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On the Mend

13 February 2020

On the Mend 

Further evidence of improvement in our economy as house prices have begun to rise again after an eighteen-month hiatus. Anecdotal evidence of growing confidence in manufacturing and construction is apparent, the latter undoubtedly taking heart from the promise of considerable infrastructure spend by the new government. I suspect this trend will gather pace over the coming months.

Across the Channel, things are moving in entirely the opposite direction. The data from Germany, Italy and France this week was truly awful and shows no sign of reversing any time soon. Much for the EU elite to chew over as they approach negotiations with our Brexit team re our future trading relationship.

The stock market seems to have largely ignored the coronavirus scare. In relative terms perhaps it is right to do so:

  • The World Health Organisation estimates that ordinary flu kills up to 650,00 people globally each year.
  • During the SARs epidemic approximately one in ten sufferers died from the complaint.
  • The coronavirus symptoms are far less severe than SARs and it kills circa one in a hundred sufferers. Is it really any worse than the flu?

If I am unfortunate enough to catch it I will, no doubt, change my tune but I suspect that a few months down the road the stock market will have largely forgotten about it.

IBM – Update

Change is afoot at America’s most hated tech stock. After market hours on the 30th January IBM announced that Ginni Romerty will be stepping down after twelve years as CEO, making way for Arvind Krishna, who will move into the role in April. Wall Street’s gratitude to Ms Romerty was displayed with an immediate 5% jump in the share price, a bounce that has now extended to over 13%. That might be a little unkind to her but there is no doubt that Mr Krishna’s credentials look suited to the role. As a thirty-year veteran of the company it is easy to assume he would be another in the staid Romerty mold. Yet he was most recently Senior Vice President of Cloud and Cognitive Software and has been significant in the development of the technologies that are key to the future – cloud, quantum computing, AI and blockchain – and led last year’s acquisition of Red Hat.

In Krishna the stock market appears to recognise the same breed of CEO as brought really positive change at Microsoft (Satya Nadella). Only time will tell but the simultaneous promotion of Red Hat CEO to IBM President looks equally positive. After a number of years of stagnation the last year has seen the first indications of revenue growth at IBM, albeit modest and stuttering. My former blogs have pointed to the huge potential offered by the strategic imperatives, as IBM calls the above technologies, particularly if they are able to seamlessly pull them all together. Will Krishna be the man to succeed in that task? If he is and Wall Street begins to think of IBM as a proper technology company again, rather than a damaged one, then where else can you find a tech stock on a 4% yield and low earnings multiple?

Some analysts have been raising their targets modestly following the recent figures, pointing to revenue growth of up to 3% over the coming year, with several also increasing share price targets. It will be interesting to see how they respond when Krishna lays out his vision for the company under his stewardship. I doubt IBM will immediately move from Wall Street’s most hated tech stock to its most loved but even “quite liked” should be enough to see an improvement from the multiple of 12 times this year’s earnings at the current $155. Our, admittedly, patient holders should now be showing a small positive on the stock, having also taken a solid income over the last couple of years. I would suggest now is not the time to bail out.

Russell Dobbs FCSI

Chartered Wealth Manager