UK goes mad over online shopping - BooHoo and Sports Direct worth an investment look

I admit it – I just love buying stuff on Amazon. I love the simplicity, the speed, the ease; such a contrast to actually having to go out and find a shop on the high street that actually stocks what I want, and at a price I am prepared to pay!

Clearly, I am not alone.

The UK is gripped by online shopping fever

Today, almost £1 in every £8 is now spent online in the UK (Figure 1), by over 42 million digital shoppers. Now that is quite a feat, particularly when you realise that only 4% of all food sales are done online.

Online now represents more than £1 in every £6 spent on non-food sales, according to the British Retail Consortium.

1: Over 12% of total retail sales are done online

Source: ONS

As you might expect, online sales are growing faster than retail sales in "bricks and mortar" shops.

Online shopping grew 13% over the last year (to April 2015; Figure 2), compared with overall retail sales growth of under 5% since April 2014.

2: Online retail sales up 13% in a year

Source: ONS

UK is the European leader of internet shopping

Did you know that we in the UK are in fact the world leaders in internet shopping?

This year, we are predicted to spend nearly £1,200 shopping online, even more than the average American online shopper and around 10% more than in 2014 (Figure 3).

3: UK shoppers spend an average of £1,174 online

Source: econsultancy.com

Delving into the top 50 ecommerce retailers in the UK, 30 of them are from the retail sector, while another 12 are in travel, transportation and leisure.

Some of the top e-tailers are immediately obvious to anyone who has not been living in a proverbial cave: Amazon, Apple iTunes, and eBay.

Online shopping via mobile phones and tablets is now the fastest-growing area of ecommerce. And the top UK mobile retail category for searches is fashion, in the form of clothing, apparel and accessories. 65% of smartphone users search for fashion items using their device, according to Econsultancy (Figure 4).

4: Fashion is the most popular mobile retail search

Source: econsultancy.com

Investing in UK online retail

In the UK, BooHoo (code BOO), Asos (ASC) and Sports Direct (SPD) are all direct beneficiaries of this move to buying sports and fashion clothing online, at the cost of more traditional high street clothing chains such as BHS and TopShop.

Out of BooHoo, Asos and Sports Direct, I am particularly keen on BooHoo and Sports Direct as good long-term online retail plays.

A quick check on the Alexa web ranking website gives a very positive first impression (Figure 5). BooHoo.com is certainly getting more popular relative to other online retailers.

5. BooHoo.com is becoming more popular, relative to other similar websites

Source: Alexa.com

What is more, BooHoo's 10 June trading update highlighted a 35% increase in sales for the 3 months to 31 May, with 3.3 million active customers worldwide (32% more than a year ago).

Very strong growth, backed by lots of cash which can be used to make further investments for future growth too.

All in all, this looks a rather attractive proposition to me at BooHoo's current 28p share price.

Sports Direct harness Click and Collect

Sports Direct's website makes great use of their brick-and-mortar chain of stores to offer a "click and collect" service. With Click and Collect, you first order your sports goods on their website, and then collect the parcel from your chosen local Sports Direct store once it has arrived.

Online sales are now over 14% of Sport Direct's total sales, but are growing at an 11% annual clip and are also helping to improve the company's profitability.

While you pay £4.99 for this delivery option with Sports Direct, you get a £5 voucher back to spend in store when you collect your order. So while in principle you pay nothing for delivery, it cleverly entices you to make another purchase from either the store or the website.

Conclusion: BooHoo and Sports Direct are two great ways to invest in the UK online shopping boom.

On Bloomberg TV: Discussing the Economy

BCS Asset Management’s Edmund Shing and Mizuho International’s Riccardo Barbieri discuss Greece’s ongoing talks with its creditors and an IMF payment that the country made. They speak to Bloomberg’s Jonathan Ferro on “On The Move.” (Source: Bloomberg)

Bloomberg TV link:

Greece Still Near Brink Despite IMF Payment: Shing

Goodbye Labour mansion tax, hello Tory post-election property bonanza at Berkeley and Foxtons

International Business Times Video link (click below):

Goodbye Labour mansion tax, hello Tory post-election property bonanza at Berkeley and Foxtons 

Could property be the big gainer from David Cameron's election win? Estate agent Foxtons and house builder Berkeley Group jumped 9%+ on 8 May. But why?

Clearly, the stock market has heaved a huge sigh of relief at the demise of the Labour Party. Now there is no fear of a mansion tax hitting London housing.

This is good news for house buyers at the £2m ($3m, €2.7m) plus price bracket, such as foreign buyers in London, who have been holding off any purchases up until now.  

