Report on Q2 2015

Report on Q2 2015

6 Jul 2015

In Q2 the FTSE 100 fell by 3.3% but the FTSE 250 was up by 2.8%. In the first half year of 2015, the FTSE 100 was flat but the 250 was +9.2%. This divergence is probably indicative of two factors. The FTSE 100 is heavily weighted with banks and resource and mining stocks, few of which have looked like attractive investments for some years. The 250 is more reflective of UK PLC. Second, despite nervous headlines about (in no particular order) Greece, China, the interest rate cycle and the various consequences of terrorism, large companies have not benefitted from any move to perceived safe havens. Blue chip oil and pharma companies yield 5%+ but the average investor doesn’t seem to care. To put it another way, investors are not particularly nervous.

European bond markets have normalised to some extent. The UK 10 year gilt yield has risen from 1.6% to 2.1%. Way back in September 2103 I recommended (and bought) a gilt, UNITED KINGDOM 1 3/4% TREASURY GILT 22. It was trading at 92. Having touched 103 in Q1 it now trades at just under 99, yielding 1.9%. This is not yet tempting me to get back in but it’s movement is worth following.

Very little happened to the share prices of the major food retailers in Q2. They have all begun to tackle their structural problems. My view is that the market is now ignoring a trickle of good news. While Tesco is taking small steps at the start of a very long road – because Tesco needs to overhaul its financial structure – Sainsbury reported that the performance in its large stores had improved in June. It implied that the appeal of discount stores like Aldi and Lidl was waning slightly. Wishful thinking, perhaps, but Sainsbury is making an effort and its new joint venture with Argos is interesting.

Morrisons has a new chief executive, David Potts, who seems to be making the right noises. When the (dull) Q1 numbers were released he said:

“My initial impressions from my first seven weeks are of a business eager to listen to customers and improve“.

He seems to be as good as his word, moving more workers onto the shop floor and offering more manned express checkouts (as well as the self-scanning variety). 720 head office jobs are going and some of those whose jobs are being made redundant will be offered positions on the shop floors – this might be hard on the individuals involved but it gets a thumbs up from this shareholder.

Last week, Kantar, an agency that monitors market data, said that in the 12 weeks to 21 June, Morrisons actually increased its market share (from 10.9% to 11.0%). No one seems to remember when that last happened.

Finally, here is another example of a received wisdom that is simply the wrong way around. I have previously written about how everyone accepts that the UK has a housing crisis because everyone accepts that the UK has a housing crisis and how most people simultaneously disapprove of inheritance tax and inherited wealth. For weeks now the news has been full of Greece and its struggle to stay in the euro. Every commentator appears to think that the euro will fall if Greece exits.

Surely the truth is exactly the opposite. There are 19 EU countries that use the euro. Of these, Germany is the strongest and Greece, despite competition from Cyprus, is the weakest. Were Germany unilaterally to abandon the euro, it would collapse in value. I think that’s obvious. It seems to me to be equally clear that if the euro loses its weakest members it should strengthen.

PS I just discovered that Montenegro and Kosovo have both been using the euro for years without even being members of the EU. Perhaps they could lend some to Greece?

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