Towards the end of November last year I flagged up Residential Secure Income (RESI) in a post that you can see here if you missed it or can't remember it. It is basically a play on social housing and you get to buy in at a discount to NAV & it offers a decent yield of over 5% which looks reasonably well underpinned which is no bad thing is these days of dividend cuts and suspensions left right and centre.
Any way they put out a COVID-19 update today where they gave an update on the portfolio, financial position and dividend. All seems fine, so check that announcement out if this interests you.
I added to my holding in the 70's during the recent sell off after they announced they had been awarded Investment Partner status by Homes England. Investment Partner status with Homes England extends ReSI Housing's ability to access grant funding to include schemes outside of London and bring forward much needed additional Affordable Housing at national level. So sounds promising in terms of their ability to deliver more homes, given they probably can't issue shares at a discount. i also noted that 4 directors were buying shares around this time too which gave me some reassurance.
It has done a decent job for me as a boring defensive play (see chart below) outperforming by about 20% and looks like it should continue to deliver the dividend too, so two ticks there. I guess there could potentially be some falls in house prices, but given the nature of their properties and the discount I'm not too worried about that.
Finally below the chart see a decent presentation that they did last year which might give you a better understanding of the business if it is of interest to you.
Further to my last post I thought I would do another quick update as the mayhem / madness in markets has continued and got much worse as the Corona Virus pandemic panic has spread around the World. After the lock down in Italy which has now just been extended beyond two weeks as I write, we are seeing similar things in Spain & France with likely the UK and maybe the US to follow.
Scary times indeed and it certainly seems to be trashing all economic forecasts and expectations in the short term & worse we don't know how long this may go on although China does provide an encouraging precedent that it may not be too long lasting if Western Countries can get it under control soon. Indeed it looks like after about 5 or 6 weeks Beijing is starting to slowly return to normal thus far, although Boris with his herd immunity strategy seemed to be talking about 12 weeks last night.
So maybe we might write off about 1.5 to 3 months of economic activity or 1/6 to 1/4 say. Which in itself might well be worse than the 2008/9 recession let alone any knock on effects that linger thereafter. So no wonder that the market has crashed I guess. Just wish I hadn't been so complacent about the effects of this virus, but I don't feel so bad about that as even Ray Dalio and Bridgewater Associates along with some other Hedge Funds go caught out by this too. Not sure why they didn't quarantine all the sick and elderly in empty hotels while letting the rest who are likely more mildly effected get on with and self quarantine as required without shutting whole economies down? But hey I'm not a virologist and any death is terrible so presumably they know what they are doing - hopefully.
it is probably too late to be panicking (in the stock market if not the Supermarket seemingly) although personally I did do some selling as things started to cut up rough but now wish I had done more given how far some of the stock I sold have fallen. But hey ho you have to take the rough with the smooth in this game and I have certainly enjoyed the ride up in the last eleven years. I did move more defensive and in addition to normal rainy day cash reserves I raised a fair bit of cash last year as we were moving home and needed some extra cash for that. Plus with the yield curve inversion I was worried about a recession ahead at some point. As we came into the year the market seemed to have forgotten these worries only for the Virus to finally cause the crash and bring on a recession.
Going forward it remains to be seen how this all works out with interest rates being slashed to record lows and central banks and governments flooding the markets with unfunded cash left right and centre. Its not clear how any of this get paid back, but I saw John Stepek of Money Week talking about this being the start of some kind of debt Jubilee with some or all of it maybe getting written off - e.g. Central banks just cancel the bonds they have been buying maybe? Guess it could all be deflationary in the short term followed by inflation thereafter due to all the money printing - quite frankly who know, your guess is as good as mine. As I said last time we are sailing or hunkering down as it were in uncharted waters.
