Miners are as varied in performance this year as are the kinds of minerals they extract from the earth, and while I think the mismatch results from differing commodity price changes and company performances, gold mining stocks are by the far the laggards. 

Fresnillo was bottom of the FTSE 100 this week after falling 27% in the almost-six months to late June while Pretty Poly(metal) was eighth from bottom of the same benchmark despite falling only around 4.4%. Meanwhile, a 12.1% fall has left Centamin tenth from bottom of the FTSE 250.

All of this follows a period in which gold itself has fallen 6.37% to $1,778 per ounce and so, with the exception of Polymetal, these performances seem like an overreaction to a gold price that could soon bounce back in the direction of record highs seen above $2,000 in July 2020. 

Most compelling among reasons for a gold price recovery, I find, is central bank demand and what it potentially says about the expected direction of an often-negatively correlated U.S. Dollar. However, a seemingly downbeat outlook for the latter is also a reason on its own. 

Many central banks have grown reserve assets of late, and may have somewhat similar views on big questions like the Dollar and by implication, gold, though not all publish data as detailed as the Reserve Bank of Australia (RBA). The RBA grew FX reserves and total reserves by nearly 15% in March, with growth in those categories slowing markedly thereafter, while gold holdings have since increased at double-digit percentages, despite falling prices.

Nothing can be said for certain but this might reflect the expectation of rising gold prices from which I think Fresnillo and Centamin would benefit more than Polymetal, given the latter is less volatile than others. 

Russia’s Polymetal is better at mimicking gold prices, which are less volatile than many shares, potentially making it a lower-risk sector exposure, while Fresnillo is a ‘high cost producer’ and the lowest margin company in the sector whose shares tend to overreact more to movements in gold.

This makes it higher risk, but also potentially a higher reward: the shares have underperformed sector peers when falling more than 40% from above £13:00 last July, a period in which gold itself has fallen by only around 15%, but did also respond more strongly when prices were rallying last year. 

Fresnillo far outpaced gold and its peers in 2020, but I won’t be writing off Centamin as a dark horse contender for outperformance in any gold price recovery, given the debt-free company’s shares have been held back this year by one of many occasional production stoppages at its flagship mine.

Centamin also still has scope to offer a best-in-class 6% dividend yield – better explained here by G A Chester – along with magnified exposure to any gold price recovery, although it goes almost without saying that each of these shares could perform badly if gold prices fall further.

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James Skinner does not have a position in any shares mentioned in this article. The Motley Fool UK has recommended Fresnillo. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

The previously proposed tie up between Pfizer Inc (NYSE: PFE) and Allergan Inc (NYSE:AGN) was the largest such deal ever to have been attempted, with the price tag that Pfizer was prepared to pay being in excess of £100bn. Ever since rumours of the purchase first began to circulate, legislating to prevent such corporate manoeuvres has been a top priority in Washington.

The last laugh

Last week, in the absence of action from Congress, the US Treasury Department had what appears to be the last laugh on the inversion issue, at least as far as the Pfizer-Allergan deal is concerned. While acknowledging that inversions cannot be stopped without legislation from Congress, the US Treasury announced a wave of new measures that will make it more difficult for some US companies to invert.

The new rules have already had an effect as, on Wednesday afternoon, both Pfizer and Allergan announced that they will no longer be going ahead with the merger and will instead, go their own separate ways. The news prompted strong gains across the London pharma sector, with shares in Astrazeneca (LSE: AZN) and Shire (LSE:SHP) each rising by almost 5% as traders speculated that Pfizer could soon be back on the acquisition trail in London.

The rub

Whether or not the US Treasury’s new rules will eliminate the practice of inversions, or even just reduce the prevalence of them, still remains to be seen. However, one thing that is for sure is that, in an election year, corporate taxes and tax inversions will make for a brilliant political football. It seems possible, maybe even likely, that Congress comes under increasing public pressure to get its act together on the subject of inversions and to legislate in order to prevent them.

Regardless of whether they do or don’t, the US Treasury department seems determined enough to make life difficult for corporate tax avoiders and this alone should probably provide cause for concern among speculators hoping to see Pfizer back in London. It seems clear from the announcement that it does not take issue with genuine mergers and acquisitions, which take place for non tax purposes, but that when companies use M&A to avoid taxes they will act where possible.

