Next Results, Brexit Politics and Statpro Offer

Retailer Next (NXT) published their interim results on Thursday (19th Sept). This is a good example of a retailer making a successful transition from shops to internet sales. Earnings per share were up 8.8% with some impact from a change to adopt IFRS16 (lease accounting) and share buy-backs. Overall revenue was up 3.7% with online sales up 12.6% but retail sales down 5.5% and now less than the online figure. One has to ask, if Next can do this why could not M&S who recently got booted out of the FTSE-100? I suggest management is what makes the difference.

This what the CEO had to say in a detailed analysis of performance last year, under “Direction of Travel”: We are often asked: “What will the high street look like in 10 years’ time?”  The only honest answer to this question is that we do not know; we can see the general direction of travel but can predict neither the speed nor endpoint for the changes that lie ahead. Our approach is to build as much flexibility into our operations and cost base as is possible to minimise the negative effects of falling Retail sales and maximise opportunities for growth Online.  This means a constant process of reinvention and experimentation within our business, whilst preserving the integrity of our brand, the calibre of our people, quality of the operations and the profitability of the Group.  The task remains extremely challenging, but with more than half of our sales now coming from our Online and Finance businesses, it feels like we are moving in the right direction”.

CEO Lord Wolfson said that they would cut prices by 2% if the UK leaves with a Brexit deal. This is due to the government’s temporary tariff regime for a No Deal Brexit, which aims to minimise costs to businesses and consumers while protecting vulnerable industries. But he would prefer to see a deal done.

It was interesting watching Lord Pannick performing in the Supreme Court over the challenge to the prorogation of Parliament which is undoubtedly being motivated by opposition to Brexit (I simply don’t believe the motivation is otherwise – Parliament has had plenty of time to debate Brexit issues and will still have more time). As the Government’s lawyer said in court, if MPs don’t like what the Prime Minister is doing they can always call a “no confidence” vote.

Lord Pannick is a very clear speaker and a good advocate of any case. I recall him representing the Northern Rock shareholders over the nationalisation of that company without compensation and actually congratulated him on his performance at the end of the case. He lost that one though. I suspect he may lose this latest, or the result will be inconclusive but we will no doubt hear in a couple of days. It does seem to me though that it is time the UK adopted a written constitution to avoid such legal challenges and not have lawyers debating political issues. More clarity is required on what is permissible and what is not, and what the powers of the executive have versus Parliament. The role of the Prime Minister and other Ministers is being undermined by MPs trying to dictate day-to-day matters such as foreign relations with the EU which undermines their historic responsibilities.

Meanwhile the Financial Times ran with a headline today saying the Labour Party’s plans to expropriate 10% of shares would cost pension funds £31 billion. It might also cost readers of this blog who invest directly in shares or in funds a very large amount. Thankfully the chance of the Labour Party winning any general election seems low as not only is the Party in some disarray over their Brexit policy but they are dropping in the opinion polls. This is of course why Jeremy Corbyn refuses to support the call for a General Election. He is also rated the worse opposition leader in the last 45 years according to one opinion poll. Those who oppose Brexit are now choosing the LiberalDemocrats while those who support Brexit are supporting the Conservatives or the Brexit Party. Only if the Conservative vote is split would Labour have any chance of winning an election. But a General Election can be a very different battle ground to polls driven by single issue politics.

On Friday (20th Sept) AIM listed Statpro (SOG) announced a recommended takeover bid from US company Constellation Technologies. The share price promptly jumped over 50% to near the offer price. I held shares in this company for a number of years. Bought in 2005 originally and sold the last in 2015, suffering an overall loss. So that’s an example of lack of patience. The company always seemed to have potential but profits were patchy – it lost money in the last three years. Both companies operate in the investment analysis and reporting markets so this is a complementary acquisition. I see no reason to turn it down.

