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As you progress on your investing journey, many new words and anagrams will appear. Having a complete understanding of these words can help minimise misunderstandings and misinterpretations, and consequently, costly investing mistakes.

In this article, I have ventured to explain what constitutes a Preference Share, hoping to help round out your investing knowledge.

1. What exactly are Preference Shares?

Preference Shares, otherwise known as Preferred Stock, can be thought of like a Corporate Bond. Preference Shares are ‘fixed income’ or ‘dividend shares’ that are prioritised over Common Shares when it comes to dividend payments.

In addition to priority dividend payments, Preference Shareholders also hold priority over Common Shareholders when it comes to recouping the value of their investment if the company is liquidated.

One downside of Preference Shares is that their voting rights are typically restricted or non-existent.

2. Cumulative vs. Non-Cumulative Preference Shares

Several kinds of Preference Shares exist, but the most common are Cumulative Preference Shares and Non-Cumulative Preference Shares.

For any dividends that a company cancels or fails to pay, a Cumulative Preference Shareholder will retain the right to be paid this dividend in the future. Moreover, the Cumulative Preference Shareholder will have to be paid any missed dividends before any future dividends can be paid to any other shareholder.

Non-Cumulative Shares do not have this same right.

3. Do Preference Shares exist in perpetuity?

While the majority of Preference Shares do not have a maturity date, there are means by which these Shares can be discontinued.

Preference Shares can be converted to Common Shares or removed from circulation altogether. To do so, the issuing company may have to pay a premium over the Preference Shares’ face value to recall them.

Alternatively, Preference Shares can be issued with the condition that gives the issuer the right to redeem or convert the shares at some specific price, some specific date, or when some other condition is meet.

What is an example of a Preference Share?

The Bank of America (NYSE:BAC) has several Cumulative and Non-Cumulative Preference Shares on its books, some dating back to 1997. From July to September 2021, the Bank of America issued 8 new series of Preference Shares. As illustrated in the table below, each series was issued with different conditions related to the dividend amount, the frequency of payment, and its redeemability.

What is a stock split?

To begin, it may pay to define what a stock split is: A stock split is a simple mechanism that a listed company can employ to increase the number of issued shares while keeping its market capitalisation/ valuation the same.

There are a couple of reasons a company may elect to perform a stock split, the chief among them is to increase the liquidity (or accessibility/ tradability) of their stock.

 

What happens to my shares in a stock split?

The most popular stock split ratios are 2:1, 3:2, and 3:1. By way of example, if a hypothetical company were to perform a 3-for-1 stock split, its shareholders would be issued an additional two shares for every share they owned before the split. In conjunction with the split, the value of each share would be devalued to 1/3 of its pre-split value. Effectively, the total value of three shares after the stock split should be worth the same value as one share before the stock split.

What is a reverse stock split?

A reverse stock split is when a company reduces the number of shares available while keeping its market capitalisation/ valuation the same. A company cannot simply remove shares as easily as it can issue new shares. Therefore, with a reverse stock split, a company is forced to revoke all existing shares and issue new shares, proportional to the reduction that the company is pursuing.

A primary reason a company performs a reverse stock split is to avoid being delisted from its stock exchange which may have set minimum share-price conditions on its listees.

What are some famous stock splits and reverse stock splits?

Tesla (NASDAQ: TSLA) performed a 5:1 split of its stock in August 2020. At the time, TSLA shares were trading above US $1,300. Tesla CEO Elon Musk believed the EV Company’s shares were too expensive for retail investors, so he reduced its price via a stock split.

Microsoft (NASDAQ: MSFT) has been a serial stock splitter. Since listing on the Nasdaq in 1986, The Software Company has performed nine stock splits, the last occurring in 2003. Consequently, 100 MSFT shares in 1986 would now total approximately 30,000 shares.