Equally well, with the risk of Labour's threatened rent controls now removed, the buy-to-let market could now see renewed activity.

Now that the Tories are in sole charge, they need to urgently tackle one of Britain's most pressing problems. London and the South East is the UK's economic heartbeat, but is desperately short of affordable housing.

House prices still on the rise – outside London

The Halifax house price index rose 1.6% between March and April, and 8.5% over the last year, for a yearly gain of nearly £20,000 on the average house (Figure 1).

Figure 1: UK house prices up by nearly £20,000 over the last year 

Source: Lloyds Bank

Last year, London properties saw the fastest-rising prices. In contrast, it is the rest of the UK that has enjoyed stronger house price momentum over these last 3 months.

According to the Royal Institute of Charted Surveyors (RICS), London is one of the very few regions where house prices have actually fallen over the last 3 months (Figure 2).

Figure 2: House prices rising fastest in Northern Ireland 

Source: Royal Institute of Chartered Surveyors

Four factors should drive a rebound in buy-to-let house purchases:

1. Lifting of the threat of rent controls;
2. High demand for rental properties (Figure 3);
3. Falling mortgage interest rates: The Co-Op Bank are now offering a new 2-year fixed-rate mortgage at only 1.09%. This suggests that the first sub-1% mortgage rate could soon be here.
4. Falling savings rates: your saved cash is worth less and less in the bank, increasing the attractions of alternative income investments. 

Figure 3: National rental demand remains very high 

Source: Royal Institute of Chartered Surveyors

All good for estate agents and house builders

What are the best ways to invest in the UK housing market? These are my two favourite housing-related industries:

Estate agents: Of course they buy and sell houses, and so make more money as house prices go up. But they also increasingly make money from the buy-to-let market, as they also act as letting agents.

House builders: who benefit from rising house prices as they can sell their newly-built homes for more, meaning higher profits.

My two favourite housing shares: Berkeley Group and LSL

I like the UK house builders as a group; they are all in general cheap, pay big dividends and are very profitable.

My favourite house builder is Berkeley Group (code BKG). It is focused on London and the South East of England, it is a generous income payer with a 6.4% dividend yield, and has been consistently very profitable over the last five years.

There are handful of listed estate agents in the UK. I like LSL Property Services (code LSL). LSL has two distinct sets of businesses:

• 539 estate agent branches under a number of brands, such as Your Move and Reeds Rains;
• Surveying and valuation services.

Both of these sets of businesses will make more money from a booming property market, whether from buying and selling or just from managing rented properties.

LSL is also a cheap stock and a reasonable income payer with a 3.7% yield; it is also consistently very profitable, with profits forecast to grow by 10% this year.

Post-election Friday was a good day for the estate agents and house builders; but there could be many more as the property market heats up again!

Idris Elba gives Superdry the premium touch as Debenhams enjoys its sweet spot

International Business Times Video Link below:

IB Times Video: Idris-elba-gives-superdry-premium-touch-debenhams-enjoys-its-sweet-spot

We as a nation spent £26.5bn (€36bn, $39bn) in the shops during February, ie £6.6bn per week. The latest retail sales data reveals we bought 5.7% more stuff from shops in the second month of the year than in 2014, an impressive growth rate.

Clearly the combination of increasing employment, rising wages and lower petrol prices are driving greater consumer optimism and are all leading us to open up our wallets and spend with abandon...

A schizophrenic retail sector: Supermarkets pressured, non-food flies

Looking under the hood of retail sales statistics reveals two very different trends at work: firstly, supermarkets continue to have a tough time, with sales flat and prices under pressure (food prices on average 2% lower now than this time in 2014).

Secondly, in sharp contrast, the non-food retail sector is enjoying a boom (Figure 1), with a 5.3% increase in retail sales value over a year ago.

Figure 1. A tale of two sectors: Food retail flat, non-food booms

Source: Office for National Statistics

Digging deeper, the sectors producing the best growth at the moment are clothing, electrical appliances and household goods (furniture, lighting, Figure 2), all growing at over 6% per year.

Figure 2. Clothing, electrical and household goods in the lead

Source: Office for National Statistics. Data as of February 2015

In the UK retail space, the obvious names come to mind such as the veritable Marks & Spencer, Next and even Whitbread (the owner of Costa Coffee, Beefeater Grill and Brewers Fayre).

So which companies should be making hay? Debenhams and SuperGroup

But I would focus right now on two other retail names: department store chain Debenhams and the owners of the popular Superdry fashion brand, SuperGroup.

