Some Like It Tops
At long last we have popped the tech-inflated record set more than 15 years ago. In case you were asleep, the FTSE 100 index closed at a new high this week. There is better to come. The mystery is why it has taken so long.
One reason for the delay is that the index was grossly overinflated in 1999, making the target harder to reach. The subsequent crash from 2000-2003 hurt a lot of smaller investors and it has taken time for memories to fade and to lure them back to the stock market.
That is only a small part of the story, though. The FTSE 100 has been slow to recognise the strength of the UK economy – indices of smaller companies set new records long ago – and it has been held back by the international nature of the largest companies listed here.
Nonetheless, those who stayed out have missed 15 years of dividend payments that have provided ample compensation for the lack of capital gains. I forecast early last year that the Footsie would set a new record in 2014. It has come two months too late but the movement is upwards. I will be staying fully invested.
Some Like It HOT
While the largest companies have struggled to gain new heights, the picture has been more mixed for AIM stocks, which tend to swing in and out of favour more readily. James Henderson, fund manager at Henderson Opportunities Trust (HOT), currently has about 40% of the fund invested in AIM stocks because he is seeing opportunities there.
Henderson points out that larger funds neglect AIM, yet, he says, “the next generation of successful smaller and medium companies will come through AIM”. He is happy to take a somewhat contrarian view because of the opportunities for stock pickers on the junior market.
“There is the potential to be a contrarian investor, looking for out-of-favour quality companies with strong cash generation and dividend growth,” he says. I agree with him on that point. Too many AIM companies don’t make profits, let alone generate cash and pay dividends, so you do have to balance the risk/reward factor more carefully on AIM. Picking companies that are, in his words, paying dividends at a faster lick makes even more sense for less experienced investors than Henderson.
He has some interesting thoughts on corporate UK in general, arguing that the financial crisis produced an atmosphere he has not seen before. Balance sheets are stronger, with net debt down because companies are not sure that banks will continue to provide loans. Because companies are not sure where the next order is coming from they cherish any orders that they do get. Cost cutting is generally continuing, and is being handled well, although costs would normally be rising at this stage of the cycle.
Henderson’s comments augur well for the UK stock market generally, not just smaller companies. If you want to buy into the AIM success story without picking potential winners for yourself, then HOT could offer a decent opportunity, since it is currently trading at a discount of more than 14% to net assets, which is far wider than its 12-month average discount of 4.3%. Outperformance versus the Morningstar UK Small-cap Equity category over the past three years has earned it a 4-star rating.
Weir Goings On
A drop of 10% in the share price was a pretty brutal reaction to what were admittedly dull full-year figures from Weir (WEIR). In fact, 2014 wasn’t all that bad. Profits would have been 7% better but for adverse currency movements, which left the reported figure down 2%, and a dividend increase of 5% was some consolation.
Alas, Weir is expecting much lower revenue in 2015 and margins will be squeezed.
There are two points to note here. Firstly, it has been obvious for some time that oil-related stocks are feeling the squeeze. Sometimes investors ignore the blindingly obvious until it is spelled out for them so there are always chances for shareholders to sell out when warning signs start to show.
Secondly, it would be wrong to assume that the recent pick-up in the oil price means that the pain is over. Quite the opposite. The collapse in crude prices last year has still to be felt by those that depend on oil exploration and refining.
Rodney Hobson is a long-term investor commenting on his own portfolio; his comments are for informational purposes only and should not be construed as investment advice. His views are not necessarily the views of Morningstar UK.
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