Review of markets December 2019

Written by Callum Abbot

January, 2020

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The Long and Short of it: Review of markets December 2019

Have you ever done an exam, been absolutely sure you’ve nailed it, discussed the answers with your friends afterwards reassuring you that you’ve aced it, only to discover on results day that you’ve completely flunked the paper? Sinking feeling, recoil from the page and hope there’s been a mistake… there’s never a mistake.  

I imagine that’s how members of the Labour party felt when the exit polls came out.

When this does happen it is tempting to blame the examiner for not seeing the merit in your whimsical prose but failure to acknowledge one’s own failing and contempt for the examiner will only lead to repeat poor performance.

The Conservatives on the other hand did nail the test, by being absolutely focused on the key topic the examiner was asking of them. The reward is the largest majority government for the Conservatives since 1987 giving Boris Johnson a mandate to “Get Brexit Done”.

The market loved it. The political risk of a hard left government gone, plain sailing from here…

Well not quite. Still the minor inconvenience of actually negotiating a trade deal with PM Boris Johnson ruling out extension beyond 2020. This has caused sterling to come all the way back to pre-result levels and some of those domestic stock rockets to peter out somewhat.

I feel these concerns will prove too pessimistic. A fixed deadline forces activity between two rational sides that should look for a mutually beneficial outcome. Being pessimistic makes you sound worldly and intelligent but doesn’t often make you rich.

Having said that it feels like a good environment for active management as while the rising tide lifts all boats initially, as Buffet said, when the froth from the waves settles we tend to find out who’s swimming naked. So while buying of “Brexit baskets” might cause the likes of Marks and Spencer’s share price to spike up it won’t get people to change their shopping habits.

The Long

Dunlem. A UK home furnishings retailer might not sound like an obvious top long pick and the sell side have tended to agree with just one buy rating out of eight brokers covering the stock. However, Dunelm has consistently delivered ahead of expectation on both growth and margin. Its ultra-low cost locations and smart online offering have attracted new customers and encouraged customers to spend more. The stock performed strongly as part of the post-election relief bounce but it has been strong all year, delivering a total return of almost 130% in 2019 (Source: Bloomberg, as at 30 December 2019).

The Short

NMC Health. This healthcare service provider has the majority of its operations in the Middle East. Until 2018 it was one of the strongest performing stocks in the FTSE All-Share index as a combination of improved health cover in its markets and multiple acquisitions drove strong growth. We first shorted the stock in September last year as we believed that organic growth was slowing and cash generation was poor. We were also concerned that management incentivised on total adjusted EBITDA (Earnings before interest, tax, depreciation and amortization) which favoured aggressive acquisition-led growth at the expense of cash generation and per-share profits. In December, the stock fell significantly due to a Muddy Waters Research short report.    

Callum Abbot is a portfolio manager for the JPM UK Equity Plus Fund 

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