Strategic sense

If Pfizer or any other company seeking to invert could demonstrate that an acquisition in London would make strategic sense for the business, for growth or efficiency’s sake, then it seems possible that they would have a ‘get out of jail free card’ on the subject and they may then be able to carry out an inversion in disguise.

However, with two empty pipelines between them, as well as two sets of revenues exposed to patent expiration induced decline, it is less clear as to whether a merger with either Astra or Shire would make any kind of strategic sense for Pfizer once the obvious tax benefits are set aside.

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If there is any one group of investors out there who have grown used to that sinking feeling often precipitated by a sharply declining share price, then that group of investors would probably include a number of Barclays (LSE: BARC) shareholders. After all, the shares were down by 30% year to date, even before this week’s losses.

When markets awoke on Tuesday morning, almost all investors in UK banks will probably have been reintroduced to that familiar sinking feeling again, as the news wires were immediately clogged with details of what is potentially one of the largest tax scandals in history.

This was as a consortium of journalists had begun to report on the Mossack Fonseca data trove, a collection of stolen client records detailing the offshore investment and tax arrangements of some of the world’s most influential people.

While news reports weren’t short of world leader and celebrity names, almost immediately a number of global banks were implicated, prompting sharp losses for shares across the entire sector during the session.

Barclays wasn’t immune to this sudden wave of selling, although the bank hasn’t yet been named as one of those responsible for any of the offshore companies that are at the heart of the investigation. So far, the list of apparent offenders appears to be limited to the usual suspects, UBS, HSBC, Credit Suisse and Coutts & Co. Barclays isn’t anywhere to be seen and so, concerns over this point are probably unwarranted.

Talking down

Yesterday afternoon Barclays caught the market by surprise when it issued a mandatory trading update alongside its call for a shareholder vote on the disposal of BAGL, the African division.

Mostly comprised of reiterations from the full year there was little by way of real ‘news’ in the update, although the continued gloom means that it read a lot more like an extended profit warning than anything else.

A cynic would say that the tone of the new management forms part of an attempt to ‘talk down’ investor expectations of the bank and that the practice of ‘kitchen sinking’ is alive and well in the corporate world.

In addition to confirming a poorer performance from the investment bank so far in Q1, group wide financial performance is also likely to be further impacted by an ongoing deterioration of returns in Barclays Non Core division, led predominantly by losses in its Education, Social Housing & Loan portfolio (ESHLA).

Food for thought

Quite apart from giving the impression that, after having thrown the kitchen sink at investors when reporting full year results, new management is now seeking to throw the tea towels, aprons and cutlery too. The recent trading update also prompts several questions, all concerning the ESHLA portfolio:

Why did a revaluation of this portfolio cost the bank £935 million in 2015 and why, after such a significant revaluation, is it still racking up losses to the extent that it can impair overall group performance? How large is the portfolio and what is actually in it?

Barclays isn’t the first major bank to suffer losses on bond portfolios. I have previously written about how some banks are challenged by risks stemming from the corporate bond market, but this can also be interpreted as meaning risks stemming from almost anything that is non investment grade or ‘high yield’.

Barclays said at the full year that the cause of losses in the ESHLA portfolio is widening spreads. But in response to a personal enquiry made this morning, the investor relations team stated that the portfolio is comprised of only UK assets, which should mean that it is free from high yield instruments.

However, this isn’t the first time that widening spreads have proven a burden in recent times and the fact that the portfolio has remained problematic long after its revaluation is ominous, almost reminiscent of the Credit Suisse debacle. I’m now wondering whether the discount implied by Barclays 0.55 x price/tangible book value measure is now warranted.

The post Barclays Plc: After The Kitchen Sink, Here Come The Tea Towels, Aprons & Cutlery! appeared first on The Motley Fool UK.

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Shares of Gulf Keystone Petroleum (LSE: GKP) have fallen by more than 50% during the last year and 5% over the last week. The company is battling depressed oil prices on one front, while on the other it faces economic and security challenges at its key drilling sites in Iraqi Kurdistan.

