What I did on THAT Friday...

26th Jun '16 by marben100

9 comments 8022 reads

I normally post most of my trades to my Twitter feed, for those interested in what I've been doing, investment-wise. On Friday, I tweeted that I was too busy reacting to events to be able to tweet all my trades and that I would do a consolidated post about what I had done, so this is that post...

My view on what is likely to happen

All my investment decisions (both before and after the referendum) are coloured by my view of what the likely impact of the vote to "leave" will be. I hope that I am wrong (and I try to take account of the possibility that I may be), because that view is pretty negative for most UK (and other EU) citizens, especially the poorest. My views are as follows:

We are likely to see a sharp drop in sterling vs the USD. This has started and I feel may have a lot further to run. Moody's has already downgraded the outlook for UK credit (the UK's ability to repay its very substantial debt is damaged by the factors I list below, which will impact tax receipts). The sterling/Euro cross is less certain, because the Euro is also damaged by the economic impact of Brexit.
Many investment decisions by corporates and by individuals will be deferred, because there is so much uncertainty about the future. That includes hiring decisions, creating a less favourable jobs market for those seeking work. So, the Brexiters will get their wish and net migration will reduce - but it will be a Pyrrhic victory, because that fall will be a result of the UK becoming a less attractive place to seek work, not because of exiting the EU.
The fall in sterling will lead to higher prices for imported goods & energy/fuel, squeezing consumers.
There will be considerable political uncertainty, globally, with a heightened danger of populist demagogues gaining power, who may inflict further economic damage through isolationist policies.
Put these factors together and they seem to me to be the perfect conditions for a deep and prolonged recession (though that may be the least of our worries).
One group of businesses, however, may benefit: those businesses with substantial overseas trade who gain from a weaker sterling, including those businesses based overseas, with USD earnings, but quoted in London.

Pre-Friday

In the run-up to the referendum, I did examine my portfolio carefully. Though (in common with most in the financial community)…

Unlock with Email

Unlock with Google

Already have an account?
Login here

TMFMayn

27th Jun '16

I regard this as a hedge against prices rising at the point when I do decide to purchase a property (which I expect to do in the not too distant future).

So despite all your negative economic implications about Brexit, the verdict has not dissuaded you from making what for most people is the largest financial transaction of their lives -- and buying a property in the not-too-distant future.

So maybe, just maybe, Brexit will not dissuade other people from buying houses.

And so perhaps that means your house builders, which you said "were already cheap", may now be rock-bottom bargains.

marben100

I see that Osborne has confirmed my thoughts on business investment/hiring and the consequent impact on the public finances, this morning::http://www.investmentweek.co.uk/investment-week/news/2462833/osborne-calms-markets-as-ftse-100-only-down-08-in-early-trading-decision-delayed-on-emergency-budget

'However, he identified a number of challenges ahead and said it is evident some firms continue to pause decisions to invest or hire. "This will have an impact on the economy and public finances," he added.'

No wonder that the Brexit campaigners are rowing back on their promises to use the supposed Brexit dividend to bolster the NHS. As events unfold, I fear the electorate will learn which side of the debate was telling the more outrageous lies. I have no doubt that those derided "experts" were right and the negative economic impact of Brexit (due to the uncertainty it creates) is likely to be far more severe than any possible saving in NET EU contributions. We have yet to see whether the deal that is ultimately negotiated with the EU will involve any net saving at all.

Ramridge

Hi marben100 -
Very good of you to share your actions and thoughts so readily. Like you I got caught with a clutch of shares in housebuilding and insurance.
I seem to concur with your economic and political impact assessment over the medium term. George Sorros is nearer to the mark of what I believe to be the the likely scenario. The sectors to avoid for now are in the main, Retail, Real Estate, Construction, Staffing and Financial Services.
The ones to go for (selectively), but only when the dust settles, are IMO companies with a large share of international earnings. The large cap ones have already been identified in the press (BATS, AZN, GSK, NG, etc). However small to mid size companies with significant overseas earnings are not so readily known. I spent time on Sunday doing some research, but it is still work in progress.

More the reason to avoid staffing and recruiters.

TMFMayne: I am in a very atypical situation, in that I will be a cash buyer. That applies to very few others. I do not intend to use debt to repurchase a property (which I previously sold in 2014).

You could be right about HB's now being bargains, which is why I have not sold my holdings, but I also feel it is risky for me to purchase more until the fallout of this situation becomes clearer. I already have significant exposure.

12th Jul '16

As per my original article above, UK real estate remains an important asset class within my portfolio, though it is now a much smaller proportion due to a) my sales on 24th June, b) market moves. To gain some early insight from expert property managers, I attended £NRR 's AGM today. This proved most illuminating. Roger Lawson was also in attendance and he will post a full write up of the meeting, for ShareSoc members, in due course. I will post again when that is available.

My key questions, relevant to the post-Brexit economic and real-estate environment were as follows:

Given the exchange rate moves and the higher cost of imported goods, how will that affect your tenants' margins, their solvency and hence future rental prospects?
Is the investor uncertainty likely to impact real-estate valuations (i.e. cause yield expansion and hence valuation reductions)?
Does this new uncertainty impact your plans to move to a main market listing?

I was delighted by property director Allan Lockhart's response to the first question, which provides hard, albeit anecdotal, evidence. He advised that he had been in telephone contact with all NRR's key tenants, asking them how they would handle the increased cost of sales due to the fall in sterling. The overwhelming view was that retailers would do their best to absorb costs, rather than passing them on. However, in NRR's case their rents were already relatively affordable, so Allan did not foresee downward pressure on rents (but he would say that!).