The beleaguered General Electric (NYSE:GE) performed a 1:8 reverse stock split in July 2021. Before the reverse stock split, GE shares were teetering around US $12. The reverse stock split meant that GE shares began trading above US $100 per share, a threshold not crossed for a very long time.

​Europe is home to some of the largest companies in the world, with market capitalisations in the hundreds of billions of dollars. However, these large European companies are not as well-known as they could be by investors outside of the Eurozone. Sexier, fast-growing US and Chinese tech stocks will generally hog media headlines and investor portfolios, shoehorning European stocks into investor blind spots. Yet, as Kiplinger has recently pointed out, overlooked markets, such as Europe, are ripe for investment opportunities.

Even the largest, most attractive companies in the Eurozone are relatively cheap compared to their US counterparts. Comparing the average Price/Earnings (P/E) ratios of European companies to US and Chinese companies can help demonstrate this assertion.

Get To Know Europe’s 5 Largest Stocks

1#. LVMH (EPA: MC)

Largest Stocks LVMH

Stock Exchange: Euronext Paris
Market Cap: 396.2 billion USD
P/E ratio: 34.95

Comparison: Nike (NYSE: NKE), Market Cap: 264.8 billion USD, P/E ratio: 45.07

LVMH, short for Louis Vuitton Moët Hennessy, is Europe's largest stock. Headquartered in France, the Company has built and acquired a portfolio of more than 70 luxury brands over thirty years. It's safe to say that many of its brands are household names in Europe and worldwide. In addition to its namesake, LVHM also owns Sephora, Dior, Bulgari, and Tiffany and Co., helping the Company generate 44.2 billion euros in 2021 YTD.

The dynamism of LVMH's portfolio is the reason for the Company's positive outlook. LVMH expects to strengthen its market-share moving forward, just as it has done over the past couple of years. For the first nine months of 2021, the Group has recorded organic revenue growth of 11% compared to the corresponding period in 2019.

#2. Nestlé SA (SWX: NESN)

Stock Exchange: SIX Swiss Exchange
Market Cap: 362.8 billion USD
P/E ratio: 27.70

Comparison: Kweichow Moutai (SHA: 600519), Market Cap: 358.9 billion USD , P/E ratio: 45.75

The Swiss conglomerate is the Eurozone's second-largest Company and the largest food company in the world. Nestlé owns more than 2000 brands, including Fast-moving consumer goods (KitKat, Smarties, Häagen-Dazs, Mövenpick, Lean Cuisine, Maggi, Hot Pockets), supplements (Boost), pet-care (Purina, Friskies, Fancy Feast), and baby foods (Gerber, Ceralac).

Producing Fast-moving consumer goods exposes Nestlé to the risk inherent in the current bout of inflation currently occurring in the Eurozone. However, the Company is confident that its margins are padded and are expecting organic growth across the whole business to lift by 6% to 7% in 2021.

#3. ASML (AMS: ASML)

Largest Stocks ASML

Stock Exchange: Euronext Amsterdam
Market Cap: 336.0 billion USD
P/E ratio: 51.57

Comparison: Cisco Systems (NASDAQ: CSCO), Market Cap: 236.1 billion USD , P/E ratio: 22.39

ASML is a Netherlands-based manufacturer servicing the semiconductor industry, supplying equipment and software to the likes of Taiwan Semiconductor Manufacturing (NYSE: TSM), Intel (NASDAQ: INTC), and Samsung Electronics (KRX: 005930).

At the start of 2019, ASML's P/E ratio was under 22.0. In two years, its P/E has more than doubled as the semiconductor industry, and its peripheries became a favourite of investors. In this way, ASML doesn't conform to the lower P/E comparison that the rest of this list does.

What ASML does have in its favour is almost complete domination of its industry. ASML is estimated to control 90% of the market for Semiconductor equipment and software. While ASML isn't predicting a lift in market share in the medium term moving forward, its main clients are expected to lift their investment in production lines significantly.