After initially showing signs of recovery, the shares extended their decline at the opening of 2016 after drillers in the region were forced to revise their reserves estimates lower in response to complications that could now make extracting some of the region’s oil problematic.

In addition to plummeting oil prices and extraction complications, GKP’s drill sites are exposed to security risks stemming from the Islamic State insurgency in Iraq, while instability in the region has also added to financial difficulties experienced by the Kurdish authorities.

As a result, the Kurdish Regional Government (KRG) now has a backlog of missed payments and debts which are owed to drillers — including GKP, Afren and Genel — that are yet to be settled.

While the KRG has recently made a number of payments to drillers in an effort to clear its debts, poor visibility on recoverable reserves, ongoing oil price weakness and the conflict in Iraq and Syria all make Gulf Keystone Petroleum a high risk prospect for even the most speculative investors.

Delivering results

Card Factory (LSE: CARD) shares were among the top risers in the FTSE 250 this morning after the group announced a better than expected set of full year results.

In detail, management reported strong growth in like-for-like and total figures for revenue, EBITDA and pre tax profits. Earnings per share were also up by just over 17% while the ordinary dividend grew by 33% from 4.5 p to 6.0 p for the period.

In addition, management announced that the group had opened 50 new stores during the year as high street demand for greetings cards and gifts remains strong despite the proliferation of online and DIY gift services or products.

While the shares are up by 4% so far today, they remain 8% below their January level, which could suggest that they still have further to run if the outlook for earnings in the current year remains bright.

Growth opportunities

Tate & Lyle (LSE:  TATE) released a brief trading update this morning, in which it stated that management expects to meet market expectations for the full year financial performance, results of which are due on 28 May. Earlier guidance had suggested that 2016 adjusted earnings will be broadly in line with the 2015 level of £192 million.

Investors have shunned Tate & Lyle over the last 18 months, prompting the shares to be relegated from the FTSE 100 in 2015, as investors reacted to a slowdown in the group’s bulk ingredients division and growing competitive threats to its core Sucralose sweetener business. However, the first half of the current trading year saw “good volume growth” in Specialty Food Ingredients across Europe and Asia more than offset weakness in other areas according to management.

In addition, the sugar tax that was recently announced in the UK could drive more soft drinks companies toward the kind of alternatives offered by Tate & Lyle over the medium term, while also underlining the longer term growth potential for companies offering healthier alternatives to sugar, such as low-no calorie sweeteners.

The shares have fallen substantially during recent years and are down by just over 2% for the year to date. However, with management appearing to have arrested the group’s earnings decline, there now seems to be at least some scope for a more prolonged recovery over the coming quarters.

The post What Does Today’s News Mean For Card Factory Plc, Tate & Lyle Plc And Gulf Keystone Petroleum Plc? appeared first on The Motley Fool UK.

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James Skinner has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

The Russian authorities announced the investigation late last week via a press release, although, according to this morning’s response by Mondi, investigators are yet to provide formal notification to management. Investors will no doubt now be wondering whether this is a genuine and well-founded competition investigation or an act of political hostility.

Details & Implications for Mondi

The FAS alleges that Mondi has attempted to fix a “monopolistically high price” for  the offset printing paper it sells in Russia, after the London based business raised its selling prices by “roughly 50%” during the last year. According to the initial release there is a considerable discrepancy between price increases for the inputs required to make offset paper and the rate at which prices have been increased by Mondi.

Perhaps the fact that one individual company has enough of a grip on the paper market for it to be able to raise prices so sharply is suggestive of an undesirable situation from a competition standpoint. However, the prospect of Russian authorities involving themselves in the pricing of any private company’s products will do little to allay the concerns of western investors in Russia.

Regardless, it seems that for the time being the authorities have found their mark and are now busy lining up Mondi in their sights. The FAS has stated that it will consider all “case circumstances and arguments by the respondent” but exactly how the group gets out of this without it costing a small fortune, or worse, still remains to be seen.  

Imperial Tobacco & Polymetal

It isn’t unreasonable for nation states to act on concerns over competition and only time will tell whether this is a serious complaint or if it is just all politics being played out underneath the table.

However, Russian state authorities do not have a fantastic record when it comes to the fair treatment of foreign companies and, if Mondi is a sign of the times to come, investors would do well to consider the implications for their stakes in Imperial Tobacco/Brands (LSE:IMB) and Polymetal (LSE: POLY).  

