Bull and Bear – an optimistic and pessimistic view of investment news. Today’s stories include: Royal Mail: is it time to sell? Graphene company floats on AIM. Global inflation is at 3.0 per cent. UK inflation sticks at 2.7 per cent
Royal Mail: is it time to sell?
Was Royal Mail priced too cheaply and was the government unfair on investors who wanted to fork out more than £10,000 on shares in the company? Why was it that institutional investors were allowed to invest millions, but retail investors were capped at £10,000?
You could be cynical and say that the reason why the government chose not to allocate shares to prospective investors applying for £10,000 or more in shares is because a high proportion of these people would probably vote Tory regardless.
It may be truer to say that the government wanted to encourage more people to enter the brave world of private investing, but it seems probable that very few who applied for £10,000 or more shares were virgin investors.
Were the shares priced too cheaply? According to this weekend’s ‘FT’, institutional investors say that if the price had been higher they may not have bought into the flotation.
Confidence is a funny thing; there is rarely a middle ground. By pricing shares where they did, the government assured high demand, and the fact that demand was so high encouraged more to jump on board, creating even more demand. It was a kind of positive feedback loop. Had shares been priced higher, the feedback, as it were, may never have formed the loop.
But the question is this? Okay, you have bought your shares: do you need to hold on to them?
It was clear in the run-up to the flotation that it represented a pretty much guaranteed way to make a quick buck. And this is how it has turned out. A nice little profit is there for those who sell.
Bear: At the 330p flotation price, shares were attractive, at 470p many might think they are over-priced. At the flotation price the expected dividend yield was 6.1 per cent. At the price the shares stand at the time of writing, the expected yield is 4.3 per cent.
Bull: But it looks as if Royal Mail will be included in the FTSE 100. If so, that will force many institutional investors to buy shares in the company. The ‘Telegraph’ quoted Gert Zonneveld, co-head of research at Panmure Gordon, who predicted the jump in the Royal Mail share price as saying: “Institutions desperate to buy into Royal Mail will support the stock over the coming weeks”. He also said that many investors have missed the point that the regulatory regime is currently more favourable to The Royal Mail than it has been.
More Bear: Positive feedback loops can become negative. Buying shares in the company at flotation may have been a very attractive proposition. It represented a sure way to make money quickly. Many investors may choose to sell quick, beating the markets, and their action may become self-fulfilling.
Limit: But there is surely a limit to how far the shares are likely to fall in the short term. The high level of expected dividends means the shares are surely unlikely to return to their flotation price.
Big question: In the long term, the key for this company is whether it can compete with rivals across the world. If The Royal Mail can become a major player on the global stage, then that is a loop investors may want to get into.
Graphene company floats on AIM
Sometimes it all comes together. Now you can hold companies listed on the AIM in your ISA. Graphene is one of the great miracle products of this age. And Nassim Taleb, author of ‘The Black Swan’, and now promoting his idea of anti-fragility says that an anti-fragile portfolio needs to put equal weight on each smaller company in a portfolio as larger ones.
Now Applied Graphene Materials, a company spun out of Durham University, is heading for AIM.
Graphene, as you may know, was discovered by researchers at Manchester University. Andre Geim and Kostya Novoselov won a Nobel Prize in 2010 for their work on graphene at the British University. Geim once described graphene as: “The thinnest possible material you can imagine.” He said: “It also has the largest surface-to-weight ratio: with one gram of graphene you can cover several football pitches (in Manchester, you know, we measure surface area in football pitches). It’s also the strongest material ever measured; it’s the stiffest material we know; it’s the most stretchable crystal.” He concluded: “That’s not the full list of superlatives, but it’s pretty impressive.”
It may have only been discovered in 2004, but this is a product that is proving highly popular. Applied Graphene Materials reckons demand for graphene will increase tenfold between now and 2017. In that year it estimates the market will be worth $195 million, and by 2023 $1.3 billion.
Jon Mabbitt, chief executive, said in a statement: “We have seen considerable interest from blue-chip businesses which have recognised the advantages of our production process, enabling us to continuously produce graphene cost efficiently on a commercial scale. Admission to AIM will provide the company with the funding for its next phase of development and build our position as a global graphene manufacturer.”
Intellectual property investor IP Group owns a 22.1 per cent stake in the company. Finance for Business North East Technology Fund, which is managed by IP group, owns a 21.7 per cent stake.
Global inflation is at 3.0 per cent
Actually, it is not global inflation that is 3 per cent so much as G20 inflation because data on the inflation rate across the planet does not yet exist.
But the Bank for International Settlements, European Central Bank, Eurostat, International Monetary Fund (chair), OECD, United Nations and the World Bank clubbed together to form the Inter-Agency Group on Economic and Financial Statistics. And this morning, it revealed its first ever attempt at recording inflation across the G20.
It turns out that annual inflation in the G20 area was 3.0 per cent in the year to August 2013, down from 3.2 per cent in the year to July 2013.
Here goes the breakdown:
In August 2013, annual inflation slowed in Turkey (to 8.0 per cent, down from 8.6 per cent in July), the United States (to 1.5 per cent , down from 2.0 per cent ), Germany (to 1.6 per cent, down from 1.9 per cent ), and more moderately in the European Union (to 1.5 per cent, down from 1.7 per cent), Brazil (to 6.1 per cent, down from 6.3 per cent ), India (to 10.7 per cent , down from 10.8 per cent), and China (to 2.6 per cent, down from 2.7 per cent). In contrast, annual inflation picked up in Indonesia (to 8.8 per cent, up from 8.6 per cent) and Japan (to 0.9 per cent, up from 0.7 per cent), while it remained stable in the Russian Federation (at 6.5 per cent), South Africa (at 6.4 per cent), Mexico (at 3.5 per cent), and Italy (at 1.2 per cent).
For some odd reason, the UK isn’t on the list.
But never fear, the ONS revealed its latest inflation data this morning.
UK inflation sticks at 2.7 per cent
UK inflation in the year to September was in fact 2.7 per cent, the same as in August.
The ONS said: “The largest upward contribution came from air fares, though this was offset by a downward contribution from petrol and diesel prices.”
Month on month the inflation rate was 0.4 per cent, which is a tad high.
Meanwhile, other data from the ONS on producer prices revealed that output prices rose by just 1.2 per cent in September from 1.7 per cent the month before.
Bull: Samuel Tombs, UK economist at Capital Economics, said: “Airfares inflation is often volatile from month to month,” and “despite the recently announced utility price hikes, we continue to think that CPI inflation is likely to fall back to the 2 per cent target within the next few months and will remain low thereafter.”
Bear: Chris Williamson at Markit said: “With Brent Crude trading at an average of $111 per barrel in October, oil is trading at a price that is historically consistent with inflation running higher than 2-3%. Add to this the widely-reported anticipated increases in domestic utility bills, and there is a significant risk that we can see inflation remaining stickier than the Bank is currently expecting.”
These views and comments are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees