Pluck up your courage

It’s an ex­cit­ing time for fear­less bar­gain-hun­ters,

Financial Mail - Investors Monthly - - Front Page - writes Stafford Thomas

For­tune favours the bold. This old id­iom could just ap­ply to in­vestors bold enough to ven­ture into the UK or Euro­pean eq­uity mar­kets.

Would-be in­vestors must con­front huge uncertainty cre­ated by Brexit, the Bri­tish elec­torate’s shock vote to exit the Euro­pean Union (EU). Prime min­is­ter David Cameron’s res­ig­na­tion af­ter­wards added to the uncertainty.

“The UK was left rud­der­less,” says Philip Saun­ders, co-head of In­vestec As­set Man­age­ment’s Lon­don-based multi-as­set team.

For­tu­nately, the prob­lem was re­solved swiftly with Theresa May’s ap­point­ment as prime min­is­ter on July 13.

May’s task will be to push the EU’s Ar­ti­cle 50 but­ton, set­ting in mo­tion the UK’s two-year-long exit of the EU. May stated af­ter her ap­point­ment: “There must be no at­tempts to re­main inside the EU, no at­tempts to re­join it through the back door and no sec­ond ref­er­en­dum.”

Un­til Ar­ti­cle 50 is in­voked, the Euro­pean Com­mis­sion has made it clear ne­go­ti­a­tions on cru­cial is­sues such as trade will not be­gin. And the com­mis­sion is ex­pected to play hard ball.

There are cer­tainly neg­a­tive im­pli­ca­tions for UK eco­nomic growth. Weak­en­ing consumer de­mand, cor­po­rate re­luc­tance to in­vest and hire staff and a sharp fall in for­eign di­rect in­vest­ment are loom­ing. Hopes that UK GDP would grow by more than 2% in 2016 have been dashed. The coun­try now faces re­ces­sion.

Es­ti­mates of how se­ri­ous it will be vary. The most neg­a­tive out­look comes from the UK trea­sury, which pre­dicts a 3.6% con­trac­tion of GDP over the next two years and 500,000 job losses.

Other EU members will also suf­fer, but to a lesser ex­tent. The Euro­pean Cen­tral Bank pre­dicts EU an­nual GDP growth will fall from about 1.6% to 1.1%-1.3% over the next three years.

It adds up to what mar­kets hate: uncertainty. “We face trauma in eq­uity mar­kets,” says Saun­ders. “But the storm will pass and mar­kets will sta­bilise.”

For bold in­vestors it sig­nals the time to hunt for bar­gains. “There will be won­der­ful op­por­tu­ni­ties for long-term in­vestors,” says Ricco Friedrich of Denker Cap­i­tal.

A start­ing point and the least risky is com­pa­nies with low depen­dency on the UK econ­omy that will ben­e­fit from a weaker pound. “A col­lapse of ster­ling is a one-way bet,” says Dino Fuschillo, se­nior Euro­pean eq­uity fund man­ager at San­lam Four.

The pound has al­ready taken a ham­mer­ing, at its worst fall­ing 14% to a 31-year low of US$1.27/£ since the ref­er­en­dum re­sult on June 24. The euro has weak­ened by 3% against the dol­lar.

“It is not beyond the realms of pos­si­bil­ity that the pound will fall to par­ity against the dol­lar and stay there,” says Fuschillo.

A clear ben­e­fi­ciary of a weak pound is Bri­tish Amer­i­can To­bacco (BAT), the world’s sec­ond-largest to­bacco group. BAT bills it­self as be­ing the “most in­ter­na­tional” to­bacco com­pany in the world. With op­er­a­tions in 50 coun­tries and prod­uct sales in 180 mar­kets, the £13bn an­nual rev­enue group’s claim is well founded. In 2015 BAT de­rived 23% of its rev­enue in the Amer­i­cas, 24% in Western Europe, 27% in the Mid­dle East

A start­ing point and the least risky is com­pa­nies with low depen­dency on the UK econ­omy that will ben­e­fit from a weaker pound

Bri­tish con­sumers are on the hunt for bar­gains. It’s a mes­sage dis­count re­tailer Stein­hoff’s CE Markus Jooste has heard

and Africa and 26% in the Asia-Pa­cific region.

An­other heavy­weight in the “sin prod­uct” game is liquor gi­ant Di­a­geo. Of its £16bn rev­enue in 2015, 43% came from the Amer­i­cas, 24% from Europe, Rus­sia and Tur­key, 20% from Asia-Pa­cific and 13% from Africa.

Highly prof­itable, Di­a­geo boasts a 32% re­turn on eq­uity. While earn­ings have been flat over the past three years the group has con­tin­ued to up div­i­dends at a steady 8%/year. Cur­rent div­i­dend yield is 2.8%.

Also stand­ing out is John­son Matthey, a FT100 group with di­verse man­u­fac­tur­ing ac­tiv­i­ties in­clud­ing emis­sion con­trol tech­nolo­gies, spe­cial­ity chem­i­cals, phar­ma­ceu­ti­cal ingredients and med­i­cal de­vice com­po­nents.

In its year to March 2016 John­son Matthey gen­er­ated only 10% of its £10.7bn rev­enue in the UK, the bal­ance com­ing from North Amer­ica (34%), Europe (28%), Asia (19%) and other re­gions (9%). Over the past five years the group has grown EPS at an an­nual av­er­age of 13.1% and div­i­dends at 8.2%.

In a sim­i­lar space to John­son Matthey is FT250 mid-cap spe­cial­ity chem­i­cals group Croda In­ter­na­tional, which in 2015 de­rived 60% of its £1.1bn rev­enue out­side Europe and the UK. Over the past five years Croda has grown EPS at an an­nual av­er­age of 7.3% and div­i­dends at 14.5%.