Bearing in mind my previous comments on technology stock valuations, it is on a forecast p/e of 8 but that is probably optimistic given that it reported a loss recently at the half-year and has a habit of disappointing. The bid values the company at 2.7 times historic revenue though which is probably reasonable assuming that Constellation can strip out a lot of the overheads. That always needs to be taken into account when looking at technology stocks. Often a trade buyer will pay more than market investors, particularly if they wish to acquire technology or customers.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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Open Orphan, Operation Yellowhammer and a Bridge to Ireland

Last night I attended a ShareSoc company presentation seminar. One of the companies that presented was Open Orphan (ORPH) which used to be called Venn Life Sciences but changed name after a reverse takeover of Open Orphan and a change of CEO. The new focus is on orphan drugs which are those medications that are focused on rare diseases, i.e. those with relatively few patients and where historically there have been few treatments available and typically very little research. Big pharma tends not to spend money researching such drugs because the likely revenue from them is small. As a sufferer from a rare disease this presentation was of particular interest to me.

As the presentation indicated, Venn was historically loss-making and was viewed as “under-capitalised”. Market cap of ORPH is only £17 million when forecast revenue this year is £16.5 million.

Open Orphan’s new strategy is to concentrate on launching additional services focused on orphan drugs and develop a proprietary data platform. That includes building a database of patient and genomic data. They are also developing a “virtual sales rep” service to enable lower cost sales to specialists in orphan diseases. This seems to be a telemarking operation supported by webinars. I was surprised to learn that drug sales in big pharma are still promoted by personal visits from highly-paid sales staff when in other fields a more “hybrid” approach is long established.

There is clearly a lot of work going into digital health platforms and databases – Renalytix which I covered in a previous report is one company focused on doing this for renal disease. So there are no doubt opportunities here although the presentation was short on information on the likely cost of developing such a platform and building the databases. Future fund raising looks a distinct possibility.

One question raised by the audience was whether patients would volunteer their own data (which in Europe they “own”). But I don’t think they will have objections because the chance of assisting development of treatments when there may currently be none will incentivize them to do so.

I suggest Open Orphan is a company to keep an eye on for the future. It’s still at an early stage of development.

Which brings me onto the subject of Operation Yellowhammer, the Government report which has now been published on the impact of a “hard” Brexit, or the “Reasonable Worst Case Planning Assumptions” as they headline the document (see https://tinyurl.com/yy2oll7p for the full document – it’s only 5 pages). As I am personally dependent on drugs to stay alive, the scare stories being propagated by some people about shortages on a hard Brexit are not just of academic interest.

The report suggests some disruption at Channel ports, including possibly up to 2.5-day delays to HGVs in Kent, i.e. similar to past disruptions caused by strikes in France which had no obvious impact on consumers although it might have some impact on “just-in-time” operations of manufacturing businesses.

But three-quarters of medicines come by the Channel straits which might have an impact on the supply of medicines and medical supplies, if unmitigated. As Nigel Farage has pointed out, the UK has 100 ports so alternatives to the Channel ports are readily available. Only a minority of drugs are time-sensitive and those could possibly be transported by air freight.

Pharmacy2U, one of the biggest prescription suppliers have published this note which covers patient concerns about Brexit: https://tinyurl.com/yxubdlsu . It basically says “don’t panic”, and carry on as normal. There are often problems with drug supplies due to complex supply chains, manufacturing or regulatory issues so this will be nothing new.

The report says demand for energy will be met as there will be no disruption to electricity or gas interconnectors but there may be rises in electricity prices. But it does warn about the availability of fresh foods, e.g. salad products from southern Europe which may be reduced. Are you worried about not being able to purchase tomatoes at Christmas? I cannot say I am.

In summary the Yellowhammer document is not something that will put off Brexit supporters from wanting to exit the EU on October 31st regardless.

