2015 Top Recommendations

2015 arrives with a bang
We commence 2015 with a number of residual issues.

*The UK retailers release Christmas updates this week. There are many issues to address, firstly whether new CEO Dave Lewis initiates a “price re-set” that takes Tesco prices down to a level that eliminates the price advantage enjoyed by Lidl and Aldi. Should he take this step that would stabilise Tesco’ s market share. Secondly what approach is taken to strengthen Tesco’s balance sheet? We expect asset sales.

*The February/ March earnings season will see the Q4 report for the oil & gas sector, Q4 2014 saw the sharpest quarterly slump in crude oil. BP Q4 could be just 5 cents post $750m of Rosneft write-offs. Given the BP quarterly dividend is 10 cents this would require BP to draw down reserves.

*May 7th 2015 is the UK General Election. We predict extreme sensitivity ahead of the election which is likely to result in another hung parliament.

*However expectations are low with investors a bit bruised by 2014. Our Top Four Recommendations reflect a conservative, prudent approach.

Bonds start 2015 in the ionosphere

At the start of 2014, bonds were high, they were in the stratosphere. As 2015 starts, to extend the metaphor they have moved to the ionosphere.

Record low bond yields mean attractive refinancing opportunities for corporate borrowers and gains for bond portfolios. The recent bond surge reflects the stance of the US Federal Reserve, and the volatility in commodity and equity prices.

Sovereign Borrower 5 Yr Yield (YTM) 10 Yr Yield (YTM) 10Yr Yield month change
France 0.14% 0.78% -0.25%
Germany 0.02% 0.50% -0.28%
Italy 0.84% 1.75% -0.21%
UK 0.92% 1.72% -0.30%
USA 0.62% 2.11% -0.19%

source: www.ft.com

The US Federal Reserve, by promising to be “patient” over rate rises (18 December 2014) notwithstanding 5% US GDP growth led investors to believe a hike in Federal funds could be later in 2015. When questioned about how long “patient” meant, Fed chair Janet Yellen said “at least a couple of Fed meetings” implying Fed funds would not change before April 2015.

The Federal Reserve is concerned over 2014’s geopolitical issues, the slowdown in China and Russia and soft demand in Europe. Slumping oil prices could impact the US recovery via destabilising the US oil and gas sectors and US capital markets.

Portfolio Particulars – individual equities details

Alliance Trust (ATST) BUY

Alliance Trust is UK 250 investment trust that enables holders to own a global blue chip, professionally run diversified portfolio, with strong processes and methodology for stock selection. The trust has an impressive track record, gaining c.60% since August 2008 and is the third largest manager of Sustainable and Responsible Investment funds in the UK.

Company Alliance Trust
Share Price 469
Target Price 520
52 Wk Hi/Low 481/426
Shares O/S 553.3m
Market Capitalisation £2.6bn
Avg Daily Volume 87.2k
Dividend Yield 2.09%

Source; Fidessa plc

Key Risks to Price Target

i) Alliance Trust is subject to changes in equity valuations which impacts net asset value.

ii) Sensitive to changes in key personnel and the ability to deliver investment performance.

iii) Subject to investor sentiment towards investment trusts which will impact the share price discount or premium to net asset value per share.

Old Mutual (OML) BUY

Old Mutual is a UK 100 listed life assurer that operates under the Old Mutual brand, holding 51.8% of South Africa’s Nedbank and a near 80% stake in Old Mutual Asset Management

Company       Old Mutual
Share Price 185
Target Price 230
52 Wk Hi/Low 209/169
Shares O/S 4.9bn
Market Capitalisation £9.08bn
Avg Daily Volume 2.4m
Dividend Yield 4.59%

Source; Fidessa plc

Key Risks to Price Target

i) Old Mutual faces regulatory pressures in the area of pension reform and capital requirements.

ii) Old Mutual balance sheet is sensitive to movements in the South African Rand and USD.

iii) Old Mutual’s structure with many separate and diverse business subsidiaries makes it harder to predict the performance of the parent company.

Portfolio Particulars – individual equities details

Pearson (PSON) BUY

Pearson is the owner of the publishers Financial Times and Penguin Random House, and Pearson Vue, a provider of examination centres. In 2014 it acquired Group Multi for £505m.

Company Pearson
Share Price 1142
Target Price 1300
52 Wk Hi/Low 1340/998
Shares O/S 819.9m
Market Capitalisation £9.36bn
Avg Daily Volume 0.75m
Dividend Yield 4.22%

Source; Fidessa plc

Key Risks to Price Target

i) Pearson operates in a highly competitive area for print and digital media in the financial sector

ii) Pearson net debt at £2bn post acquisition of Grupo Multi (£505m).

iii) Significant sales (60%) exposure to US and growth challenges in Schools division.


TSB is the UK’s seventh largest retail banking group as measured by branch network. It was listed via an IPO of 38.5% of TSB in June 2014 having been demerged from Lloyds Banking Group in September 2013. The TSB business is primarily engaged in personal loans, mortgages and current account banking for retail clients.

Company TSB
Share Price 278
Target Price 330
52 Wk Hi/Low 297/247
Shares O/S 500m
Market Capitalisation £1.4bn
Avg Daily Volume 281k
Dividend Yield 0%

Source; Fidessa plc

Key Risks to Price Target

i) TSB net interest margin is sensitive to mortgage spreads and impairment losses relating to its UK loan book.

ii) Lloyds retains a 50% stake in TSB and is likely to sell further TSB shares over the next 24 months. This creates an overhang in TSB shares.

iii) Increasingly UK competitive environment, via new challenger banks, building societies, large UK banks which many impact net interest margin.


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