So in the usual one minute to midnight fashion or maybe 6am in this case, the EU and Greece came up with a new fudged proposal to bail out the Greek economy for another three years - maybe. I find it sad that in the home of democracy they went though the charade of giving the people a vote on whether to accept or reject further austerity then turn around and sign up for pretty much what had been rejected while extracting little or nothing in the way of concessions or badly needed debt relief. It seems unlikely to me that further spending cuts and tax rises and staying in the Euro is going to do much for the plight of the sickly Greek economy.
Consequently it remains to be seen if they will get it through parliament or not or if there will be a popular back lash against this apparent injustice. I also find it strange that the EU leaders tried to manipulate the vote by saying a No would mean an exit from the Euro, while The European commission president, Jean-Claude Juncker said pretty much the same thing.
Meanwhile a week on Junker says "there will be no Grexit, satisfied with deal" with the inconvenient No vote apparently meaning nothing and promptly being forgotten about. This carries on the pattern of No votes in referenda being generally ignored as EU leaders carry on with their grand plan for ever closer union regardless and do their utmost to keep the Euro from falling apart. As a result the poor Greeks are losing much of their sovereignty to the EU which is the ultimate goal of ever closer union at the end of the day. Oh well plus ça change as they say in France, but as investors I guess we should just be happy that the uncertainty is over for now (assuming it is approved by the Greek parliament) and that markets can maybe focus on something else for now until the next inevitable Greek crisis blows up again a few years down the line.
Talking of which we have had a trading update from EMIS Group (EMIS) the £600m Aim listed UK leader in connected healthcare software and services which is helping another over spending outfit, the NHS in England, to achieve cost savings. In their in line update today they flagged that the NHS in England has identified the need to create £22bn in efficiency savings to fill a £30bn gap between likely demand and funding by 2020, Tim Kelsey, National Director for Patients and Information at NHS England, has announced that the use of digital technology can create savings of £8.3bn to £13.7bn a year by then. Emis therefore see themselves as being well placed to help with delivering some of this given their strong market positions in some key areas such as GP surgeries, Primary & Community Care, Community Pharmacies and Secondary and Specialist Care software.
Longer term readers may remember that this is one I suggested looking into when it was down around 600p per share in 2014. Since then it has done well and been re-rated onto a fairly full looking rating of around 20x with a yield of just over 2% but with 20%+ earnings growth forecast for the current year.
As I have explained in the past with posts on sell discipline here and here which outlined why I tend to use those kind of metrics (20x & 2%) as a trigger for re-considering a stock as don't tend to buy stocks on that kind of rating and above.
Thus this one is one I have been toying with the idea of selling, but for now I have continued to run it as it continues to be a good quality company which is continuing to perform well and which has seen upgrades to earnings this year. While looking ahead, given the statement today and the separate announcement of another small (£3m) earnings enhancing acquisition, this should help to underpin and possibly lead to further upgrades to earnings. On this basis I'm still just about inclined to run with it given the continued positive trading, but accept that a further upwards re-rating seems unlikely. However if I do find something offering similar quality and growth but on a more reasonable rating then I may rotate into that, so a hold / look to sell up here rather than a buy I would say.
We had the second budget of the year this week was much heralded as the first fully Tory budget for around 20 years. However it was quite strange and looked more like a budget from a coalition with Labour to me as he seemed to raid some of the tax changes Red Ed had proposed before the election. Then as George became Red George he even decided to intervene in the markets by forcing employers to pay what he called the living wage - I reckon Maggie Thatcher will be spinning in her grave!
The other surprising thing from a Tory chancellor and the one significant thing for income investors in the Budget was the change to the taxation of dividends. He scrapped the dividend tax credit from April next year and introduced from the same date a new £5,000 tax free allowance fro dividend income. This is supposed to encourage people to invest, but will mean a tax hike for more wealthy investors who have portfolios that earn more than £5,000 per annum in dividend income.
I shared this article on Twitter recently and it generated quite a bit of discussion. So just in case you're not on Twitter I thought I'd add it here. It gives a good explanation of the effects of the changes and discusses the best ways to use the various allowances that are available. Obviously makes sense to use your ISA allowance as a result of this if you can afford to and them at least beyond that your first £5,000 of income will be tax free.
..as despite EU leaders trying to tell Greek voters that a No vote would be a No to the Euro here we are again with another last chance to do a deal by this weekend, although supposedly they have a plan B which allows for a Grexit. I guess we'll have to wait and see again. Or it could be Georgehog day as we have another budget today from George Osborne.