One way around the problem of the Irish “Backstop” in the Withdrawal Agreement is to simply move the customs border to the Irish sea. This won’t please the DUP party of course but can they be bought off with the sop of a new bridge linking Northern Ireland to Great Britain? Or is this another of Boris Johnson’s bridge fantasies like the Garden Bridge in London? Is it even practical?

The Daily Telegraph published an analysis by a civil engineering expert. In essence it is possible because there are similar bridges in terms of length (13 miles or more depending on the chosen crossing point) elsewhere in the world. Even the deep water, up to 160 metres on one possible route, can be done. The cost might be £15 billion. So it’s perfectly feasible and probably better value than HS2.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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Watch Your SIPP REIT Dividends, RPI Change and Brexit

Many shareholders hold Real Estate Investment Trusts (REITs) as they provide a high level of dividends, partly because they have an obligation to distribute most of their income to shareholders as Property Income Dividends (PIDs). These are taxed in a different way to other dividends. They incur a tax charge of 20% which is like a withholding tax. But if you hold the shares in a SIPP then the SIPP can reclaim the 20% tax from HMRC.

I hold two SIPPs. One operator routinely refunds the REIT tax but the other one (operated by Curtis Banks) appears to have no system to do so. I have had to chase them more than once about outstanding refunds going back several years. Currently they are saying that they have to wait until the year end before they can submit a reclaim because they cannot submit claims of less than £5,000 during the year.

Shareholders who have REITs in their SIPP portfolios need to keep an eye on such refunds otherwise you could be losing hundreds if not thousands of pounds in missing tax claims.

Yesterday, among other activity by the Chancellor of the Exchequer, he issued a letter indicating that despite demands to revise the calculation of the Retail Price Index (RPI) he is putting off consent for any change until at least 2025 with consultation on when it might be implemented. See the letter here: https://tinyurl.com/y3muwr3g

There is of course strong opposition from some people to any change in the calculation of RPI. For example it might impact the returns on Index Linked Gilts that use it as it is generally seen as giving slightly higher figures than other inflation indices. But other people would welcome a change because it affects the cost of rail fares for example. It does appear wise to me to have extensive consultation on such a change before it is implemented, particularly where it affects people who have purchased investments such as index linked gilts or national savings certificates on the basis of the current formula.

The Chancellor, Savid Javid, did of course deliver a Spending Round review document to the Commons yesterday – you may have missed it among all the Brexit debates. In summary it commits to higher expenditure on schools, the NHS, the police, on social care, on defence and on other crowd-pleasing measures – a total of £13.8 billion. This should help to boost the economy, and might be seen as a typical pre-election attempt to win votes.

I watched the debates in Parliament yesterday and am baffled by what MPs have decided to do. One Bill (the European Union (Withdrawal) (No.6) Bill if you wish to read it) which seems likely to be approved demands that the Prime Minister sends a letter to the European Council requesting a further extension past October for Brexit. The proposed letter is specifically worded.

But under the UK’s, albeit unwritten, constitution the Prime Minister’s powers include: “Relationships with other heads of government” – see https://tinyurl.com/y3wneo9s for more on the Prime Minister’s powers. In effect MPs seem to want to take over executive powers in our relationship with foreign powers such as the EU. But the Prime Minister can surely contradict any such letter or undermine it in other ways because he alone has the powers to negotiate with the EU (as Mrs May negotiated the proposed Withdrawal Agreement”). This just gets us into a constitutional and political crisis.

The second decision by MPs was not to support the Prime Minister’s request for a General Election which would be one way out of the impasse. That leaves the Prime Minister and his Government in an impossible situation, particularly as now the Government has no overall majority in Parliament. In effect they may find it impossible to get any business through. This can surely not continue for long.

