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David Kempton: investors can't relax with hard Brexit

The plunge in the pound has boosted UK share prices but investors in smaller companies need to take care and choose wisely.

 
David Kempton: investors can't relax with hard Brexit

It's been a turbulent time for the British economy with sterling sliding 16% against the dollar since the Brexit vote, now trading at $1.22, the lowest for 30 years, which should surprise nobody. 

For the last year I’ve advocated holding cash in dollars, now up 20% on sterling in that time. HSBC predicts the pound could fall to $1.10, close to its lowest ever, whilst cashing pounds today at the airport will buy less than one euro. That’s a shock to the casual tourist! The UK has become the cheapest of all the world’s major destinations to buy luxury goods; no wonder our leisure industry is booming.

Interest rates in the US are moving up. There could even be an increase in December, especially if Hillary Clinton is elected president, but UK rates, now the lowest since the Bank of England started 300 years ago, should remain unchanged following the pound’s plummet.

Trumpet blown

After the second presidential TV debate it would appear we can discount the terrifying Trump effect as he looks to have blown it. We must hope so or all bets are off: his protectionist policies would hugely upset currency and stock markets.

Despite brave post-Brexit statements, and even some euphoria, there are now worrying signs as the IMF revises downwards its forecast for UK economic growth from 1.8 to 1.1% for 2017 and we hear aggressive noises from Brussels as the hard Brexit date is confirmed. 

To be clear ‘hard’ means exit from the EU single market, risking tariffs on food, nearly half of which we import, clothing and cars. Add this to the new low pound and we’ll see inflation and wage increases.

Given the EU accounts for 43% of UK exports while the UK represents only 16% of the EU's combined exports, I wonder who negotiates from the strongest position? I know we have the rest of a big world keen to trade with us (we hope) but how many years will all those new agreements take to negotiate?

Don't Ghosn

Some of our major manufacturers are starting to express more concern, especially in the important car industry where Nissan CEO Carlos Ghosn has made it very clear that he would want to see clarification of UK/EU trade arrangements before deciding on their impending investment in Sunderland or Europe. We really don’t want Ghosn to lead the charge out to Europe.

To put this in context, Nissan in Sunderland is a phenomenal success, employing 7,000 workers making 500,000 cars a year, more than the whole Italian car industry. Nissan came here because the UK has a low-wage zone, with a compliant workforce, the most pro-business laws in Europe and a great pool of English speaking engineers.  We must defend all that to keep them here and attract more of their kind.

The smooth entrance of Theresa May into office following Cameron’s resignation was so welcome that there was no real focus on what she stood for, although that is now clearer after the Conservative Party conference.

She seems admirably supportive of people who are ‘just surviving’, a set of the electorate that Cameron appeared oblivious to and which he ignored at his peril. Unfortunately, she looks to be turning away from the City and business with worrying signs of losing interest and contacts. 

The back-pedaling on an intention to legislate employers to list all foreign workers is welcome, but such threats will disturb many of our trading partners. At a recent eye operation in Moorfields in London, I had contact with 19 hospital employees at all levels and I don’t think any were UK born. The service, treatment and skills were world class. 

Plea from the Powerhouse

And, a cry from the North, please can we have HS3 to connect Manchester and Leeds for a Northern Powerhouse and not squander money on HS2, which seemingly mostly benefits London – again.

On the subject of infrastructure, Cross Rail will be transformational, but please can we have a new runway too?

Whilst the pound has fallen 16% since 23 June, the FTSE 100 is up 18% boosted by the fact that blue chips generate three quarters of their corporate earnings overseas, which are worth more when translated into weaker sterling. It still looks soundly based, with an estimated £150 billion in cash available for investment.

Stock tips

Then there’s Chinese debt and relations with Russia to worry about; all comment for another day, but don’t relax, run the 20% stop loss and try and invest in stocks with reasonable liquidity, where you can exit fast – don’t get stuck, unable to sell.  

Only four weeks ago I wrote about the inheritance tax protection available in some AIM stocks, where I said I would compare three portfolios. Of the stocks mentioned in my portfolio then, most have been written up by me in previous Citywire articles. In the table below I show the movements since the original buy recommendations.

Of these 14 stocks, I have suggested buying 11 in previous Citywire articles and will revisit these in the weeks ahead, but would certainly suggest all stocks on this list remain a buy.

David Kempton's AIM portfolio

Stock Date Price at date (p) Price (10/10/16) Gain / loss
Arria (NLG)# 31/08/2016 15 17 13%
BCA Marketplace (BCA) 19/09/2016 190 181 -4%
Burford Capital (BURF) 25/05/2016 312 446 43%
Cerillion (CER) 19/09/2016 127 130 2%
Conviviality (CVRC) # 18/07/2016 199 217 9%
ECO Animal Health (EAH) 04/05/2016 375 492 31%
EKF Diagnositics Holdings (EKF) 16/06/2016 12 17 41%
IQE (IQE) 02/08/2016 24 31 29%
Lok'n Store (LOK) 22/10/2015 303 369 21%
Morses Club (MCLM) # 02/09/2016 116 126 8%
Serica Energy (SQZ) 24/05/2016 11 15.75 43%
Swallowfield (SWL) 12/07/2016 191 282 47%
XLMedia (XLM) 19/09/2016 85 100 17%
Watkin Jones (WJG) 02/08/2016 112 122 9%

Note: date given is when stock first mention in my Citywire articles. Stocks marked # I have not previously written about.

David Kempton is an experienced investor, proprietor of Kempton Holdings and a non-executive director of a number of quoted and private companies. He may have an interest in any of the investments which he writes about.

18 comments so far. Why not have your say?