#4. Roche (SWX: RO)

Stock Exchange: SIX Swiss Exchange
Market Cap: 335.5 billion USD
P/E ratio: 21.60

Comparison: Johnson & Johnson (NYSE: JNJ), Market Cap: 428.8 billion USD , P/E ratio: 24.49

Roche, another Swiss conglomerate, is Europe's largest healthcare company, generating 46.7 billion CHF in revenue in 2021 YTD.

Roche is at a critical juncture, as patent protection lapses for many of its legacy drugs. Herceptin, Avastin and Rituxan, which used to generate one-third of the Company's revenue, are all sliding in sales as off-patent brands hit the market.

However, several new drugs from the Company are hoped to bolster growth prospects moving forward. Drug development and approval are typically glacially slow. Yet, in one 2021 case, Roche has been approved fast-track approval by the US Food and Drug Administration for an Alzheimer's drug.

#5. L'Oréal SA (EPA: OR)

Largest Stocks Loreal

Stock Exchange: Euronext Paris
Market Cap: 257.0 billion USD
P/E ratio: 35.84

Comparison: Revlon (NYSE: REV), Market Cap: 550 million USD , P/E ratio: 38.87

L'Oréal is a French cosmetics, beauty, and consumer goods Company and the second-largest stock on Euronext Paris. A household name itself, L'Oréal, also owns Maybelline, Lancôme, and Garnier, among a handful of other brands. The cosmetics giant projected a "roaring 20s" in respect to 2021 revenue and has not disappointed YTD. Sales over the entire Group for 2021 are up by more than 18.0%.

Moving forward, the outlook for L'Oréal is potentially just as rosy, with the Group set to benefit from an uptick in demand from China consumers, as well as customers preferring a higher-margin direct-to-consumer (DTC) experience. L'Oréal has noted that DTC will account for 50% of its sales in the future. However, it hasn't set a timeline to achieve this milestone.

“In my 45-year career as an investment counselor, humility did show me the need for worldwide diversification to reduce risk”.

The above quote is from Sir John Templeton, the founder of Templeton Investment (now morphed into Franklin Templeton Investments (NYSE: BEN). The advice to diversify is iterated in some form or another by financial advisors frequently, such as Forbes Advisor.

As such, it is prudent to understand the investment opportunities found across the world’s 60 stock exchanges before acting on the advice.

In today’s article, I would like to introduce you to the Stock Exchange of Hong Kong Stock (HKEX). The HKEX, with a market capitalisation of 6 trillion USD, is Asia’s third-largest stock exchange and the sixth-largest in the world. More than 2,500 companies are listed on the HKEX, half of which are mainland Chinese companies.

Why Do Chinese Companies list the HKEX?

Chinese Companies list on the HKEX as an alternative to mainland exchanges, such as the Shanghai Stock Exchange (SSE), the Shenzhen Stock Exchange (SZSE), and US-based exchanges. With China and US relations strained as of late, The HKEX has reported an increase in enquiries from companies looking for an alternative exchange to primary Chinese and US exchanges.

As a financial hub of Asia, Hong Kong is equipped to help companies that list on the HKEX to access capital outside of mainland China, as Hong Kong is (slightly) regulatory distinct from the mainland.

How do we measure the performance of the HKEX?

The most widely used measurement of the HKEX is the Hang Seng Index (HSI). It is a weighted index that follows the 60 most significant and most liquid company shares on the HKEX. These 60 companies represent a little more than half the market capitalisation of the HKEX (55% to be accurate).

As one of Asia’s financial and technology hubs, it is no surprise that 36% of these companies operate in the financial industry, and another 26% are in information technology. In fact, nine of the top ten weighted shares in the companies operate in either (or both) of these dominant industries.

How well has the HKEX performed?

How well the HKEX has performed all depends on the period you use to evaluate the HKEX and its Hang Seng Index.

