This is a transcript of David Kuo's recent podcast with Richard Hunter of Hargreaves Lansdown.
You can listen to or download this podcast here.
David:
This is Money Talk, the weekly podcast from the Motley Fool. I'm David Kuo, and today I am joined by one of the UK's foremost investment commentators, Richard Hunter, who is Head of Equities at Hargreaves Lansdown. Welcome, Richard.
Richard:
Thank you, David.
David:
You are still Head of Equities at Hargreaves Lansdown?
Richard:
I am indeed, yes.
David:
Despite the 4:1 drubbing by Chelsea of Arsenal at the weekend?
Richard:
That must be 13 seconds into the interview, I was expecting that at the end, rather than the beginning, but yeah, thanks for reminding me.
David:
I just thought we would set the tone for the podcast, because I know you're an ardent Arsenal fan?
Richard:
Yes, yes, nice of you to mention it, yes.
David:
That's OK, do you think football clubs are a good investment? – just out of interest?
Richard:
Certainly not, they've been a disastrous investment.
David:
Even for Manchester United, do you think?
Richard:
Well, Manchester United, of course, aren't a quoted company any more after Glazer bought them out a couple of years ago, and obviously saddled them with debt. At one stage, there were about 20 quoted football clubs after the Taylor report, whereby all stadiums in the Premiership needed to be made all-seater, and at that stage transfer fees were going through the roof, so a lot of companies who were football clubs had to raise a lot of money, that 20 has now dwindled to about three or four, within the Premiership I think Tottenham are probably the only quoted company left, because all the big clubs of course tend to be owned by individuals or a small group of individuals, so as an investment, and the way that these shares have performed, because they've got such a high cost structure, and obviously it's totally tied to performance on the field, and whether you qualify for Europe etc, so they've tended to be very much for die-hard fans and, if anything, as a lot of early investors in football club shares did, just buy the shares and stick the certificate on your wall.
David:
So when we hear about clubs like Stockport County going into administration, and Southampton going into administration, you're not in the least surprised?
Richard:
No, not at all, because they've also outside of the Premiership, I mean you've got to put the Premiership to one side, but outside of the Premiership, the difficulty in the wider economy, with the recession, there's less people going to the games in the first place, what little corporate hospitality they've got is also going downhill, and of course less people committed to buying seasons tickets, and those are three main strands of income for those low division clubs who haven't necessarily got the TV rights to back them up, so yeah, there have been some, and there could well be some more.
David:
So given that there is no more distraction yet as far as investing in football clubs are concerned, can we just sort of turn to the stock market now? The stock market has actually risen by, according to my calculations, somewhere around 30% from its low in March of this year?
Richard:
That's right, yeah.
David:
Now, is it a genuine rally that we're seeing there?
Richard:
I'd say that it's more accurately described as a recovery, because as we speak almost to the point the FTSE 100 is where it started the year, on 2 January, it actually started at 4,434, which is roughly where we are, so effectively we've been treading water for the last getting on for five months now, but give the wider distractions, given the weakness of the global economy, that's actually not a bad performance. The big debate now, of course, and it's a massive debate, and opinion is really split down the middle, is to whether this is just a bear market rally, or whether it's actually telling us that we're going into a new bull market, and there's been some fairly big UK luminaries who've been making the case for this being the start of a bull market, but the problem, of course, is, if you look at any economy either side of the pond, two things that have to be put right before you can start talking about a recovery are unemployment and of course the housing market.
We're certainly a mile away from that in the UK. In the US, there are some signs of stabilisation in the housing market, although that's a particularly difficult market to measure, because obviously you've got 50 states all with different laws and different economies, etc, and unemployment again, 630,000 lost their jobs last month, better than the 700,000 a month before, and obviously that's what the bulls are clinging onto, that the US economy is still decelerating, but not at the pace it was decelerating, which could suggest that that's starting to get somewhere near the bottom.