A com­pany now very fa­mil­iar to SA in­vestors, An­heuser-Busch InBev (AB InBev) de­serves a place on a po­ten­tial buy list. The world’s largest brewer de­rived a mere 6.4% of its profit in Europe in­clud­ing the UK in 2015.

AB InBev has set a crack­ing growth pace over the past five years, lift­ing EPS by 14.7%/year and div­i­dends by 29.6%/year.

With SABMiller about to come into AB InBev’s fold, the share is a firm favourite with an­a­lysts. Of 26 polled by Thom­son Reuters, 20 ex­pect it to out­per­form the mar­ket.

The likes of AB InBev, BAT and Di­a­geo are de­fen­sive, sleep-easy shares and their prices post-Brexit have al­ready moved up strongly. The re­ally big win­ners could be lurk­ing in sec­tors that have fallen heav­ily out of favour with the mar­ket.

Among the hard­est hit has been UK com­mer­cial prop­erty, as in­vestors run scared of the po­ten­tial dam­age to of­fice and re­tail prop­erty oc­cu­pancy rates, rentals and val­ues.

The big­gest fear con­cerns of­fice space in an over­sup­plied Lon­don. Many for­eign banks may shift thou­sands of jobs from Lon­don to cen­tres such as Frank­furt, Paris and Dublin.

The out­come of ne­go­ti­a­tions be­tween the UK and EU on “pass­port­ing” will be cru­cial. This en­ables non-EU fi­nan­cial ser­vices firms to be based in Lon­don and of­fer ser­vices in the EU.

Amid in­vestor panic, trade in more than half of the funds in the UK’s £25bn UK’s prop­erty fund sec­tor has been sus­pended. In a scram­ble for liq­uid­ity, fire sales of prop­erty are a real risk.

All panic sell­ing plays it­self out. Euro­pean in­surer Al­lianz’s global strate­gist Neil Dwane puts a strong case for­ward for longer-term con­fi­dence in UK prop­erty. In a re­cent opin­ion piece, he noted: “There is an in­tense al­lure of UK and Lon­don as­sets to over­seas in­vestors who value le­gal cer­tainty and ex­cep­tional prop­erty rights as much as they value re­turns.”

Sell­ing of most UK listed prop­erty shares has left them trad­ing be­low net as­set value (NAV). Among them is Cap­i­tal & Coun­ties (Capco), now at a 14% dis­count to NAV. Capco, which at its worst post-Brexit level was down 26%, ap­pears to be get­ting un­due pun­ish­ment.

Its big­gest as­set, at 54% of NAV, is Lon­don’s Covent Gar­den. By far the bulk of vis­i­tors who stream into this shopping precinct are for­eign tourists — more than 40m an­nu­ally. It would ap­pear to make it im­mune to the UK’s woes. In­deed, a weak pound is likely to boost tourism.

Capco’s other two as­sets are also out of the line of fire of prob­lems in the Lon­don of­fice mar­ket. At 38% of NAV, the largest is Earls Court, now be­ing re­de­vel­oped as a com­plex of 1,500 af­ford­able homes.

In­vestors in­clined to take a con­trar­ian view should also con­sider UK house builders, a sec­tor hit even harder than prop­erty. The largest, Tay­lor Wimpy, has seen its share price slide 27% post-Brexit.

May has made it clear house-build­ing will be a pol­icy pri­or­ity. The Bank of Eng­land has also eased re­serve re­quire­ments, a move in­creas­ing their lend­ing ca­pac­ity by up to £150bn.

It makes a share like Tay­lor Wimpy an in­ter­est­ing bet. Most an­a­lysts agree. Of 14 polled by Thom­son Reuters, eight rate it a buy and five a hold.

There could be in­ter­est­ing bets lurk­ing in the UK re­tail sec­tor too. But they are un­likely to be among food re­tail­ers, which are still los­ing ground to Ger­man dis­coun­ters Aldi and Lidl.

Bri­tish con­sumers are on the hunt for bar­gains. It’s a mes­sage dis­count re­tailer Stein­hoff’s CE Markus Jooste has heard loud and clear. Far from run­ning scared of UK re­tail, which al­ready ac­counts for 11% (£820m) of group re­tail rev­enue, Stein­hoff is plung­ing in with am­bi­tious plans to grow its fur­ni­ture brands Har­veys and Ben­sons for Beds. It is also tack­ling the cloth­ing sec­tor through Pep&Co, which has opened over 50 stores since launch­ing July 2015.

Clearly con­fi­dent in its proven abil­ity to grow in hard-pressed consumer mar­kets, Stein­hoff has just ac­quired Europe’s big­gest sin­gle price re­tailer, Pound­land. The £597m cash deal brings with it 850 stores in the UK, 51 in Ire­land and an­nual rev­enue of £1.33bn. Of 11 an­a­lysts polled, Stein­hoff is rated a buy by eight, six of whom ex­pect it to out­per­form the mar­ket.

How­ever, the dust is far from set­tled on Brexit. That will take at least an­other two years. It makes for volatile mar­kets, cre­at­ing op­por­tu­ni­ties for bold in­vestors who keep their nerve.

Pic­ture: REUTERS

A man walks through Lon­don's Ca­nary Wharf Fi­nan­cial Dis­trict. Among the hard­est hit sec­tors post-Brexit has been UK com­mer­cial prop­erty.

Bri­tish Amer­i­can To­bacco’s global head­quar­ters in Lon­don.

Newspapers in English

Newspapers from South Africa

© PressReader. All rights reserved.