HKEX

From the ten-year perspective, it has underperformed, up by only 30.2% from October 2011 to October 2021. Worryingly, the Index has retraced to approximately the 50% level on the Fib over this period. The HSI peaked at over 33,000 points in January 2018 before falling to its current level of ~25,500 points.

The above assertion that the HSI has underperformed is derived from its comparison to the Shenzhen 100 Index (SZSE), up by 110.6%, and the Hang Seng Composite Index (HSCI), up by 69.4%

HKEX YTD

The latest significant downward trend has been caused by tightening regulations that have affected some of the larger Chinese companies listed on the HKEX. As such, from the perspective of the Index YTD, the performance is much poorer, down 6.26% since opening on January 4, 2021.

What are the dominant companies on the HKEX?

As of September 2021, the five largest companies listed on the HKEX are:

1- The financial and technology conglomerate Tencent Holdings (HKG: 0700) is the largest listed company on the HKEX and the first Asian Company to hold a market cap greater than 500 billion USD. Currently, Tencent is valued at 609.4 billion USD, making it the tenth-largest company in the world

2-   Industrial and Commercial Bank of China (HKG: 1398) (ICBC) is the second-largest listed company on the HKEX, with a valuation of 244.0 billion USD. The ICBC was established in 1984 by the CCP and has since grown to become the largest bank in the world by total assets owned (5.1 trillion USD).

3-   Meituan Dianping (HKG: 3690), valued at 201.9 billion USD, is a Chinese-native shopping platform offering similar services to US platforms, Groupon, and Yelp, among a wide variety of other services.

4 & 5- Banking is obviously big business in China. China Merchants Bank and China Construction Bank are the fourth and fifth-largest company’s listed on the HKEX, valued at 198.8 billion USD and 186 billion USD, respectively.

Last Friday (20-08-21), Cristiano Ronaldo announced that he would be leaving Juventus FC (BIT: JUVE) and returning to play for the club where he started his professional career, Manchester United (NYSE: MANU). While I’m not a football fan or follower, I understand that Ronaldo is one of the most recognisable faces on the planet and one of the highest-paid athletes. Hence, this transfer can have huge financial ramifications for Ronaldo and associated clubs, apparel makers, and sponsors.

Coincidently, both Juventus and Manchester United are two of the few football clubs publicly listed and traded on open exchanges. Here we can see the Ronaldo effect in action. In the hours immediately preceding the transfer announcement, MANU shares jumped 8% before subsiding, ending the Friday session up 5.8%.

Meanwhile, JUVE rose 1.2%, presumably on the notion that the club will now be able to acquire younger (and less salary heavy) substitutes to help them to return to championship contention.

In light of this announcement, what better time to highlight sport-themed ETFs. Some of which will no doubt have been impacted by Ronaldo’s presence in the sport and his recent transfer between football behemoths.

Roundhill Pro Sports, Media & Apparel ETF (MVP)

There are surprisingly few ETFs centred on sport-based equities. I assumed the popularity of sports would translate into the popularity of stocks and funds comprised of sporting teams and sporting gear makers. However, there are very few available. One that fits the bill is Roundhill Pro Sports, Media & Apparel ETF.

The selection of equities in the fund will impress football fans more than followers of other sporting codes. The ETF consists of all the major listed Football franchises, including AFC Ajax (AMS: AJAX), AS Roma (BIT: ASR), and Lazio Soc Sportiva (SSL: IM). MANU and JUVE are both included in the fund, each held at a weight above 5% of the total.

It should be noted, the stock prices of many of these Football clubs have performed rather poorly of late, compared to the overall market. One issue these clubs face is scaling further and gaining new fans while already at the pinnacle of the sport. This could be why their respective stock prices are relatively stagnant. Buying top-rated players, such as Ronaldo, could be one way to overcome limitations in reaching new fans. This strategy clearly worked for Juventus but is evidently not a great long term solution. JUVE has since retraced to below the 23.6% FIB level.

