the call for a General Election. He is also rated the worse opposition leader in the last 45 years according to one opinion poll. Those who oppose Brexit are now choosing the LiberalDemocrats while those who support Brexit are supporting the Conservatives or the Brexit Party. Only if the Conservative vote is split would Labour have any chance of winning an election. But a General Election can be a very different battle ground to polls driven by single issue politics.

On Friday (20th Sept) AIM listed Statpro (SOG) announced a recommended takeover bid from US company Constellation Technologies. The share price promptly jumped over 50% to near the offer price. I held shares in this company for a number of years. Bought in 2005 originally and sold the last in 2015, suffering an overall loss. So that’s an example of lack of patience. The company always seemed to have potential but profits were patchy – it lost money in the last three years. Both companies operate in the investment analysis and reporting markets so this is a complementary acquisition. I see no reason to turn it down.

Bearing in mind my previous comments on technology stock valuations, it is on a forecast p/e of 8 but that is probably optimistic given that it reported a loss recently at the half-year and has a habit of disappointing. The bid values the company at 2.7 times historic revenue though which is probably reasonable assuming that Constellation can strip out a lot of the overheads. That always needs to be taken into account when looking at technology stocks. Often a trade buyer will pay more than market investors, particularly if they wish to acquire technology or customers.

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

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Open Orphan, Operation Yellowhammer and a Bridge to Ireland

Last night I attended a ShareSoc company presentation seminar. One of the companies that presented was Open Orphan (ORPH) which used to be called Venn Life Sciences but changed name after a reverse takeover of Open Orphan and a change of CEO. The new focus is on orphan drugs which are those medications that are focused on rare diseases, i.e. those with relatively few patients and where historically there have been few treatments available and typically very little research. Big pharma tends not to spend money researching such drugs because the likely revenue from them is small. As a sufferer from a rare disease this presentation was of particular interest to me.

As the presentation indicated, Venn was historically loss-making and was viewed as “under-capitalised”. Market cap of ORPH is only £17 million when forecast revenue this year is £16.5 million.

Open Orphan’s new strategy is to concentrate on launching additional services focused on orphan drugs and develop a proprietary data platform. That includes building a database of patient and genomic data. They are also developing a “virtual sales rep” service to enable lower cost sales to specialists in orphan diseases. This seems to be a telemarking operation supported by webinars. I was surprised to learn that drug sales in big pharma are still promoted by personal visits from highly-paid sales staff when in other fields a more “hybrid” approach is long established.

There is clearly a lot of work going into digital health platforms and databases – Renalytix which I covered in a previous report is one company focused on doing this for renal disease. So there are no doubt opportunities here although the presentation was short on information on the likely cost of developing such a platform and building the databases. Future fund raising looks a distinct possibility.

One question raised by the audience was whether patients would volunteer their own data (which in Europe they “own”). But I don’t think they will have objections because the chance of assisting development of treatments when there may currently be none will incentivize them to do so.

I suggest Open Orphan is a company to keep an eye on for the future. It’s still at an early stage of development.

Which brings me onto the subject of Operation Yellowhammer, the Government report which has now been published on the impact of a “hard” Brexit, or the “Reasonable Worst Case Planning Assumptions” as they headline the document (see https://tinyurl.com/yy2oll7p for the full document – it’s only 5 pages). As I am personally dependent on drugs to stay alive, the scare stories being propagated by some people about shortages on a hard Brexit are not just of academic interest.

The report suggests some disruption at Channel ports, including possibly up to 2.5-day delays to HGVs in Kent, i.e. similar to past disruptions caused by strikes in France which had no obvious impact on consumers although it might have some impact on “just-in-time” operations of manufacturing businesses.

But three-quarters of medicines come by the Channel straits which might have an impact on the supply of medicines and medical supplies, if unmitigated. As Nigel Farage has pointed out, the UK has 100 ports so alternatives to the Channel ports are readily available. Only a minority of drugs are time-sensitive and those could possibly be transported by air freight.

Pharmacy2U, one of the biggest prescription suppliers have published this note which covers patient concerns about Brexit: https://tinyurl.com/yxubdlsu . It basically says “don’t panic”, and carry on as normal. There are often problems with drug supplies due to complex supply chains, manufacturing or regulatory issues so this will be nothing new.

The report says demand for energy will be met as there will be no disruption to electricity or gas interconnectors but there may be rises in electricity prices. But it does warn about the availability of fresh foods, e.g. salad products from southern Europe which may be reduced. Are you worried about not being able to purchase tomatoes at Christmas? I cannot say I am.

In summary the Yellowhammer document is not something that will put off Brexit supporters from wanting to exit the EU on October 31st regardless.

One way around the problem of the Irish “Backstop” in the Withdrawal Agreement is to simply move the customs border to the Irish sea. This won’t please the DUP party of course but can they be bought off with the sop of a new bridge linking Northern Ireland to Great Britain? Or is this another of Boris Johnson’s bridge fantasies like the Garden Bridge in London? Is it even practical?

The Daily Telegraph published an analysis by a civil engineering expert. In essence it is possible because there are similar bridges in terms of length (13 miles or more depending on the chosen crossing point) elsewhere in the world. Even the deep water, up to 160 metres on one possible route, can be done. The cost might be £15 billion. So it’s perfectly feasible and probably better value than HS2.

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

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