Brexit continues to divide the nation. It’s been revealed by the Office of National Statistics that there were no baby Nigels born in 2016 (- the fact there were 19 named Corbyn is quite weird, but hey ho, each to their own). Meanwhile blood curdling warnings from messrs. Blair, Clegg and Hammond that we are all going to be swallowed by the bogey men Barnier and Juncker continue to keep us all uneasy in our beds!
However, the current wave of euro-scepticism is not confined to the awkward squad here in perfidious Albion. The Czechs are about to elect a hard line Eurosceptic. Andrej Babis is a Slovak with a business empire spanning food to media worth $4bn and who’s about to become Czech Prime Minister in next week’s Czech elections. The Czech Republic has so far taken in the grand total 12 out of 1600 refugees it is supposed to have taken in from the EU quota programme agreed this year and Babis will join the deeply sceptical Hungarians and Poles in opposing further European integration. In September the European Union’s top court dismissed complaints by Slovakia and Hungary about EU migration policy, upholding Brussels’ right to force member states to take in asylum seekers. Slovakia, and Hungary were supported by Poland and a “stop Brussels” campaign gains more support daily from a region who believes that forced immigration infringes upon their rights as citizens and is an area of the European Constitution to which they are fundamentally opposed. There have been numerous statements by Polish politicians that they would rather leave the EU than take migrants.
Here in the UK, Prime Minister May has probably gone as far as she can in making concessions to Barnier, Juncker and co amid calls from the Tory right for her Finance Chief Philip Hammond to be replaced. I got to know Brexit secretary David Davis briefly in my early city days when I was part of a right leaning economics think tank and he’s a genuinely die-hard opponent of EU government. With Catalonia spilling over into violence and the “euro opposing” Beppe Grillo’s 5 star movement about to become the largest party in Italy, Europe remains a tricky place to be invested in, although one must say there has been surprisingly little volatility so far, we remain cautious and defensive in our approach to investments in the region. We did spend some time with top Italian companies this week at the annual Borsa Italiana conference of 40 leading Italian companies. Some of them have been terrific performers this year with CASE NEW HOLLAND, FIAT and FERRARI shooting the lights out and the Italian market up 20% this year.
We prefer Asia and we especially like China and Japan currently. In China the 19th National Congress of the Communist party committee takes place in Beijing next week where 2,000 delegates will assemble in the Great Hall to choose the various key members of the politburo who will be among the successors to current President Xi Jinping. The Chinese continue to invest heavily in the industries of the future, aerospace, cloud computing, Artificial Intelligence and biopharmacy as well as clean tech and renewable energy (including nuclear) are all part of the 10 core growth sectors in Xi Jinping’s 2025 campaign. Japan is interesting too and the Nikkei hit a 21 year high this week as the Asian economy continues to accelerate leading world growth forecasts higher. Chinese investment is also leading the way in the UK with major investment in property (both the Cheesegrater and Walkie Talkie now owned by Hong Kong based companies) while IMAGINATION TECHNOLOGY one of Britain’s largest technology firms was taken over by a Chinese backed private equity firm last month.
More globally, little Rocket Man as DT is now openly calling Kim Jong Un continues to threaten America or rather a few islands in the middle of nowhere. It’s estimated the last bomb that went off had the power of 1/100th of the US’s first H bomb in 1952.
However, the war talk is making nervous governments invest in the latest defence systems to galvanise the big spending defence industry with LOCKHEED built THAAD missile technology now being sold to Japan as well as South Korea and Saudi Arabia-one of the many reasons we’re bullish on the global defence and aerospace industry.
Little by little the oil price has moved up and is nudging $60 a barrel best for two years. We remain overweight oil and are big fans of the iShares in the majors that carry a 6% net yield though if the Saudis have their way Aramco may soon wreak havoc with index weights. A $1 trillion mcap would take it straight in at 40% of the index!
We also like nuclear technology and the engineering suppliers developing sophisticated technology into the supply chain like ROLLS ROYCE in the UK, EDF in France and FLUOR in the US.
In industry, the talk all this week has been about transport and the growing role EV technology is going to play…new cycle highs for cobalt and lithium attest to this with lead, nickel and zinc also hitting 52 week highs…VW and the other German OEMs all having to play catch up re investing in EV. The latest stock market pop is being led by cyclicals with CAT and DEERE leading the charge in the States and stock markets globally hitting new highs.
We remain generally wary though still of markets globally wherever they are with valuations at all-time highs and global earnings growth that while positive are only high single figures.
While we continue to be cautious overall, our big calls have worked out well enough, so like emerging markets, gold and precious metals, infrastructure via suppliers like building materials and exposure to chemicals and more recently oil where we’re overweight as well as the new tech in things like EV where we’ve made good returns investing in suppliers.
We do like income in many of its forms, discounts to net assets, gold and precious metals and more broadly specific commodities and, in particular, emerging market government debt, European corporate debt and US preferred shares especially.
Our core positions are:
Neuberger German Floating Rate
iShares US preferred
iShares Emerging Market Bonds
iShares European Utilities
iShares European Property
Galloway Emerging Market Corporate Income
JP Morgan Strategic Income
iShares short duration High Yield
Chinese A shares
iShare Europe Oil and Gas
We continue to believe global manufacturing is one of the interesting places to invest. Global PMI (Purchasing Manager’s Index) has momentum and is at a 20 year high. The underinvestment in capital stock has been such a feature of western economic structures since 1973 is changing and in the UK this is changing markedly.
Last month alone:
UK engineers reported a 34% rise in 12 month orders.
AKZO opened its biggest factory in Europe in Northumberland, North East UK. The company, maker of paint number one Dulux, will produce 2m tons of paint at its factory. AKZO, which has just fought off a takeover bid by US paints company PPG…(as an aside we continue to be very bullish on paint and chemicals overall).
ROLLS ROYCE Engines has created a consortium to build a series of mini nukes in the UK.
BOMBARDIER is going ahead with its ground breaking C series jet with DELTA confirming go ahead despite BOEING inspired US Commerce Department’s building the wings for its new C series plane in Northern Ireland
And finally…while one wag was unkind enough last week to suggest that in days of yore a criminal record was not only not an impediment but a requirement to get out on the boat to Oz, times have changed and in classic English sporting style, our best player all-rounder Ben Stokes has been arrested for alleged ABH and is now out of the Ashes tour…strewth ‘mate…