All this week we bring you the best income opportunities across the globe, as picked by top fund managers, professional investors and our own stock and fund analysts as part of Morningstar’s Guide to Finding Investment Income.
Tesco (TSCO)
Equity analysts think there has been a permanent change in the competitive environment in the U.K. with the onslaught of the hard discounters, whose market share is structurally increasing, helped by an aggressive store opening program, customers' search for low prices and hard discount's small, amenable store format. This new channel is better satisfying customers' requirements for shopping more regularly for fresh produce but spending less on each trip, with a preference for more local and convenience formats.
New management have had the courage to make hard choices to rebuild the business; there is improved capital discipline, and prices in the U.K. have been slashed. The dividend has been suspended, inventory is down and the race to open U.K. stores has ended.
Glencore (GLEN)
Glencore ranks among the most diversified of the global megaminers. But because China is the key demand driver for nearly everything Glencore digs out of the ground, diversification benefits are limited. With weaker Chinese demand growth set to pressure copper and coal prices, profits will be far harder to come by than in years past. Production growth is unlikely to be an offset, as Glencore has been rightfully more reticent than peers when it comes to large, capital-intensive greenfield growth projects.
Anglo American (AAL)
As China rebalances away from infrastructure and construction-led growth, long-lagging Anglo American will find itself better positioned than most diversified peers. The company has greater exposure to consumption-oriented commodities like platinum and diamonds, which should enjoy better demand growth than investment-oriented commodities like iron ore and copper that prospered most in the past decade.
Although overweight consumption-oriented commodities, Anglo has major exposure to investment-oriented commodities, including iron ore, copper, and metallurgical coal. Investors should expect waning demand growth for these commodities as China rebalances. This will increase the importance of cost competitiveness, an area where Anglo does not stand out.
Royal Bank of Scotland (RBS)
Analysts believe RBS' financial position has improved significantly since the financial crisis. The bank's fully loaded common equity Tier 1 ratio was 15% at the end of September, among the best reported ratios in Europe.
Accounting rules that do not allow RBS to fully provide for its legal liabilities until they can be accurately estimated inflate these ratios, but analysts anticipate that the bank will maintain a common equity Tier 1 ratio above 13% throughout the forecast period even after legal and restructuring costs are considered. Analysts think that RBS is unlikely to return significant capital to shareholders until its U.S. mortgage litigation is resolved, and management has said that it will pay a dividend in 2018 at the earliest. Still, they think RBS' continued shrinkage will free up significant capital, as will its earnings in 2018 forward.
Standard Chartered (STAN)
Standard Chartered is amid a massive upheaval, as both internal and external forces have laid it low. Morningstar equity analysts expect the turnaround to be difficult, but feel CEO Bill Winters has the right approach. He’s clearly identified the issues with the bank’s risk controls, culture, cost base, and overall sprawl across markets where it lacks a deep understanding of the competitive dynamics.
While analysts expect the bank to slowly right itself, they do believe that structural changes in the trade finance market, increased fraud detection rules and higher trade barriers, as well as slowdowns in China’s growth and commodities will mean the bank’s days of consistent 15%-20% growth are behind it. The bank has also been slow to adapt to regulatory changes around capital, which have boosted capital buffers and risk-weighted asset intensity at the expense of lower returns.