David:
But isn't there an argument that says that the fact that there are collapses out there, that there are people being made redundant, that is actually good for the industries that remain, so therefore the ones that are still standing after the recession, those are the ones that are going to be pushing the bull market forward?
Richard:
No question about it; by the same token, we are in that shakeout stage now. In terms of the recession itself, let's just look in the UK, for example, the recession doesn't really affect you unless you haven't got a job.
David:
Right, and nine out of ten people have got jobs, haven't they?
Richard:
Exactly, and you'll always hear the 7% unemployed figure, you won't hear the 93% employed figure. However, in terms of consumer sentiment, the very fact that you might lose your job tends to make people spend less, and where they've built up an amount of debt over the last, the credit glut that we've had over the last ten years, some people are looking to pay that debt down and save, that's certainly what's happening in the States, and of course when you're paying debt down and when you're saving, what you're not doing is spending, and so that money isn't getting out into the wider economy, and now, of course, as we know, the Bank of England, as indeed they're doing in the States, are trying to pump more money into the system, so that the banks can get hold of this money cheaply, so that they can lend it on, so that we can get the credit wheels turning again, and that's the theory anyway, but we're still in the early stages of that horrible phrase, ‘quantitative easing'.
David:
Right, I'm glad you touched on banks, because banks is one of the sectors that's performed particularly well since March. Now, my calculations show that the entire banking sector has gone up by somewhere like 90%, so, as far as the banks are concerned, are they out of the woods yet?
Richard:
If you've got a share price of a pound, and that goes down 90%, it's gone down to 10p. If that goes up 90% now, it goes up to 19p, so you're still 81p down from where you started.
David:
Right, you did that without calculator!
Richard:
I've got it written on the back of my hand! And that's roughly where we are with the banks, even, of the UK banks, the one that's gone down the least is Standard Chartered, and that's about 23%.
David:
That's not really a UK bank, is it?
Richard:
Well, it is in terms of if nothing else, in terms of its structure, it has UK presence, it's quoted in the FTSE 100, always overlooked, it's actually been the darling of the UK banking sector some time now, but that's roughly where we are. Yes, Barclays might be up 80% since March, it was over 200% at one point I think, but from a much lower base, and the likes of RBS, for example, still down 80% over the last year, notwithstanding they've had a run up all the way to 50p, but the big concern, it's almost a case of once bitten, twice shy, because the banks are currently saying, our regulatory capital cushions are looking good, we shouldn't need to raise any more money, and the market's saying, how many times did we hear that in 2008, because the danger you've got when it comes to the bank is moving away from the sort of credit crunch write-downs that we saw last year; what you're now going to start getting is traditional recessionary write-downs, those people that have lost their jobs, those businesses that are going to the wall, that's going to result in defaults, in impairments, and the banks have got to make allowances for that, and as we've seen, particularly for those banks which are particularly UK-focused, like Lloyds for example, they're already having to put a great deal more money aside in terms of these bad debts that's come, and that big question mark, of the five UK banks for example, if you take the general market consensus, three of them are holds and two of them are sells, and the market, what that's saying of course, is that the market won't get drawn into saying any of the banks are a screaming buy, notwithstanding if you've been lucky enough to buy them in early March and have sold them now, yes, you've made a tidy profit, but if you've been holding bank shares for a number of years, you're still nursing a fairly painful loss.
David:
But the trading updates from both Barclays and HSBC were very promising, weren't they? I mean, HSBC said it's going to make bigger profits this year than the same time last year for the first three months of this year, it's going to write down a lot more debts, but it's saying that, although there are no green shoots of recovery, it's saying that consumers are feeling a little bit more confident, so it's feeling a little bit more confident.
Richard:
Yeah, I mean that was a general theme across all of the trading updates over the last few days, that the investment banking side in the sort of wholesale divisions all had a very good time in the first quarter, question: can it be maintained, but of course set against that, and it varies between banks, is those very write-downs, and of course one of the other reasons that the banks had always been a good investment destination was their dividend yield, and of course two or three of the banks aren't currently paying dividends, Barclays have said they might resume it towards the end of 2009, but on a very conservative basis; Standard Chartered have never yielded particularly highly, HSBC are cutting theirs, so their yield's going to come down, for the others you can forget about a dividend yield, so you've also had that added pressure of investors switching out of banking shares, because with interest rates being so low, where do you get any sort of return on your money, so they've been chasing some of the higher-yielding shares.