As for the Compound income Portfolio, this normally does monthly screening. However it got its allocation of Ninety One Plc (N91) via the de-merger from Investec with great timing on the 16th March. This fell about 25p below the bottom of the price range 175p to 225p that was quoted, which didn't seem much versus the falls in the market & the hit taken by other asset managers. I noticed that the Employee Benefit Trust has been buying so I took the opportunity to slot my stock and that for the Compound Income Portfolio into this given it was a small holding and their profits and dividends may be pressured by all this. Plus the fact that other asset mangers have nearer halved during this period I think there could be more downside here in the short term. As for the balance of Investec that seems to have cratered like everything else & looks incredibly cheap, but again who knows how banks pan out from here. Their year end update today seemed OK but like everyone else they can't really say what the future holds.
With that in mind I would just caution subscribers to be careful with the Scores at the moment as they will reflect historic forecasts, which in the main do no reflect much if any of the likely hit to earnings other than for those who have already initially warned about the effects. In addition we are seeing lots of corporates suspending and even scrapping originally declared but not yet approved dividends so you probably can't rely on all the forecast yields being accurate, but again that comes with the equity territory. Having said that these are quite extreme circumstances which could mean that the dividend cuts this time around could be even worse than normal and those seen in the 2008/9 so watch out and be careful out there but don't you know....
March so far has certainly been a challenge for investors as the markets finally seemed to have panicked as the number of Corona virus cases continued to ramp up around the world and Italy went into lock down.
Against this background Central Banks including the US and UK have undertaken emergency cuts in interest rates as they seek to protect their economies from the negative effects from the virus in the short term. In addition to this governments are also likely to be coming forward with various measure on the spending and fiscal side to provide support and bolster economies too.
So given that and the fall in the markets so far, which is getting on for a fairly normal 20% correction it may not pay to get too bearish down here. That is unless this all leads to a larger and longer lasting recession rather than a v shaped affair if the virus effects and counter measures work out satisfactorily. As ever time will tell on that one, but as of now the other economic indicators I follow are not yet signalling a recession, although there does seem to be a increased risk of one in the short term. If that does come to pass then you would need to be prepared as Warren Buffet says for your holdings to be cut in half in the short term. If you are not prepared for that then obviously you would need to make other plans.
Meanwhile the Compound income Portfolio has been hit along with the rest of the market, but given it has no direct exposure to the oil sector, I think it should have fared reasonably well again in a relative sense at least. Indeed looking at the various metrics on the CI Portfolio as at last nights close it seems to be on 13x forecast PE with a 4% expected net yield on the back of forecast 1 year dividend growth of 18%. We should however take those forecasts with a pinch of salt as they could be vulnerable to downgrades if a recession does really take hold rather than a short sharp shock from the virus.
Meanwhile it is budget day today and this is widely expected to include quite a number of spending commitments on infrastructure type things with road, rail, telecoms and flood defences already being mentioned as recipients I think. On that basis I think it should be quite good for a stock called Renew Holdings (RNWH) which recently entered the CI Portfolio based on its good Scores and decent value metrics.
This one jumped on the Conservative Election victory but has drifted off a bit with the market recently, although it has out performed by falling less. It seems to tick many of the boxes of areas which are likely to be seeing extra government spending as follows:
What's not to like? Apart from the fact that it is construction related, which is often bad news when you are talking about contractors (see Costain today). The saving grace here may be that most of their stuff is more related to on going maintenance and upgrades etc. which should make their revenues & margins more predictable. I also seem to remember Paul Scott mentioning working capital financing by clients seeming hefty & negative assets etc. See here if you are a Stockopedia Subscriber. If not and you'd like to check it out here and if you sign up I might get a referral credit off my subscription.
The only other thing that slightly concerns me about the limited assets on the balance sheet, from reviewing past accounts, this seems to result from a few asset write downs in subsidiaries over the years which I don't quite know what to make of. It could mean that past profits were overstated and they have taken the losses through the balance sheet to hide this. They did however have a stated aim of raising margins over the last few years so maybe they were just tidying up an old structure by closing down lower margin operations to focus on the higher margin maintenance type work. Any way I'll give them the benefit of the doubt for now and don't forget to do your own research and make sure you are comfortable with these aspects if it is one that attracts you too. Happy Budget Day - hopefully barring any nasty surprises on the tax front!
