A bet on geopolitics and history in the making

Historical events don’t always have to come out of a book, or be taught in colleges and universities. People around the world enjoy reliving history.  Dressing and acting like people did from times long past no doubt make historical events come alive.  Events from the past have provided copious inspiration for film, music and books based on true stories, and using historical fact to weave stories around.  Two examples, before we enter this post.  Jaws the film was an incredible success for director Stephen Spielberg.  Jaws the book by Peter Benchley, was based on the Jersey Shore shark attacks of 1916.  A panic stricken beach town caused by one shark attacking multiple people inspired one of the best known film stories of all time.  I bet you didn’t know the book about Norman Bates called Psycho was later made into a film, but, the book was actually based on a real murderer called Ed Gein.

Historical events happen all the time, but, there as some monumental events happening right now. Not just Brexit, Donald Trump insulting another journalist, Vladamir Putin playing grand piano as he waits for the Chinese Premier Xi Jinping at the “One Belt, One Road summit”.  Rather events that your children’s, children may study in the future but not from a school curriculum.  This post will review big things happening in geopolitics, economics and how it’s going to affect financial markets.

In the lifetime of most people the United States of America has been a leading global superpower. Affecting our culture from everything from Breakfast cereals to Televisions shows, sorry television programmes, and children’s toys.  Not to mention the functioning of politics, pensions plans and other financial institutions.  The Hollywood film industry is (or rather the industry as a whole) is arguably one of the most powerful industries in the world, with the power to inspire and influence peoples ideas, lifestyle choices and emotional biases.

Could this be the beginning of the end of America being the worlds leading superpower?

American has provided security and stability to a lot of countries by providing intellectual and financial capital for financial systems, institutions and contributions to countless technological breakthroughs.  Any big change to this will have big consequences for anyone thinking about where to place their bets for growing their wealth.  Let’s take a look at the bigger picture.

Since the Bretton Woods Agreement after World War Two the United States Dollar has been the worlds dominant reserve currency. US Dollars where lent to countries damaged by war to build infrastructure again so that society would function properly. A good idea, which especially helped the United States, because it developed the world economy and promoted North Amercian economic and political values. Values which they gained originally from Europe (and the rest of the world before that). Great news for the World Economy as it developed a stable system allowing countries and individuals to trade and prosper. Part of the agreement stipulated oil had to be traded in Dollars. So if you need oil for industry or whatever you have to buy dollars to trade it. The reserve currency status also meant dollars where the preferred currency to trade goods and services in the global economy.

Soviet representatives attended the conference. They declined to sign off on the final details of the plan. Labeling the institutions created by the agreement to be branches of Wall Street. Which of course they are / where. Institutions created by the USA and United Kingdom where the International Monetary Fund and the World Bank.

The IMF’s Articles of Agreement state: the IMF is ” to promote international monetary co-operation, international trade, high employment, exchange-rate stability, sustainable economic growth, and making resources available to member countries in financial difficulty. ” All good things right? They hold a fund made up of Special Drawing Rights which consist of a basket of other currencies that can be used to help stabilise member nations using liquidity (cash injections).

Other things that came from the Bretton Woods Conference where the instigation of freely floating currencies and the idea that it’s better to reduce trade tariffs to promote trade. Relative to before Bretton Woods the world economy is almost a completely free trade system now with low tariffs being standard practice.

Agreements ratified at Bretton Woods encouraged many countries around the world to use dollars for trade. This financial model has worked well and allowed a lot of people to benefit who would not have if a plan had been signed off based on the principles of the Soviet era. Many advances in technology, medical sciences, welfare systems would not have happened had it not been for this system. For normal people, this means no more having a toilet in the shed in the back garden, hot water, a General Practitioner to help with your ailments, a pension, money if your your boss cuts you loose from your job as well as other welfare benefits and many more things like, iPhones, GPS so you don’t get lost,  free online software, shops with almost anything you could want, and doctors with almost any drug required to help you live longer. Let’s not forget the option to travel almost anywhere in the world for a holiday or vacation.  Of course the list goes on.