I like Debenhams (code: DEB) for a number of reasons:

1. It sits in the current sweet spot of retailing, offering clothing, footwear and household goods in its department stores.
2. Current trading is strong, following the strong key Christmas period with 4.9% like-for-like sales growth. Online was strong too with its debenhams.com website growing sales by 29% over the four-week period, helped by the success of its click-and-collect service.
3. Gross profit margins continue to improve, highlighting the better cost control and fewer discounted items sold.
4. Valuation remains cheap at only 10x P/E (thus far cheaper than Next, Marks & Spencer or Associated British Foods – owner of Primark; Figure 3), while income lovers will like the 4.6% dividend yield paid out. 

Figure 3. Debenhams, SuperGroup cheaper than other UK retailers

Source: Stockopedia.com. Note: SuperGroup P/E adjusted for net cash

The stock has been on a strong run of late, rising from under 60p in October 2014 to touch a peak at the end of February of over 80p, before settling back to 76p now. I think there could be plenty more upside left in Debenhams, given the following winds from the UK economy.

SuperGroup: Buying into the new strategy

SuperGroup (code SGP), the retailer behind Superdry, has decided to buy back the distribution rights for its fashion brand in the US, so as to sell Superdry clothing Stateside rather than through a partner. At the moment, Superdry is not making money in the US, but this strategic move highlights the new management's confidence in its US growth potential.

Secondly, it has recruited actor Idris Elba (The Wire, Luther, Prometheus, Pacific Rim, Thor) for a collaboration on a new premium range of Superdry clothing, which should deliver a boost to UK sales.

Thirdly, it is initiating a dividend for the first time, which will allow part of the £66m of cash on its balance sheet to be progressively returned to shareholders.

Top-line growth for Superdry is still estimated to beat 10% per year going forwards, generating 12-14% earnings growth. For this, an investor is paying just over 13x P/E on an ex-cash basis, which seems a remarkably good deal for this recovering branded goods growth story. So shop till you drop with Debenhams and SuperGroup.

Pension reforms - freedom, stealth tax or a scandal-in-waiting?

International Business Times Video Link below:

IBT Video: Pension-reforms-freedom-stealth-tax-scandal-waiting

Does anyone fully understand the UK's new pension rules? I have tried, and let me tell you, it is not at all easy! For a start, thanks to the Government's haste in pulling this pre-election rabbit out of its budget hat, the venerable HM Revenue & Customs is still releasing guidance notes on the details of the taxation and rules governing private pensions.

So there is hardly any surprise to see that the over-55s are having such a hard time trying to figure out what they should do with their private pension pots, and with any annuities that they may already have been bought. At the best of times, the subject of pensions is poorly understood by the vast majority of people, and the radical changes to pension legislation enacted over the last two tax years have only served to increase the confusion.

Risk 1: Another Mis-Selling Scandal in the Making? Get Proper Advice!

In my view, the combination of (a) radical changes in pension rules, combined with (b) the difficulty of the subject for most people, could open the floodgates for mis-selling of new pension products. One obvious danger: the over-charging of pensioners and would-be pensioners for dealing with pensions, e.g. the cashing in of annuities, resulting in pensioners getting very poor value for money.

Whoever said that giving people more choice was always a good thing? I would remind you that the last time a radical change was made to the pension system back in 1988, allowing the contracting-out of the State Second Pension, six million people opted out of SERPS, of which 2.4 million were later found to have been poorly advised and were potentially worse off as a result.

Even a body as august as the Financial Conduct Authority (FCA), the UK financial services watchdog, has flagged up the risk of poor advice and mis-selling surrounding these pension reforms. So far, the FCA has contented itself with warning the pensions and insurance industry that it must behave itself and treat clients fairly. But it has quite clearly flagged up this mis-selling risk.

My Pensions Tip #1: Take your time, get professional advice (without overpaying for it!) and if in doubt, do nothing!

While I normally shudder at the thought of getting professional advice regarding investment and taxation, in this case the sheer complexity of the subject of pensions and the huge number of new choices available make good advice essential.

Good first steps in getting unbiased pensions advice include reading the Government-sponsored Money Advice Service's web page on Options for using your pension pot, and calling the official Government-pension advice service,The Pension Advisory Service on 0300 123 1047.

Risk 2: The Government's tax trap – a big tax bill CAN be avoided

Even if you manage to avoid this mis-selling trap, there are other potential pension bear traps lying in wait for you. One of the choices open to you as an over-55 with one or more private pensions is cashing out more than the 25% of your private pension pot that you can take out tax-free as a lump sum. Now, you can theoretically take out your entire pension pot to spend as you like – the so-called "Lamborghini pension".

