John Murphy, Branding, Fevertree, Downsizing, McCarthy & Stone & the Motor Industry

In yesterday’s Financial Times there was an article on John Murphy, my ex-brother-in-law. It covers his “downsizing” which in his case means moving from three houses (Tuscany, Suffolk and Islington) to one in London. Although I rarely meet him nowadays as he divorced my sister many years ago, he has an interesting history. He developed the first large branding and trade mark consultancy (Interbrand) and I worked with him briefly in it. He taught me the importance of strong branding and protectable trade marks. He subsequently was involved in the re-establishment of Plymouth Gin and claims to have started the whole fashion for gin which was otherwise a declining market at the time. Charles Rolls, one of the founders of Fevertree (FEVR), worked with John at Plymouth and that company is another good example of how important strong branding is in consumer products. The FT article is here: https://www.ft.com/content/c48fcdec-3071-11e9-8744-e7016697f225

On the subject of downsizing, I visited the latest McCarthy & Stone (MCS) “retirement living” development in Chislehurst recently – Shepheards House. It’s recently been completed and is not far from where I and my wife currently live. And very nice it is too. A 2-bedroom apartment costs £552,000 but the big problem would be downsizing to fit all our offices (3 including two “work rooms” for my wife), books and art into the one apartment. They have limited storage space in them. My wife suggests we would need two of them. Don’t think we are yet old enough to justify doing this and the economics of two of them don’t work.

Just reviewing the latest share price of McCarthy & Stone, which I held briefly, it’s still only about half the price at which it did an IPO in 2016. With the housing market in London and the South-East declining that is not going to make life easier for the company, although they seem to have sold the apartments in Shepheards House very rapidly. Profits were down last year and build costs are increasing which combined means the shares are looking relatively cheap now. It’s a typical problem with IPOs – the sellers know when it’s a good time to sell.

There was a good article on the UK motor industry in the main section of the FT yesterday under the headline “forced into the slow lane”. Apart from the mention of the impact of Brexit, which the FT has been repeatedly promoting with negative articles and editorial in the last few months, much to my annoyance, it does explain why the motor industry is facing difficulties.

It’s not just Honda’s decision to close Swindon, which has nothing to do with Brexit, as a Honda executive spelled out, but there is a general malaise in the industry which is also affecting German car manufacturers. The abrupt policy change over diesel vehicles, which has made them unsaleable to many people, has tripped up many manufacturers such as JLR and the fact that the EU has now negotiated a tariff-free trade deal with the EU means that Japanese car manufacturers no longer need to bother with manufacturing in Europe. That is particularly so when their markets in the Far East are growing while Europe is shrinking (Honda’s production at Swindon has been declining).

Vehicle sales have been dropping in the UK in what is a notoriously cyclical industry. It’s one of those products that does wear out, but new purchases can always be put off for some months if not years if there is uncertainty about technological change. With vehicles lasting longer than they ever did, there is no reason for buyers to acquire new vehicles at present.

Perhaps the Government should ask Tesla or other new electric car manufacturers if they want a ready-made facility and reliable workforce that will become available soon? In a couple of years’ time, the market for vehicles may well pick up.

But John Murphy’s decision to stop owning a car as part of his downsizing is a sign of the times also. When I first knew him, he owned the revolutionary Citroen DS and subsequently owned Bentleys. It must be quite a change for him.

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

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A Bad Day in the Market, but Good News from Unilever and BEIS

It was a bad day in the market yesterday, with the FTSE All-Share falling over 1%. This seems to have been driven by a sell off in bonds. Equity prices are usually linked to bond prices simply because as bond yields rise from a fall in bond prices, it becomes more attractive to hold bonds relative to equities. That particularly applies to shares that are “bond proxies”, i.e. ones bought because of their high yields for income seeking investors.

These changes have been driven by the realisation that the US economy is booming. The Federal Reserve has already raised US interest rates and is therefore likely to do so again if the US economy continues to race ahead. But a booming US economy is of course good news for many companies. Higher interest rates may mean that some companies pay more on their debt but that it a longer-term impact and many “new economy” companies do not have any debt.

When markets are falling in general, there is no place to hide. My over-diversified portfolio, mainly in UK small cap stocks, fell about 1%. Not every share declined but the majority did. It affected particularly highly rated, go-go stocks such as Fevertree (FEVR) which was down 8% yesterday. I am glad I now only have a nominal holding in the company. But also affected were many investment trusts which I hold as their typical low liquidity compounded by a few private investors panicking drove down the prices. Some fell more than the underlying shares they hold.

Property companies have also been affected as interest rates have an impact on their business model, despite the fact many have locked in low rates on long-term debt. Safestore (SAFE) for example was down 3.9% yesterday (I hold it).

The share price declines spread like a contagion to many other stocks who should be positively affected by a booming US economy and not impacted by higher interest rates. The rise in interest rates is hardly a surprise though it has been well signaled in advance in both the US and UK. It was unrealistic to expect the historically exceptional low interest rates to continue forever.

My reaction when there is carnage in the stock market is to stand back and wait to see whether it develops into a trend or is simply a short-term blip. There can be buying opportunities if the reaction to economic news is too severe. But interest rates are nowhere near low enough yet to cause me to abandon the stock market and move into bonds. I feel there is more destruction to come in the latter. 

Unilever and Enfranchising Nominee Shareholders

Today we have some good news from Unilever. They have backed down on their proposal to merge their dual legal structure. The announcement said “We have had an extensive period of engagement with shareholders and have received widespread support for the principle behind simplification. However, we recognise that the proposal has not received support from a significant group of shareholders and therefore consider it appropriate to withdraw”.

There was opposition from both individual shareholders and institutions in the UK and there was a risk that they might fail on the Court hearing vote to gain enough support. It’s always good when shareholders make their voice heard, although it still leaves the issue that shareholders in nominee accounts were likely to be disenfranchised.

The good news in that regard is that I have received a letter today from the BEIS Department which says “BEIS is sponsoring a project by the Law Commission to examine the UK system of intermediated securities”. I will try and find out more, but don’t get too excited – it might not report before 2020!

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

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