Barron's : It’s Time to Bet on British Stocks — Even With Brexit Looming

It’s Time to Bet on British Stocks — Even With Brexit Looming

It’s an opportune time to bet on British stocks.

The country’s economy is strong, stocks are inexpensive relative to those in the U.S., and when the Brexit drama passes, the pound sterling should rise.

Investors playing a likely rally should purchase the iShares FTSE 250 exchange-traded fund (ticker: MIDD.UK). It tracks the FTSE 250 index, which includes companies ranking from No. 101 to No. 350 in market valuation on the London Stock Exchange . These tend to focus more on United Kingdom, rather than foreign, markets.

The FTSE 250 contrasts with the more famous FTSE 100, which tracks many of the global multinationals like energy giant BP (BP) and beverage maker Diageo (DGE.UK). These large multinationals tend to sway to the same influences as the biggest constituents of the S&P 500. Put simply, the broader index doesn’t reflect the economic health of Britain’s domestic businesses.

The U.K. economy, which is about the same size as California’s, is strong. Unemployment has fallen to 4%, its lowest level since 1975. The postcrisis high for joblessness was greater than 8% in 2011, according to data collated by Trading Economics.


The country has seen positive growth each quarter since 2010, and inflation, as measured by the consumer price index, stands at 2.4%, slightly ahead of the 1.9% core rate of inflation, which excludes the volatile food and energy components.

Worries over Brexit have so far not hurt Britain, which is enjoying the best of times, at least economically. Better still, the economy shows no imminent signs of weakening anytime soon.

“We have noted many times before how the uncertainty experienced over the past couple of years has not had a big impact on confidence or investment,” states a recent report from London-based consulting firm Capital Economics. “The economy’s reasonable performance in the past year or two suggests that we were right to take a relatively optimistic view about how the U.K. would fare in the immediate aftermath of the EU referendum.”

While the economy has done well, the currency has been pummeled. Before the June 2016 Brexit/EU referendum, the British pound fetched $1.44; recently, it was worth $1.30. The drop has been precipitated by uncertainty over whether Britain and the European Union could cut a good deal.

Currently, no agreement seems close—the norm in negotiations with the EU. The 2011 Greek debt crisis at times looked as though it would rip apart Europe’s single currency, the euro. A deal got cut, but at the last minute. The same will probably happen with Brexit. “Cool heads have prevailed, and cool heads will keep prevailing,” says Konstantinos Venetis, a senior economist at London-based financial firm TS Lombard.

He says that getting to a point where the U.K. leaves the EU without some form of a trade deal, also known as “hard Brexit,” isn’t likely. “The bar for a hard Brexit is pretty high,” Venetis contends. Instead, he sees a deal before the March deadline. Without one, Britain has much to lose, and so does the EU. “If tomorrow we get a smooth deal, then you would see a jump in sterling to $1.40,” he maintains. At that point, U.K. stocks, especially domestically focused ones, would rise in dollar terms.

The U.K. market is cheap by conventional measures. The FTSE 250 has a forward-looking price/earnings ratio of about 14.3 and a price-to-sales ratio of 1.1. That compares with about 18 and 2.3 for the S&P 500. The dividend yield of the FTSE 250 is 3.2% versus 1.9% for the S&P.

Among individual stocks, one attractive choice is Barratt Developments (BDEV.UK), says Jim Clarke, portfolio manager for global opportunistic equity strategy at Brandywine Global in Philadelphia. The British home builder trades for about eight times 2019 earnings, has more cash than debt, and has steadily increased return on capital employed over the past few years. For 2018, ROCE was 29.6%, versus 19.5% in 2014. “The board is confident of delivering a good financial and operating performance” in fiscal year 2019, the company said last week.

In comparison, U.S.-based home builder Lennar (LEN) trades at 10 times earnings in a slowing market that is weakening, in part because of tax-law changes.

The U.K. government has resolved to address the country’s chronic housing shortages, which should give Barratt opportunities. Prime Minister Theresa May has promised to make more building space available.

To be sure, there are risks in Britain. A Brexit with no deal would hurt U.K.-based companies. And all stock markets are exposed to the negative effects of rising interest rates. But the lower valuation of the FTSE 250 versus its U.S. counterparts makes that less risky for investors.

“I expect interest rates to normalize, and that will put pressure on the higher valued equity markets like the U.S.,” says Jack Ablin, chief investment officer at money manager Cresset Wealth Advisors in Chicago. “As those rates rise, the cheaper stock markets will endure much better.”

