The lifting of storm clouds over the UK economy is welcome, but the best growth − and value − prospects for investors still lie elsewhere, writes fund manager Tim Price.
“A pro nation state, pro free market party wins a massive majority against a socialist party ashamed of our nationhood. My faith in the good sense of ordinary British folk is renewed.”
– Tweet by Douglas Carswell (founder of the Centre for Economic Education, co-founder of Vote Leave and previous Conservative MP), 13 December 2019.
“Eurosceptic MP Mark Francois compared the collapse of Labour’s “red wall” of northern seats to the collapse of the Berlin Wall. The BBC’s Andrew Neil asked if he was hallucinating.
“Meanwhile, in the seat of the shadow chancellor John McDonnell, there was a fist-fight — presumably training for the coming Labour leadership election. Emily Thornberry, re-elected MP for South Islington and Finsbury, gave a speech that sounded like a pitch for the top job. Maybe a third consecutive leader from north London is just what the party needs.”
– Henry Mance, ”Collapse comes suddenly as Corbynistas’ credit runs dry”, The Financial Times, 14 December 2019.
“He’s gone! He’s gone from here! The evil is gone!”
– Loomis (Donald Pleasence) in John Carpenter’s 1978 horror film Halloween.
So, in the end, it was less Friday the Thirteenth and altogether more Independence Day. The scale of Boris Johnson’s general election victory can hardly be overstated, though it is certainly more than welcome. The only lingering concern is just how so many of my fellow Britons could conceivably have chosen to vote for a political party led by someone who is, in my opinion, a terrorist-supporting, Marxist anti-Semite. Strange days, indeed.
But this is hardly a time for cavilling. The bottom line is that three years of steadily accumulating ‘dark clouds’ (a mixture that we might call ‘Brexit stasis’ and ‘Corbyn terror’) have finally lifted from the UK market. The immediate post-election bounce by sterling and the FTSE – especially the more domestically focused FTSE 250 index – was, therefore, hardly a surprise.
Now, finally, we can all try to move on.
As UK-based investors, our firm is often asked why we don’t have greater exposure to the UK stock market within our portfolios. Our answer has been – for the last four years at least – that while the FTSE 100 and FTSE 250 indices trade at no great premium versus other international markets (and notably the US), we have simply been able to find far more attractive valuations – not to say stronger revenue growth – in markets like Japan and Vietnam, especially on a bottom-up, company-specific basis. While many asset managers are continually guilty of home-country bias, we have seen no compelling reasons to join them.
For the first time in four years or so, however, UK companies are starting to appear on our value screens, which take account both of valuation metrics and underlying corporate operations. In other words, we endeavour never to overpay for anything we buy, relative to its inherent value, but we also seek companies with solid and ideally improving trends in cash-flow generation. Even before the election, we had started to nibble at the UK market and over the last two months had raised our allocation to UK-listed firms by around 5% or so. Now we can really let rip.
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The focus for international investors can also switch to the real ‘elephant in the room’, namely the rapidly deteriorating health of the eurozone financial system. As the financial analyst and market historian Russell Napier says:
“At some stage the markets will have to deal with the inconvenient truth that the destruction of value for investors in Europe, particularly for the owners of financial institutions, is due to the creation of the euro. Investors who are prepared to accept that analysis, seen by many as plain impoliteness, realise that not only is the current collapse in European bank shares, down almost 30% from their late 2018 peak, not reflective of a cyclical slowdown but is the final structural crushing of a financial sector by a monetary system which has failed a generation of savers – but more importantly a generation of citizens. If this is structural, and perhaps 30 years of zero capital returns suggest it is something more than cyclical, then the structurally enforced pain will continue unless there is some sudden reform to that failing monetary system.
“The crushing of a financial system in an economy as big as Europe has implications far beyond a decline in the price of bank equity. It augurs an economic collapse in Europe, a major decline in global growth and a socio-political earthquake in Europe. Most investors are not even prepared to discuss the possibility that European equity prices are being crushed by the failed monetary experiment to create a single currency. Treating the current decline as merely a cyclical phenomenon avoids difficult conversations with one’s fellow Europeans about the failure of a grand European experiment for integration and the dire socio-political implications of its failure.”
Why have these problems been entirely unaddressed during the last three wasted years of Brexit stasis? You’ll have to ask those members of a biased, europhile media in the UK who also saw all their delusional, metropolitan elitist ideals collapse, in flames, on the night of 12 December 2019. But not all the financial world’s challenges originate in a failing eurozone.
Just before Christmas, the Financial Times reported that the Federal Reserve was considering the introducing of a rule that would let inflation run above its 2% target, which would be one of the most significant changes to the Fed’s inflation-fighting mandate in its history.
This correspondent has long believed that the global debt predicament (too much debt in the system, and not enough economic growth to keep that debt serviced, by anything except continually devalued money) would ultimately result in a potentially messy outbreak of inflation. We concede that a period of deflation could plausibly precede it, if not accelerate its arrival. Nevertheless, as we have stated before, we try not to let subjective ‘macro’ prognostications drive our investment process. Every equity purchase we make is predicated on company valuations that are already attractive, and where our sole forecast is that next year’s earnings will at least match those of the current year, if not actually surpass them. This presumed inflationary backdrop notwithstanding, we are starting to find new opportunities in the commodities space − for example, the Swedish mining and smelting company, Boliden AB (STO:BOL). Whatever your concerns about the volatility of commodities prices, Boliden has shown an ability to grow its book value even during the most challenging of operational environments. It managed to compound its book value by an annualised 11.4% during the five-year commodity bear market that we believe ended at the start of 2016.
If the Fed is going to “temporarily” abandon its strict inflation mandate (and the likes of Christine Lagarde at the European Central Bank are going to insist on imposing her ‘mission creep’ of economically unproductive, pointless greenwash, to be paid for by purposely devaluing the currency), then the outlook for commodities prices in general, and precious metals prices in particular, may be even more constructive than we have been led to conclude. The monetary metals, gold and silver, have featured in our client portfolios for as long as I can remember. Why? Because the behaviour of central bankers across the world gives us every reason to conclude that they simply will not stop with monetary stimulus until the inflationary genie is out of the bottle. And once out of the bottle, he may prove stubbornly resistant to going back inside. To cite George Bernard Shaw:
“You have to choose between trusting to the natural stability of gold and the natural stability of the honesty and intelligence of the members of the government. And, with due respect to these gentlemen, I advise you, as long as the capitalist system lasts, to vote for gold.”
So, my investment recommendations for 2020 are not vastly changed from those of previous years. On the grounds of both valuation and growth, my favourite markets are Japan and Vietnam (the latter of which can be accessed through the London-listed investment trusts the Vietnam Opportunities Fund (LON:VOF) and Vietnam Enterprise Investments Limited (LON:VEIL)). Vietnam is a standout opportunity because its economy is rapidly industrialising; its people are well educated, hard-working and eager to advance themselves; its companies are growing profits quickly but are very reasonably priced; the economy is a magnet for foreign direct investment across south-east Asia; and Vietnam itself is not even a permissible asset for most asset managers, given its designation as a frontier economy as opposed to an emerging or developed one. That will change over time, as Vietnam gets ‘promoted’ into more mature indices of economic development. Meanwhile, private investors who aren’t constrained by benchmark or indexation limits should strike while the iron is hot.
Also, the slow advance in the popularity of modern monetary theory towards the corridors of the central banks makes the likes of gold and silver must-own assets, in my opinion – if only for portfolio-protection purposes.
Finally, my best wishes to all readers for a happy, peaceful and prosperous New Year!