However, this withdrawal from your pension is subject to the balance over 25% of the pot being subject to income tax at your marginal tax rate, which could then be as much as 40% of the total amount "liberated" if the sum withdrawn takes your annual income over the 409% tax threshold.

According to the HMRC's own calculations, they estimate that 130,000 of the 400,000 people that are eligible to access their pensions each year in this way to do so, with the HMRC to potentially receive £320m in extra income tax for 2015/16, rising to £1.2bn by 2018/19, for a total over 5 years of £3.8bn (Figure 1).

1. HMRC Due to Get £3.8bn Over 5 Years from Extra Pension Tax 

Source: HM Revenue & Customs

My Pensions Tip #2: Now there are a number of ways to liberate your private pensions without paying an inordinate amount of extra tax to HMRC.

But the way to accomplish this will depend on your particular situation and your goals, and is thus beyond the scope of this short article – and that is why you need proper professional advice!

Risk 3: A Rush to Buy Overvalued Buy-to-Let Properties

After the sharp rise in UK house prices (+21%) since the depths of the 2008-09 Financial Crisis, using your pension pot to buy an income via a buy-to-let property given average 5.0% gross rental yields could be very enticing. But beware: this is not necessarily as easy as it may seem.

Firstly, house prices can go down as well as up! So your capital is not free of risk – an obvious statement perhaps, but one which bears repeating. Secondly, a monthly income from the rent is not guaranteed either; houses and flats can lie unlet for months on end, even costing the owner money as the Council Tax must still be paid on the property.

And of course, there is always the cost of maintenance and potentially the cost of a letting agent to consider too. All in all, the net (i.e. after-cost) buy-to-let rental yield (the annual rental income after all costs, as a proportion of the initial total cost of the property including stamp duty, conveyancing and solicitor's fees) may be nothing like as attractive as you may at first think.

My Pensions Tip #3: Think hard and do realistic net rental income calculations before going to the effort of taking a large cash lump sum out of your private pension to plunge into the buy-to-let property market!

Annuities are probably still a good choice for most people

Remember, despite all the bad press about annuities, they are not necessarily a bad thing!

First of all, what is an annuity exactly? It is simply a form of income guarantee: in return for a lump sum paid up front, an annuity provider (typically an insurance company) promises to pay you a regular monthly income for the rest of your life, however long you live.

There are many different types of annuities to consider, for which once again, advice will be required in order to choose between the various options. But the idea of a guaranteed income for life is no bad thing, as it removes the risk for most people that they exhaust their pension pot at some point, and then be forced to suffer a big drop in income as a result.

Right now, while annuity rates may have dropped over the last few years, a non-smoking male aged 65 today can guarantee an income of over £5,600 per year for life in return for a £100,000 lump sum payment from his pension pot (Figure 2).

2. 65-Year Old Non-Smoking Male Can Get a 5.6% Annuity Rate Today 

Source: Moneyfacts.co.uk

My Pensions Tip #4: So at the very least, buying an annuity with at least part of your private pension pot to ensure a minimum guaranteed level of income over and above the State Pension is probably a good choice for most people.

Overall, then, I don't want to sound like a complete party pooper – there are a number of very positive features of George Osborne's pension freedom changes for current and prospective pensioners; but at the same time, Caveat Pensioner!

In future articles, I will examine other potential investment options for your private pension cash, including the attractions of owning a portfolio of shares in solid dividend-paying companies...

Edmund

George Osborne election budget: Tax cuts predicted but no giveaway

IB Times UK Video: Edmund-shing-predictions-george-osbornes-budget-2015

That man of the people, Chancellor George Osborne, is sure to mimic Mr Robertson in giving us all some jam in the Budget on 18 March. After all, we are merely two months away from a May general election and the Conservative Party is sure to want to play its usual low tax card.

I would also wager that the Blues will attempt to sway the grey vote their way with further presents for pensioners, in the form of the granting of further pension freedoms. After all, it is clear Ukip have had particular success in appealing to the fiftysomething-plus Saga generation, which has traditionally been the core of Tory support over the post-war decades.

Higher personal allowance on the cards

So let's start with the most obvious tax-oriented measures – the raising of the threshold for the paying of income tax in the form of the personal income tax allowance, currently £10,000 per person per tax year. Firstly, this is one measure the Conservatives and Liberal Democrats continue to agree on. Secondly, the strength of the UK economy allows Osborne to relax his fiscal shackles a little and give back to UK households.

