General News

US Corporate Profits Article

CAllen — Thu, 07 Aug 2014 15:34:27 +0000

US Corporate Profits Article

US Corporate Profits Reflect Stronger Growth

Markets have recently taken on a slightly defensive air, with lower bond yields suggesting concern about economic growth. However, in most instances economic news has confirmed the strengthening growth picture, with the most recent US Gross Domestic Product (GDP) release for the second quarter showing a strong rebound from the weak first quarter, with 4% growth on an annualised basis.

In a recent report on corporate earnings from Barclays*, 70% of the S&P 500 companies, the largest quoted companies in the US, have reported their second quarter results with 63% beating profit expectations and 65% beating sales expectations – healthcare, technology and energy have surprised on the upside. Whereas consumer staples such as food and detergents have lagged expectations, further undermining their expensive valuations. These are encouraging numbers, particularly on sales, with the average company growing revenues by 7%. Earnings growth has been 16% year-on-year. Forecasts for this full year have been revised down slightly to a still respectable 13.9%, but encouragingly have been increased by 0.77% to 15.5% for next year. At a time when some commentators are beginning to question whether the market rally is beginning to run out of steam, these figures provide some positive input. *Source Barclays, US Earnings Scorecard (2Q14), 31st July 2014

Alexander Hoare's Summer Letter

CAllen — Wed, 06 Aug 2014 15:22:49 +0000

Alexander Hoare's Summer Letter

Managing Partner Alexander Hoare publishes his Summer Letter to customers in which he discusses notable topics from the past few months and looks ahead.

Click here for the full Summer Letter

Hoare's Bank Manuscript of the Month

CAllen — Tue, 05 Aug 2014 13:17:55 +0000

Hoare's Bank Manuscript of the Month

August Manuscript of the Month

Each month, the bank's archivist Pamela Hunter publishes an illustrated article which looks at a single item from our historical collections and the story behind it.

View the August edition of Hoare's Bank Manuscript of the Month

Is China Past the Worst?

CAllen — Fri, 01 Aug 2014 14:36:54 +0000

Is China Past the Worst?

We believe that the authorities in China are now managing the change in orientation from an export led economy to a more balanced one, relying more on domestic demand. This will be an ongoing process. In the meantime improving global demand is still a significant factor in China’s ability to achieve its near and mid-term goals. Reform is being implemented by the relatively new leadership. The easing of the restrictive ‘Hukou’ residential system which ties benefits, such as education, to families’ region of origin, along with the freeing up of some investment restrictions, are signs that they wish to create a more market orientated approach. This is supported by a longer-term aim to have market determined interest rates and to reduce indiscriminate risk taking by allowing some bad investments to fail. Earlier this year we saw the first bond default, which we think is healthy as it removes the asymmetric position where ever more uneconomic projects were supported by the informal/shadow banking sector. However we still believe state related projects will not be permitted to default and that Chinese reserves are sufficient to deal with any likely breakdown in the financial system. Dealing with corruption is also a positive for the mid-term. The regime’s at times inelegant approach to dealing with the financial markets will ease as they become more market aware and more comfortable using the sort of levers applied in established markets. The economic picture in China has seen a turn for the better with manufacturing production improving and a stronger outlook from purchasing managers’ indicators together with an increasing belief that this year’s economic growth target of 7.5% will be achieved. While there is still concern surrounding the banks and the real estate sector we do not believe that a significant dislocation will occur and while debt is historically high, it is low by international standards. As a result we feel that it may be time to look at China again.

Sir Thomas Hughes-Hallett

CAllen — Wed, 30 Jul 2014 12:57:35 +0000

Sir Thomas Hughes-Hallett

The Master Charitable Trust - A customer's view

Hoare's Bank customer and Philanthropist Sir Thomas Hughes-Hallett talks about his great passions in life and how the bank's Master Charitable Trust Service has helped him with his own philanthropic goals.

Access the Sir Thomas Hughes-Hallett video below

Jenny Kingsley

CAllen — Thu, 17 Jul 2014 11:32:06 +0000

Jenny Kingsley

Read more about Jenny Kingsley

Pots of Fortune

Journalist and writer Jenny Kingsley was so inspired by a talk at Hoare’s bank recently that she wrote an article about the project which was featured in the July issue of the online arts magazine, Cassone.

