Daily Stock Market Report (27 Dec)
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.
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.
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.
Uniqlo has been an extraordinarily high performer in the last few years. It’s gone from relative unknown, to a huge retail footprint globally, and is part of a number of companies which are encroaching on the dominant position in sportswear previously held by Nike and Adidas.
Japanese funds have caught the eye of many UK investors, with fund inflows to Japanese specialists among the highest this year.
Disclaimer
This is not financial advice. Our content is intended to be used and must be used for information and education purposes only. Please read our disclaimer and terms and conditions to understand our obligations.
38 comments
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.
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)."
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.
Anyone any ideas why Raspberry PI Holdings (LON:RPI) is doing so well- Its near doubled this month! What am I missing ?
Proactive Investor suggest that it's due to this purchase by a US Investment Group. https://www.londonstockexchang...
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
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.
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.
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.
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.
timarr
"£2.6bn from the strategy over 10 months."
"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.
What are people’s thoughts on the UK market for 2025? I’ve currently got a bit of a negative view of the UK market following the last budget and feel this will be a really challenging year for the UK economy with higher tax, employment costs, continued high interest rates and a slow down consumer spending. I’ve sold a few UK stocks and brought a few US ones as feel trump coming in may be a positive for US business.
My impression is that companies are drawing in their horns. I expect a recession next year as bad news feeds into the market.
Raspberry PI Holdings (LON:RPI) having a Santa rally, doubled in a month - can't see why...
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.
Not worth the agro ?
Agronomics
Quite like it .
12m cash
170m NAV
Market cap 38m
Strip out the cash thats 170m assets for 26m
Thats an effective 85% below NAV
The biggest holding liberation labs appears to be fully funded to open a new factory in early 25 and is stuffed full of orders and will theoretically be generating 25m FCF per year
Agronomics own 35% of Liberation labs .
Share price has been smashed to bits by its major institutional investors liquidating due to net outflows of their closed end funds .
Downside seems protected unless all their portfolio of companies are crap overhyped twaddle which is a possibility, but you would hope they have a few winners in there .
Quite speculative and very easy to buy so those funds are still selling down their last few %.
When they clear and if they get the factory open looks to have very good upside .
Anyone got any thoughts ?
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.
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
Certainly interesting , I never believed cultured meat would catch on. But can see it being sold as dog meat cheaper than the branded versions
I had a quick look through my notes today. I found an interesting little tidbit of into worth sharing. This is from Russell Napier, of the Library of Mistakes (yes, for real):
From at least 1900, there is not relationship between GDP growth and the return from equities - price is what you pay and value is what you get.
Somehow, dedicating a library to cataloguing everyone's mistakes seems a uniquely British thing to do. Joking aside, it is a place of serious historical and academic interest, and you're sure to find some interesting videos on YouTube by Russell. The library is head-quartered in Edinburgh.Is anyone watching 10-year US and UK treasuries? Over 4.6% in the US and UK this morning. This is a bit of a headwind for global stock markets in my view. If we get a couple of days of further increases what will this mean for bank balance sheets at 31-Dec?..it could cause something to break somewhere is my thought. It also gives the impression that the Fed is losing control.
"The 10-year note yield is now up 100 basis points since the "Fed pivot" began in September. In other words, while the Fed has CUT rates by 100 bps, rates in the market have RISEN by 100 bps."
Very closely....but not half as closely as I hope Rachel Reeves is.
We are approaching 4.7% on the 10yr Gilt. We last saw that sort of yield in the trading range observed between 2000 and 2008. If maintained I'm not sure people have grasped just how that is going to percolate through everything - deeply fundamental stuff like mortgage rates, discount rates and financing the national debt.
Future returns on equities are probably in the region of 6-7% (off the cuff, broad brush, not being scientific here) once you factor in that the US has had a very good run recently.
Close to 5% on gilts is going to tempt some people. Especially if you think the Bank of England will be forced to cut next year despite the Budget further stoking inflation (will we see the word "transitory"?).
Yes, "Rachel from accounts" is hopefully watching! I wouldn't disagree with you on the UK long-term. The US is a totally different matter though in my view. Annual nominal returns historically for the next 12 years are -6% from this stretched starting valuation point.
Agreed Topvest I think currently 10% of the UK total tax take (in excess of a trillion) is spent on debt interest servicing.
I do wonder at what point the £400 billion that was printed to finance covid I'm guessing at sub 0.50% gilt rates then will start rolling off and need refinancing at north of 4% then the games really will begin.