I would pitch for an immediate increase in the personal allowance up to perhaps £12,000 per year (saving all taxpayers £200 per year), with a further pledge to continue raising this threshold if the Conservatives are returned to power.

Of course, some of this largesse is likely to be clawed back via indirect taxes such as higher petrol duty, given how oil prices have collapsed over the last six months or so, allowing UK motorists to buy unleaded petrol today 18% cheaper than it was back in July 2014 (Figure 2).

Benefits for savers – via Isas

Secondly, Gorgeous George will want to help savers, given the paltry interest rates now on offer from high street banks and building societies.

The current Individual Savings Account (Isa) limit has already been raised substantially to £15,000 for the current tax year (from £11,520 previously), and is set to rise to £15,240 under existing government commitments. However, it could go further and perhaps round this amount up to a more generous £16,000, allowing savers to shield earned more interest, dividends and capital gains from income and capital gains tax.

Targeting pensioners – via pension bonds

Remember Pension Freedom Day is approaching with the new tax year, on 6 April.This allows those holding private pensions to liberate them once aged 55 or older, effectively offering a far wider set of financial alternatives for current or those fast approaching retirement. However, this is likely to prove very complicated for the man on the Clapham omnibus, given pensions were an impenetrable subject even before the announcement of these welcome changes.

One set of pensioners who are likely to be targeted by the current government are those who have already used their private pensions to buy an annuity (a product that provides a guaranteed level of income for the remainder of one's life). The potential to trade in an existing annuity for a lump sum instead could well be a new measure introduced in this Budget, extending the liberalisation of private pensions.

A second measure benefiting pensioners could be the extension of the popular Pension Bonds offered by the government-run National Savings & Investments. Currently, pensioners are limited to investing a maximum of £10,000 in each of a 1-year 2.8% bond and a 3-year 4% bond. The government could well increase the amount of these bonds on offer to pensioners to allow more to benefit from these market-beating interest rates, or to increase the amount that a pensioner can invest in each bond.

Caveat voter: All budget commitments could be unwound come May

But you would do well to remember any pre-election giveaways from the chancellor can be unwound following the May general election by any eventual winner. So it would pay not to get too excited by and long-term measures announced during the Budget.

Thus far, the one fact that I can safely state is that there is a record level of uncertainty over the result of this upcoming election, with the two main parties polling less than two-thirds of the total UK vote, a post-war low (Figure 3).

Greatest certainty: Another hung parliament

Taking these average poll results and translating them into parliamentary seat swing predictions, no combination of two parties (apart from Conservatives and Labour) looks capable at present of forming a majority coalition government (Figure 4).

Even a putative Labour and SNP coalition would not yield the necessary minimum Parliamentary majority of 326 seats, falling short by eight MPs.

So what can we conclude from all this? Firstly, any tax giveaways will be limited by the coalition nature of the government, with the Liberal Democrats putting the dampers on any excessive Tory tax cuts.

Secondly, tax-free saving and pensioners should get a boost. And thirdly,  the chance of an inconclusive May election is at present running very high, with the risk of even needing a second election soon after the first...

There remain two months for the main parties to sway current voting intentions their way but they had better get on with it. In the meantime, make sure to use up your current ISA allowance of £15,000 by 5 April (perhaps buying exposure to the current UK & global stock market rally), or else it will be too late.

Véronique Laury aims to renovate and add value to B&Q and Screwfix owner Kingfisher

Kingfisher (UK code KGF), the owner of DIY businesses B&Q and Screwfix, has been taking flight over recent months, climbing from 286p in November 2014 to 374p today.

But what you may not realise is that Kingfisher's biggest business geographically is in fact not in the UK, but actually in France with the Castorama and Brico Depot Do-It-Yourself chains of stores. The company's chief executive, Véronique Laury, is also based in France and took the reins in January after previous boss Sir Ian Cheshire stepped down.

Kingfisher's performance of late can be best described as somewhat schizophrenic. On the one hand, its two UK businesses have been performing well, in particular the Screwfix catalogue/online building supplies division, which posted 25% year-on-year total sales growth in the third quarter (to end-September 2014).

However, on the other hand, the French Castorama and Brico Depot DIY chains of stores have suffered from a weak French DIY market, hit by a triple whammy of fragile consumer confidence, higher taxes and declining house prices. These factors have led to an 8% fall in French retail profit in the third quarter (adjusted for currency movements).