David:
Like utilities and tobacco, that kind of thing?
Richard:
Very much so, and the oils, yes.
David:
Right, so are you saying that the PE ratios, I mean this is is the price to earnings ratio that many people look at as far as the banks are concerned, Barclays on a PE of 15, HSBC on a PE of 20, I have to point out also that Lloyds and RBS have a lot of P, but no much E at the moment, so are you saying those PE ratios are not a very good measure of whether or not the banks are going to be making better profits in future?
Richard:
I don't think PE ratios are a particularly good measure for any sector in the UK at the moment …
David:
Good grief.
Richard:
… because the E is totally unknown. In the US, for example, they've written earnings down over there by 42% of the SNP 500, obviously some companies have exceeded that, but generally speaking they've called that quite right, so when you have the E being a complete unknown, particularly given the current environment, then PE ratios have to go out the window, and I keep hearing myself, as I'm sure you do, that the market's on a PE of x, well, the market's the market's the market, and at the end of the day, even if there are some sort of greener shoots of recovery coming from somewhere, of all of the trading updates we've had in the last two to three months, almost to a man, and it's becoming quite a boring cliché, you will hear the words ‘challenging outlook', and there are very few FTSE 100 companies out there at the moment who are saying anything other than the rest of 2009 is going to be tough.
David:
OK, so let's put the banks in the bins for now, so shall we take a walk down the high street, metaphorically-speaking, so what do you think about the retail sector? Any signs of promising shares there?
Richard:
I have to say, this is quite fascinating, because this sector of all should be the one that's really feeling the pain at the moment, with the consumer tightening his or her belt and spending a bit less, and yet, if you look at the top 20 performers this year, you'll find Marks & Spencer and Next both in that list, Marks's are up about 50% this year so far, and Next are up about 36%, which is extraordinary, it does say something about the resilience of the consumer, it does also say something about the fact that they've both tried to go towards the sort of more value end of the market, which might be enticing some more people.
David:
But that's already quite crowded already, isn't it? – the value end, with things like ASOS, and Primark, which is owned by Associated British Foods, I mean that's really quite crowded.
Richard:
Yes it is, and Primark as an aside haven't been doing particularly well for AB Foods for that very reason.
David:
No, their like for like sales aren't particularly sparkling, are they?
Richard:
No, they're not, but then they're coming up against tough comparatives, because don't forget that in 2008 they had a particularly good time, Primark, so we're now starting to compare what they're doing right now with what they were doing this time a year ago, so they are still a contributor.
David:
They have some good value ballerina shoes, I think, at the moment.
Richard:
I like the ones you're wearing, actually, David, they're very becoming!
David:
I think ballerina shoes and pumps are doing quite well there, yes, so I'm told anyway. So what you're saying is, there are pockets of the high street that are doing well, and there are also big pockets there that are not doing well?
Richard:
For sure, for sure, and again, as you referred to earlier….
David:
What, the ballerina shoes?
Richard:
… yes, you can take them off now, David! But as you referred to earlier, only the strongest will survive, and the survival of the fittest is very much the story. The most interesting thing about the retail sector in particular is that the theory goes that when the economy starts to recover, you get the early cyclical stocks which really perform; in other words, people come out of the boring old defensive stocks, the utilities, tobaccos, pharmaceuticals, they go into things like retailers, property etc.
For there to be two retailers within the top 20 performers in the market in the year to date, in mid-May, is that question mark a sign of investors switching into early cyclical stocks, because they think the recovery's just around the corner, and that's the most fascinating thing about the likes of Next and Marks & Spencers having performed so well, because at this part of the cycle that we think we're in, they shouldn't be.