In other words, if higher borrowing costs prompt investors to flee stocks globally, cheaper markets, such as Britain, will probably lose less than pricier ones, including the U.S.

WSJ : Italian Credit Downgrade Likely to Add to Pressure on Europe’s Markets

Italian Credit Downgrade Likely to Add to Pressure on Europe’s Markets
Moody’s cuts the country’s debt to a notch above junk rating amid fears of contagion

Italy’s credit was cut by Moody’s Investors Service Friday to the lowest investment-grade rating, in a move that will likely add further selling pressure on Italian bonds and raise borrowing costs for the debt-laden country.

Italy’s bonds had already sold off again on Friday before recovering later in the day. This past week, selling also spread to other Southern European economies, in a worrying sign for investors who until recently hoped that market jitters would be contained.

Moody’s downgraded the country’s credit rating to Baa3 from Baa2, citing a “material weakening in Italy’s fiscal strength” after the government targeted higher budget deficits and stalled economic and fiscal reforms.

Italian bond yields have risen sharply since late September, when the country’s government set a 2.4% budget-deficit target that put it at odds with the European Commission.

“Italy’s public debt trend is vulnerable to weaker economic growth prospects, which would see the public debt ratio rise further from its already elevated level,” Moody’s said in an emailed statement.

While many investors had anticipated a credit downgrade, the move to one notch above a junk rating is still a significant threshold, given some funds can’t hold sub-investment-grade bonds.

Further selling could add to pressure on the eurozone’s markets.

The gap in yield between 10-year Spanish bonds and haven German debt hit its widest level since April 2017 during Friday’s session before narrowing later in the day, according to Refinitiv, while Portuguese debt also came under pressure.

Investors hadn’t sold the debt of other weaker Southern European economies. That kind of market contagion has rarely been seen since the depths of the eurozone sovereign-debt crisis over six years ago.

That changed this past week, as the extra yield premium investors demand to hold Spanish debt over similar German bonds climbed to 1.33 percentage points, according to Refinitiv, versus about one percentage point in late September.

Still, the selloff eased in European afternoon trading Friday—with Italian bonds rallying after the country’s 10-year yields hit their highest level since early 2014 earlier in the day. That turnaround came after a senior European Union official played down tensions with Italy’s antiestablishment government.

But investors predicted the standoff between Brussels and Rome will continue, likely keeping markets volatile.

“People are very focused on [the] downside risk to Italy, and it has spilled over more in the last couple of sessions,” said Ryan Myerberg, a portfolio manager at Janus Henderson Investors.

Mr. Myerberg said Spain’s and Portugal’s finances look solid. But in the short term, something of a “perfect storm” could cause their bonds to slide, including concerns over credit-rating firms downgrading Italy and crowded positioning in Spanish debt.

“They won’t be immune if Italy continues to move higher in yields,” he said.

Italy is the eurozone’s third-largest economy and has a public debt load that equates to about 130% of gross domestic product. Analysts fear that if Italy crashed out of the common currency, other weaker economies would be dragged to the exit with it.

The EU’s executive arm warned Italy’s government in a letter on Thursday that its budget plans appear to violate commitments to reduce its debt and deficit. The fact that Rome has opted to expand its deficit instead of cutting it, and the scale of the deviation from previous promises, “are unprecedented in the history of the Stability and Growth Pact,” the Brussels-based European Commission wrote, referring to the EU’s fiscal rules.

The government has said it won’t change its plans to boost welfare and pension spending and cut taxes, even if the commission launches disciplinary proceedings, which could potentially lead to financial penalties for Italy.

The continuing selloff in Italian bonds challenges government officials’ claim that financial markets are more relaxed about their economic policies than Brussels. The bond selloff is also hurting Italy’s banking sector, which is heavily exposed to the government’s debt.

But despite bouts of anti-euro rhetoric from Rome’s antiestablishment government, most analysts see a eurozone breakup as very unlikely.

“The recent [bond market] move is not a European-break-up-driven move,” said Mr. Myerberg.

Many investors still expect Rome and Brussels to reach an agreement on the Italian budget. That may take some time, though, meaning bond markets are likely to stay volatile.

“We’re looking for a resolution,” though it may not come until December, said Adrian Helfert, senior portfolio manager at Amundi.

“There’ll be an entry point” to buy Italian debt, he said.

