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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Scottish Mortgage Investor Meeting

Yesterday I went to the meeting for investors held by Scottish Mortgage Investment Trust (SMT) in London. This was a useful event as they normally hold their AGMs in Scotland. Needless to say this company’s name is now grossly misleading as it does not invest in mortgages nor in Scotland but is a “global” investment trust. It has a great track record in the last few years and has a focus on growth companies. Their top 10 investments are Amazon, Alibaba, Illumina, Tencent, Tesla, Baidu, Kering, Inditex, Netflix and Ferrari which gives you a good idea of their focus. Here are some of the words of wisdom from manager James Anderson:

He finds the stock market ever more puzzling. Investors think daily headlines help you to invest but there is no correlation. Comment: I think he is saying ignore the political gyrations and such matters as Brexit. He suggested that people way cleverer than us get the world wrong and referred to the work of Hans Rosling and that of Hendrik Bessembinder who reported that 0.4% of all US stocks created half the wealth. Comment: Anderson implied that the key was to pick a few of those really successful growth companies because they will have the biggest impact on overall returns.

SMT therefore tries to identify businesses that are focused on growth markets with great potential – at least 40% per annum. Typically they are also run on a completely pragmatic basis.

Anderson thinks that deflation is highly likely in the next few years as companies they are investing in are reinventing the world. For example healthcare may become a lot cheaper as diagnostics improves and reduces the burden of expensive late stage interventions in cancer and heart disease.

Catherine Flood talked about the companies they are invested in and about the biotechnology sector where genome mapping is creating major opportunities. They have a rising number of private companies in their portfolio.

In response to questions, Anderson said they sold Apple two years ago because growth prospects seemed limited and had reduced their holding in Facebook for other reasons. He also questioned whether the kind of investment strategy following by Warren Buffett will continue to work in future as markets get disrupted by new companies using innovative technology. We may be facing a different world in future where “value” is less important.

As regards their large number of holdings in Chinese companies, Anderson was not worried about the political risks in China and expected China to become the dominant world economy in the near future. They are leading in technology in some areas (e.g. NIO in electric cars).

Overall this was an educational presentation as we got some understanding of the investment strategy of the company which clearly has worked well when economies have been buoyant and markets have been heading consistently upwards. The share price is at a premium to assets of 3.6% at present so might be vulnerable to a correction if there is any hiccup in the global economy. There was no mention of cash flows, return on capital or other “fundamental” measures of value in companies which tells you something does it not. But if you wish to invest in global growth companies, this is certainly one investment trust to consider.

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

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