Mellon on the Markets: British shares make sense

Inside the mind of the Master Investor: Influential British investor Jim Mellon reveals his latest thoughts on the markets.

I’ve just been in the US, speaking at the spectacular Mauldin Economics conference where I had the pleasure of listening to George W Bush in conversation with Kyle Bass. The ex-President could give British politicians lessons in self-deprecation, charm, decisiveness and compromise. Lessons much needed.

But, despite all the noise, angst and bitterness, the UK economy, flexible as it is, continues to defy the predictions of the pre-referendum worthies who suggested we would all be ferreting around in rubbish bins by now. Three years of continued economic growth, subdued, but better than our supposedly blessed European major neighbours.

Brexit really doesn’t matter much in my view – though it is an awful distraction – and the longer it takes, probably the better as a hard Brexit is probably now well anticipated and prepared for by what is still a very good civil service. The European Parliament will be an interesting place though, with a band of committed dissidents from the UK, Italy, France and Hungary, amongst others livening what is otherwise the dullest parliament in the world.

Jeremy Corbyn does matter, however, as Victor Hill has eloquently written in these pages. But I am guessing that the chances of him getting in remain very low. And that’s why I am a big buyer of sterling against the dollar (overvalued) and the euro (fragile, with the fracture index rising).

There isn’t much value in the world today, but British shares with dividend yields of over 4% make eminent sense, especially with the international spread of business that many UK companies have.

British shares make “eminent sense” at these prices

When gilts and other major economy bonds yield so little, why wouldn’t you buy the shares of genuine, blue chip and well-run companies like BP (LON:BP.), Shell (LON:RDSA), Lloyds (LON:LLOY), HSBC (LON:HSBA), GSK (LON:GSK), BAE Systems (LON:BA.), and even, despite or perhaps because of, the recent dividend cut, Vodafone (LON:VOD)?

I came into some money recently, and I am doing just that. Lock away and forget. There are funds that can do that for you, at modest cost, good examples being iShares, Fidelity Funds and Netwealth and if you don’t want to do the work of selecting individual shares yourself, I would go that route.

In contrast to the UK market, I think the US market is distinctly overvalued, and the rush to the exits by early backers of Pinterest (NYSE:PINS), Uber (NYSE:UBER), Lyft (NASDAQ:LYFT) – and lining up on the runway, Airbnb and We (the owner of We Work) – is illustrative that the smart money believes that now is the time to cash in.


They might just be a little late though. Uber and Lyft are down from their offering prices, and the usual suspects who backed these companies are locked in typically for six months post IPO. Tesla (NASDAQ:TSLA) is now showing followers of cults that these are not a one-way street. Even long-term bulls are now turning their backs on the electric car maker. In my opinion (and Tesla was a no. 1 short pick of mine at Master Investor) the best that can happen to this company is that it gets acquired. The cars might be nice, but so were De Loreans!

The fact is, every car manufacturer of note will have electric cars soon, and most know how to produce and deliver automobiles better than Tesla does. Tesla is overpriced, over indebted, and heading for the rocks. I would stay short, at least till $100 per share, at which point Apple (NASDAQ:AAPL) might buy them for loose change.

UK property

Regular readers will also know that I have been bearish on UK property for some time, with a few regional exceptions. London has been battered particularly hard, with prices in prime areas back to their pre-2011 levels. With many tower blocks on the market or about to come on the market, there is no screaming reason to get involved in the residential property market (offices remain strong).

But, if you were thinking of buying somewhere in London, what with the pound down and prices at multi-year lows, putting a few low-ball offers in might not be such a bad idea, especially if the property is for less than £2 million, where the Osborne stamp duties become punitive. Those stamp duty rises have proved, as do all usurious tax rises, to be counter-productive and have really dampened activity. Poor estate agents! Meantime, we are continuing to look at UK REITS (real estate investment trusts) as a source of regular dividends, with many selling at significant discounts to NAV.

At time of writing, I am in my house in Spain, where the weather has been uncharacteristically chilly for this time of the year. In fact, we have a fire going, which I think for late May is a first. But in an hour or so, it’s back to work for me. I’m off to Oxford University for the whole of the remainder of the week, to be educated by an array of professors in the wonders of molecular biology, along with 12 others, mostly investors in Juvenescence, our longevity company.

We are dining in hall, and having drinks with the Provost, as well as revisiting the pub where I spent many a happy hour in my long-lost youth. The one thing we are not doing is staying in the college; my taste for student accommodation was lost a long time ago, and I can’t see it returning any time soon. We have one night off, when some of ours are heading to London’s O2 for a concert by Mark Knopfler, of Dire Straits fame. Remember the “money for nothing” song?

Well, as all readers of Master Investor know, there is sadly no such monetary manna available to those who aren’t curious, adaptable and apply themselves to the serious business of investing.

Keep some gold, stay cautious, but consider nibbling at those British stocks!

Happy Hunting!

Jim Mellon