Betting on Geopolitics

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The letter is dead long live Royal Mail

Royal Mail’s bread and butter business is in structural decline.  As sure as video killed the radio star email has killed the letter.  Following the accession of a new monarch in various countries on lookers would proclaim ” the king is dead, long live the king “.  As one monarch dies they salute the new monarch.  Royal Mail’s letter business is dying but they are saluting new avenues of growth from Parcel Deliveries in the UK and around the world through the wholly owned dutch subsidiary General Logistics Systems (GLS).

Let’s take a look at why Royal Mail could be a good investment.  Royal Mail was fully privatised for the first time in 500 years in October 2013.   During is life as a state run monopoly Royal Mail built up a massive asset base and had no pressures regarding operating efficiency (like modern publicly listed companies do).  It employees are well treated with generous pensions and sorting offices use aging technology.  For the new management of Royal Mail cost saving opportunities will be around every corner.  From making better use of technology to bringing the employee pension scheme up to modern standards.

Modern technologies are being employed to create productivity gains, the work force has been reduced and the number of mail centres and delivery offices have been reduced.   Rivals like Deutsche Post (DP) where privatised years ago and it has had a marked positive affect on their business (possibly not for employers but for the business).  DP sports operating margins of close to 8%.  Royal Mail’s operating margins are just over half of that figures so they’ve got some catching up to do.  Catching up is what they are currently doing.

What has an investment in Royal Mail share got going for it?

  • Lots of low hanging fruit for saving costs, costing savings plan increased to £600M by 2018.
  • Can bid for contracts outside of the UK allowing Royal Mail to benefit from Globalisation. GLS operating in 42 European Countries and all over the world and is the 3rd largest parcel delivery provider in Europe. Revenues from this part of the business are growing at nearly 10% per year.  Stimulation of Eurozone economies by the European central bank are feeding through to GLS’ main markets including Germany, Italy and France.
  • Operating profit margins and operating profits should rebound as transformation costs reduce and investments in acquisitions start to enhance earnings. Geographic expansion has been made having purchased ASM in Spain and GSO in California, USA.
  • More control over pricing in the UK and in the other countries they operate in.
  • Online shopping is growing at 10% per year.  Parcel Deliveries are becoming a larger part of the delivery Market help offset the decline in letter deliveries.  Royal Mail should continue to win a significant part of this business despite competition from TNT, DP and Yodel.
  • Offering customers a better service.  Personally having bough myself a new watch recently with Royal Mail’s 24/7 tracked service I new where it was each step of the way.
  • Royal Mail owns lots of property.  As property prices have inflated the value of not or under used Royal Mail property has soared.  Sale of these assets to property developers desperate for quality plots in prime London locations will help fund Royal Mail future expansion plans and pay it’s dividend. Owning property is also a good hedge against inflation.
  • Royal Mail debt is relatively low.  Interest payments are covered by operating earning easily and net debt is a comfortable amount.
  • Dividend growth was over 5% last year and is expected to be over 4% this year.  The dividend yield is currently higher than average.
  • As far as the share is concerned it is in a range bound market and currently sits at the bottom of the range.  Making a increase to the upper end of the range a good bet.

What are the negative aspect of investing in Royal Mail

  • Higher transformation costs and investment spend has hit operating profits and reduced profit margins
  • The dividend is barely met by free cash flow after capital expenditure, financing and acquisition costs. Albeit higher due to the current transformation and acquisitions to lay down geographical expansion.
  • Amazon are delivering their own parcels.
  • Increased competition from Rivals, espcially in the UK market.  For instance Deutsche post has moved into the UK market by buying UK Mail.
  • Regulatory burdens reducing competitiveness, such as having to provide the universal service
  • Slightly overvalued compared to the transportation industry average (not taking into account dividend growth)

Big questions remain

Can the growth in Global operations and high performance of UK Parcel deliveries offset the reduction in revenue from UK letter deliveries?

Can acquisitions add to growth after financing costs?

Will the cost reduction programme go to plan without spiraling transformation costs?

Will dividend increases continue at the current rate?

Opinion of the author; Royal Mail is a good bet based on dividend yield, dividend growth rate, manageable debt levels, transformation plan of decreased costs, technological enhancement and productivity drive going to plan, and the global expansion.  A reduction in operating costs will see it’s share price move up and reduce it’s PE ratio to be inline with that of Deutsche Post, which has a 5 year average PE of around 15 and a lower dividend yield.


Disclosure; the author owns share in Royal Mail. 