Imperial’s largest market is Russia. It has a 9.2% market share and sells more cigarettes in this country than in any other, including China. Should concerns spread about the overreaching hand of the Russian authorities, then investors could soon start to discount the shares.

Equally, Polymetal is one of the region’s largest gold and silver miners, although it is listed in London. It holds the largest silver deposit in the world and has assets right the way across both Russia as well as Kazakhstan. Should the political winds cool even further shareholders may also need to consider the potential for the market to begin discounting these shares as well.

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In an addendum to February’s 2015 results Credit Suisse (NYSE: CS) explained to investors that, among other things, it would be accelerating the pace of its restructuring and further downsizing its Global Markets business. This was after a series of bad bets on junk bonds and complex derivatives pushed the bank into the red.

Soured trading positions cost Credit Suisse $633m in the fourth quarter after spreads widened and client activity fell off the edge of a cliff. They also cost it a further $346m in the first quarter, prompting management to exit some parts of the market and reduce scale in others.

It remains an open question as to how soon the bank will be able to walk away from some of these lines of business given that the current illiquid condition of the underlying assets has been a major driver of the above trading losses.

The elephant in the room

The source of Credit Suisse’s trading woes are largely the result of conditions at the lower rated end of the bond market.

Many will remember how the financial world shuddered in late 2015 as a deteriorating junk bond market, which was mostly the result of Fed tightening, forced a small number of US mutual funds to suspend client withdrawals in a series of events that almost echoed those of 2008.    

The problem today is that these conditions have not eased so far into the new year. Spreads are still prohibitively wide and uncertainty pervades.

Moreover, Bloomberg recently reported that 40% of US junk bonds didn’t trade, or change hands at all, in the first two months of the year. This is while most high yield corporate bond indices have fallen to 2009 lows, surpassing levels last experienced during the taper tantrum of 2013 and the European debt crisis.

Casualties and other implications

This article isn’t meant to be a prediction of pending doom or anything close to it. After all, the Fed now appears to be taking a slower path toward a tighter policy environment, while the shift to negative rates in Japan and the increasing scale of the ECB’s intervention may also mean that a certain level of ‘reaching for yield’ continues regardless of what happens in the US.

However, it does not take a rocket scientist to see the potential for casualties on both sides of the market in the coming quarters. Some investors are clearly concerned about the implications of tighter policy in the US and economic conditions elsewhere in the developed world, while there remains a large universe of highly leveraged companies out there, many of whom depend upon access to capital markets for survival.

If the current environment persists then there are going to be further implications for investor confidence in the ability of these companies to service and eventually repay their debts. Such concerns may even spread to encompass some of the more highly rated, but similarly geared issuers.

Other banks with large fixed income operations, like Barclays, could suffer from trading losses if the market does not improve, while some of the lower rated issuers could face insolvency if the market deteriorates further and they are deprived of access to funding.

One thing that seems almost certain is that, as private investors, it is probably time to rethink expectations for returns from the banking sector and to steer clear of highly geared companies. Particularly those at the lower end of the ratings spectrum.

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The FTSE 100 is now close to its break-even for the year to date, despite falling by 11.4% during the five weeks to the 11th February. Behind all of this price action has been a single common theme —commodity prices and commodity producers.

Initially, tumbling commodity prices drove a significant deterioration of earnings across the commodity space, prompting a wave of dividend cuts, disposals and restructurings. More recently, oil and industrial metals prices have embarked upon a sharp and sustained recovery and consequently, investors have piled back into the sector.

Bear market or blip?

After seeing such wild swings in equity prices and with the FTSE 100 now so close to its break-even level for the year, many investors could be forgiven for asking if this is really the beginning of a bear market or if it is just a blip. The truth is that we probably won’t know for at least another three to six months.

The oversupply that has driven the sell-off is yet to show signs of dissipating and although the number of active oil rigs in the US has fallen by almost 50% since May 2015, suggesting that some producers have come off line, global oil output remains at record levels and North American commercial crude inventories are still close to an 80 year high.

The fact that oil and other materials prices are rising, even as this oversupply persists, suggests that investors could now be betting on production shortages over the medium to longer term, given the extent to which capex has been cut across the commodity space in recent quarters.