Meanwhile in the UK stock market all the on going concerns over Greece forced the FTSE down into the support zone between 6200 and 6400 that I suggested recently. We also had an in line update from Interserve (IRV) who saw a slow down in construction in the UK but did flag some big orders they have won recently. There was a slightly better than expected updated from Connect (CNCT) bolstered by their acquisition last year. Both look good value but weak finances somewhat detract from the bull case and may help to explain the low ratings.
The other more interesting announcement yesterday came from S&U (SUS) who revealed an unsolicited approach for their home credit business from the new business Non-Standard Finance which was set up by the former Chairman of Provident Financial and back by Woodford Asset management among others. This is quite a big move for S&U as this has been the core of their business for years and their plan is to reinvest some of the proceeds into their more recently established and rapidly growing car finance business. The other effect will be to leave them with cash on the balance sheet and once they have worked out their capital requirements and investment plans they say they will consider a return of capital to shareholders after consulting with them.
This was quite well received with the share up a few percentage points in a soggy market yesterday. However, they did suggest that it will dilute their earning in the second half so it will be interesting to see if it can sustain a re-rating on the back of this given the higher growth and returns that they get from the car finance business. I just hope they are not going nap on it just as the latest UK consumer debt fuelled boom gets back into top gear again and car sales hit record highs.
...oh yes except that the Greeks have said no to the last EU bail out terms which had in any event been withdrawn. So it will be interesting to see if this does finally mean the long awaited Grexit or if like other referendums which have said no to Europe they just ignore it and carry on regardless. Given the political capital invested in trying to keep the Euro train destined for ever closer union on the rails - I guess they may well come up with a new fudge as the Greek PM seems to think.
Failing that they may of course allow Greece to fully default and reintroduce the Drachma and leave the Euro which while painful in the short term should ultimately help Greece to recover down the line. If that did turn out to be the case then this would put pressure on the governments of other struggling periphery economies like Portugal, Spain and Italy.
Aside from that I see we have had another profits warning from Rolls Royce (RR.) which looks like it will result in around 5% downgrades. The shares have fallen by 9% to 780p this morning and this has taken them back to the November 2014 lows they reached when they last warned on profits. They have also closed a gap which opened up on the chart at that time when they started to rally. In addition as you can see from the chart below they are heavily oversold too. Thus technically they might be interesting for a trade down here once the dust has settled (continues after graph).
This was what happened last time they warned and when I suggested them as a trading buy at 780p as eventually the market comes back to it and gives it the benefit of the doubt given the long term resilient nature of the business. Thus the shares had recovered to over 1000p recently, although I did suggest taking a trading profit at around 930p.
Fundamentally, it looks fair value at 780p on around 14x the likely new earnings with a 3% yield, but given the regularity of the warnings the market may be more sceptical this time around and could de-rate it a bit I guess. So probably not one to rush into today but may be one to put on your watch list and look for signs that it is stabilising and building a base in price terms.
As I'm sure you have heard and read already apart from the terrible atrocity in Tunisia, the other major news at the moment is the on going threat of Greek default and a potential exit from the Euro. This seems to have come a step closer as the talks broke down and now Greek banks have been closed and currency controls imposed.
There is still an outside chance that the EU might get its way via regime change if the Greek people vote for the deal which might then leave the current Greek government in a difficult position. So certainly a week will feel like a long time in Greek politics this week. In terms of what does this all mean - I saw a good article in Money Week recently which looked at an Anatomy of a Grexit: What would happen if Greece left the euro? Interestingly in the table about half way down the article which looked at the timetable for a Greek exit from the Euro the first stage was closure of the banks, although I note they are still allowing partial withdrawals.
So time will tell if this is the beginning of the end for Greece in the Euro or if there will still be some last minute fudge. Regardless of that it has still caused a wobble in the markets as the reality of a potential exit finally dawns. At the time of writing the FTSE for example is off around 1.5% to 6650 and the Eurostoxx 50 is off over 3%. In terms of FTSE and the chart below, it looks like it is just about hanging onto support in the low 6600's which it bounced from earlier this month.
However if that gives way it looks like it the 6200 to 6400 area might be the next most obvious area of support may be.
In the short term this will obviously continue to unsettle markets until it is resolved one way or another. It remains to be seen if it might be a sea change event which has knock on effects and contagion around the rest of the EU periphery and whether this brings the 6 year old bull market in equities to an end. Failing that, longer term it might actually be good to have finally got it out of the way and it might then actually help Greece and the Eurozone to move onto a stronger footing. Time will tell if we have seen the top or if the current shake out represents a healthy correction and a good buying opportunity but not a time for being a hero right now I suspect.