Recently I attended a talk at Hoare's bank, about a project the bank helps to fund that enables women potters in Sri Lanka to sell their wares to British retailers. Buyers include Jamie at Home (Jamie Oliver), David Mellor, Habitat, and the Cinnamon Club indian restaurants. The bank allocates profits towards an associated trust (The Golden Bottle), which grants awards to artistic, educational and environmental ventures. The speaker was Maham Anjum, a ceramicist and former scholarship student of Central St Martins College of Art and Design, and the Royal College of Art (RCA). She has been directing the project for nearly 11 years. Anjum was drawn to a career as a ceramicist because she believes in the importance of art in the rhythm of the every day and its civilizing effect. The rarefied fine art world does not offer this attraction. Indeed, before coming to Britain 18 years ago, Maham studied for a fine art degree in Karachi, where she grew up. Maham speaks from experience. After the talk, Maham explained to me, ‘pottery has been made and used for thousands of years. It’s part of our heritage. We cook with pottery; we serve with pottery; we eat with pottery. Pottery is art, creating it is an art – aesthetically satisfying as well as functional’. Pottery doesn’t have to be purely ornamental, she emphasizes. Clay, its primary material, is found all over the world; it can be used for a broad range of products. It’s variously big business, art for art’s sake, high tech, low tech. For her MPhil at the RCA, Anjum envisioned a project reflecting her values, and so she developed the idea of working with artisanal potters, helping them to develop processes, techniques and designs that could be produced simply and marketed abroad. Through her educational and professional association with the design group Queensberry Hunt she established contact with women potters in the village of Rukmale (pronounced ‘rookmalay’) near Colombo, Sri Lanka. Queensberry Hunt has worked with porcelain factories in Sri Lanka for years and through them they had discovered craft potters. David Queensberry, Senior Fellow and former Professor of Ceramics at the RCA, was Anjam’s dissertation supervisor. Maham was in like-minded company. The firm believes that the art of design, which ‘gives form and function to the products that we use has more impact on our lives than any other art’. Queensberry Hunt has undertaken projects for manufacturers such as Spode, Portmeirion, and Waterford Wedgewood Royal Doulton UK. ‘At first the women didn’t think we were serious,’ Anjum recalls. ‘They thought we were funny, peculiar. Why was this woman here? Their work was becoming increasingly difficult to sell locally; they couldn’t believe that people from faraway, so different from them, would find their wares attractive.’ Rukmale has a population of 3000–4000. Most of the women potters with whom Maham works are the family breadwinners. They are in their 40s, 50s and 60s. Mothers-in-law work with daughters-in-law. This helps to keep the skills in the family. (The nature of pottery-making differs from region to region.) Daughters are rarely part of the team, as they tend to move away from the home upon marriage. Daughters-in-law move into the area to join their husbands. When Maham first contacted the women, almost instinctively they were making the same shapes they had known all their lives, never contemplating change or experiment. One afternoon, in the early days, when Maham was working with Matilda, a ‘master potter’ in her late 60s, she suggested to Matilda that ‘she change her pot ever so slightly, take in the wall of a piece. By doing so, we turned it into a tea light holder. When Matilda took it off the wheel she said, "oh, why didn’t I ever think of this". I hugged her with joy. The other women in the room were shocked. The potters are the secondlowest caste, certainly not meant to be embraced by strangers, especially me’. The products sold in Britain are all terracotta and glazed on the inside. Their shapes are based on traditional designs, which have been, in response to Maham’s inspiration, altered slightly to increase their appeal to British customers. Maham never intended to change the designs radically, merely to enhance them. Respecting the sensibilities of the women with whom she works is vital to her. The tea lights sell well. Their glazed inside helps to reflect the candle light. Some have a ring of tiny holes running around the outside, which further enhances the warmth of the light. The traditional bowls for sweets have been altered slightly so they can stack and are marketed as bowls for nibbles, and unusual and useful gift packages that are easy to store. Cooking and serving bowls in various sizes are also popular. One design, the potato pot, is shaped on the potter’s wheel, then the bottom is shaped and rounded by being ‘beaten’ with a flatbased wooden tool against a knobbed stone anvil. The beating enables the clay-based material to expand and contract when placed over an open flame, making it less likely to crack. The potato pots are then fired at a low temperature, 850 C, by the women, in a wood kiln on site. Clay is sourced locally from a nearby river. The local factory purifies the clay by filtering out foreign material such as debris and organic matter. During firing, impure clay can cause uneven glazed surfaces, cracking and swelling – ‘bloating’. The clay is stored until used in plastic bags. The potters’ wheels are based in a communal area. They may be electric or foot operated – ‘kicked’. The women work for a few hours in the morning and in the afternoon. They determine collectively who will make what. This is how the women have always organized their trade. Once a week the wet ware and the fired potato pots are collected by the factory, some 200 kilometres away, and the wet ware is shelved until it is dry – greenware. The pottery (excluding the potato pots) is then fired in an electric industrial kiln at 1000 C – ‘biscuit fired’ – and afterwards checked for cracks. All the pottery is then glazed, i.e. a thin coating of a vitreous substance is sprayed all over the inside. This process adds colour or gloss and makes the pottery waterproof. The pottery is fired again at 1150 C. It may take three to four months for an order to be completed and boxed for shipping to the UK. The factory pays the women for their work per piece. Before the project became a reality the women were paid 37 pence per pot, now they are paid £1.15 for each pot. Still, the local demand for their wares is drying up. Nowadays many Sri Lankans use steel and plastic utensils and cookware as they are regarded as signs of affluence. Terracotta pots might still be used for cooking and for traditional feasts, weddings and ceremonies, but on a limited scale. The potters need their foreign market. Health and safety at work have improved immensely since the project began. The women now dust and sweep their working areas regularly. This reduces the chance of contracting silicosis from the dust, a hazard of pottery making. Backache and stiff limbs are less prevalent thanks to benches and tables; rarely do the women work while sitting on the ground as they used to. Maham says, ‘the women have a new lease on life; I feel personally rewarded by their increased sense of self-esteem. It’s phenomenal. They’re amazed by the fact that their work is featured in magazines, newspapers and on the Internet’. The potters have used their increased earnings in sensible ways. When Maham visits the women at home she notices that there is more fruit on the table, more furnishings and practical household appliances. Some of the potters have invested in a pineapple farm. One woman, Kanti, has bought a sewing machine, which her mother-in-law uses for making clothes for the local school children. Kanti also contributes to her daughter’s university fees. Indeed, most of the younger women would rather go to university than become a potter. But perhaps with Maham Anjum as a role model some will see how being a potter can be rewarding in a productive professional and philanthropic context. Instead of studying to be a lawyer or an accountant they could study applied art, establish their own ceramics firms and create ‘pots of fortune’.