Implications

Nevertheless, it will be difficult for anybody to predict where commodity prices will be in six months time without knowing first, how sovereign and commercial producers are likely to react to the current recovery.

If, in six months time, the rig count has begun to creep back up in the US and/or capex is rising once again at the global level, then it is likely that the current rebound will fade into memory as a mere blip at the beginning of a bear market for the FTSE indices.

If, on the other hand, US shale stands pat and industry wide capex barely moves then it is quite conceivable that commodity shares could cling onto much of their recent gains. This would be great news for the FTSE 100 and FTSE 250 indices in 2016 and, given the heavy weighting toward raw materials in each, it could also mean that a bear market is avoided.

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After having covered many of the sector’s key constituents in February, now seems an appropriate time to take a quick look at Royal Bank of Scotland (LSE: RBS) and Lloyds Banking Group (LSE: LLOY), before results begin to emerge for the first quarter.

Worth holding onto

February’s results day will not have been the first time that RBS investors were caught on the wrong side of a collapse in the bank’s share price. The group has disappointed the market before and it still has a long way to go before it can close the book on a litany of issues stemming from the pre-crisis years.

Most notably, investigations into the securitization and sale of US mortgages could still cost shareholders billions, while the sale of PPI, interest rate swaps and the bank’s treatment of distressed customers in the UK could also add significantly to the final bill for past conduct.

However, looking past this, the majority of analysts agree that underneath everything else, RBS still has a pretty valuable personal and business banking franchise. Analysts at Berenberg estimate that this could be worth 19p-21p earnings per share annually.

Moreover, the eagerly awaited sale of Citizens Financial Group and Williams & Glyn, if either ever happens, will free up regulatory capital and enable management to focus more on the above core activities, which will be key to an eventual recovery of the shares.

In the meantime, expectations are about as low as they can get while the shares trade at just 0.67x tangible book value and 11x adjusted earnings per share, which is broadly in line with sector averages.

While it could still be some time before the shares stage a meaningful recovery, the aforementioned suggests that further downside could be limited from here and therefore, the shares may be worth clinging onto.

A watchful eye

Lloyds is another bank that has radically reorganised itself in recent years, shedding international exposure, in order to refocus itself on the domestic UK market for retail and business banking.

While a return to dividend payments was widely expected, management surprised everybody in February when they announced a higher than expected payout of 2.25p per share for the full year, in addition to a special distribution of 0.5p.

However, statutory earnings were just 0.8p for the period, thanks in large part to an increase in conduct related provisions. This means much of the dividend was paid from reserves, leaving the shares sat at an inflection point.

Investor expectations for dividend growth have risen since the results announcement but the bank will needs to reduce conduct costs and keep income steady if it is to even sustain the recent payout. If conduct costs show signs of rising again as the year progresses, either due to the approaching claims deadline for PPI or if the Plevin Case becomes a point of interest among ambulance chasers, investors could soon begin to doubt the bank’s ability to deliver.

As a result, conduct related news will require a watchful eye as the year elapses because developments here risk leaving investors disappointed. Nevertheless, most observers still seem upbeat in their outlook for the shares, while the average broker recommendation remains a Buy.  

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But with full-year results now in and no calamities reported on regulatory capital, it’s a good time to start refocusing on incomes, liabilities, margins, dividends and macro drivers such as interest rates for clues of what investors can expect this year.

Income investors

Aviva’s acquisition of Friends Life boosted assets under management and regulatory capital, while reducing leverage measures of the balance sheet. However, this is old news and it’s now down to management to achieve the promised synergies and growth if Aviva is to keep the wolves at bay.

Some have doubted Aviva’s ability to integrate Friends Life given its past record on acquisitions, while others have expressed longer-term concerns over persistently deteriorating margins.

Last week management announced that the group had covered its Solvency II capital requirement 1.8 times over and achieved faster-than-expected progress on the integration of Friends Life. According to the release, synergies to date now sit at £168m, while the remaining £57m should be achieved one year ahead of schedule, at the close of 2016.

