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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.

 
David Kempton: my stock bets for an uncertain year

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.

24 comments so far. Why not have your say?

Geoff Downs

Jan 03, 2013 at 12:51

I have read it twice and don't think I have seen the word debt once.

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Keith Cobby

Jan 03, 2013 at 13:17

My 8 are:

Aberdeen Asian Smaller Companies Trust

Aberdeen Asian Income Ltd

Henderson Far East Income Ltd

Schroder Oriental Income Ltd

Murray International Trust

Scottish Mortgage Investment Trust

JP Morgan Global Emerging Markets Income Trust

F & C Global Smaller Companies Investment Trust

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John Coles

Jan 03, 2013 at 13:29

Far more sensible, Keith Cobby. Investment Trusts are an undiscovered sector of the market. Find capable management, with a good dividend (>3%, say) and, if possible, a discount to NAV and then sit back and watch. Happy 2013!

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Al

Jan 03, 2013 at 14:16

So how are we to buy into KL property?

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gravedigger

Jan 03, 2013 at 14:37

The Malaysian Government is encouraging foreigners to buy property, although they have flip flopped on the issue several times in the past. Some International real estate agents operate in KL, and the Malaysia Institute of Estate Agents has a list of members on their website. You can view properties on-line and get an idea of values. Better visit and view to see the location though.

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Al

Jan 03, 2013 at 14:50

Very good digger but an unlikely route for anyone other than high risk high rollers - not exactly the target audience here? What was the point of mentioning it without a way in e.g. one of the A/P property funds?

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Rob Pratley

Jan 03, 2013 at 14:55

David, Can you please confirm the VW ticker. Unable to find on iii. Many thanks in advance. Rob

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Graham D-C

Jan 03, 2013 at 15:42

AMER might be worth buying into, however potential investors should be aware that since 11/12/11 122m shares have been issued and now total circa 1037m.Also, in 2012, 5 of 6 directors exercised options most at VERY low prices and sold them shortly afterwards at a huge proft.(3 of them bought a total of 43.32m @1.75p and together sold 34,936,900 shortly afterwards @ 37.5p(Mmorningstar premium service data) . No director exercised above 15p befor selling. Needless to say, I will not be buying AMER. DYOR

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Anonymous 1 needed this 'off the record'

Jan 03, 2013 at 17:07

My selection (one only) is CF ODEY ABSOLUTE RETURN FUND which is the top Absolute Fund for last twelve months. The fund is run by James Hanbury who appears to be doing a good solid job.

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joe stalin

Jan 03, 2013 at 17:23

what.s with all the micro cap stuff? There are plenty of good names out there without trawling through the obscure.

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Michael Hellman

Jan 03, 2013 at 22:11

Enjoyed the article.. some great food for thought. @ Keith have you been looking at my portfolio?

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masud butt

Jan 05, 2013 at 21:23

well done Cobby, I have 4 of yuor choice, I have now invested in BG japan IT.

I also have Newton asian income fund. I am thinking to invest in global smaller Companies--I like SL global smaller Co fund- any suggestions, please, thanks.

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Anonymous 2 needed this 'off the record'

Jan 06, 2013 at 09:27

Fund managers = crooks in suits

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stormdog

Jan 06, 2013 at 10:45

An interesting read, thanks.

My four are:

Belvedere Resources.

Coalspur Mines.

.Fluor Corporation.

Bank of Ireland,

They say that Fortune favours the brave.

With the possible exception of Fluor, none of the others are even within hailing distance of being suitable for widows, orphans, people of a nervous disposition and those who cannot afford to lose.

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Graham D-C

Jan 06, 2013 at 12:45

Take a look at Steppe Cement (LSE: STCM) in Kazakhstan -GDP growth at 6%. Recent 40m share offer @ 25p to existing holders only, oversubscribed by 34%. Major conversion of production line 5 (completion by Autumn 2013) will increase production by circa 75% to 2.8M tonnes, with $8.5m annual cost savings. 2012 Q1 & Q2 revenues combined =£31.072m, Q3 revenues =£28.9m. DYOR

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david kempton

Jan 06, 2013 at 19:12

thanks for some interesting suggestions

sorry not to mention US debt, which not oversight, but space precluded. As a factor, it's a 'given' and not a new issue so one attempts to work within that knowledge. I have some strong views on it but no room here and for another day

I really like investment trusts and collectives are core holdings of mine, but you cannot compare them to a single equity investment, which quite different volatility and risk/reward ratio

sorry about KL property. perhaps a bit flippant, but intended more as an illustration of the need for booming Singapore overspill, which is bursting the borders.

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david kempton

Jan 07, 2013 at 07:55

forgot the VW query. there are 20 or so different ways of buying VW. Brokers seem to find VOW3:GY the easiest to trade

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Keith Cobby

Jan 07, 2013 at 09:19

I haven't bought individual equities for many years now because it is very time consuming for the UK and very difficult for global/asian companies.

I kind of subscribe to Jim Slater's 'Zulu principle' which is to basically specialise and so I stick to investment trusts and some property/asian offshore investment companies (as noted in my list). I find the company reports very readable and transparent unlike OEIC and ETF.

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John Osborne

Jan 07, 2013 at 13:38

Is there a good REIT or Property IT that invests in KL and Singapore that anyone recommends ?

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Kenpen2

Jan 07, 2013 at 14:30

David, I too am nursing losses from some of your resource tips but no hard feelings, am in for the long haul. My Wildhorse Energy stake just turned blue for the first time this morning !

Just read an article about the potential of thorium-fuelled nuclear power. Any thoughts on miners or engineering companies which might benefit from research and development of this ???

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stormdog

Jan 07, 2013 at 15:37

Kenpen,

Lucky you and many congratulations.

I am stuck in Wildhorse at AU$0.30

The chance of them going into the 'blue' feels a little remote.

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joe stalin

Jan 07, 2013 at 19:19

You don't have to pick a bunch of obscure stocks or funds to make money! Stick with lloyds rbs Taylor wimped etc and for a bit spice fortune oil

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joe stalin

Jan 07, 2013 at 19:20

Wimpey even :-) wretched predictive text

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david kempton

Jan 07, 2013 at 22:34

yes, sorry about Wildhorse. I'm sticking with mine and quite hopeful of a good result but longer time than expected. There's lots happening there

I've kept all my resource stocks since many look very oversold, China is perking up and there's potential consolidations this year.

I don't know a Singapore/Malaysia property fund but worth a look on the local exchanges. I mentioned this more to reflect the local conditions than to suggest a direct investment. However somebody may want to go to KL and buy a flat or even syndicate it. I'm sure it would pay off but obviously not an easy asset to own, but then no property is compared to a stock.

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