Update on Financial Markets

LWellings — Tue, 22 Jul 2014 13:45:39 +0000

Update on Financial Markets

Our latest comments on the Financial Markets

Markets have struggled to make headway this month after a rise in geopolitical risk...

Markets have struggled to make headway this month after a rise in geopolitical risk in the Ukraine and Israel, financial risk over the struggling Portuguese Banco Espirito Santo and, not least, the question mark of when the Federal Reserve Board (FRB) will begin to increase US interest rates. Janet Yellen, chair of the FRB, maintained in her recent testimony to the House of Representatives Committee that she expects interest rates to remain low. Tellingly, however, she also remarked that if unemployment continues to fall at the current rate US interest rates may have to rise a little earlier than currently anticipated by the bond markets. An early rate rise would put pressure on global bond markets. This is why we are retaining low interest rate sensitivity in portfolios but, on the condition that interest rate increases are reasonably slow, we think equities can still make headway. We would also expect the recent outperformance of more bond-like, defensive equities to reverse versus more economically sensitive companies (cyclicals). This is provided, of course, that the reason for interest rate increases is because economic growth is progressing well. On that note, earnings reporting season has begun in the US and the early signs are that the vast majority of companies are beating analysts’ expectations for both earnings and revenue generation. This is particularly true for banks, which augers well for expected equity returns. Whilst we are alert to the risks to financial returns, we believe there are still good reasons to maintain a positive stance.

Mansion Tax

LWellings — Tue, 22 Jul 2014 11:21:32 +0000

Mansion Tax

Read more about Mansion Tax

Our Views on the Mansion Tax

Our Tax Team has considered the current "Mansion Tax" regime and endeavoured to understand the evolving views of the main political parties.