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The spectre of inflation is creeping up on us

Deciding where to place financial bets on company sectors, mega trends, individual companies, and collective investments like investment trusts are effected by macro economic factors.  This post is intended to tackle the concept of inflation and how it’s going to affect where readers may want to invest.

Mervyn King Baron of Lothbury, former Governor and member of the Monetary Policy Committee, spoke at a speech in 2013 and said that he has worked during a really ‘nice’ period in financial history.  King coined the term NICE to mean a period of “non-inflationary consistently expansionary”, NICE.  Companies and the economy continued to grow without any of the negative side effects normally associated with economic growth.  Inflation is one of these negative side effects.  Products (food, petrol, housing, etc) and services (legal, accounting etc) remained affordable whilst more and more people where employed and experienced rising wages.  Not only where things affordable many things got less expensive, like, personal computers, and cars.

NICE was a consequence of globalisation (relocating certain industries and work to places in other countries particularly China) and technological advances (including supply side reforms such as automation) which kept a lid on inflation.  During the 1990s that worked very well, but what’s changed?  Debt.  An explosion of debt which started with the low interested rate policies of Alan Greenspan former Federal Reserve chairman (various factors went into the mix with those decisions including the Sept 11th terrorist attacks).

What’s happened now?

NICE turned into a period of low or no growth with disinflation (falling inflation) or outright deflation.  Times like these really bring into focus the importance of placing the right financial bets and investing wisely for the future.  Debt has been discussed in more detail on other pages in the investing section here on Let’s Compare Bets.  In short, the financial authorities want to avoid a period like the 1930s when there was a depression with falling prices and low unemployment.  A period where Al Capone held the keys to the whiskey cabinet and people where desperate to make ends meet.  Now, due to the amount of debt in the system financial authorities need inflation to keep the system working.  Inflation in wages, economic gross domestic product etc  helps to reduce the amount of debt as as wealth (or money creation) out paces debt.  Deflation on the other hand increases debt, as there is less money to pay interest and make capital repayments, which causes less disposable income for buying goods and services, or, less money for companies to invest for the future. An increasing debt pile, no employment, and a time like the 1930s.  For normal people this would mean a time where there is no whiskey, no job, and and lots of frustrated people.

Right now political changes are bringing a catalyst for change.  President elect Trump in the USA brings inflation friendly policies and rhetoric to the table.  He has openly criticised America’s central bank for policies which are now causing serious harm to the economy.  Especially the very low interest rates and the possibility of negative interest rates, which have various negative sides effects including making banks very unstable and causing pensions to be under funded.

President Trump plans to reverse some of the drivers of low inflation.  Reducing the free movement of people, like illegal immigrants crossing the Mexican border (which stops wages being depressed).  Reducing the effects of globalisation by using trade tariffs and spending big on infrastructure.  Low corporate tax rates have been proposed which should encourage USA Inc. to bring their case hoards back to the USA.  Also many companies will be encouraged to bring manufacturing back from overseas.  President Trump want’s Apple to manufacture the iPhone in the USA and to bring their massive cash pile back home.  With low tax rates and a population getting paid more money Apple may be willing invest more in the USA to secure their future growth, for instance they are rumoured to be entering the automatic car market.  Trumpflation will also include big infrastructure spending paid for by creating money through the central bank (money printing).

Things are changing in Europe.  Trump seems very friendly with Nigel Farage who has been one of the main architects leading the United Kingdom’s exit from the European Union.  Apparently Trump doesn’t drink or smoke so it can’t be for the love of beer and cigars that Trump wants to cosy up to Nigel.  More likely is that President Trump supports Mr Farage’s view on Europe.  The UK was the first to leave Europe but the big question now is who will be next and when?

An exit from the European Union has been positive for the United Kingdom and has helped play a part in rebalancing the economy.  As the value of Pound Sterling dropped the price of imported goods have gone up helping promote supply side inflation.  Now we’ll have to wait and see if wages follow suit.  When wages start to follow suit interest rate rise won’t be far behind.  As the European Union continues to be remodeled there will be increased volatility in financial markets (prices plunging and rebounding), but, as an exit (sorry Brexit) has been good for the United Kingdom it would be good for other countries that leave in turn having a positive affect on the world economy.

How will inflation affect your financial bets

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