Things I Think You Ought to Know

Asian Stars

Malaysia’s Hap Seng Consolidated Berhad (KLSE:HAPSENG), a property, plantations and buildings material conglomerate, has managed to quadruple its share price in the last three years and is up 55 percent over the last twelve months – despite a modest decline in the Kuala Lumpur index[i]. It has managed to double after-tax profits despite falling oil prices and the slowing Malaysian property market. Clearly, vertical integration has paid off: its fertiliser business sells on to its palm oil business. Also, an aggressive programme of acquisitions has borne fruit. Hap Seng even runs a network of Mercedes Benz dealerships across Malaysia.

With a price-earnings ratio of about 18, Hap Seng still does not look overpriced by European and American standards. But my real point in telling you this is the following. It is still possible for clever stock-pickers to make good money in emerging markets if they are prepared to do their homework. In the USA, and to a lesser extent the UK, every quoted company is constantly scrutinised by brokers and fund managers, whereas in Asian markets a lot of stocks still fly, so to speak, below the radar.

Personally, I don’t like conglomerates – and they proliferate in emerging markets like Turkey and Malaysia. It is so difficult to value them. And there is an awful lot of inter-company trade going on at artificial prices. And I’m not entirely comfortable with the liquidity of the Kuala Lumpur market – 157 quoted stocks change hands through a small, tightly-knit coterie of brokers. But such stocks still have the capacity to make money for eagle-eyed investors.

Immigrants on Immigrants

I once went to Trumper’s of Mayfair to have my hair cut. But, life and fate being what it is, I no longer have hair. These days I regularly get my number zero shear at a Kurdish barber shop in Gravesend (the Riverside Heritage Town extolled by Visit Kent: JWM Turner once praised the quality of the oysters there). You get all of Trumper’s touches – singed ears, trimmed eyebrows and all the rest for men who are follicly challenged. But in Gravesend it costs about six quid.

I couldn’t help enquiring of Adnan (let that be his name) where he stood on the referendum. He replied: I’m out, mate, innit? Too many of them Eastern Europeans coming in taking our jobs…

The Markets Don’t Look Good, Anyway

We already knew that growth in the US in Q1 was down to just 0.1 percent but Donald Trump took to twitter last Friday to lambast the Obama administration for the latest jobs figures in America. Even the oracular Janet Yellen has described them as disappointing – which is about as apocalyptic as central bankers get. But at least the figure (38,000 more on the non-farm payroll) was positive. Though this figure will make it harder for Yellen & Co to raise rates, as planned.

This side of the pond, the research group Markit revised the Q2 growth forecast downwards to just 0.2 percent. This follows 0.4 percent for Q1 2016 and 0.6 percent for Q4 2015. The trend is clear. Markit also opined that George Osborne’s Living Wage is already proving to be a brake on new job creation.

So the UK referendum of 23 June, whatever its outcome, takes place against the backdrop of slowing growth and job creation on both sides of the Atlantic.

Currencies

I don’t entirely agree with Jim Mellon that the markets will shrug off a Brexit – Keep Calm and Carry On. I hope that I am honest enough to admit that there will be two years of serious turbulence in the currency markets. Only towards the end of this parliament, when the final shape of the New Deal comes into focus, will we return to any kind of “normality”.

If you have a significant part of your portfolio in cash – and a lot of people who are nervous about equity and bond markets do – then you should diversify. At least you should have some of your cash in Euros (negative interest rates, I know) and US Dollars. I am also taking a look at the Australian Dollar, which has fallen against the Pound of late – but which could rebound. The ten-year chart implies that the GBP/AUD rate is regressing to a long-term mean – it’s currently back to where it was in 2009. Anyway, if you have a stock of Aussie Dollars you can always spend them in Brisbane or Sydney.

From the Garden of England

Neil MacGregor, the feted ex-Director of the British Museum, who is now assisting the Germans in cultural matters, recently told an audience of German academics: The English are obsessed with three things – monarchy, dogs and gardens. I’m not quite sure about the first (don’t get me wrong, I adore HMTQ) but as for the last two – right on. And we have some of the finest gardens in the world down here in the Garden of England. Sissinghurst, Hever, Knowle… Not to mention the amazing private gardens one can visit across the county on Garden Open Days. Dogs are invariably welcome.

It is curious then that I can’t find a decent garden centre to invest in. They all seem to be in the hands of the families who own them or the wicked private equity firms who have swallowed them. One of the largest, Wyevale Garden Centres, with 153 outlets across England and Wales was absorbed into the bosom of Terra Firma Capital Partners in 2006.

Homebase and B&Q both have garden centre type offers as an extension of their DIY offer.

In January this year Homebase was sold by Home Retail Group (LON:HOME) to Australian retail giant Wesfarmers for £340 million. Wesfarmers (ASX:WES) already owns Bunnings – one of Australia’s largest suppliers of outdoor living and DIY products. The 265 UK Homebase sites are to be rebranded under the Bunnings banner over the next three to five years. Wesfarmers will spend a further £500m on upgrading the UK stores. Wesfarmers, which owns one of Australia’s biggest supermarket chains, Coles, thinks that the UK’s home improvement and garden market is worth £38 billion.

B&Q, owned by Kingfisher (LON:KGF), is still the market leader.

There’s no money in dogs, though. In my personal experience they are just a more than averagely smelly cost centre. But indispensable.

And Don’t Forget Kentish Wine

Oh, sweet climate change! Advance as quickly as you can…

Kent has exactly the same calciferous geological substructure as the Champagne region of France. It is still (at present) a trifle colder. But recently Kentish sparkling wines are giving the burghers of Reims cause for concern – they are surprisingly excellent. No wonder the great house of Taittinger has been buying up land near Ashford.

In April, Kent winemaker Chapel Down announced that wine sales were up by 27 percent. Chapel Down also makes beer and cider under its Curious Drinks label – and these were up by 50 percent. The company, which is still losing money, invested £1.3 million in 90 acres of new vineyards last year. Chapel Down, which currently trades on ISDX, accounts for about 193 acres of vines out of the total in England and Wales of an estimated 4,500.

Can Chapel Down’s debut on the AIM be far away? I’ll drink to that.

[i] See Bloomberg, 02 June 2016, available at: http://www.bloomberg.com/news/articles/2016-06-02/top-asian-stock-that-s-returned-400-is-happy-to-stay-unknown