Mansion Tax is likely to be subject to continuing debate through to the General Election in May 2015. A banded Mansion Tax known as the Annual Tax on Enveloped Dwellings (ATED) has been in existence since April 2013. As the name implies, this tax only affects residential homes that, effectively, are owned by companies. There are exemptions for residential properties used in a business, including where property is let. Originally brought in as part of a variety of measures for homes worth above £2m , the ATED is to be extended to capture more properties by a staged lowering of the value threshold through to 2016/17. By April 2016, houses worth £500,000 and above will be subject to the ATED, as below. PROPERTY VALUE (Fixed at 1st April 2012 ANNUAL CHARGE (ATED)* Over £500,000 £3,500 Over £1m £7,000 Over £2m £15,400 Over £5m £35,900 Over £10m £71,850 Over £20m £143,750 *Subject to inflation increases in line with the Consumer Price Index (CPI) Post 2015 General Election If there is anything other than a Conservative led government, it is likely that Mansion Tax style charges will be extended. Whatever colour(s) the new government might be, the ATED regime as above is likely to be left in place for corporate ownership. In addition, both the Liberal Democrats and Labour seem to be suggesting a Mansion Tax policy that would extend the annual charge to individual owners. The indications point towards an annual Mansion Tax for individuals only applying where a home is worth above £2m, giving some comfort to non corporate owners whose homes are worth between £0.5m and £1.999m. Labour appear to suggest that three house value bands would be in play: £2m to £5m, £5m to £10m and a final band for properties in excess of £10m. The bands would not require annual valuation. There is not yet any firm indication of the actual charge that will be applied at each rate band or the valuation date that would be relevant. For ATED, the applicable value date was 1st April 2012 with revaluation scheduled for 1st April 2017. Labour has promised that concessions will be available to ensure fairness for asset rich, cash poor owners. These would include the ability to defer payment of the charge until a property was sold. Presumably such deferral would be secured by way of a legal charge. Whichever way the country votes next May, tax charges on wealth that is tied up in high value property are unlikely to shrink away. There will be nervousness about the rate that will be applied, the date of the relevant valuation and whether the valuation thresholds will continue to be driven downwards. Should you wish to discuss Mansion Tax or any other Taxes, our Tax Team would be delighted to hear from you. The information contained within this document is believed to be correct but cannot be guaranteed. Opinions constitute our judgement as at the date shown and are subject to change.

European Banks

LWellings — Thu, 17 Jul 2014 13:09:46 +0000

European Banks

Read more about European Banks

Earnings of European Banks

Before the financial crisis of 2008 the earnings of European banks reached unsustainable levels due to the high debt across companies, individuals and governments.

Before the financial crisis of 2008 the earnings of European banks reached unsustainable levels due to the high debt across companies, individuals and governments. The Eurozone crisis of 2011 dealt another blow to both earnings and the stability of the sector. Since then intervention by the European Central Bank (ECB) and the rebuilding of confidence in both the regulatory environment and prospects for economic growth has led to the beginning of a recovery in earnings and share prices. Given the extent of the problems this recovery was always unlikely to be simple or smooth, as we were reminded last week with the news about problems at Banco Espirito Santo (BES) and their privately owned parent company affecting markets globally. Whilst we are watching the situation and believe the ongoing Asset Quality Review (AQR) being conducted by the ECB may yet uncover some issues in the weakest banks, we do not, at this stage, think these or the problems at BES will prove to be too severe. In the meantime we are remaining overweight to the European banking sector. We believe earnings remain depressed and have significant upside potential as the economy improves, bad loan impairments fall, lending growth gradually picks up and costs are cut. Whilst we don’t expect earnings to recover to the peak achieved before the crisis, a recovery to the long term trend should provide upside to share prices. "Opinions constitute our judgement as at the date shown and are subject to change. This article is not intended as an offer or solicitation to buy or sell securities or any other investment or banking product, nor does it constitute a personal recommendation. C. Hoare & Co. or a connected company, and their customers, officers and employees, may have a position in, or engage in, transactions in any of the securities mentioned."

Rotation out of 'Growth' into 'Value'

LWellings — Wed, 09 Jul 2014 07:11:29 +0000

Rotation out of 'Growth' into 'Value'

Whether to invest in 'Growth' or 'Value'

Whether to invest in ‘growth’ or ‘value’ style in equity markets is an ongoing debate, with some participants focusing on one or the other.

Whether to invest in ‘growth’ or ‘value’ style in equity markets is an ongoing debate, with some participants focusing on one or the other. Evidence suggests that a flexible approach driven by the economic cycle is most likely to be successful. When looking for ‘growth’ investors are looking for companies that will grow their sales or earnings faster than the economy or the rest of the market on a sustained basis. This includes smaller companies as they are often developing new niches or taking market share with innovative products or services. The growth sector also includes defensive sectors where earnings grow steadily year on year, regardless of the economic cycle. Sectors such as consumer staples, whose products are essential items regularly bought regardless of the economic cycle, are categorised as defensive, as are healthcare and pharmaceutical companies. Growth investing implies that valuations are either unimportant or are of secondary importance to investors; therefore these stocks can become very expensive. Whilst there will always be opportunities for individual growth companies to outperform, at this stage of the economic cycle, when growth has been re-established and interest rates are expected to rise, it is common for leadership to switch to more economically sensitive companies. These are in sectors likely to grow earnings and profit margins at times of strong demand, when both volumes and prices are expected to improve. We have been raising our exposure to these sectors of the market over the past few months. For instance we have added to the financial sector where the large banks are looking inexpensive, as well as the large integrated oil & gas exploration and development companies. So far this year there has been a clear rotation out of defensive sectors into more economically sensitive or ‘cyclical’ sectors, rather than simply out of growth and into value. In the US in particular we are looking to move our positions to a more cyclical and value orientation, as we believe economic momentum will remain strong.

Manuscript of the Month

LWellings — Fri, 04 Jul 2014 14:04:13 +0000

Manuscript of the Month

Each month, the bank's archivist Pamela Hunter publishes an illustrated article which looks at a single item from our historical collections and the story behind it.

View the July edition of our Manuscript of the Month.

US Unemployment

CAllen — Mon, 30 Jun 2014 16:10:20 +0000

US Unemployment

Read more about US Unemployment

US Unemployment Falling Faster Than Anticipated

In May the unemployment rate in the US reached its lowest level since September 2008 at 6.3%. Unemployment has fallen rapidly since peaking at 10% in the aftermath of the financial crisis towards the end of 2009. Janet Yellen, Chair of the Federal Reserve Board (The Fed) has estimated that full employment for the economy is when the unemployment rate is between 5.2 to 5.6%. At the current rate of reduction and pace of economic growth it is expected to fall below 6% by early next year and break through this ‘full employment’ level within 12 months. This seems quite quick in the context of below trend Gross Domestic Product (GDP) growth the economy is currently experiencing. The Fed has consistently argued that the number of potential job seekers actively looking for jobs has fallen as a result of the weak economy and will therefore rise again as employment conditions improve and finding jobs becomes easier. There have been few signs of this happening, however. The participation rate peaked at the turn of the millennium with 67.3% of the US population actively participating in the labour market (working or looking for work). This then fell gently over several years to just over 66% at the onset of the financial crisis in 2007, since when it has fallen more sharply, to just 62.8% in May. We think it is more likely that the fall in the participation rate is structural and a function of an ageing population. Consequently, we believe inflationary pressure from the labour market will rise. Whilst this will be good for consumer confidence and consumption it may also lead to earlier interest rate rises. Alternatively, the Fed may stick by their guns and ignore the pressure for the time being in the pursuit of reducing long term unemployment. This means they have to be right about an increasing participation rate or run the risk of even higher inflation.

Interest rate outlook

LWellings — Thu, 19 Jun 2014 09:33:43 +0000

Interest rate outlook

Is the first rise a step nearer?

In the light of recent data releases, the Mansion House speech from Mark Carney and our recent ‘Thought piece’ on the outlook for UK Interest Rates, we thought we should revisit the topic outlining what, in our opinion, has/has not changed. Last week’s UK job numbers showed how strongly the economy is growing, with a 345,000 jump in employment between January and April, the largest increase on record. This has brought the unemployment rate down to 6.6%, below the most recent forecast made in May by the Bank of England’s Monetary Policy Committee’s (MPC) Inflation Report. What is more, the proportion of these moving into full time employment, at almost two thirds, was especially positive. Despite this there still seems to be sufficient slack in the economy to prevent pay growth from picking up; in fact headline annual pay growth fell to only 0.9% in April. This was well behind the Consumer Price Index, which rose 1.5% in the most recent release for May. This lack of inflationary pressure gives the MPC a good excuse to avoid raising rates. Up until Mark Carney’s Mansion House speech last week, the market was certainly expecting that the MPC would delay raising rates for as long as possible, probably until the second quarter of 2015. He surprised his audience by suggesting rates may rise sooner than expected, reflecting the buoyant housing and jobs market. Since then sterling has risen further, particularly against the euro, and market expectations of interest rates rising have been brought forward. Deutsche Bank has suggested that the market is now pricing in a rise as early as November. However we are not convinced, believing the MPC is still likely to use the excuses of slack in the economy, low inflation, above average underemployment (as a result of the rise in zero hours contracts and part-time working), and weak wage growth to avoid raising rates until next year. This may, however, now happen in the first quarter rather than the second. As such, we believe the environment remains positive for real assets such as equities and property and continues to justify our overweight position in equities.

New Series of Videos Available to View

CAllen — Wed, 11 Jun 2014 13:39:28 +0000

New Series of Videos Available to View

Chief Investment Officer David Cavaye has produced a series of short films in which he talks about a range of economic topics including our current asset allocation, the current status of QE in the main global economies and active portfolio management at the bank.

Click here to view the complete series in our video gallery

Hoare's Bank Manuscript of the Month

LWellings — Mon, 16 Jun 2014 14:40:21 +0000

Hoare's Bank Manuscript of the Month

Manuscript of the Month

Each month, the bank's archivist Pamela Hunter publishes an illustrated article which looks at a single item from our historical collections and the story behind it.

View the June edition of Hoare's Bank Manuscript of the Month.