Whether you are a Brexiteer or a Remainer, surely you should be concerned by this turn of events which seems to be driven more by emotions about Brexit and opinions on the merits of the Prime Minister than any rational consideration of the constitutional crisis that is being created and the overall wishes of the electorate.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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Victoria AGM, Dunelm Results and Brexit Impacts

I attended the Annual General Meeting of Victoria (VCP) in central London yesterday. I have held a few shares in this producer of carpets and tiles since the revolution that installed Geoff Wilding as Executive Chairman a few years ago. He did a great job of turning the business around but the share price fell back sharply last October over concerns about the level of debt and a failed bond issue to replace bank debt which cost £7.3 million As Mr Wilding says in the Annual Report: “There is no way to view the majority of these costs other than, with the benefit of hindsight, a waste of money”. The Annual Report is certainly worth reading as it is a good example of the Chairman and CEO revealing their thoughts on many issues rather than the polished and anodyne statements you see in most such reports.

The company has subsequently issued some loan notes with a five-year term and fixed rate of interest to replace some of the bank debt. These were described as “covenant light” in the meeting. The company has adopted the use of high debt levels (net debt/EBITDA ratio of 3.2) to finance acquisitions and to finance substantial restructuring of its operations. There is extensive justification of this policy in the Annual Report but there are clearly still concerns among investors.

Last year the company reported a loss of £7.9 million despite reporting an operating profit of £24 million because of the exceptional finance costs, restructuring costs and amortisation of acquired intangibles. This is one of those companies where it is best to look at the cash flow statement to see what is going on as the accounts are otherwise quite confusing. The company did generate £52 million in cash from operations last year.

An announcement from the company on the morning of the AGM contained positive comments and they expect to meet market expectations for the full year. They are also continuing to look at further acquisitions although it states “mindful of financial leverage levels, the Board is proceeding cautiously”. I would certainly like to see some reduction in debt levels with fewer exceptional costs for a period of time.

There were less than a dozen shareholders at the AGM. There were only a few questions. One was on the attributes of new non-executive director Zachary Sternberg, and what he will be contributing. Apparently he is the investment manager of a US fund who have a 15% stake in Victoria. It was said he is very good at financial analysis but is not a flooring expert.

I asked about the breakdown of sales. Turf (i.e. artificial grass) is now 4% and growing. Otherwise it’s about two thirds tiles to one third carpet. In Europe hard flooring (not just tiles but wood/laminates) is growing but the demand varies between countries. That surely is has been a long-term but slow trend in recent years in the UK for example. Even my wife wants to replace our hall carpet with something else because she is tired of cleaning it but other areas are likely to remain carpet.

I also asked about the impact of Brexit, hard or otherwise. Earlier in the year they built up stock in case of disruption and are now doing this again. But the CEO said they might be able to take advantage by increasing prices. He did not appear too concerned about the prospects.

In summary a useful meeting, but investing in this company is very much dependent on one’s trust in Geoff Wilding to manage the debt levels and its business operations wisely. Mr Wilding has a beneficial interest in 18% of the shares although he did dispose of some shares last year.

Another company I hold is Dunelm (DNLM). The company issued preliminary results this morning and at the time of writing the share price is down about 8%. That may be surprising because the earnings were slightly better than forecast and a special dividend was also declared. Like-for-like revenue was up 10.7% and market share is increasing in the homewares sector. The company appears to have been successful in moving into “multi-channel” operations with internet sales rapidly increasing. So why would shareholders be concerned about the announcement?

One comment in the announcement was “Whilst trading performance has continued to be strong, we remain cautious about the full year outlook due to ongoing Brexit uncertainty and specifically the impact it may have on consumer spending as we enter out peak period”. They go into more detail on the impact of Brexit, especially a “no-deal” version which might disrupt imports after the possible Oct 31st date. But if Boris Johnson loses his fight against the “remainers” this evening then it could be put off yet again, even into “never-never” land. Comment: What a shambles and the House of Commons is descending into anarchy. I hope Mr Johnson manages to call a General Election to get this matter settled finally. But at least a Scottish Court has rejected the challenge to the Government’s ability to prorogue Parliament which was surely misconceived. Legal cases driven by emotion are never a good idea.

As regards Dunelm, perhaps another issue that rattled investors was the adoption of IFRS16 which will apparently reduce group pre-tax profit by approximately £3 million (i.e. by about 2.3%) but with no impact on cash flows. However EBITDA will increase. IFRS16 concerns accounting for leases and has surely been well known about for some time so it is odd if this was the cause of the share price fall.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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CentralNic, Photo-Me and Nationalisations

Firstly lets talk about a couple of companies in which I hold no shares. CentralNic (CNIC) published interim results this morning. This company sells internet domain names and web services. It states that both revenues and adjusted EBITDA have tripled year on year. The share price has not moved at the time of writing.

This company is surely operating in a growth sector but the company’s share price is less than it was 5 years ago. The company has been growing via acquisitions, but the key problem appears to be that the dilution of shareholders from the issue of new shares means that reported earnings and cash flow per share have bounced around a bit but not consistently grown even though revenue has. The reported loss after tax at the half year was £3.3 million and it generated negative cash flow from operations of £1.4 million.

The CEO comments on “these outstanding results” and he is “confident in continuing our trajectory towards joining the ranks of the global leaders in our industry”. But shareholders might prefer that the company simply generates some profits and cash from the capital raised.

PI World interviewed John Lee last week – see https://tinyurl.com/y6z9zwa8 and he is always worth listening to. Lord Lee is a well known private investor and writer on stock market investment. As he has realised some cash from a takeover he is looking at new investments and one he has been considering is Photo-Me (PHTM). Photo-Me has traditionally been an operator of photo booths, but as that market is strategically challenged it has moved into self-service laundry units and launderettes. It has now also acquired a fresh fruit juice vending operation in France. In effect it is focused on several “vending” type operations. A quick look at the financials gives a historic p/e of 12.9 dropping to a forecast 10.6 next year and dividend yield of 8.2%. In other words, it looks very cheap on the normal fundamental ratios.

But on Friday the Investors Chronicle published a “SELL” tip on the company. It suggested returns on capital were falling, that the photo business which still represents a major proportion of revenue was becoming more difficult as passport photos are easy to produce on any smartphone or camera, and the dividend is barely covered.

This is a business that is highly profitable with a good track record but faces some business challenges. This is why the share price has been drifting over the last few years as investors have become nervous about the future. With investors now focusing on “growth” stocks it may remain out of fashion. John Lee is not a follower of fashion though.

The Financial Times ran with a headline story of the Labour Party’s plans to confiscate £300 billion of UK company shares to give them to workers. Over 10 years all companies with more than 250 staff would be required to transfer 10% of their shares to workers over a period of ten years. The article also covered the party’s nationalisation plans including apparently perhaps even travel agents which the article suggests one in four people would support. That of course means most do not, but a Labour Government might not take much notice of the latter. Why travel agents? It appears some people think that the answer to any concerns about the cost of a service and the way it is provided justifies nationalisation. Have they learned nothing from history?

Many companies and investors might simply choose to move their assets from the UK if a Labour Government was elected but the reaction might be to impose capital controls to stop that. In other words, shadow chancellor John McDonnell might put us back into the 1960s – exchange control was not lifted until 1979.

The last time Labour was in power they nationalised Northern Rock and Bradford & Bingley banks. The original shareholders are still very disgruntled and they continue to fight for fair compensation after more than ten years. See this article for the latest on Northern Rock: https://tinyurl.com/yxpvk8sl , or the latest on Bradford & Bingley here: http://www.bbactiongroup.org/News.htm . The fact that the leaders of these campaigns continue to fight after so many years tells you how strongly they feel that their assets were confiscated at less than fair value.

Unfortunately there is a lot of irrationality in the political scene of late which may undermine our financial prosperity unless people come to their senses.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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Burford, Channel Island Registrations and Brexit

Firstly lets talk about Burford Capital (BUR). Tom Winnifrith, who has been complaining about the accounts and other issues at that company for a long time, sent a letter of complaint to the FCA and FRC (the Financial Reporting Council) asking them to investigate the allegations of Muddy Waters. The FRC have responded with this comment: “Burford Capital is incorporated under the Companies (Guernsey) Law 2008 and is accordingly not subject to the requirements of the Companies Act 2006”. They also said that the shares are traded on AIM which is not a regulated market. The FRC’s Corporate Reporting Review Team therefore does not have powers to make enquiries about the matters raised.

In summary, although the FCA and the FRC have some powers relating to the company’s directors and its auditor, Mr Winnifrith will have to complain to the Guernsey Financial Services Commission who are the regulatory authority.

As I said in my recently published book, company domicile does matter and is definitely worth checking before investing in a company. I specifically said: “In general for UK listed companies, any domicile outside the UK adds to the risk of investing in a company. Domicile in the Channel Islands or Isle of Man is also not ideal [see Chapter 7]”. So that’s yet another reason why I would not have invested in Burford, apart from my doubts about the prudence of their accounting.

Brexit

At the risk of offending half (approximately) of my readers, here are a few comments on the latest political situation and the prorogation of Parliament. Speaker John Bercow has said that “shutting down parliament would be an offence against the democratic process and the rights of parliamentarians….” while there was an editorial in the Financial Times today that said “it was an affront to democracy” and that Mr Johnson had “detonated a bomb under the constitutional apparatus of the United Kingdom”. But I tend to side with Leader of the House Jacob Rees-Mogg who called it “completely constitutional and proper”. Suspension after a near record long parliamentary session to allow the Government to put forward its programme in a new Queen’s Speech is entirely appropriate and not unusual. There is also time before the suspension, and after, for Parliament to debate whatever they want before Brexit date on October 31st. Also Parliament is often closed down in September for the party conferences so this is not unusual.

It’s simply a case of sour grapes from remainers who realise they may not be able to stop Brexit or cause further trouble in resolving the impasse in Parliament. John Bercow is particularly to be criticised because he is supposed to be independent and should not be making such comments on a well-established procedure supported by precedent.

Parliament has been debating Brexit for many months and it is time to draw such debates to a conclusion because it gives the false hope to the EU that the UK will change its mind over leaving. The UK voted to leave and we should get on it with, preferably with some kind of Withdrawal Agreement, or otherwise none. Business is damaged by the on-going uncertainty which is why the pound has been falling. Boris Johnson is simply forcing the pace which is quite right.

If the opposition parties or remainers in the Conservative party do not like what is happening they can call for a vote of no confidence. It that was passed then a general election would no doubt be called, which the Conservatives might actually win, or the election might take place after the Brexit date which would put the remainers in a very difficult position. That is why they are so clamorous. They simply don’t like the position they find themselves in which has actually been caused by those in Parliament who have wanted to debate the matter endlessly without coming to a conclusion.

There are some possible legal challenges but should, or will, the judiciary interfere in what is happening in Parliament? I don’t think they should and I doubt they will. Are Scottish judges, where one challenge is being heard, really going to attempt to rule on a matter of UK wide importance? This seems unlikely in the extreme.

In summary, I think everyone should calm down and let the matter take its course. Those who are not happy with the turn of events can challenge it in Parliament via their elected representatives if they wish. But Brexit needs to be resolved on Oct 31st, one way or another. Not delayed yet again. There are so many other issues that Parliament needs to deal with that more debate on the matter is simply unacceptable.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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Brexit Investment Strategies

Investors may have noticed that the pound is in free fall and heading towards US$1.20. That’s near the low after the initial Brexit vote. Pundits, not that they can be relied on for forex forecasts, suggest it could go lower now that we seem to be heading for a “no-deal” Brexit.

