Daily Stock Market Report (27 Dec)

27th Dec '24 by Megan Boxall

38 comments 3955 reads

Good morning, I hope everyone is having a lovely Christmas period.

The markets are open again this morning, so we’ll have this post open for comments. For those who would rather chat about ideas than the (relatively thin) news, we are three stocks into our 12 stocks of Christmas. These are the stocks that we’re feeling optimistic about for 2025. Check out our analysis here:

Today's company news

Name(Mkt Cap)	RNS	Summary	Our view
SRT Marine Systems (LON:SRT) (£110m)	New contract	$9m contract announced in November has been signed
Gelion (LON:GELN) (£25.8m)	Final results	Revenue entirely generated from R&D tax grants. Losses narrowing

Market Comment

It’s a quiet day on the companies front, but a few interesting snippets of information and conversation to close off the year.

Active funds have suffered heavy outflows, but the passives keep reeling in the punters. According to Morningstar the UK equities sector has seen investors pull more than £15bn from active funds. Some of the highest profile names in the industry have borne the biggest brunt of the negative sentiment towards UK equities. For example, investors pulled £2.6bn from Fundsmith (which has assets of £22.8bn under management). The normally popular Baillie Gifford funds also saw big redemptions. AD_4nXfN5OrPkAnFjwAM0m1-YnacWhLIbs3OHl_X653nNv4ND5KbSRPwYK8EW1dVP78zvibCE9J-NCSwtwbpWx42J3H0QaRY_FgjQinpmNrQB16bAWXRQUG8DPjQRucZOCFRpEwiL598?key=-m8eNnqp4VP9xpEh9ka8DoBv

The popularity of passives remains an interesting source of discussion. Passives are cheap, which is great for less experienced investors or those without a huge amount of time to research individual equities.

But passive fund growth feeds a virtuous circle which benefits the biggest companies in an index. In the US, the S&P500 is up 28% in the year to date, the Magnificent 7 stocks have risen 71% on average, while Nvidia is up 171%.

The Magnificent 7 stocks now make up 40% of the total market.

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Japan is heading for a record close. The Nikkei looks set to close at its highest level since 1989 - when the market surged during the country’s economic bubble. Gains in the year have been driven by the nation’s car giants, as well as Sony and Uniqlo’s parent company Fast Retailing.

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Mark Carter

27th Dec '24

"According to Morningstar the UK equities sector has seen investors pull more than £15bn from active funds."

Passive trackers are indeed ferociously hard to beat. Berkshire Hathaway (NYQ:BRK.A) has underperformed a US index fund for the 22 years ending Oct 2024. The Financial Analyst journal wrote an article in 2018 entitled "Buffett's Alpha". They found that a multifactor asset pricing model explained Buffett's performance and found that there was no statistical evidence that he had any alpha. They concluded that Buffett's success is explained by his systematic preference for cheap, safe, high quality stocks combined with leverage.

This should be great news for Stockopedia subscribers, of course, because it means that their quantitative methodology is the way to go.

One thing I did notice is that their rankings work better for smaller caps than the large ones. So this might give you an even greater outperformance edge.

"Investors pulled £2.6bn from Fundsmith"

It could be that investors are doing the wrong thing as the wrong time. On the other side of the coin, the fund's portfolio has a cashflow yield of about 3.3%, or thereabouts. US treasury yield are 1% above that (depending on which period you use), so I think the fund is facing significant valuation headwinds.

Monty Carlo

Chairman & Co-Founder is Jim Mellon.

Without trying to lead the witness either way (and I would say the same about Nigel Wray's portfolio companies), in my experience that adds a further layer of complexity. I need to consider who the shareholder base is, why they bought, and their appetite to support the company if cash gets tight.

Also, their investment Solar Foods was listed in Helsinki in Sept and has promptly halved in value. Given the prevalence of down rounds in small speculative companies of late I wouldn't be too confident in the NAV which may reflect valuations/costs from funding rounds that will now be viewed as belonging to another era....

But I'm interested enough to look further when I get a chance.

Beats me. I'm just enjoying the ride.

Since the subject of computers has been bought up today, and it's the giving season, I thought I'd give a mention of STMicroelectronics NV (EPA:STMPA). It makes MCUs (microcontrollers).