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.
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.
Citywire:
UK equity funds recorded their first month of inflows in more than three-and-a-half years, after a period during which investors have pulled more than £25bn. According to data from Calastone, which tracks money entering and leaving funds via financial advisers, fund supermarkets and wealth managers, UK equity funds recorded net inflows of £317m in November.
Bodes well for the likes of Impax Asset Management (LON:IPX) , Liontrust Asset Management (LON:LIO) , etc
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.
BAE Systems (LON:BA.) 1157p A boring stock for you today. But, it has doubled its EPS since 2014. It has raised its dividends each year during that time. It is on a fwd PE of 15 and has an average ROE of 23%, which interest coverage nearly 8 times. It offers a nice yield of 3%.
Notable is its share price decline since Trump won the presidential election. BA now trails the FT100 slightly YTD (up 3.9% vs 5.4%). Trump's ability to stop the Ukraine conflict with a phone call is probably overstated.
Shares have grown by about 8.4% over the last 20 years. Add in the dividend and you'd have made over 10%pa during that period.
Should be resilient to any macro. Slow and steady wins the race.
Update: I hold. I should add that the shares I've recommended in the "12 days of xmas" aren't really shares that I think will do well in 2025. I consider them longer term holdings offering quality, growth and reasonable valuations.
I think the pull back is temporary. Trump recently suggested NATO countries should be spending 5% on defence, not the current 2%-2.5%. Additionally, with the longer term threat from Russia, China, N Korea and Iran means all forms of defence will be an attractive long term play for the next decade. The issue will not go away with an end to war in Ukraine or Gaza. And it’s not just making missiles, it spans drones, cyber, laser, you name it, a huge amount of money will be spent on it. In addition to holding BAE Systems (LON:BA.) and Qinetiq (LON:QQ.) I also bought VanEck Defense UCITS ETF USD A (LON:DFNG) to get a broad exposure to US defence companies. I might top up with the recent pull back.
Indeed! There are all sorts of threats out there that I can imagine flaring up.
I think there's a big amount of catch-up that Western Europe has to do in terms of defence spending just to replenish what we've used.
BAE Systems (LON:BA.) and Qinetiq (LON:QQ.) are my 4th & 6th largest positions in what is a global portfolio of 180 stocks....
Problem is, after several years of war in Ukraine their prospects are well-known, so where is the marginal buyer coming from?
I reassure myself that the valuation ratios may still be reasonable when you consider the deep technical expertise that resides in both companies, which is difficult to replicate - to mention a few aspects when you look forward (where there could be future benefit to P&L, as opposed to current work in progress). The following is qualitative, not quantitative:
BAE Systems (LON:BA.):
- Big in cyber security
- Well placed in artillery with Bofors and munitions
- Gaining non-competitive single source contracts for advanced artillery in the US
- New remote sub in testing to defend underwater infrastructure
- AUKUS sub work
- 2 new Eurofighter orders recently (Spain & Italy)
Qinetiq (LON:QQ.)
- Runs the aerial targeting function for multiple militaries
- Dragonfire laser is probably one answer given shift to drone warfare
- Radio frequency drone defence demonstrator is probably another answer
- Remote weaponry development plays to QQ's skillset
BUT there are two major negatives....
1. The best product in the world isn't much use if the government client can't/won't pay for it. Just look at the Solid State (LON:SOLI) share price for a lesson in what can happen when a Defence Review defers orders.
2. Never underestimate the ability of defense contractors to aim their highly accurate weapons at their own feet. Bribery allegations follow overseas orders like night after day, Babcock caught gluing on the screwheads in a nuclear sub (it wasn't safety critical, but even so...) and losing money on Type 31 frigates, the Army's never-ending Ajax debacle, the decades deep swamp that hinders the march from Bowman to Morpheus....and so many more! I deliberately didn't mention Tempest under BAE as it is likely to end up a big sucking black hole as multinational mission creep sends the spec into orbit....
I've switched out of the 12% IPF3 bond and bought into the International Personal Finance (LON:IPF) equity.
Yields 9%, P/TB 0.67, StockRank 99..SP above 200d SMA and just shy of crossing the 50d SMA.
International Personal Finance (LON:IPF) chart looks very supportive. I’ve also started a position today.
eParo, I also just sold the IPF3 bond......didn't feel quite brave enough for the equity, but might close my eyes and jump in.
Typo, Garmin not Gamin.