I am writing this in New York where president Trump’s surprising sabre rattling is proving popular, although the face-off between the US and North Korea is terrifying.
I’ve been surprised by the support for the new Trump regime both on Wall Street and in industry. They like his accessibility and raw humanity. He attacks problems with a fresh approach, albeit there’s a palpable fear of his unpredictability – you never know quite what policy he will adopt next.
However if you are a car maker, textile manufacturer or banker seeking an audience, he won’t make you wait three months but will see you for an hour tomorrow, accompanied by an expert adviser.
Trump is seen as having a commercial understanding of the issues and an urgent wish to do something effective. Despite all the political gaffes and outrageous policies, Americans seem surprisingly relaxed with the situation, helping to push the US stock market onwards in its eight year bull market.
No golden age
Back in Blighty we have very different issues. On the surface we look to be in a golden period of low inflation, low interest rates, increasing exports with strong global trade helped by China's growth, and a FTSE All Share index that has compounded at 6.2% a year since 1985.
Looking forward, however, the picture is very unsettled. We are more certain to see economic change in the three years leading up to Brexit than we’ve seen in the last 30 with no more quantitative easing or interest rate cuts from the Bank of England to help us.
Irrespective of the recent improving growth rates across Europe, the EU is bust under a mountain of debt – the project is not working and even looks likely to be reconstituted with Britain’s exit possibly a catalyst for change. There is further real uncertainty cast by the unpredictable September German and this Sunday’s French election.
If the anti-business Le Pen or Melenchon are eventually elected at the second stage in May, it would throw European markets into turmoil. Macron should win, though, in which case there’ll be a powerful relief rally as investors snap up euro stocks fast.
In the UK we have no idea of what lies ahead with just seven weeks from our own election. We appear to start from a position of hard Brexit and will negotiate down from there, whilst both sides are mindful that 43% of UK exports go to the EU, whilst 8% of theirs comes to UK – who starts from the stronger position in any negotiation from that standpoint?
In fact, 53% of all UK imports come from the EU – 20% of German cars, actually made in Germany, come to the UK, making us their single biggest world market in volume terms.
We have a long period of uncertainty ahead, but will 10,000 City workers really relocate? Nobody knows but there is a huge reluctance to leave; people like London with its established financial infrastructure, education and entertainment, though sadly there seems a real expectation that banks and financial firms will lose the passport which lets them trade freely across Europe.
With a watchful eye on all this turmoil and the certain significant changes ahead, I continue to invest cautiously.
My AIM stock portfolio:
Arria (NLG) – sold at my declared 20% stop loss.
BCA Marketplace (BCA) – sold at 1% loss.
Bioventix (BVXP) – a biotech with a real P/E and yield. Up 46%. Buy.
Burford Capital (BURF) – legal financing fund. Up 56%. Buy.
Cerillion (CER) – billing software provider up 5%. Hold.
Conviviality (CVRC) – wholesale drinks retailer up 30%. Buy.
ECO Animal Health (EAH) – animal medicines. Sold after a 3% loss.
EKF Diagnostics (EKF) – healthcare. Up 43%. Buy.
IQE (IQE) – semiconductor manufacturer. Up 112%. Hold.
Journey Group (JNYJ) – airline caterer taken over.
Lok’nStore Group (LOK) – storage company. Up 22%. Hold.
Morses Club (MCLM) – loan agency. Sold after 8% gain.
Serica Energy (SQZ) – North Sea oil producer. Up 113%.
Swallowfield (SWL) – beauty products maker. Up 33%. Buy.
Watkin Jones (WJG) – student property developer. Up 41%. Buy.
XLMedia (XLM) – internet marketer up 25%. Buy.
With identical initial investment in each, the total return is 34% over seven months including the Arria stop-loss sale.
(In a previous piece I had suggested Atlas Mara (ATMA), which proved a dog. I was correctly criticised for ‘conveniently’ not mentioning again, which was unintentional and I apologise, but I had sold at my constantly mentioned 20% stop-loss and hoped others might have done the same.)
I have replaced the five sales with the following recent purchases:
Amerisur Resources (AMER) – oil exploration and production in Colombia and Paraguay. I’ve held and sold this stock before but have just bought back since it looks ludicrously cheap. Now producing 5,000 barrels of oil per day, 7,000 by year end and 20,000 by 2019, with an operating cost reducing to $15 per barrel and sitting on $40 million cash. Revenue for 2018 forecast at $136 million for $50 million pre-tax profit and P/E () of 9.
Bacanora Minerals (BCN) – a lithium carbonate miner in Mexico. Knowing the competent board and good quality institutional investors with 40%, I’ve been watching. I bought the stock following last week’s announcement of a partnership with Japan’s Hanwa Co, one of the largest battery chemicals traders in Asia, taking 100% of current production, whilst buying 10% of the equity. Not only does this give BCN an assured revenue stream to build on, but also validates their battery grade lithium.
Hutchison China Meditech (HCM) – an innovative Hong Kong-based biopharmaceutical company aiming to be a global leader in targeted therapies and oncology. Normally this would be a bit blue-sky for me but I was attracted by the prescription drug service and strong growing demand for their coronary drug, such that revenues increased to £148 million which could show a solid profit were it not for spending on new drug development R&D, although a £50 million contribution from two powerful Chinese joint ventures mitigate this. Five brokers follow the stock and all mark it a 'strong buy'.
M P Evans (MPE) – a palm oil producer in Indonesia which sold some peripheral interests last year and could dispose of property assets in Malaysia too if necessary. That leaves it focused entirely on palm production where they are expanding their plantation hectarage significantly to deliver strong crop growth. Now with £8 million cash, earnings per share are projected to grow 75% in 2017 for a low PEG (price-earnings-growth ratio) of 0.2. A bid last year by Malaysian palm oil company KLK at 740p was rejected strongly by the board. If they bid again, they’ll certainly need to make a £10/11 offer now.
Sirius Minerals (SXX) – developer of the world's largest quality deposit of polyhalite in north Yorkshire. The mineral is a rich source of potassium and is a vital ingredient in fertiliser. Possibly the most enigmatic quoted company in the UK, with a market value of over £1 billion, with no revenues yet in sight, cash of £261 million, burning at £23 million in 2016 reducing to £12 million losses in 2017/18. It might seem hard to make a case to buy, but actively traded daily and considered by two brokers a ‘strong buy’, target price 60p – equivalent to a £2.5 billion valuation.
Having just moved from AIM to the main market, Sirius is sadly now no use for IHT planning. Perhaps there’s some comfort in knowing that construction is on track with the mine projected to open in 2021, then potentially a massive operation; the shares should rise steadily over the next four years. Lock them away and watch with interest.
I’ve bought these five stocks, but do your own research and stay alert for the essential 20% stop-loss protection.
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.