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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Tesla, Unilever, EasyJet IT Write-Offs and Cash Holdings

The big news today is that the US Securities and Exchange Commission (SEC) have charged Tesla CEO Elon Musk with securities fraud. This charge relates to his comments on Twitter that he would likely be taking Tesla private. To quote from the SEC complaint: “Musk’s statements, disseminated via Twitter, falsely indicated that, should he so choose, it was virtually certain that he could take Tesla private at a purchase price that reflected a substantial premium over Tesla stock’s then current share price, that funding for this multi-billion dollar transaction had been secured, and that the only contingency was a shareholder vote. In truth and in fact, Musk had not even discussed, much less confirmed, key deal terms, including price, with any potential funding source”. Mr Musk vigorously rejected the charges, as did the company.

The full SEC complaint is here: https://www.sec.gov/litigation/complaints/2018/comp-pr2018-219.pdf

Comment: it is of course the oldest trick in the book if you are unhappy with the share price of your company to announce a potential bid from yourself or a third party. Making such an announcement via Twitter, if that was the motivation which has yet to be proven, would certainly be something new though. Making any announcements via Twitter is exceedingly risky and Tesla’s advisors must be tearing their hair out over this sequence of events. Who else if anyone reviewed the tweets before they were sent? Probably nobody I suspect. And anyone who uses Twitter will know it’s very easy to let typos, grammar errors and Spoonerisms creep in. Such important announcements should only be issued by the proper regulatory news channels. Elon Musk should have known better.

But if Elon Musk was forced to step down from Tesla, which might be the outcome, would it matter? I suspect not. The merit of Tesla as a company is in the technology in the cars which is still ahead of most potential electric car competitors. I have driven a Tesla Model S and it is a very good car indeed. But unfortunately my wife thinks I don’t need to buy expensive, flash cars to impress people any more so I’ll have to wait for the cheaper Model 3 to become available in the UK.

Unilever and Shareholder Voting

Unilever is planning to consolidate the two arms of the business in Holland, and drop the dual listing. UK shareholders would end up holding shares listed only in Holland, and as a result the dividends would be subject to Dutch withholding tax which is currently at the rate of 15%. Such taxes always cause problems although sometimes they can be refunded by submitting claims to do so. There is also the possibility that the withholding tax will be dropped. Another difficulty is that as Unilever is in the FTSE100, any funds running a FTSE-100 tracker would have to sell the shares. The Investors Chronicle ran a longish article on this subject and suggested it was a “no-brainer” for UK shareholders to vote against it.

But it seems that might be easier said than done. According to a report on Citywire, any shareholders in nominee accounts (i.e. in ISAs, SIPPs or other broker accounts – which means most UK shareholders now) will have to “rematerialize” their shares if they want to vote them, i.e. convert them to a paper share certificate. The company is not accepting votes submitted by nominee operators. Dematerialising shares is typically a costly and time-consuming process and is actually impossible to do if the shares are in an ISA or SIPP which have to be held in nominee form. This is truly outrageous news and any shareholders holding Unilever shares who wishes to oppose the move by the company should complain to the FCA, your Member of Parliament, the Company Chairman Marijn Dekkers, and anyone else you can think of.

[Postscript: the issue here seems to be the votes for the Court Hearing where the number of individual voters is taken into account. But for the shares held by a nominee operator, which may represent many thousands of underlying beneficial owners, only one vote would be counted even if it was submitted as there is only one holding on the register. ]

It has been reported that a number of institutions might oppose the unification of the company but it would certainly help to get retail shareholders voting.

Incidentally I attended a meeting today with Link Asset Services (one of the largest registrars) where the problem of retail shareholders not voting was discussed. I’ll write a separate blog post on that later.

EasyJet

If you recall, I mentioned previously the large expenditure on a “big-bang” IT project at Abcam which is clearly over-budget and over-time. That might have contributed to the 35% share price drop immediately after their recent preliminary results announcement. Now EasyJet have made a similar announcement today in their trading update. To quote: “…easyJet has now made the decision to change its approach to technology development through better utilisation and development of existing systems on a modular basis, rather than working towards a full replacement of our core commercial platform.  As a result of this change in approach, we are recognising a non-headline charge of around £65 million relating to IT investments and associated commitments we will no longer require. EasyJet will continue to invest in its digital and eCommerce layers that will enable it to continue to offer a leading innovative, revenue enhancing and customer friendly platform.”

That £65 million is no small sum and just shows you how IT is so critical to how businesses are managed in the modern world. Similar problems arose at TSB where they attempted to replace their old Lloyds systems with completely new software which was allegedly not adequately tested. But any IT professional will tell you that you cannot test and anticipate all the problems in a diverse customer environment ahead of going live with new technology. The NHS was another prime example of a “big-bang” approach to IT system development that ended up costing the Government, and us as taxpayers, at least £10 billion (that’s not a typo – it was ten billion and more). Evolution rather than revolution is the way to develop IT systems as EasyJet and Abcam seem to be learning, the hard way.

Cash Holdings

I suggested in a previous blog post that a newly available easy-access deposit account might be a suitable place to move cash from your stockbroking account to get a decent rate of interest rather than none. The problem of course is that most retail investors have most of their money in ISAs and SIPPs and taking cash out is problematic.

For ISAs, you may not realise that you can actually take cash out of a “flexible” ISA (which most ISAs are such as Stock & Share ISAs or Cash ISAs) and put it back in later. This was a recent change to the ISA regulations. However you can only do that within the same tax year without affecting your ISA allowance.

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

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