Britain starts 2017 as the strongest of the world’s advanced economies outpacing Europe, US and Japan. Recruitment is strong across all major sectors and employment is at an eleven-year high. Since the Brexit vote in June the FTSE 100 has advanced 13% to an all-time high while the FTSE AIM index has soared 18%.
Britain is firing on all cylinders, confidence is the highest it’s been for years, which must mean the Brexiteers were right: the Remainers had nothing to fear after all?
Don’t be misled. We are benefiting from a weak pound, down 17% against the dollar and 10% versus the euro since 24 June, as a result of the fears Brexit will have on the UK economy, whilst concurrently we still enjoy free trade with the EU and the rest of the world.
The realisation of this false premise could hit when Article 50 is triggered in March, inflation and interest rates trend upwards and the UK starts protracted negotiations for new worldwide trade agreements for a standalone Britain.
The obvious spoilers for markets as we move into a period of unusual instability are:
- The French election in the spring: could the hard right Marine Le Pen win? Could France leave the euro and resurrect the franc?
- And looking ahead to Germany’s autumn elections: could Angela Merkel lose?
- What happens to Nato and the UN if Trump’s US will no longer police the world funded by its taxpayers.
- Russian 'misinformation' – or is it?
- China’s debt problems bite, exacerbated by Trump’s import tariffs designed to support US jobs.
- US and Russia resume a nuclear arms race.
- The US/China stand-off in the South China Sea escalates.
- The proliferation of malware ends the open internet. Our new National Cyber Security Centre plans a UK cyber wall; other nations will follow.
- Cars, trains and even planes succumb to cyber attacks.
- Other country risks: North Korea missiles, nuclear conflict between Iran and Saudi Arabia, Russia newly confident and territorially acquisitive.
- Armies of migrants sweeping through a borderless Europe, changing populations and living standards.
- Terrorism escalates: a 'dirty' or chemical bomb in a major Western city.
Stocks I'm buying
Back to a world without black or 'grey' swans. This year sterling will stay weak, dollar-priced oil and resources will trend commensurately higher, inflation will exceed wage rises and interest rates will rise hurting all excessive borrowers.
Nothing new there so the markets will take it in their stride. Whilst the music plays, dance on and seek more bargains to buy.
In my piece on 21 December, I said that my ‘disruptive’ picks for the year were Purplebricks and RedT; both have risen since, but are still well worth buying.
Purplebricks (PURP) has the advantage of being the first online estate agency, selling and letting property using local property experts to advise clients. I’ve personally heard good reports from people I know, where both a sale and a let were executed efficiently at a fraction of the charges from a traditional high street agency.
With £29 million net cash, a small UK profit of £300,000 in the half-year to October projected to rise to £8 million on revenue of £69 million by 2017/18, it has successfully launched in Australia. A bunch of brokers watch the stock diligently with three rating it a ‘strong buy’, two a ‘strong sell’ and several more sitting on the fence. Take your choice – I’m a believer and bought stock in November.
RedT Energy (RED), develops and supplies commercial power storage systems, using vanadium redox flow technology. An economical efficient battery system to store renewable energy from wind and solar, often produced when it’s not required, is a missing link in the whole renewable energy sector. RedT provide commercial scale flow batteries suitable for both short and long term, predicted to last 20 years, invented by NASA to hold power for very long periods. No sign of early profit, now predicted in 2019, but power storage is the holy grail and RedT would seem to be the leader.
I bought Avingtrans (AVG), again, having held it before and always kept under watch. The company has changed a lot since netting £52 million from the sale of its aerospace division last May to focus on medical components, a business that has picked up significantly, and energy services, where it won a large Sellafield nuclear contract and could be awarded further work for another 10 years.
Full of cash, they tried to buy back £28 million shares at £2, but such was the faith of shareholders in the management that only 35%, or £19 million, of issued shares were tendered. With a market value of £37 million and cash of £28 million, you’re getting a very successful medical and energy services business for just £9 million. The firm considers itself to be turnaround specialist in the style of Melrose (MRO) and with the management’s big aspirations the company looks wrongly priced by the market.
David Kempton is non-executive chairman of Hawksmoor Investment Management. He is an experienced investor, proprietor of Kempton Holdings and a non-executive director of a number of quoted and private companies. He may have an interest in any of the investments which he writes about.