David:
There must be a lot of pent up demand at the moment from consumers, people must be opening their wardrobes, and thinking, “My goodness, that wardrobe looks really drab at the moment”, well, in my case it always looks drab! – but they must be thinking, “I have to go out and buy stuff”, so eventually there is going to be that sort of pent up demand unleashed on the high street. Now, which are the ones that people should be having a look for, for any kind of recovery as far as the share price is concerned?
Richard:
Well, that's a good question, because obviously if you look at the obvious …
David:
But Marks & Spencers and Next are already so strong, I mean where should people be looking for?
Richard:
Yeah, that's right, and of course in terms of retailing, just taking the clothing, staying on the high street, if you like, but taking the clothing out of it, some of the companies that have taken a particular hit are some of the DIY companies, for example, of which they're usually a subsidiary, like the likes of B&Q and what have you.
David:
Yes, I've got home retail down as well.
Richard:
Home retail, Argos, that's right, and Homebase I think.
David:
Yeah.
Richard:
So the current model which seems to be working, in better times anyway, is a large internet presence, so you've go the Next Directory catalogue, for example, that's been on for a while; in terms of Argos, you've got this click and collect thing, and all the companies that got into the internet early, even though it seems like it's been here forever, it's only just gone past it's 20 year anniversary, which is extraordinary, but all of these retailers that got in early have now got all the bugs out of the system, etc, don't have to rely on the weather, or whether people have to physically go down the high street, because it's just as easy to do it online, the so-called ‘clicks and mortar' story, that has tended to be …
David:
Did you think that one up yourself? – 'clicks and mortar'?
Richard:
I did, some time ago, and I mention it wherever possible!
David:
Right, OK. So can we go down the pubs now, yeah?
Richard:
Already?
David:
No, not already, no! Can we just take a trip down the pubs? Now, the pub sector has remained what I would consider to be fairly resilient, I think, in this recession, things like Wetherspoons, they seem to have done quite well -- why is that?
Richard:
Wetherspoons is probably the best example to quote, because quite simply, they've got a very targeted market, you tend not to ….
David:
What, drinkers?
Richard:
So I'm told, yeah – you tend not to have music in there, you tend not to have …
David:
What -- boring drinkers? Serious drinkers?
Richard:
It's serious drinkers, no music, no television as a rule, and of late …
David:
That's not a pub, is it? -- that's my front room! Except I don't have any drink either!
Richard:
Exactly! ‘J D Kuo', as you're otherwise known. Yeah, and lately of course they've being doing a lot of pound-a-pint of Courage kind of deals, and that has attracted certain people, and of course there is a school of thought that really, I know you do, but do you spend that much in a pub? In other words, of all the things …
David:
I never spend anything in a pub!
Richard:
So I've heard! -- but of all the things you cut down on, you're not actually spending that much in a pub, so they have stood up fairly well, not however, this doesn't apply to all of them, because you've got the likes of Enterprise Inns, for example, which haven't done so well, and of course they've been up against it, haven't they? They've been up against the alcohol duty inevitably raised again in the Budget, they've been up against the smoking ban, and really these days, certainly in terms of the further you get out of the big towns, etc, they're really restaurants as much as pubs.
David:
I mean, there are so many surveys that come out, they say, a pub is closing every week or something?
Richard:
I think it's six a day or something?
David:
Something like that, yes, something quite horrendous, so is the pub sector a good one to go into now?
Richard:
Again I think what you need to do is look at those pubs with less debt, or that, certainly the ability to repay that debt or keep on top of that debt, and if possible those, and there are a couple out there, those with large property portfolios, so again it's safety first in terms of where we are.
David:
OK, so can we now pop down the mineshaft and have a look at the mining sector? Now, what do you think about the mining sector – do you buy into this idea that we have this super cycle for mining shares?
Richard:
I probably do.
David:
You like Jim Rogers then, do you? Or do you just like his bow tie?