Investors have been highly enthusiastic on all things chip and AI related this year (Intel excepted, of course). STMPA is another company in the doghouse, having fallen 45% YTD to €24.30.

It's TTM PE is 11.1X. Well, I actually like its products, its line-up of STM32s. I think it's trying to steal market share from 8-bit micros, too. The company provides its programming tools for free and has lots of tutorials on Youtube.

It's popular amongst hobbyists, although its mainly targeted at industrial manufacturing. The company is innovating all the time. I did think about buying some shares earlier on this year, but never did. Seems quite overlooked, though, as everyone is chasing NVDA, TSMC, and a few others.

Phillip Arghebant

Dear Megan

I just want to point out that Fundsmith owns a global equity portfolio of which less than 4% is in the UK and approximately 73% is in the US. So when you refer to investors selling UK equity funds, I cannot see how Fundsmith qualifies given its global portfolio, even if investors have withdrawn £2.6 billion (although we are not told over what period).

Kind regards

Phillip

intuitive6191

I wondered if the gilt yield would get some discussion today. 5% on gilts is getting paid not to take any risk - there will be some takers here.

A poor budget is slowly being found out and punished by the markets.

Stagflation is looking more likely to me. Hope I am wrong.

Rusty2

Good point about hardly any UK shares. I think people are withdrawing, because of the poor performance, considering the high US content. Compared to the S&P500, it has been disappointing. He has made some poor decisions.

"5% on gilts is getting paid not to take any risk"

There are different schools of thought on this.

Buy the 10yr gilt today and see what happens to the price if rates are 6% in 6 months time.... So only risk free if you are committed to holding to maturity. Even then you may find inflation exceeds the 4.7% YTM you purchased at and you are looking at a real terms loss over a decade.

Against that, there are those who believe gilt yields are lower than they should be on a risk/reward basis (the swap rate being the relative benchmark given swaps are collateralised), in that with a gilt you pay a liquidity premium for a liquid asset that you can almost always sell, and that some gilt buyers are forced buyers. I'm not sure whether the LDI Truss debacle has modified that opinion...the BofE did step in to restore liquidity after all.

Tortoise investor

I think we should wait to see the whole quarter before getting too excited. November is probably just a bounce back after the pre Budget sell-off in the prior months.

bohenie

Anyone any ideas why Raspberry PI Holdings (LON:RPI) is doing so well- Its near doubled this month! What am I missing ?

timarr

So when you refer to investors selling UK equity funds, I cannot see how Fundsmith qualifies given its global portfolio, even if investors have withdrawn £2.6 billion (although we are not told over what period).

Fundsmith is a UK equity fund because it's marketed to investors who are UK based. Megan's point was about UK investors withdrawing funds from active investment funds, not the state of the UK market which is a valid, but very different point.

We can see the impact of this on the quoted investment fund companies, all of whom are sitting on valuations that in normal times would suggest some kind of serious issue. There may be a secular change happening in the market - as Megan suggests - where people shift from active to passive funds. Given the failure of most active funds to outperform the market that's not surprising but there does appear to be some kind of positive feedback effect happening with indexers that means the largest stocks get larger, regardless of underlying performance.

Although I've no great regard for active funds or their managers I do have a smidgen of sympathy for anyone who's dared to go against the market and not invest in the M5, because they've virtually guaranteed underperformance by daring to do something different. However, in the end valuations can't keep rising because earnings can't keep rising because there's not enough money in the world to keep the whole show on the road.

In the meantime it's mildly enjoyable watching the money roll in, even if it is in the certain knowledge that one day it will roll out again.

The Phoenix

I do wonder as these funds get bigger if it becomes virtually impossible to then out perform the amount of money under management means you have to go for big liquid companies so you must end up become a quasi tracker particularly if your over 80% invested in one area of the globe ?

Probably not a problem in the US markets. He did sell PayPal Holdings (NSQ:PYPL, Adobe (NSQ:ADBE) and Intuit (NSQ:INTU) all poorly timed, Paypal too late, the other 2 were near the bottom, both recovered strongly soon afterwards. Even Novo Nordisk A/S (CPH:NOVO B) one of his star performers has taken a dive recently. He did not buy NVIDIA (NSQ:NVDA).