A more difficult month, to say the least, after the mixed start to the year that we saw in markets in January. So equity markets in the UK and around the world saw further negative returns, with the FTSE All Share, which I use as a benchmark for the Compound income Portfolio, providing a negative total return of 8.9% which leaves it negative by 11.9% YTD too. This came as markets suddenly seemed to get spooked about the potential negative effects from the spread of Corona virus having been fairly relaxed prior to that.
Compound Income Portfolio
Against this on going negative sentiment in the market it was unsurprising that the CI Portfolio saw negative returns too, albeit that the -6.7% was less than the -8.9% from FTSE All Share in February. This leaves the portfolio down by 6% YTD (having been up in January) versus the 11.9% negative return from the broader market. So at least some decent out performance in the bank should things get more difficult as the year progresses, not that you can spend relative performance! If you would like to see the full performance history please click here to view.
With this months screening there were a couple of stocks which came up as natural sales based on their deteriorating Scores & I did decide to top slice Avon Rubber (AVON) this month as the position size approached 10% as it held up well in the market carnage & I wanted to lock in some of that out performance having enjoyed a brilliant run in the stock from under £10 when the portfolio first bought in. This was also driven by the valuation with the PE of around 27x and a dividend yield of well under 2%.
In terms of reinvesting the proceeds from these sales a couple of names returned to the portfolio as their Scores, valuations and prospects looked satisfactory enough to justify a purchase, although one of them could be vulnerable to the virus causing public event shut downs, but one never quite knows how the potential spread of the Corona virus may hit any stock in reality. Aside from those I added to the portfolio's holding in Investec (INVP) as it has fallen further with the market and they have announced the pricing range for the Asset management arm which seems to be roughly as expected. This also helped to reinvest some of the proceeds of one of the sales which was also in the financial sector. If you'd like to find out more about the Scores that help to drive the stock selection and subsequent performance of the Compound Income Portfolio then please see the Scores & Portfolio menus or click here to learn more about the Scores and how you could gain access to them.
Market Timing Indicators
Given the fall in UK equity markets this month these all fell below trend into negative territory and therefore signalling a potential negative stance on the market. However as longer term readers may remember I don't follow these signals unless they are backed up by other economic indicators signalling a likely recession in the US to avoid being whip sawed. As of now these economic indicators are not suggesting that with the latest US PMI figure remaining just above 50 this month for example.
Nevertheless there is a risk that the Corona virus could dramatically cut global growth if it turns into a serious global pandemic, with the OECD for example suggesting a near halving of global growth if it does rather than a 0.5% hit for a contained outbreak. The more extreme outcome, or domino effect as they call it, would equate to a global recession. So no wonder markets have suddenly woken up to the potential threat of the virus, but we will need to see how it pans out from here and what response governments and central banks come up with in terms of fiscal stimulus and monetary policy easing to counter it. Indeed markets are already looking for the US Federal Reserve to cut rates by 0.5% fairly soon. Plus if the spread is contained, then I suspect in those circumstances this could turn out to be a run of the mill 20% or so correction and we could get a v shaped recovery.
Summary & Conclusion
A tricky month and an outlook which is difficult to call given the uncertainties surrounding the spread of the Corona virus. That and the negative signal from the market timing indicators suggests it is probably right to remain cautious for now, but not panic at this stage as we see how the virus and economies develop in the months ahead.
The main concern is that this all comes at a time when economies and markets are vulnerable after such a long rising streak which doesn't leave much protection to the downside in terms of valuation support or monetary & fiscal flexibility. As ever we seem to be continuing to sail in uncharted waters, although previous crises do offer some guides and it has usually paid to take advantage of crises and invest for the long term by being greedy when others are fearful as Warren Buffet says. Indeed the Sage of Omaha, said the other day, if you are likely to be investing for at least ten years then you probably should not worry too much about the effects of the current news in the short term, but you do need to be prepared to live with the volatility & the potential for your stocks to halve that it brings along the way (usually in a recession), which unfortunately we could be facing if we end up with a serious pandemic on our hands. So mind how you go and Keep Calm and Wash your Hands!