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Thomas Report May 2017

Download the full report here

“Is there nothing that I can say to make you change your mind? I watch the world go round and round and see mine turning upside down.” – Throwing it all away – Genesis


How politics dominates capital markets at every turn. Equities seem to rise on a wall of fear. Central Bank stimuli is morphed into fiscal stimulus. Deflation gone, hello inflation/ reflation. My local newspaper, the East Anglian Daily Times, has a weekly section called Days Gone By. On 20th of February this year, they showed the front page of their edition for the same date in 1975 and the headline proclaimed – wage rises hit a record of 29.1% per annum!

I don’t think that type of inflation is due here anytime soon. However, talking to homewares retailer Dunelm (which we hold in the AXA Framlington UK Select Opportunities Fund), they are increasing prices, by 5% on average. The weakness of sterling is the prime driver, although their supply chain has taken some of the strain.

Sir Charlie Mayfield, Chairman of John Lewis commented in March, “The two major influences are pricing, where the rate of change in selling prices is likely to be significantly slower than the rate of change in input costs as a result of weakness in the sterling exchange rate, and the continued shift from shops to online”.

On this latter point, there is much change and it is secular and permanent. The UK ranks first in the world for online business to customer retail sales. At a WPP investor day last year, Bryan Gildenburg, Head of Research at Kantar Retail, forecast that, by 2018, 10% of everything that’s sold in the world will be through e-commerce.

The UK is already at 15% of retail sales being purchased online, excluding vehicle fuel1.

75% of consumers purchase clothing and footwear online and 80 – 90% of these indicate that they have bought from Amazon2. The value of the UK parcel delivery market is £9.7 billion and jumped 9.7% last year3. Some retailers bemoan this.

Ray Kelvin, founder and chief executive of Ted Baker, commented after reporting strong Christmas sales: “It’s a shame – retail sales used to be a craft. Today it’s a faceless business, relying on delivery companies and service providers to do the work for you.”

This huge growth in online retail sales is made possible in the UK by a staggering fact pointed out by Bryan Gildenburg: “the UK is a very densely populated country with about 80% of its purchasing power within 100 kilometres of four points in the country!”

As a country, we get it, they deliver it.

As mentioned in previous Thomas Reports, reflation will focus some attention on infrastructure, on both sides of the Atlantic. We have been adding to our holding of Ashtead, whose major trading subsidiary is US plant hire company, Sunbelt Rentals.

With U$ 2.9 billion of rental revenue and U$ 1.1 billion of earnings before interest, tax and amortisation from 546 US locations, it is second to market leader United Rentals. 47% of revenue is from construction and the balance from non-construction, such as general buildings maintenance, special and outside events, municipalities and emergency responses, such as hurricanes4.

Not only would the sector benefit from extra infrastructure spend, but there has been a secular change in the USA, regarding plant hire. In the year 2000, rental market share in the USA was only 20%. Today it is 55% and ownership is 45%. In the UK, plant hire is more mature at 75% of the market5.

Also, if Donald Trump is more pro-business, seeking supply side reform through lower corporate taxes, then that would benefit many companies exposed to this stimulus.

We have been adding to our holding of BBA Aviation. BBA refuels and services business jets across the USA and the globe. 65% of the world’s business jets and turboprops are based in North America and BBA services them from 139 sites6. BBA has 55% market share in the US which will account for 90% of group profits in the full year 20177.

Although flight volumes have only been growing at 1% p.a. post the credit crunch, according to data from the Federal Aviation Administration (FAA), fuel burn has been growing 8% p.a. (FAA, Flightaware). Around 75% of BBA’s flight support services are attributable to refuelling8.

Reasons for the increased fuel burn seem to be longer flights and a trend to use larger aircrafts9. But significantly, there is a clear link between business confidence and business jet activity. Small business confidence in the USA is now at its highest level since December 200410. If corporate taxes are lowered during the Trump administration, this can only help confidence amongst BBA’s customers, and BBA itself, with so much of its earnings from North America.

The weakening of sterling against many currencies has left some UK companies exposed to merger and acquisition activity. The much publicised Heinz/Unilever brief courtship failed to consummate.