FT : Quantum computing can optimise portfolios, says US space agency

Quantum computing can optimise portfolios, says US space agency
Study by Nasa and Standard Chartered points to benefits for fund managers of atomic processing

Embracing quantum computing may be a small step for asset managers but it would be a giant leap for investment decision-making, says a forthcoming report co-written by the US space agency.

Nasa worked with the Universities Space Research Association, an academic group, and Standard Chartered, the UK bank, to investigate the efficiency benefits that quantum computers could bring to investment portfolios.

Till now, such machines have been used mainly to solve problems related to data for machine learning and to improve the effectiveness of medicines. The paper will argue that asset managers can use quantum computers to create optimised portfolios, for instance by finding the perfect balance between risk and return.

“People often say that quantum computing will dramatically disrupt all industries some time in the future — but it’s already here,” said Alexei Kondratyev, managing director for financial markets at Standard Chartered, who worked on the report.

He said there had so far been little uptake among asset managers of quantum computers because of their cost, which starts at $15m. He expects much more use in the next couple of years as fund managers are able to rent computer firepower through the cloud.

“It’s about gaining an edge,” Mr Kondratyev said. “These computers not only make quicker decisions, they also make more accurate decisions.”

Quantum computers differ from classical super-computers by harnessing the power of sub-atomic particles to speed up processing. In certain scenarios, they are 100m times faster at solving problems than conventional computers. They were developed in the 1980s and have recently been used for more commercial purposes.

Nasa and Standard Chartered have been running a research programme since the beginning of the year looking at their use in designing investment portfolios.

The use of quantum computing in the investment industry has been considered for several years, with Marcos Lopez de Prado, who recently left Guggenheim Partners for quant specialist AQR Capital Management, one of its biggest proponents.

Mr Kondratyev provided an example where quantum computers would come into their own. If an investment manager wished to construct a portfolio of 30 stocks from a universe of 60, there would be 100,000tn possible combinations. A quantum computer would be able to calculate the most appropriate line-up significantly quicker than a conventional computer.

FT : Shakespeare would have been subject to censorship in his own times

Shakespeare would have been subject to censorship in his own times

I greatly enjoyed Yuan Yang’s article “ The Bard and Beijing” (Life & Arts, October 6) on how performances of Shakespeare’s plays in present-day China are posing challenging questions to a regime reliant on political and artistic control. It is worth pointing out, however, that Shakespeare’s world had much more in common with the Chinese Communist party’s attitude to literary censorship than to 21st century Britain’s. Shakespeare had to submit his plays to the Revels Office for licensing and authorisation. The “Master of the Revels” — without whose authorisation no play could be (legally) performed — would scrutinise them with the aim of editing out content that might have displeased the authorities, the Church or the monarch.

A 1606 Act of Parliament ordered that “any Person or Persons [who] do or shall in any Stageplay, Enterlude, Show, May-game or Pageant, jestingly or profanely speak or use the holy Name of God …shall forfeit Ten Pounds”. The Chinese official who demanded the removal of a four-letter word from a production of The Tempest, as Ms Yang reports, was seemingly on a similarly moralistic endeavour.

Censorship had just such a political role in Queen Elizabeth’s England as it does in Xi Jinping’s China. The scene in Richard II in which that King is deposed was, for years, forbidden to be printed at all — presumably someone was worried that the staging of violent disruption to the political status quo might encourage real-life attempts to do the same. That play is intimately concerned with ideas of succession and dynastic validity — an anxiety always on display at the CCP’s National Congress.

Shakespeare’s plays present the possibility of a different world order, of a different way of doing things. For censors — whether working for English monarchs or Chinese presidents — that is quite troubling.

>>> Endocyte/Novartis deal driven by positive FDA update

Endocyte/Novartis deal driven by positive FDA update
19 OCT 2018
Following a key US Food and Drug Administration (FDA) decision in September, Novartis [VTN:NOVN] believes now is the best time to acquire biotech firm Endocyte [ECYT], a spokesperson for Novartis said.

“Whilst we have been monitoring Endocyte’s progress for some time, given our interest and expertise in RLT (radioligand therapy), recent de-risking events including FDA acceptance of rPFS [radiographic progression free survival] as an alternative primary endpoint for full approval” of the Phase III trial of Endocyte’s lead development program, “in addition to OS (overall survival), makes this the optimal time for Novartis to invest”, the spokesperson said in a statement to this news service.

The FDA update, disclosed by Endocyte on 10 September, could potentially accelerate the approval timeline for the company’s lead program, Lu-PSMA 617. Approval is now expected to come before the end of 2019, according to the company.