The good news for Kingfisher is French consumer confidence is now in fact surging and has touched a three-year high, due to falling petrol prices (boosting purchasing power) and unemployment that has finally started to decline (Figure 1).

Acquiring Mr. Bricolage

With some of these gains in French purchasing power likely to be found in better home improvement sales going forwards, combined with the ongoing restructuring programme ("Creating the Leader" self-help initiatives), Kingfisher's French profitability should turn around sooner rather than later.

Helping this rebound in French profitability is the recent acquisition of smaller French DIY retail chain Mr Bricolage, which should result in further cost savings across the group's three French operations from enhanced purchasing power and closing of weaker stores to focus on the most profitable sites. Kingfisher's management has already indicated this acquisition should boost the group's earnings per share, delivering welcome profit growth from the other side of the Channel.

UK DIY market looking sturdy

At the same time, the buoyant nature of the UK housing market and record high UK consumer confidence (at its highest level in 10 years) should continue to propel continued growth in the UK B&Q and Screwfix divisions, after strong 11% UK retail profit growth in the third quarter.

Up to now, the push-pull effects of weak French performance and strong UK performance have seen Kingfisher's share price go on a rollercoaster ride, falling from a 2014 high of 440p to a September-October low under 300p, before recovering of late to 374p (Figure 2). While it has lagged the FTSE 100 index over this period, it is catching up fast.

As part of ongoing restructuring, Kingfisher has already taken action to curb its money-losing operations outside of Europe, agreeing late in 2014 to sell 70% of its China operations (including 39 B&Q home improvement stores) to local supermarket giant Wumei for £140m. This sale has allowed Kingfisher to launch a £200m dividend and share buyback program spanning fiscal year 2014-15, with £180m already spent in 2014, and more to be spent going forwards.

Key to Kingfisher's fortunes going forwards will be the strategy update that Laury is to deliver in a month – this could prove a true catalyst for further upside in Kingfisher's shares, should her vision for Kingfisher, as DIY shopping habits change, prove revolutionary.

Takeover target?

The final wildcard that could play out in Kingfisher's favour is that it could become a takeover target (according to the Evening Standard), given its dominant position in European DIY retail, with private equity groups holding record amounts of cash and looking for potential companies to buy. All in all, Kingfisher shares may prove more alluring than the challenge of some weekend DIY.

SuperGroup and easyJet promise mid-cap momentum in the stealth bull market

International Business Times Link to Video, Article:

SuperGroup and easyJet promise mid-cap
 momentum in the stealth bull market

No surprise that financial journalists are seizing on the FTSE 100's proximity to the magic 7,000 level to pen myriad articles, all variations on the "FTSE to hit a new all-time high after 15 years".

But what is perhaps far less well documented in the financial press is the fact that the FTSE Mid 250 index, including more domestically oriented sectors such as house building, non-food retail and media have been in a stealth bull market over this same period, posting a compound annual growth rate of not far shy of 10% per year including reinvested dividends, compared with only 3.9% for the FTSE 100 (Figure 1).

At a new all-time high of over 17,000, it seems as if the FTSE Mid 250 index is poised to capitalise on the economic strength evident in the UK, as we see record employment and the resumption of better wage growth while the inflation rate is the lowest seen in many a year (Figure 2).

There are two ways to invest in the FTSE Mid 250 index as it reaches a new all-time high: buy one of a number of FTSE 250 companies that are performing well and offer good value; or simply buy the entire index via exchange-traded funds (ETFs).

My personal FTSE 250 favourites

If you are taking the first approach, and are keen to buy a handful of FTSE 250 companies, I would suggest looking for exposure to the buoyant UK economy via more domestically-oriented sectors such as:

1. Travel: budget airline easyJet (UK code: EZJ.L) is enjoying ever-higher UK passenger numbers (read my February 18 budget airlines article including easyJet)
2. Non-food retail: SuperGroup (SGP.L) has benefited from a strong Christmas trading period, with 12.4% like-for-like sales growth to 10 January (read my December 22 Santa's Secret Stock Tips article)
3. House builders: Berkeley Group (BKG.L), which is exposed to the buoyant housing market in the affluent south east of England and which offers a near-7% dividend yield (see my February 2 Housebuilders' article)
4. Insurance: Lancashire Holding (LRE.L) is a Lloyd's insurer that has two key attractions: (a) a very generous 9% dividend yield and (b) the potential to become a takeover target given recent purchases of UK competitors Catlin and Brit Insurance. See my recent Lancashire Holding article for more detail.
5. Asset managers: Jupiter Asset Management (JUP.L), one of the UK's largest asset managers that  manages nearly £32bn of assets in its various funds, and which currently pays a near-5% dividend yield. Greater UK investor optimism should benefit Jupiter via higher funds under management, and thus higher management fees and profits.