You would have done better in an index tracker.

planetx

Cash looks ok for quite a long time, thats what gave me a good level of comfort (they said 10 years in some presentation)

Looks out of fashion and hammered so total lack of momentum .

Bit of a strange relationship with Mellon and management charges but he certainly looks aligned

Cash looks fine to me

johnsmith68

I find this sort of fact free bashing of Fundsmith to be a peculiarly British thing - I think it's probably tall poppy syndrome. The facts are that the fund has annualised returns of 15% net of fees since inception. That's pretty good especially when you look at the relatively low volatility of the fund.

"He has made some poor decisions." Who hasn't? He's also made some great calls - he bought Meta Platforms (NSQ:META) when it's PER was at a once in a lifetime low double digits, and he was into Novo Nordisk A/S (CPH:NOVO B) long before Wegovy was a thing.
The fund has held Microsoft (NSQ:MSFT) as a main holding since before the Magnificent 7 was even a term

For my money, I think Terry Smith is one of the most astute, transparent and straight talking money managers around. I've held a portion of my portfolio in Fundsmith for a good while now and I'm delighted with the performance, the communication and the customer support which is beyond exceptional. I find that people who hold critical views of the fund or of Terry Smith, really haven't taken the time to research him or the fund.

I found an interesting page: https://www.edwardconard.com/m...

Dec 23, 2024: "The CAPE ratio for America’s stockmarket is higher than it has been for 98% of the time since 1900. ... At present, the CAPE yield for the S&P 500 is 2.6%. ... When the CAPE yield has been between 2% and 3%, the average annualised return has been -1.5% in nominal terms, and -4% in real terms."

I read somewhere that when the market leaders tank, the rest of the market follows. They do tend to fall less than the leaders and recover quicker, IIRC.

Terry Smith has had an excellent run. Quality is a factor that has really helped the fund. Valuations are important too, though.

Trump has promised to lower interest rates, which could fuel further increases in US markets. Some have argued that interest rates are largely out of his control.

I think it's likely that Trump will lower rates and increase gov't borrowing. It has been argued (convincingly, in my opinion) that cutting the budget is likely to be much more difficult than promised.

As the saying goes, the market will do whatever it takes to prove the majority wrong.

I'll conclude this post with a quote I found recently from Milton Friedman: "Keep your eye on one thing and one thing only - how much government is spending - because that's the true tax. There's no such thing as an unbalanced federal budget. You're paying for it (either in the form of direct taxes, or indirectly in the form of inflation or borrowing)."

"£2.6bn from the strategy over 10 months."

I'm with you Mark if he can get rates down and deficits blown up even more I think 2025 will be good at least for the US it then depends how much more he can inflate the bubble and if the wheels then come off circa 2026 or 2027.

John LA

Certainly interesting , I never believed cultured meat would catch on. But can see it being sold as dog meat cheaper than the branded versions

Harry Hindsight

28th Dec '24

See nobody says "elephants don't gallop" anymore (was always an oxymoron).

My thoughts for 2025

The 'picks and shovels' of AI - chips, data centre landlords (REIT?), power supply (SMR's and specialist fuels).

Crypto (unfortunately a bit hard to participate with our "Ministry of Truth & Safety".

Musk - SpaceX will be interesting. Satellites and internet is of interest with the subsea cable war going on. National security. EV's are a mess - either let China build the things and we buy them at affordable prices or not.

Drones - have changed the world - for sure our billion pound aircraft carriers will use them if they get out of port lol. And who want's to sit in a tank, not me bro.

Weight loss - a pill not a needle.

Who makes the ammo, rockets, shells etc. Chemring (LON:CHG) don't seem to be very good at it.

Rebuilding Ukraine - cement, er cement, er aggregates, steel, US CONTRACTORS so forget our hero's.

Energy - looks like LNG from North America. Milliband farts wont' cut it.

number33

Proactive Investor suggest that it's due to this purchase by a US Investment Group. https://www.londonstockexchang...

Daily Stock Market Report (27 Dec)

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Megan Boxall

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