Jim Thompson

Oct 12, 2016 at 14:31

Nice article David.

The bit about the compliant low wage workforce made me shudder a bit. Anyone who thinks that someone can buy a home and bring up a family on £7.20 an hour needs to have a reality check away from their cosy middle class lifestyle. Mr Ghosn earns about £3,000 an hour by the way.

That is why I have a lot of time for Mrs May, if she is going to represent all classes in a balanced way.

...and can we stop with the foreign workforce are amazing thing! I work in the transport industry and I can tell you that foreign factory workers are just as bone idle as anyone else. However, the self employed and 'professional' workers do seem to work with more pride I grant you. Perhaps we should be asking why we have trained a generation of young brits to think that menial jobs need to be done by foreigners?

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Denis Parkinson

Oct 12, 2016 at 18:09

I would suggest we have trained a generation of young Brits not to do menial lower paid jobs through the life style they can manage by living on benefits.

Anyone working a full week should be better off than somebody on benefits.

Having a couple of children works wonders for your benefits life style.

This obviously does not apply to the majority of younger people though.

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RBNF

Oct 12, 2016 at 18:26

David

A couple of clarifications

BCA Marketplace is not an AIM stock

Burford is & a star but does not qualify for IHT exemption

Lok n Store probably doesn't either

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david kempton

Oct 12, 2016 at 18:28

Thanks Jim (Thompson) useful response..

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Francis Wilkinson

Oct 12, 2016 at 20:50

Spot on with need for HS3-can't find anybody who thinks HS2 makes sense.

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Gleaner

Oct 12, 2016 at 20:59

Its good to read a well balanced informative article. Other contributors cannot seem to write ten words without extreme descriptive adjectives.

Times are peculiar at the moment, the fall in our currency would be greeted with delight in many countries, but are presented with despair in our daily drivel's.

Whilst politicians are crying out for new homes, the builders share prices are falling as the market fears a lack of demand and price falls. Property companies report full rental, but have SP's 20/30/40% below their NAV.

I think it may be time to move away from two of my 'value stocks, (SMP and BLND) have have a closer look at the suggested AIM stocks.

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mc2

Oct 12, 2016 at 22:20

great article, sober and effective.

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Charles Biggs

Oct 13, 2016 at 08:15

Many thanks David, for a refreshingly objective, factual article. Even within the financial pages many writers seem to regularly rely on sensationalist claims to try to get their point of view over.

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anglo29

Oct 13, 2016 at 09:57

Agree with the comments re. HS2 making no sense. The sheer cost just of routing a new line out of London from Euston would be horrendous. It would involve the destruction of possibly hundreds of homes through Camden alone, many of them classical Victorian/Edwardian buildings now valued in excess of a million pounds each. All of these homeowners will have to be compensated. There will also be the loss of valuable agricultural land en-route; when we need to be increasing our own food production and become less reliant on imported produce in the wake of Brexit..

Instead, why not spend the money in re-connecting those towns so senselessly cut off the rail network initially by Beeching, then the Wilson government in the early 60's?....the Devon town of Kingsbridge which I'm familiar with is a case in point. If small businesses are the future, it is towns like this that need re-connecting to the national rail network.

While we're on the subject of nonsense spending, can we please abandon all thoughts of that monumental piece of unnecessary frippery; the Thames Garden Bridge?

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Francis Wilkinson

Oct 13, 2016 at 10:06

Nobody is complaining about east coast service from north to London-everybody would like better commuting train services in the north-politicians need to understand this.

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sarah b

Oct 13, 2016 at 10:25

As always a well written article thank you.

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david kempton

Oct 13, 2016 at 13:23

response to RBNF, and apologies not sooner.

correct - BCA Marketplace is not AIM

Re The Business Property Relief on AIM stocks is not always totally clear, i.e. IHT relief on Burford and Lok'n Store. HMRC exclusion states "mainly deals with securities, stocks or shares, land or buildings, or in making or holding investments” this doesn't necessarily preclude these two companies and you'd probably have to get a ruling at the time. But, I agree, not cut and dried on Burford and Lok'n Store.

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sgjhaghsdg

Oct 14, 2016 at 10:05

Better connections between Manchester and Sheffield would also be rather welcome, both road and rail.

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anglo29

Oct 14, 2016 at 14:38

Yes, I'm not as familiar with connections between northern towns but I can well believe it. Unfortunately successive governments are more interested in grandiose schemes like HS2, that are horrendously expensive, than using that money to re-connect towns to the national network which is what's really needed to get isolated communities that are dying through lack of transport, working again.

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Spartacus

Oct 16, 2016 at 16:36

Personally I think we're heading for disaster.

Theresa May is going round telling people what they want to hear and after reading Private Eye this week, her words about "going after tax avoiders" seem laughable.

No plan or any semblance for a plan for Britain post Brexit, not evena plan to keep the UK from falling apart.

I'm investing my money overseas only from now and i might well follow..

sorry to be negative, but hat's how it is

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Francis Wilkinson

Oct 16, 2016 at 19:32

Good Luck Sparticus-if you find Utopia let us know-chances are the other man's grass is less green than you might imagine!

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Spartacus

Oct 16, 2016 at 20:46

It's not a case of seeking a utopia - it's more a case of avoiding a meltdown.

If by some miracle Brexit succeeds - I could always return!

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anglo29

Oct 17, 2016 at 07:41

The above comments highlight the need for diversity. I have taken on an Emerging Markets and a Latin American fund recently, but not at the expense of long term UK and Global investments which have provided a healthy regular dividend income over many years as well as worthwhile capital gain.

We have had major scares before, (2008 for instance) yet markets recover, but unless you stay invested and even increase your holding during a downturn, you miss out on that recovery.

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