Recap on the performance of my six secret Santa stock picks

I gave six FTSE 250 stock tips in a pre-Christmas article back on December 22. How have they fared in the intervening two months?

Well I am pleased to report that these stocks have returned an average 6.2% over the two months led by SuperGroup and Amlin, beating the FTSE 100 index handily. (Figure 3)

Don't want to pick single stocks? Buy a FTSE 250 ETF instead

If you prefer the lazier way and just want a single investment to capture the FTSE 250's strong momentum, the cheap way to buy exposure to the UK's economic momentum would be via a FTSE Mid 250 exchange-traded fund (ETF), such as those offered by ETF providers iShares (UK code MIDD.L), Deutsche Bank x-trackers (XMCX.L) or HSBC (HMCX.L) (Figure 4).

Bottom line: Remember the headline FTSE 100 index is more a proxy for the global stock market given its heavy weightings in global industries such as healthcare, mining and oil & gas. In contrast, the FTSE Mid 250 index is a much better proxy for domestic economic growth and has outperformed the FTSE 100 by a country mile over the past 15-plus years.

TalkTalk may follow O2 and succumb to telecom takeover mania

International Business Times Article Link: Click Here to View

The airwaves have been awash of late with UK telecom takeover stories. Firstly Telefonica's UK mobile phone operator arm O2 is reportedly to be sold to Hong Kong billionaire Li Ka Shing's Hutchison Whampoa, the owner of the Three mobile phone network, for £10bn.

Figure 1a. UK Mobile Operators' Market Share: Current situation 

Source: Jeffries Investment Bank

O2 plus Three's combined UK mobile market share would rise to 40% from Three's current 12% share, easily becoming the UK's largest mobile operator (Figure 1a and b).

Figure 1b. UK Mobile Operators' Market Share: If O2 and Three are Merged 

Source: Jeffries Investment Bank

Secondly, both Deutsche Telekom and Orange are potentially ready to sell their combined UK mobile operation EE to BT, who is looking to buy its way back into the UK mobile network business some 13 years after selling its mobile arm BT Cellnet, which eventually turned into O2.

BT's potential purchase of EE fits with the predictions made by the credit ratings firm Standard & Poors, who expect to see more fixed-mobile combinations in the UK telecoms market as key players seek both revenue and cost synergies.

Vodafone the wallflower at the mobile phone party?

Looking at the four UK mobile phone incumbents, the only operator so far not mentioned in this merger and acquisition merry-go-round is the number three player ranked by customers, Vodafone.

Believe it or not, even at a total market capitalisation of nearly £64bn currently, mobile phone juggernaut Vodafone (LSE code: VOD) has been talked of as a potential acquisition target in the global telecoms sector, ever since it agreed to sell:

• its 50% share of US mobile operator Verizon Wireless back to Verizon for £54bn
• its 44% share in French mobile operator SFR back to majority holder Vivendi.

Who could afford to buy Vodafone? Two much larger suitors have been identified in the recent past: US telecoms giant AT&T and the leading Chinese mobile phone network, China Mobile. In terms both of market capitalisation and annual income generated, these two telecoms companies dwarf Vodafone (Figure 2a and b).

Figure 2a. Vodafone is dwarfed by China Mobile, AT&T

Source: Finviz, Stockopedia

Figure 2b. Vodafone is dwarfed by China Mobile, AT&T

Source: Finviz, Stockopedia

In fact, AT&T and China Mobile are not the only two potential suitors mentioned, as back in September last year Japanese conglomerate Softbank, the owner of Japanese mobile network Softbank Mobile (formerly Vodafone Japan) and US mobile network Sprint, was also earmarked as a potential bidder for Vodafone.

Vodafone as predator rather than prey

Given Vodafone's size, it would certainly be a huge undertaking for any acquirer to pursue. But as well as being a potential takeover target, Vodafone can also be seen as a potential acquirer itself in the rapidly consolidating UK telecoms market.

Indeed, Vodafone's CEO Vittorio Colao recently warned that were BT to move aggressively into the mobile telecoms space, then Vodafone would retaliate by moving into the consumer broadband business, where it has been thus far absent.

But how would it accomplish this strategic move, given that thus far in broadband it only serves business customers, after buying out Cable & Wireless's UK broadband network?

One potential target could be TalkTalk (LSE code TALK), one of the premier consumer broadband network operators, serving four million customers in the UK.

