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David Kempton: my stock bets for an uncertain year
Experienced private investor David Kempton is in a bullish mood as he highlights eight investment opportunities for 2013.
It is the time of year when all manner of pundits try to predict the future. My previous 20-year career as an engineer, often working in the tough environments of Arabia and Asia, taught me to skim much of that sort of commentary and focus on the bottom line and the raw data.
Last year was important and several issues were of major significance:
- The International Energy Agency projects the US will be the world’s biggest oil and gas producer in five years.
- We tend to think of fracking for shale gas, but the principle also applies to oil where US production is already up 20%
- Cheap local energy will reduce inflation and boost incomes. Boston Consulting Group predicts by 2015 US manufacturing costs will be 15-20% lower than Germany, France, Italy, Japan, 8% lower than UK and only 7% more than China
- Outsourcing will come home to Uncle Sam and China has become the US’s largest export market. It seems unnoticed that China’s current account surplus last year was only 2.6% of gross domestic product.
- Meanwhile China will add 125 million cars in five years with petrol at the pump now only 66p a litre.
- 20 million rural immigrants arrive in cities each year, but as Asia shifts to a high protein diet, arable land shrinks by 12m hectares a year.
- The OECD's predicted growth rates for next year are: China 8.5%, India 5.9%, US 2%, UK 0.9%, Germany 0.6% and the rest of Europe below that with some deep into negative territory
- Europe now has 19 million people unemployed with 3.5 million of these under 25, as southern European countries slip down the CEBR’s World Economic League Table. Also slipping are Switzerland and France , with the latter now aiming for the highest tax rate in the world, whilst its brightest and best consider the extraordinary choice of moving to Belgium or Britain.
- Meanwhile the UK climbs the league table. We are blessed with an independent currency, a language with global reach, the best time zone in a connected world, temperate weather (yes, really!) and stable government.
- Our UK major companies and exporters are amongst the world’s best, stuffed with cash and bursting with ideas. My favourite festive titbit came from Diageo chief executive Paul Walsh who said he hoped to see the value of his group’s whisky exports increase from £135 to £150 per second in 2013.
- Our foreign-owned motor industry had its best year ever.
- UK inflation stays strangely benign at 2.7%, but will increase in 2013 in spite of public sector workers being held on a two-year pay freeze, with the private sector enjoying a 2% rise on average..
While the economic data before Christmas from Europe and China were poor, US figures were pretty good, pointing to a continuing recovery. The fiscal cliff still hangs over us but is in the process of being resolved, delayed or fudged.
The recruitment company I chair has ten offices in UK industrial towns and gives me a good finger on the pulse, arguably better than the cold statistics emanating from London.
We are leaner, fitter, all working harder for less money, but our figures are better in these last six months and 2011 feels like a low point. We’re not excited yet but certainly much encouraged as we start the new year.
We’re not talking sunny uplands here but there seems to be better expectations for a global uplift encouraging me to continue my trend of increasing equity exposure, at the expense of cash and bonds.
I’m definitely not a believer in Japan for next year. While the country enjoys a honeymoon period with the newly-elected Shinzo Abe and his money printing plans, its industry is not coping well. Japan’s electronics manufacturers are being murdered by the excellent competitive products from Korea and the Chinese are buying fewer cars in response to the arguments over the Senkaku Island.
I really like the Japanese people and a holiday there two years ago was one of our best, but I wouldn’t buy into its stock market now.
I have bought Volkswagen (ticker VOW3:GY is the easiest form to trade ). The car manufacturer has 20% of the Chinese market having doubled production in the last six months to an astonishing 4 million vehicles a year. Production in the US has turned around too, with output up 34% to 0.5 million cars next year, 4% of the market and growing fast.
The company is an underrated success story with its shares valued at just five times earnings, undeservedly much lower than the P/E of nine for both BMW and Daimler.
Having been burned badly in resource stocks last year, all still held and some looking ridiculously cheap, my pick for next year would be Amerisur Resources (AMER.L), again! I’ve held the stock for over 10 years in three different guises, and it’s probably amongst my best ever, and have just bought some more.