Management doesn’t have much of an answer on margin concerns at the moment, except for the same old cliches of ‘cost reductions’, followed by pledges to boost ‘growth’. However, with healthy dividend cover of 2.4 times and a yield equivalent to 4.5% at current prices, the shares could still be worth holding onto for income investors.

Growth investors

Legal & General offers a larger dividend, with a yield of 5.8%, although it’s worth noting that dividend cover of 1.5 times doesn’t leave much of a margin of safety. This could become less of an issue with time if consensus expectations for earnings growth prove well founded. 

Management stayed the course in tough markets as others pulled out, while being ahead of the pack on efficiency and an early adopter of digital technology in years gone past. All that could mean these expectations are well placed. L&G’s Liability Driven Investment (LDI) service, a type of investment that seeks to match investment income exactly with pension liabilities, is a now-key growth driver with a dominant position in the market as a result of the above.

Given the industry-wide mismatch in investment incomes and pension liabilities ($9trn globally), left over from yesteryear’s generous final salary schemes and a long-term decline in interest rates, the size of the market for LDI services should also continue to grow for some time.

In addition, L&G’s defined contribution business is going from strength to strength. The government’s auto enrolment scheme has significantly increased the size of the market. Meanwhile L&G’s early adoption of digital technology and its best-in-class fee structure have enabled it to grow total customer numbers on its platform to 1.8m and increase assets under management by 13% in 2015.

Furthermore, with regulatory capital concerns fading into history and the shares still down by 20% over a 12-month period, L&G could also be one to watch in 2016.  

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Reasonable store of value

The last few quarters have been less than kind to Old Mutual shares, with shareholder returns failing to meet investor expectations in 2014 and throughout much of 2015. This followed a period where, according to management, the complex structure of the group has lead investors to persistently under-value the shares, prompting the announcement of a break up of the company this morning.

The  ‘Managed Separation Plan’ will see Old Mutual reduce its majority stakes in publicly traded Nedbank and OM Asset Management, with management also considering a possible flotation of the wealth management and emerging markets businesses as well.

A mixed reaction from the market and a lack of detail makes forecasting difficult at present, although the Morningstar consensus still implies modest earnings growth ahead and that dividends will remain above 9.5 p per share (a yield of 5%) through to 2018.

When taking into account a ‘lower for longer’ interest rate environment and the prospect of additional capital returns as the break-up progresses, in addition to an unconstrained balance sheet and the recent under-performance of the shares, Old Mutual could still prove a reasonable store of value for investors.

A riskier prospect

With the bottom having fallen out of the UK annuities market during 2015, a subsequent raft of downgrades to earnings projections in the broking world have driven Standard Life (LSE: SL) shares back to 2012 levels, bringing losses so far in 2016 to 7.29%.

The shares are projected to offer a dividend yield of 5.5% in 2016 and the balance sheet remains in good health. However, dividend cover at just 1.3x is low, while further rate increases from the Federal Reserve could mean that Standard Life experiences some losses in the longer-dated bond portfolios that comprise a meaningful portion of assets under management for the life business.

This means that the shares probably aren’t the greatest idea for risk averse investors although, if the group is able to throw sand into the eyes of doubters when it releases first half results in August, investors could benefit from capital appreciation as the shares begin to recover lost ground.

Positioning for growth

St James’s Place (LSE: STJ) has performed strongly since the financial crisis, with the shares up more than 500% in the years since, as strong growth in assets under management and stable margins have driven a consistent expansion of earnings during recent years.

St James’s has been investing considerably in an international expansion for some time now, with emerging markets such as Hong Kong and Singapore now providing attractive growth opportunities for the future.

Looking ahead St James’s Place should continue to benefit from ‘lower for longer’ interest rates and the consequent demand for its services among private investors, given the sub-par returns available from traditional assets such as cash and simple fixed income securities.

The shares are down so far this year, like many others in the wealth management arena, while dividend cover is hovering around the 1.0x level according to the Morningstar consensus for earnings per share and dividends per share over the next two years.

This means that the shares could be risky for those who value a stable income stream. But a reasonable outlook for earnings growth could still bode well for capital appreciation over the coming quarters.

The post Could Heavyweights Old Mutual Plc, Standard Life Plc & St James’s Place Plc Boost Your Portfolio In 2016? appeared first on The Motley Fool UK.

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