Non-Football holdings

For the fans of other sporting codes, the fund includes holdings in the New York Knicks and New York Rangers (NYSE: MSGS), Ferrari (BIT: RACE), and Callaway Golf (NYSE: ELY).

Sports Apparel Companies such as Asics (TYO: 7936), Adidas (ETR: ADS), Nike (NYSE: NKE), Puma (ETR: PUM), and Under Armor (NYSE: UAA) are all included in the ETF and will undoubtedly be some of the better performers. For the past six months, Puma, NKE, and Asics are up 18.4%, 21.7%, and 31.6%, respectively.

Admittedly, MVP ETF isn’t the best performing fund around... yet.

In its short history (released March 2021), the fund is down 1.56%. This value is not hugely disappointing, but nothing to celebrate, considering the broader market (S&P500) is up 12.2% in this timeframe.

Arguably the fund is too young to judge in terms of returns. Interestingly, you will find several SPACs within the fund that has yet to acquire a suitable sporting-based company. Now, I don’t know how common it is for ETFs to be loaded with SPACs. At a glance, I count five SPACs, including the Alex Rodriguez associated, Slam Corp. Perhaps the number of SPACs included in this ETF indicates a lack of viable sports-based equities available. Either way, MVP’s success might be dependent on the future decisions of the SPACs included in the fund.

​#interestingfact: The S&P 500 has not had a 5%+ drawdown from a peak for the past ten months.

This timeframe equates to over 200 sessions. As this hot run continues, more and more analysts come out of the woodwork, predicting that it will shortly come to an end. Perhaps these analysts are correct, and the S&P 500 will hit a wall at 4,500, a value the index crossed for the first-time last Friday. Coincidently, it was also the time the S&P 500 hit its 8th 100-point day for 2021.

As it currently stands, the S&P 500 is at 4,528.79, up another 19 points on Monday trading.

Of course, this consistent rise of the SPX is out of the norm and, therefore, concerns investors. While we cannot control the unforeseeable, we can follow the market announcements coming out of the US (or other appropriate regions) that might keep us abreast of possible changes in market sentiment and direction.

Economic reports

It is an atypically quiet week on the US reports front. It is not until Wednesday that the big boy reports are released.

ADP Employment Change

united-states-adp-employment-change S&P 500

The precursor to the Non-farm Payroll, the ADP Employment Change report, is forecasting 500K jobs added to the US private sector economy in August. Bear in mind that this report's estimates were off by more than 70% (330K vs 695K expected) last month.

If the ADP Employment Change number comes in at 500K, it will signal a big turnaround for the private sector job placement, which has steadily declined since a record 882K jobs in May. This decline could be forgivable if the 20 million jobs lost in April 2020 had since been regained. However, as it stands, the US economy is still down a net 4 million jobs.

EURUSD NFP S&P 500

NFP creeps in on Friday

The consensus is that 750K jobs have been added to the US economy in August, more than 100K less than expected last month. But, as we all know, NFP beat the expectations of July by a significant number and injected a great deal of optimism in the USD (see EURUSD chart).

How did this big NFP beat translate on the S&P 500?

S&P 500 NFP

Click to enlarge

For the past four NFP job reports, we can observe a pattern.

When the NFP disappoints, the S&P 500 has a rough few days. This rough patch is clearly illustrated in May, where the NFP reported a paltry 266K jobs vs an expected 978K. What ensued on the following Monday was three days of selling, resulting in the S&P 500 falling from 4,233 to 4,058. The SPX didn't gain back those losses until the day before the next NFP was released.

When the NFP beats, the S&P 500 falls, but by far less than when it misses. This begs the question: What will it take for the S&P 500 to react positively? I think it is waiting for an NFP to report more than a million jobs, like last reported in August 2020 (July Job numbers). Otherwise, the Russel 2000 Index will be the biggest beneficiary of the positive, but not grand, NFP reports.