TalkTalk is today the fourth-largest broadband internet provider in the UK (Figure 3), achieved largely through offering very cheap combined "triple-play" offerings (broadband internet, telephone and television services).

TalkTalk CEO Dido Harding has even gone as far as to state that: 

"If [Vodafone] decides it simply has to quickly have a fixed-line asset, then I'm not naive enough to think that we're not one of the companies it would look at".

Figure 3. TalkTalk is the fourth-largest UK broadband internet provider
 

Source: Ofcom

Two potential takeover targets in UK telecoms to choose from

So there you have it – two ways to play ongoing consolidation in the UK telecoms sector: Vodafone and TalkTalk.

Note that Vodafone offers a juicy dividend yield of 4.8%, and TalkTalk is close behind with a prospective yield of 4.7%. Not bad dividends to pick up while you are waiting for a potential takeover.

Edmund Shing is the author of The Idle Investor (Harriman House), an expert columnist and a global equity fund manager at BCS AM. He holds a PhD in Artificial Intelligence.

Can Ukip's Nigel Farage woo City of London's hedge funds?

A Happy New Year to you!

IB Times Article: Can Ukip's Nigel Farage woo City of London's hedge funds?

Ukip's leader will have to convince hedge fund managers Ukip is not a party of protest

Even in a representative democracy, such as we possess in the UK, the plain fact is that money talks. 

It doesn't speak on the same scale in the UK as it does in the US – where the former chairman of US investment bank Goldman Sachs, Jon Corzine, reportedly spent over $62m (£40.34m) of his own money to win a US Senate seat in 2009 – but it is still an important electoral weapon.

Ukip's leader Nigel Farage is only too aware of this fact and is thus targeting donations from hedge funds, according to a leaked internal Ukip memo from 2012.

We should not be surprised at this fact, given that Farage's career as a commodities trader was firmly rooted in the City of London. He has already garnered a number of high-profile supporters in the City and aims to add to these ranks in the run-up to this year's general election.

Source: Ipsos MORI/UKPollingReport

Surfing on an austerity-driven nationalist swing

UKIP continues to ride a Europe-wide swing towards pro-nationalist, anti-Europe parties throughout Europe, with immigration remaining a hot topic in the UK in particular, as this Ipsos MORI poll shows.

But the real question is: is this simply a protest driven by austerity measures squeezing the purchasing power of the middle classes in the Western World, or is there more to Ukip's current popularity, which is hovering at 16% in the latest polls of UK voting intentions?

Two Barriers to Wooing City Donors

We can expect Farage and Ukip to focus on disaffected Conservative Party donors rooted in the City, as this has already proved fertile ground for the party, recruiting such grandees as long-time Schroders fund manager Andy Brough and hedge fund manager Crispin Odey.

But for Farage to woo hedge fund donors, it must be demonstrated that Ukip is more than a single-issue, protest vote party, and is one that can stand the test of time to maintain its recent strong political momentum.

Doing this requires potential donors to answer two questions: the first being how many high-profile members of Ukip – apart from Farage and Ukip's Tory MP converts, Mark Reckless and Douglas Carswell – can they name ?

This is what is known in finance as the "Key Man Risk": what would happen to Ukip if Farage disappeared tomorrow? In reality, are you backing Ukip, or the personality cult of Nigel Farage?

The second question is how many of Ukip's policies can the potential investor name, apart from withdrawing the UK from the EU and limiting of immigration to the UK?

While Farage is aware of the need to publicise Ukip's other policies – for instance via LBC's "Phone Farage" radio show hosted by Nick Ferrari – it is not clear to me that Ukip's other policies are any more favourable to the City and hedge funds than the Conservative's current policy platform. After all, in the final analysis, personal interest is a key driver of polling intentions at general elections. Why should Ukip be inherently more attractive to a prospective City donor than the ruling Conservatives?

For me, these remain the two towering hurdles to Ukip garnering widespread financial support from the City, which I think Farage and Ukip have not convincingly answered up to now.

Hedge funds are global, not just British!

The final key impediment to Farage's strategy of wooing City-based hedge funds is that they are populated, in a large measure, by the best talent in the finance industry drawn from all over Europe – indeed from all over the globe.

This is hardly surprising, given London's ascent to now being the most global city of all, driven in large part by its pre-eminence as a global financial centre based in Europe and straddling both North American and Asian time zones.

Why should London-based French, Italian and American hedge fund managers give money to an anti-immigration Ukip party? Why would they bite the hand that feeds them?

Edmund