In my eyes, this has some important implications:

Retailer margins are likely to be squeezed - so caution is advised if investing in retailers.
Consumers may not be squeezed as much as I feared, which is potentially positive for the UK economy and may mean a relatively soft landing lies ahead.
A lot depends on the future trajectory of sterling: if it recovers, then current circumstances may come to be seen as a blip. If not, and it continues down, there is only so much pain retailers can take, before they're forced to raise selling prices and/or some are put out of business, which could increase NRR's vacancy rate and put downward pressure on rents, in turn affecting valuations.

On the second point, Allan acknowledged that there could be a squeeze in valuations. He pointed out that the gated funds, who were now forced sellers of property, only represented 3% of the market and were more focused on city offices, so he does not foresee a big impact from that alone. David Lockhart (Allan's father and CEO) pointed out that NRR was born in the depths of a recession (2009) and the management team was well experienced in managing property in difficult economic times, by pro-actively helping tenants boost their sales through marketing initiatives. Those difficult times also create opportunities to acquire properties at attractive valuations.

I observe that NRR has positioned itself well for difficult times, by reducing its LTV ratio to 27% as at the year-end. That means that it is hard to envisage any circumstances under which NRR would find itself under financial pressure and it should be able to ride out any downturn comfortably. However, that does NOT mean that the share price would be unaffected by such a downturn in values (which would significantly impact reported profits, due to the need to mark down property values).

On the final point, David Lockhart advised that plans for a move from AIM to the main market were well advanced and he saw no reason why there should be any delay in that process.

So, the future direction of sterling is critical. A key determinant of that will be who Mrs May chooses to be her chancellor and what policies they will adopt. Brexiteers dismissed Osborne's warning about an "emergency budget" as part of "project fear". It was not, and the only reason it hasn't happened yet is that it can't be done until the new May government is in place (in which Osborne is unlikely to be chancellor) and the broad policy direction has been set, for the following reason.

It is almost universally agreed amongst economists (the "experts" Gove derided but which financial markets, the treasury and the BoE DO pay heed to) that UK GDP will be lower post- the referendum results than was previously anticipated. That, in turn, means that government tax receipts will be lower than previously anticipated, which means that the OBR will be forced to revise its model and estimates of future budget deficits. That leaves the incoming chancellor between a rock and a hard place: either raise taxes and/or cut spending, as Osborne indicated was necessary in his emergency budget warning, or let the deficit balloon. An emergency budget is required to take account of these changes to crucial planning assumptions. If the former path is taken a deep recession becomes inevitable (which would be negative for sterling), in the latter case sterling is likely to get a further pounding in the currency markets as confidence in the UK government's ability to pay its debts (without somehow generating massive inflation to devalue those debts) diminishes.

So, either way, the future of sterling does not look positive to me - and hence I will remain cautious on real-estate, not rush in too soon (on what will probably prove to be a "false dawn" we have seen since the May appointment) and keep plenty of cash on the sidelines.

I look forward to the AGM of TR Property Investment Trust Closed Fund (LON:TRY) on 26th July, when I will hear the views of master real-estate investor Marcus Phayre-Mudge (and how and whether he has repositioned his portfolio) and by which time I expect the government's chosen path will be a little clearer.

https://www.youtube.com/watch?v=Jmg86CRBBtw

Mark

Twitter @marben100

Roger Lawson

Comments altogether too negative I fear Mark. The Chancellors "Emergency Budget" was cancelled because it was hot air anyway, and totally inappropriate to meet with the prospective circumstances however negative the forecasts. And those forecasts have not yet arrived anyway. See former Bank Governor Lord King in a video here: http://www.bbc.co.uk/news/video_and_audio/headlines/36642662 . The Chancellor has reacted though in a different way - he simply has postponed when he expects to achieve a balanced budget!

Time will tell who is right on this! Thanks anyway for your write-up, which is available to ShareSoc subscribing members here: http://sharesoc.ning.com/xn/detail/6389471:Comment...

If you're not already a member you can join here: hTTp://www.sharesoc.org/membership.html

Once you've joined, you'll receive an invitation to register for our "members network" private social network, from where you'll be able to access the report (and reports on 100s of other meetings). If you're already a member and have any difficulty accessing the report, please do not hesitate to contact us here: hTTp://www.sharesoc.org/contact.html

One further thing I meant to say, regarding sterling, is that it is important to consider its valuation relative to other specific currencies. At present the US dollar looks like a much safer haven - but that could change in the event of a Trump presidency. Similarly, the potentially destabilising effect of Brexit on the EU could impact confidence in the Euro - so its not a simple or uniform picture and significant volatility - in either direction - can be expected over the coming months.

So, it is important to look at currencies on a case-by-case basis when assessing the impact of actual and possible currency moves on any company with foreign currency costs or revenues.

I am very happy to be exposed to gold miners (as geared plays on the gold price), as gold looks like a genuine haven amidst all this uncertainty for fiat currencies. That exposure has increased, due to substantial share price appreciation in recent months and weeks, despite a little topslicing along the way.

What I did on THAT Friday...

Unlock the rest of this article with a 14 day trial

About the Author

Marben100

9 comments

Unlock the metrics for all these stocks and more...

Unlock the metrics for all these stocks and more...