With the pound falling, and potential damage to the UK economy from a hard Brexit, investors should surely have been avoiding companies reliant on UK sales, or UK consumers, or those such as engineers and manufacturers that rely on just-in-time deliveries from Europe. The key has been to invest in those UK listed companies that make most of their sales overseas in areas other than the EU.

One such company that announced interim results today is 4Imprint (FOUR), a supplier of promotional merchandise. Most of its sales are in the USA and its accounts are in dollars. Revenue in dollar terms was up 16% at the half year and pre-tax profit up 22%. The share price rose 6.5% yesterday and more this morning but the former suggests the good news leaked out surely. With the added boost from currency movements, this is the kind of company in which to invest but there are many other companies with similar profiles. For example, many software companies have a very international spread of business, or specialist manufacturers such as Judges Scientific (JDG). Those are the kind of companies that have done well and are likely to continue to do so in my view if the US economy remains buoyant and the dollar exchange rate remains favourable.

The other alternative to investing in specific UK listed companies with large export revenues and profits is of course to invest directly in companies listed in the USA or other markets. But that can be tricky so the other option is to invest in funds such as investment trusts that have a global spread of investments with a big emphasis on the USA. Companies such as Alliance Trust (ATST), Scottish Mortgage (SMT) or Polar Capital Technology Trust (PCT) come to mind. Alliance Trust has a one-year share price total return of 11% according to the AIC and the share price discount is still about 5%. I received the Annual Report of PCT yesterday and it makes for interesting reading. Net asset total return up 24.7% last year and it again beat its benchmark index. The investment team there has been led by Ben Rogoff for many years and what he has to say about the technology sector is always worth reading. Apparently the new technology to watch is “software containerisation” which is compared to the containerisation of cargo shipments in its revolutionary impact.

Another interesting comment is from the Chairman complimenting Ben on having the skill of buying shares and holding those which go on to outperform, but also knowing when to sell at the right time which the Chairman suggests is not common in fund managers.

Another hedge against a hard Brexit is to invest in companies that own warehouses because a lot more stockpiling is already taking place as a protection around the Brexit date by importers, but also more will be required to hold buffer stocks for manufacturers in the future. Companies such as Segro (SGRO), Tritax Big Box (BBOX), and Urban Logistics (SHED) have been doing well for that reason. They have also been helped by the trend to internet shopping which requires more warehousing space and less retail space. These trends are likely to continue in my view and the retail sector is likely to remain difficult for those retailers reliant on physical shops. You can see that from the results from Next (NXT) this morning. Shop sales down while internet sales up with the overall outcome better than expected as on-line sales grew rapidly. Anyone who expects the high street or shopping malls to revive is surely to going to be disappointed in my view.

There are bound to be some problems for particular sectors if we have a hard Brexit. The plight of Welsh sheep farmers was well covered by the BBC as Boris Johnson visited Wales yesterday. Most of their production currently goes to Europe but they may face 40% tariffs in future. The Prime Minister has promised assistance to help them but they have been heavily reliant on subsidies in the past in any case. There will need to be some difficult decisions made about the viability of farming on marginal land in future.

The falling pound has other implications of course. It will help exporters but importers will face higher prices with the result that inflation may rise. However, there are few products from Europe that cannot be substituted by home grown or produced equivalents, or by lower cost products from the rest of the world. With import tariffs lowered on many imports the net effect may be very low in the long term. But it will take time for producers and consumers to adjust. Tim Martin of JD Wetherspoon is well advanced in that process so you can see just how easy it will be to adapt.

In summary, investors should be looking at their current portfolios and how they might be impacted by Brexit now, if they have not already done so. There will clearly be winners and losers from the break with Europe and investors should not rely on any last-minute deal with the EU even if Boris is expecting one. Any solution may only be a temporary fix and the policies suggested above of international diversification are surely wise regardless of the political outcome.

Note: the author holds some of the stocks mentioned.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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