Market Commentary November 2011

Read our new Market Commentary newsletter. This contains our view on the stock market based upon fundamental and technical analysis along with some recommended investments for the current market.

National Grid I/L 1.25% 06/10/2021 – Buy

National Grid will shortly launch an index-linked bond on the London Stock Exchange’s Order Book for Retail Bonds, a market set up to make bonds more transparent and accessible to investors (see attached complimentary research note).
The bond matures on 6th October 2021 and will pay a 1.25% coupon twice a year on 6th April and 6th October. Whilst this appears low, the coupon is adjusted to take account of the effects of inflation as calculated by the Retail Prices Index (RPI). With the RPI currently standing at 5.2%, that equates to a yield of 6.45%. Whilst the RPI can fall, potentially meaning that bond holders receive less than the previous payment or not receiving the 1.25% coupon at all, its 30 year average has been 4.4%. Also, like I/L gilts, the redemption value is linked to the rise in RPI over the period, the first of its kind in the corporate bond market. Unlike I/L gilts however, the bond will pay back the face value even in a deflationary environment.
The issue has a minimum denomination of just 2,000 (£2,000 at issue), which compares favourably with existing National Grid bonds which tend to have a minimum of 50,000 nominal. Thereafter, the bonds can be bought and sold in multiples of just 100. The issue has a BBB+ rating from Standard & Poors, making the bond “investment grade”.
We view this issue as a ‘strong buy’. Investors should note that there is credit risk but one that is acceptable within a well balanced portfolio. Index linked investments are very popular with investors (I/L gilts are expensive and NS&I had to recently withdraw their IL savings certificates due to demand). This leads us to believe that the bonds will trade higher in the secondary market.
The book building exercise runs until the end of the month for settlement the 6th of October so please submit any interest to us by 1pm the 28th of September if you would like to purchase the bond in the primary market.

FTSE 100 Options

Please find the FTSE 100 options we are recommending this month.

Aviva – Buy

We feel the company has many catalysts that could see the share price rise substantially over the next twelve months. At just 415p, the stock is cheap trading on a forward P/E multiple of just 6.9x and at a substantial discount to its EEV of 487p per share. In the meantime, investors are rewarded with a well-covered yield of 6.2%. Option traders may want to look at the August 380 or 400 puts, trading at 4p and 9p respectively.

Research Note – Tesco Personal Finance 5.2% 2018

Please read our research note on the Tesco Personal Finance Plc 5.2% 24/08/18 bond.
This issue has a GRY of 4.53% and ticks all the right boxes for retail investors – a good name, a low minimum size (£100), a straightforward “vanilla” structure and a good yield (the GRY of the benchmark Treasury Gilt 5% 07/03/18 is just 2.57%). The bond also pays interest twice a year – in February and August.

HSBC Option

HSBC is one of the world’s largest banks with high exposure to fast growing emerging markets such as Hong Kong, Asia Pacific and Latin America. The stock is supported by a good dividend yield of 4.1% and trades at a discount to rival Standard Chartered despite offering similar growth prospects. Morgan Stanley has just issued a 760p price target, indicating 21.6% potential upside.

We are recommending option traders sell the September 580 puts for a premium of 7.5p.

Core Defensive Options

Please find the core defensive options we are recommending this quarter.

Cyclical Options

Please find the cyclical options we are recommending this month.

FTSE 100 Options

Please find the FTSE 100 options we are recommending this month.

A Guide to the Traded Options Market

Please read our complimentary guide to the traded options market with some previous recommendations included. This is a highly specialised field, often out of the reach of retail investors. This guide focusses on GAM’s approach to trading options.
GAM has been trading options on behalf of clients over many years and we target annual returns of 25%-40%.
However, this is a high risk strategy which can result in losses that exceed your initial deposit. Options trading is not suitable for everyone and we recommend no more than a 10% allocation in a portfolio.
To establish whether options trading is appropriate for you and, if so, which strategies are suitable to your
circumstances, please give us a call.