Lu-PSMA 617, a potential first-in-class radioligand therapy, is currently in Phase III development for the treatment of metastatic castration-resistant prostate cancer (mCRPC).

“Radiopharmaceuticals are becoming an increasingly important treatment option for patients and a key growth driver for our business”, the Novartis spokesperson said.

This week the Swiss pharmaceutical company announced plans to acquire West Lafayette, Indiana-based Endocyte for USD 24 a share in cash, a 54% premium to Endocyte’s closing price on the prior day. The USD 2.1bn transaction is expected to close in 1H19, according to the press release.

The merger agreement includes a no-shop provision, a termination fee of USD 73.5m and a reverse termination fee of USD 150m.

The acquisition of Endocyte would expand Novartis’ oncology presence and “build on its radio-ligand therapy platform by adding a second RLT to launch following the very successful launch of Lutathera,” the spokesperson said.

Novartis can maximize the potential of Lu-PSMA 617 thanks to its “knowledge of the radiopharmaceuticals space and complex supply chain dynamics and accelerate the development of Endocyte’s pipeline”, the spokesperson added.

Centerview Partners and Jefferies served as financial advisor to Endocyte. Faegre Baker Daniels acted as legal counsel to the company. Cravath, Swaine & Moore advised Novartis.

Endocyte declined to comment.

>>> Swiss Re possibly interested in Anbang Insurance stake, acquisition of Vivat

Swiss Re possibly interested in Anbang Insurance stake, acquisition of Vivat

Switzerland-based insurer Swiss Re [SWX:SREN] has been conducting talks with Anbang Insurance about buying a stake in the Chinese peer, De Financieele Telegraaf reported, citing unnamed sources.
The talks with the Chinese authorities were also about a possible takeover of Netherlands-based insurance company and Anbang subsidiary Vivat by Swiss Re, the report continued.
Swiss Re is supposedly one of the parties asked by the Chinese authorities to discuss buying a stake in Anbang, which is having grave financial problems. A takeover by Swiss Re of Belgian insurer Fidea was part of the talks too, the report noted.
This news service earlier this week reported that the Singapore sovereign fund Temasek has had discussions with authorities in China over a potential purchase of a stake in and certain assets of Chinese insurer Anbang Insurance.
China Insurance Investment, a local entity held by some of China's largest insurers, is also mulling an investment in Anbang and is discussing with Chinese regulators.
Swiss Re has not made any decisions yet, the item added

>>> US Close Dow +0,26% S&P -0.04% Nasdaq -0.48% Russell -1,20%


Closing Market Summary: S&P 500 Finishes Flat Despite Strong Start

The S&P 500 closed Friday at its flat line, a fitting end to a flat week; the benchmark index ended just 0.02% above last Friday's close. The session began with a bang, with the S&P 500 adding as much as 1.0%, following a positive overnight performance from Chinese markets and more upbeat earnings. However, sentiment soon shifted, prompting a slow and steady retreat from early highs.

As for the other major averages, the blue-chip Dow Jones Industrial Average added 0.3%, tech-heavy Nasdaq Composite lost 0.5%, and the small-cap Russell 2000 fumbled 1.2%.

China's Shanghai Composite rebounded from a four-year low on Friday, adding 2.9%, despite reporting a lower-than-expected GDP reading (+6.5% actual vs +6.6% consensus). Chinese officials made a collaborative effort to ease investor angst about liquidity risk and China's economic fundamentals.

On the earnings front, Procter & Gamble (PG 87.30, +7.06) and PayPal (PYPL 84.78, +7.30) jumped 8.8% and 9.4%, respectively, after beating earnings estimates. Procter & Gamble wowed investors with quarterly organic sales increasing 4% -- its highest increase since Q1 of its fiscal 2014 year. In addition, Dow component American Express (AXP 106.73, +3.89) enjoyed a healthy gain of 3.8% after besting earnings estimates and raising its profit guidance.

Within the S&P 500 sectors, investors played defense again. The consumer staples (+2.3%), utilities (+1.6%), and real estate (+1.0%) sectors finished atop Friday's leaderboard. Conversely, the consumer discretionary (-0.9%) and health care (-1.0%) sectors weighed on the broader market, and energy (-0.8%) and materials (-0.7%) also underperformed.

Looking at other markets, U.S. Treasuries ticked lower to conclude the week, pushing yields higher. The 2-yr yield and 10-yr yield each increased two basis points to 2.90% and 3.20%, respectively. For the week, the 2-yr yield added four basis points, and the 10-yr yield added three basis points. In addition, the U.S. Dollar Index fell 0.3% to 95.46.