The internet may suffer from fake news, but stock market participants are inured to it; they are called rumours. John Cole, the American political cartoonist and columnist, paraphrased one of Winston Churchill’s quotes,

“A lie gets halfway around the world before the truth has a chance to put its pants on”. Into the modern era “a lie tweets halfway around the world-wide web before the truth has a chance to log on!”

We have had four takeover bids in the Fund in the last six months. Brammer was taken over by private equity company, Advent. E2V (the old English Electric company) was taken over by US corporation, Teledyne. Ithaca Oil and Gas has a takeover proposal from Israeli conglomerate Delek and the marriage between Tesco and Booker is ongoing.

Our investment mantra, “things will not necessarily get better or worse – they will become different” is confirmed week in, week out as the economy, companies and consumers change their preferences. Even politicians cannot change secular trends once established in the direction they are already going. I was staggered to learn that over a sunny weekend in March this year in the UK, on the Saturday, solar power produced more than six times more electricity than coal, and that on the Sunday and Monday, 15% of all electricity generated was from solar panels11.

The announcement of the UK General Election was unexpected. Sterling strengthened and FTSE 250 and smaller companies started to outperform the big overseas earners in the FTSE 100. How long this will last is not predictable, but uncertainty will prevail until 8th of June, Election Day.

Brexit will rumble on and much halitosis will be generated from Brussels and Westminster.

“We’ve got to get in to get out.” – Carpet Crawlers – Genesis

To download a PDF version of The Thomas Report, please click here

1 Source: IMRG and Capgemini, 2 Source: UBS Evidence Lab, 3 Source: Apex Insight. 4 Source: Ashtead, 5 Source: Ashtead, 6 Source: BBA, 7 Source: JP Morgan Cazenove, 8 Source: J.P. Morgan Cazenove, 9 Source FAA, 10 Source: Bloomberg, 11 Source: Shore Capital.

Fund key risks

Concentration Risk: as this Fund may, from time to time, hold relatively few investments, it may be subject to greater fluctuations in value than a fund holding a larger number of investments.

The value of investments, and the income from them, may go down as well as up and you may not receive back the full amount invested.

Liquidity Risk: some investments may trade infrequently and in small volumes. As a result the Fund Manager may not be able to sell at a preferred time or volume or at a price close to the last quoted valuation. The Fund Manager may be forced to sell a number of such investments as a result of a large redemption of units in the Fund. Depending on market conditions, this could lead to a significant drop in the Fund’s value and in extreme circumstances lead the Fund to be unable to meet its redemptions.

Further explanation of the risks associated with an investment in this Fund can be found in the prospectus.

Before making an investment, investors should read the relevant Prospectus and the Key Investor Information Document, which provide full product details including investment charges and risks. The information contained herein is not a substitute for those documents. If you are unsure about any of the information provided please speak to a financial advisor. If you do not have an adviser you can find one at

The source of all information in this document is as at 30 April 2017, unless stated otherwise.

This document does not constitute an offer to buy or sell any AXA Investment Managers group of companies’ (‘the Group’) product or service and should not be regarded as a solicitation, invitation or recommendation to enter into any investment transaction or any other form of planning. It is provided to you for infor- mation purposes only. The views expressed do not constitute investment advice, do not necessarily represent the views of any company within the Group and may be subject to change without notice. Whilst every care is taken, no representation or warranty (including liability towards third parties), express or implied, is made as to the accuracy, reliability or completeness of the information contained herein. Past performance is not a guide to future performance. The value of investments, and the income from them, can fall as well as rise and investors may not get back the amount originally invested. Due to this and the initial charge that is usually made, an investment is not usually suitable as a short term holding. Framlington Equities is an expertise of AXA Investment Managers UK Limited. Issued by AXA Investment Managers UK Limited which is authorised and regulated by the Financial Conduct Authority in the UK. Registered in England and Wales No: 01431068. Registered Office: 7 Newgate Street, London EC1A 7NX. Telephone calls may be recorded for quality assurance purposes. 21026 05/2017


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