Richard:
Neither particularly, but you do have to take his opinion into account. I'm not so sure that, over the next year or so, the mining shares are going to have such a good time, they had an extraordinary run in 2007, difficult 2008, almost seen as a wider economy play, suddenly very volatile, and actually had a good year to date this year, in fact going back to that top 20, within the top five performing stocks, four of those are mining stocks, so since 1 Jan '09 they have recovered again from a relatively low base, but they've had a pretty good time. But of course, the main story, without a question, around the mines, is long-term demand, and that's what's hit them last year, as China's GDP debt went down to "disastrous", 6% growth, which obviously most other countries …
David:
I think we'd give our right arm for, wouldn't we?
Richard:
Most other countries would kill for at the moment, but anyway, so that was seen as the Chinese economy slowing down, and therefore they wouldn't have the demand for metals to build things, etc, etc, so therefore the miners would be over-supplied, and that's where they took a hit. If you take a ten year view, with the likes of China and India, Russia, Brazil, the BRICs countries, are all pulling that demand back in. It was only probably 18 months ago when, in terms of mining shares, they couldn't get the stuff out the ground quick enough.
David:
Yes, now somebody out there must be asking, what exactly are ‘BRIC countries', so can you explain to our listeners what a BRIC country is?
Richard:
Yes, it was coined by an analyst …
David:
Not by you, then?
Richard:
Not by me, that one, a few years ago, just to, it's basically a generic term for emerging countries, but the 'BRICs' specifically is BRIC: Brazil, Russia, India and China.
David:
No 'K' at the end then?
Richard:
Kuwait could be on the end, yes!
David:
Or Kathmandu, maybe! So, how do these various sectors that we've looked at, we've looked at the banking sector, the retail sector, the pubs, and also the mining, which one out of the four would you say is a definite no-no for me?
Richard:
I think if you, it depends on your attitude to risk, of course, but if you are in any way risk-averse, I'd put a big question mark over the banking sector at the moment, and probably the mining sector as well, unless you really don't mind a rough ride.
David:
Yeah, but surely the banks aren't going to come out and ask for any more money now? I mean, surely all the baggage is out the way, isn't it?
Richard:
Well, good question, look what's just happened in the US, they've done their stress tests, what the Fed has basically done is overlaid a worse scenario in terms of what could happen to the market.
David:
How much worse can it get, Richard?
Richard:
Well, what they've decided is, that of the 19 banks they've stress tested, ten of them have got capital raising requirements. Now, if you want to read that across to European banks, which includes UK banks, then it's really going to be a question of how bad these write-downs are, in terms of recessionary bad debts, individuals and companies – that's going to be the killer in terms of whether banks need to raise any more capital, and that's why a big question mark hangs over the sector.
David:
I would like to touch on many more sectors, but unfortunately we haven't got time, so just a very quick yes or no – the travel tour operators?
Richard:
Again, yes – if you've got the attitude for risk; funnily enough one of the biggest destinations this summer has apparently been Turkey, which has got its own currency, so of course people aren't going to the States or to the euro zone because of weakness of sterling, not necessarily the case when it comes to Turkey or countries with their own currency, so like anything else, there are always the odd pockets of success stories out there.
David:
And good kebabs as well out there?
Richard:
Absolutely!
David:
So anyway, thank you Richard Hunter from Hargreaves Lansdown for coming in today. Now, as you well know, because you've been into these podcasts before, I end the podcast with a quote, and today's quote comes from Michael Burke – do you remember him, Michael Burke, the newsreader?
Richard:
I do, yes.
David:
He said, “Good instincts usually tell you what to do long before your head has figured it out”.
Richard:
Quite right.
David:
Have you figured it out?
Richard:
Quite right too, and that's why you're wearing those ballet shoes.
David:
I know they'll come back into fashion one day, yes. I think they set off my trousers quite well. So anyway, this has been Money Talk, if you have a comment about today's show, you can do so on the Money Talk blog, which you can find at www.fool.co.uk/podcast, and if you have a suggestion about future shows, you can email me at moneytalk@fool.co.uk.
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