Election Recap & Stock Market Musings

Morningstar columnist Rodney Hobson reviews the election results, the challenges facing the US economy, and reveals one stock pick that went sour

Rodney Hobson 9 November, 2012 | 1:38PM
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US Election is Over, But Political Concerns Endure

One hurdle has been cleared, though with a nasty fall, in the US political handicap, but several more hurdles stand in the way before we can feel entirely happy with the outcome. Meanwhile, the sharp slide in share prices on Wednesday has presented a buying opportunity.

We have, in effect, more of the same: the same Democrat president, the same Democrat control of the Senate and the same Republican control of the House of Representatives but with the vital difference that the elections are out of the way.

I had hoped for a resounding victory for one presidential candidate or the other to give him authority. Although Barrack Obama has secured a clear majority in the electoral college he is not far enough ahead in the popular vote to claim a massive endorsement. Fortunately the worst case scenario, of Obama winning narrowly but the Democrats losing control of the Senate, has been avoided.

There is now very little time to reach a compromise on the ‘fiscal cliff’ of tax rises and government spending cuts, which is due to take effect in January. With both sides able to claim a partial victory, there will be some digging in of heels.  It is curious that American politics has become increasingly polarised over the years while at the same time the major political parties here have adopted increasingly similar policies.

Failure to reach agreement will undoubtedly plunge the US back into recession, which is the fear that hit shares so heavily after the election. However, I hope that neither side will want to take the opprobrium of sabotaging the economy. There should be enough moderate Republican Representatives who are horrified at the way that the far right is taking over the party and damaging its chances of selecting an electable presidential candidate.

The ‘fiscal cliff’ was a deliberate ploy to break the party political deadlock. The idea was to have a deadline that would concentrate minds in the search for a permanent solution to the American government’s debt problem. It seems more likely now that another temporary fudge will be mangled together and that, with the Republicans holding a 40 seat majority among Representatives and the Democrats in a clear majority in the Senate, the new Congress will be in even less of a mind to reach a long-term solution.

Thus we will have the United States and the European Union both pushing the day of reckoning further down the road. It is less than ideal but better than many commentators feared earlier this year. The glass remains half full.

Shop Front

Politicians know all about managing expectations and there was a hint of it about the half-year results from Marks & Spencer Group (MKS). The company’s 9.6% fall in profits was seen by the markets as not too bad. In fact, M&S shares rose 10.8p on the release of the figures after two days of press speculation about a possible dire outcome.

The problem is with general merchandise, which includes clothing and home goods. Sales were down 4.3% on a like-for-like basis in the half year but most of the pain came in the first quarter, when this section was down 6.8% like-for-like. My spy in the High Street tells me that the clothing ranges are definitely improving.

In fact, whichever figure you select, total or like-for-like, and whichever section of M&S you take, general merchandise, food, online, overseas or group, the second quarter was measurably better than the first.

Total sales for the first half were actually 0.9% higher than for the equivalent period last year, not exactly sparkling but at least an improvement. The problem is that M&S does seem to swing about from quarter to quarter, so we need further gains to feel comfortable with holding the shares.

The interim dividend has been maintained, giving a yield of 4.4%. That is quite reasonable, but given the struggle on the High Street it is nowhere near enough to tempt me.

Severfield Wrong ‘un

Shares in specialist steel manufacturer Severfield-Rowen (SFR) tumbled 25% when it suggested that pre-tax profits this year will be only about £1 million compared with £6.8 million last time. I have now lost about half of my money on this modest investment stake that I took some time ago. It serves me right for not getting out sooner, for there have been plenty of warnings on the way.

The great fear is that one profit warning is often followed by another. While we are far enough into this year to feel reasonably satisfied that Severfield will not make a loss, one has to wonder how next year will pan out. I really cannot recommend trying to get in at this stage as the risks are too great.

I should be listening to my own advice and selling out before worse befalls but I have decided that my stake is now worth so little that I will cling on. I certainly do not regret buying the shares. I wanted to get in early to one or two stocks that depended on a recovery in construction generally but I was reluctant to commit too much to one company. I also had no exposure to manufacturing.

Thus I bought Barratt Developments (BDEV) (initially disastrous but I’m glad I hung on), Taylor Wimpey (TW.) (ditto), Speedy Hire (SDY) (ditto but only just ahead), Balfour Beatty (BBY) (good from the start) and Severfield. The gains have far outweighed the single loss.

Market Performance (November 5 - 9)

FTSE 100: -1.68%
FTSE 250: -2.30%
FTSE All Share: -1.75%
FTSE Small-Cap: -1.05%
FTSE AIM 100: -2.25%
FTSE Fledgling: -1.27%

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Rodney Hobson is a long-term investor commenting on his own ideas and portfolio; his comments are for informational purposes only and should not be construed as investment advice.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Balfour Beatty PLC406.40 GBX0.20
Barratt Developments PLC500.73 GBX0.59Rating
Marks & Spencer Group PLC305.79 GBX-1.23Rating
Severfield PLC80.90 GBX0.12
Speedy Hire PLC39.40 GBX0.65
Taylor Wimpey PLC157.85 GBX0.51Rating

About Author

Rodney Hobson

Rodney Hobson  is a columnist for Morningstar.co.uk and author of several investing books, including The Dividend Investor and How to Build a Share Portfolio.

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