When Hillary Clinton stumbled from ill health on Sunday, her US Presidential campaign did likewise, investors were forced to confront the real possibility that Donald Trump could be elected Commander in Chief.
This is a year to expect the unexpected. It seemed there was no way that we were going to vote for Brexit or that Trump would be selected by the Republicans to lead the party. His elevation to the Presidency was at first unthinkable, but Clinton has failed to open up a clear lead. If she is chosen, she will almost certainly face at least one chamber in Congress in Republican hands.
We will thus have another four years of political gridlock: a Democrat president unable to push a programme through Congress plus endless wrangling over the Budget. That might be no bad thing. The US economy has continued its stuttering recovery over the past four years and will no doubt manage pretty well on more of the same.
Trump could face a similar scenario should he be elected, with the Senate in Democrat hands, but he is the more likely of the two to face a Congress dominated by his own party. While the more moderate Republics will try to restrain his wilder ideas, he will have scope to reduce taxes and throw money around, giving a short term boost to the economy.
In that event, there will be a massive future bill to pay but we can worry about that in two years’ time. For now, at least, the election in November does not worry me as an investor.
Mixed Results from Food Retailer
Trading updates are supposed to leave investors with a clear picture of the business, but perhaps that is too much to hope for from a company that confusingly mixes food production with a clothing retail chain. I read the statement from Associated British Foods (ABF) three times and still felt unsure of what was going on.
Ostensible, AB Foods was claiming that results would be slightly better than last year thanks to the positive aspect of a fall in the value of the pound. However, this improvement also took into account a change in accounting policy that lowered the previous year’s profits, leaving shareholders to work out how much of the improvement was genuine.
It also said that sales at Primark would be up 9% before admitting that this was entirely down to new store openings and an extra week in the financial year – like for like sales are actually 2% adrift. There were several other instances in the statement where apparently good news was subsequently qualified or completely offset.
Primark will in fact see margins squeezed because higher import prices will not be passed onto consumers, although I felt that was one of many aspects of the statement that could have been put more clearly.
By the time I had worked out what was going on, the shares were already down 6% and they ended the day 10% off, with a further fall of 3% the next day. I’m not surprised that investors were reluctant to commit to a company that isn’t upfront with the bad news. You can count me out as well.
Unsustainable Dividends Make Me Nervous
Two other things I don’t like to see in a company: income heavily biased towards one currency while borrowings are predominantly in another; and a dividend that is not fully covered. We got both from City of London Investment Group (CLIG).
Given that borrowings are in dollars and income in pounds, that should have worked better than it has done in recent months. I worry about what will happen if sterling stages a recovery.
If you like closed-end funds, then John Laing Infrastructure (JLIF) looks more promising. Its results showed a leap in the value of the assets it holds and if the new government puts more money into infrastructure projects, as expected, the sector could take off.
Rodney Hobson is a long-term investor commenting on his own portfolio; his comments are for informational purposes only and should not be construed as investment advice.