In energy, WTI crude recouped some of its recent losses on Friday, settling 0.8% higher at $69.26/bbl. Still, the commodity remains near a one-month low.

Reviewing Friday's sole economic report, Existing Home Sales for September:

  • Existing home sales declined 3.4% month-over-month in September to a seasonally adjusted annual rate of 5.15 million (consensus 5.30 million), which is the lowest sales level since November 2015. Total sales were 4.1% lower than the same period a year ago.
    • The key takeaway from the report is that home sales activity was pressured by the limited supply of lower-priced homes and the affordability constraints presented by higher mortgage rates.

Looking ahead, investors will not receive any economic data on Monday.

  • Nasdaq Composite +7.9% YTD
  • S&P 500 +3.5% YTD
  • Dow Jones Industrial Average +2.9% YTD
  • Russell 2000 +0.4% YTD

>>> US Gapping down

Gapping down

In reaction to disappointing earnings/guidance:

  • OZK -21.8% (missed Q3 EPS by wide margin) LLNW -9.4% (Q3 in-line, FY18 outlook in-line), SREV -8% (guided Q3 and FY18 revenues downward; appointed Richard G. Walker CFO), MAN -6.8% (missed on top line) TEAM -5.4% (beat Q1 ests; guided slightly above ests) CNXN -3.9% (issued downside guidance for Q3 EPS and revs), ADNT -2.4% (lowered FY18 outlook)

M&A news:

  • VLO -3% (acquiring VLP, downgraded to Sell at Goldman)

Other news:

  • INAP -13.9% (announced common stock offering; light Q3 rev guidance), AKTS -9.2% (proposed offering of common stock and convertible senior notes), XOG -5.5% (updated FY18 production outlook and provided initial look at FY19 crude production), AIG -3.3% (announced preliminary global catastrophe losses net of reinsurance of approx. $1.5-1.7 bln for Q3), DWDP -1.3% (disclosed $4.6 bln impairment charge; announced filing of initial Form 10 registration statement for the separation of Corteva Agriscience)

Analyst comments:

  • EBAY -6.3% (downgraded to Hold at Stifel following PYPL earnings), NVRO -5.3% (downgraded to Sell at Goldman ), BIIB -1.3% (downgraded to Mkt perform at Bernstein),


>>> US Gapping up

Gapping up

In reaction to strong earnings/guidance:

  • SKX +8.3% (beats EPS, guides Q4 above), PYPL +7% (beat Q3, strong metrics; encouragement around Venmo monetization) CLF +6.6% (Beat EPS ests; initiates dividend) VFC +4% (beat and raise, increased dividend) PG +3.8% (organic sales growth aclerated to +4%) CE +3.4% (issued upside guidance for FY18 EPS), HON +2.8% (beat Q3 estimates) ISRG +2.4% (beat Q3 ests, raised FY18 Procedural Growth guidance on call), WERN +1.9% (beat Q3) AXP +1.9% (beat Q3, raised FY18), CP +1.5% (beat Q3 EPS, raised FY18) IPG +1.4% (beat Q3 estimates) ETFC +0.7% (beat Q3, not looking to sell)

M&A news:

  • VLP +6.4% (acquired by Valero (VLO) for $42.25/unit)

Chinese stocks gapping up:

  • WUBA +3.7% ASHR +3.5% YY +3.3% MOMO +3.3% BILI +3.0% SINA +2.9% SOHU +2.8% TCEHY +2.7% JD +2.6%. 

Other news:

  • AVXL +21.1% (FDA accepted IND for ANAVEX2-73), CAL +11.2% (announced acquisition of Vionic for $360 mln), TTGT +10% (to join S&P SmallCap 600), CLVS +5% (initial Phase 2 TRITON2 data), TSLA +1.9% (released lower cost Model 3), FBC +1.8% (slated to join S&P SmallCap 600), MU +1% ( to exercise right to call Intel's (INTC) interest in IM Flash Technologies JV for $1.5 bln)

Analyst comments:

  • VRAY +6.2% (Baird initiates Outperform), XRAY +4.1% (upgraded to Buy from Sell at Goldman), ROKU +3.5% (upgraded to Buy at RBC), DIS +1.6% (upgraded to OW at Barclays), AAPL +1% (Wedbush initiates Outperform with Street-high $310 tgt, adds to Best Ideas List ), MSFT +0.9% (Wedbush initiates Outperform)