IN THE BACK
STOCKS
OPPOSITE
ATTRACTION
Henry Dixon, manager of the GLG Undervalued Assets fund, has been looking for
stocks that represent the antithesis of bonds with a negative yield
W
hile absolute value has not been a feature of
the equity markets for a little over two years,
the relative value argument versus bonds has
been pronounced. However, even this is now coming
under threat. This is firstly a result of the combination
of rising prices and falling earnings, which cannot
continue indefinitely. Secondly, and perhaps more
pertinently, we have had a meaningful rise in bond
BANKS ARE CLEARLY
UNPOPULAR, but their profit
potential as rates normalise is
significant. This is most evident in
their sizeable deposit bases which
are delivering little revenue given
the current level of interest rates.
RBS recently announced plans to
retreat from investment banking
and eventually it should look
similar to and be valued on a par
with rival Lloyds. On price to book,
the shares trade at 0.9x tangible
book value versus Lloyds at around
1.6x book. This value gap of about
75 per cent looks increasingly
unsustainable.
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yields, which also serves to undermine the attraction of
most equities. On the subject of fixed income, it is our
view that negative bond yields will in time be judged
extremely harshly, even when compared with previous
bubbles. The key question therefore is what is the
opposite of a bond with a negative yield? To our mind,
it is the cheapest and shortest-duration assets that we
can find.
AMLIN, THE LLOYD’S OF
LONDON INSURANCE BROKER,
is currently out of favour and finds
itself trading on 11x earnings with
a yield of approximately 6 per
cent. Further to writing insurance,
the company has more than five
times its market cap in short-term
investments. These, it almost goes
without saying, are yielding next
to nothing. The company will
therefore enjoy a material uplift
in profits if there is even a modest
interest-rate rise, and should these
climb to half the level they were at
before the financial crisis, its profits
could double.
TULLETT PREBON, THE
INTERDEALER BROKER, finds
itself trading on 11x earnings,
offering a 4.6 per cent yield and
with approximately 20 per cent
of its total market cap in net
cash. The business model yearns
for volatility, but of course this
has been in short supply given the
activity of central banks. However,
it would be wrong to assume
central banks can maintain
stability indefinitely and we are
therefore of the opinion that
Tullett Prebon’s shares are cheap,
taking into account the broker’s
cyclically depressed earnings.
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