With its main operations in Colombia, arguably now the best governed country in Latin America, but also with assets in Paraguay, producing 5,000 barrels of oil per day at end 2012, which should double by 2014, the shares remain stuck on a large discount to net asset value. With exceptionally low operating costs of $15, falling to $10/barrel, nine new wells a year are planned, funded from cash flow.
Moreover, an interesting announcement from President Energy (PPTC.L) on Paraguay on 17 December points to huge potential for AMER’s neighbouring 60,000 sq km land, and at nil value in corporate broker RBC’s 72p target.
Another buy last month was Aviva (AV.L), pretty boring for me, but it might just not be. It feels flabby with poor market focus, mostly UK and Europe, compared to its peers in the FTSE, where RSA is a class act and Prudential has rebalanced its markets to US and Asia. The new chairman is making a fast impression with divestment and market refocus. A leaner, fitter company could be much more valuable and might just get taken over anyway. Meanwhile sit happily on a P/E of seven, yield of 7% and a PEG of 0.1 for 2012.
I have bought some Quindell Portfolio (QPP.L), because it is such a compelling story providing its own technology, software and consultancy for insurance company claim management, hugely reducing costs, also applicable to the telecoms industry and capable of enormous growth. Having raised an additional £80 million in November of working capital through some equity and bank debt to meet new contract awards, the company looks to achieve target earnings in 2013 for a P/E of 7.7 and a PEG of 0.1. The management is ambitious, intelligent and in a hurry, and with a possible early move to the FTSE 250, it still looks well worth buying, although it needs watching carefully.
I have three ‘binary’ flyers for the year worth a small investment.
Shaft Sinkers Holdings (SHFT:L) is a shaft sinking and underground excavation company with half its operations in South African platinum. It doesn’t get much riskier than that! However, it is going well there now and with an order book of £350 million on a P/E of six for 2012 falling to 3 in 2013, I have bought some, convinced by the broker’s highlighting a yield of 11.8% and words of comfort on early settlement of their litigation issue.
Now I turn to two high risk oil exploration companies. The investment principle in buying exploration stocks is to buy small units in about eight companies. This allows two to fail, four to limp on with their cash assets and two to hit pay dirt.
Pantheon Resources (PANR:L) has two properties in East Texas, although the current £15 million market capitalisation is currently underpinned by one property only. The company considers that the overlooked second property could be a world class oil reserve lying beneath a high pressure gas reservoir, which although technically difficult to reach, could produce net revenues of $300 million with similar revenues from the other well. This should commence production in 2013 and greatly increase the company’s value.
Infrastrata (INFAT:L) was originally a gas storage company in a subsea salt deposit off Dorset, then more latterly Larne in Northern Ireland, but it is now much more exciting. The CEO commented in November that imaging had identified exciting oil and gas prospects, whilst in Dorset they will drill an appraisal well where oil has already been encountered. I have been a shareholder here for 15 years and lived through the good and the bad and dreams of finding the extent of Wych Farm. Unforunately, the Sunday Times nipped in with a tip and the shares have shot up in recent days. However, on a market valuation anywhere below £20 million, this is worth a small punt for a potentially very interesting year.
I am indebted to David Stevenson in the Financial Times for the best geared play of the year. If you can’t be bothered with shares but want to take a position, the recent SocGen leveraged trackers are perfect. The UKL5 exchange traded product offers five times the return of the FTSE 100 index, whereas UKS5 is the short position.
My speculative property bet for the year is Kuala Lumpur. A visit to Singapore last month confirmed my views that this phenomenal Asian country is bursting at the seams and will have to overflow its business and services to its neighbour.
KL is a nice international city with easy access to Singapore by air, road and rail, whilst having high quality property at a fraction of the price, currently strangely left behind.
David Kempton is an experienced investor, proprietor of Kempton Holdings and a non-executive director of a number of quoted and private companies.
The Citywire guide to investment trusts
In association with Aberdeen Asset Management
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Look up the shares
- Amerisur Resources PLC (AMER.L)
- Aviva PLC (AV.L)
- Quindell Portfolio PLC (QPP.L)
- Shaft Sinkers Holdings PLC (SHFT.L)
- Pantheon Resources PLC (PANR.L)
- Infrastrata PLC (INFAT.L)
- President Energy PLC (PPTC.L)
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by Gavin Lumsden on Mar 07, 2014 at 18:53