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Our Electric British Opportunity: What Will We Plug Into Next?

Markets hate uncertainty. Investors don’t invest. Or they fear and sell. Then a dam of money builds up, waiting for a new home to find yield.

Well, since Friday, the dam has burst. The FTSE 100 posted a big rally. Leading British companies saw their market value jump £50bn.

The ‘Boris Bounce’ electrifies the pound and FTSE. Source: Money Observer

One key piece of uncertainty for our portfolio has been the UK election and the Brexit plan. We now know — give or take wrangling with the EU — more of what we may get. Boris Johnson won the largest majority since Thatcher’s 1987 landslide. Giving him a mandate for his deal.

But key challenges remain. Can he secure a full tariff and quota-free trade deal with the EU? With other nations? Can he keep the United Kingdom together, with an emboldened Scotland? Will all the spoils of deregulation go to London, leaving other regions in the angry cold?

Last night, the pound and FTSE suddenly pulled back again. Boris announced he would add a revision into the Brexit bill to rule out any extension to the transition period beyond December 2020. And the markets clocked new fear of no-deal being achieved.

Could this be time to buy the dip?

As Lifetime Wealth Investors, we need to know where and how we can grow our profits and continue our yield. Let’s take a look…

The opportunity

The UK within the EU is more constrained than the mainstream media will dare to tell you. A friend of mine in England faced the threat of job loss should he take a ‘Leave’ view at work.

Inside the EU, the UK can’t really choose its migrants. EU members take many of the places, with no promise that they’re the brightest or wealthiest.

It faces top-down regulation across so many industries until innovation gets stifled. Ever wonder why the EU — similar in size to the US — has no Apple, Facebook or Google?

And any free-trade agreements with faster-growing areas of the world — America or Asia — depend on the slow grind of the EU.

Meanwhile, the alarm sounds.

UK growth is stagnant. The population — along with much of the European continent — is ageing.

A brighter future?

Britain has deep connections with its Old Commonwealth — Canada, Australia, and New Zealand. Hundreds of thousands of Brits now live in those countries. And these economies have quietly surpassed the UK in per-capita wealth:

Spend any length of time in the UK and you’ll experience rubbish-strewn roads, as well as airport and public-transport facilities that do not appear to be First World. The country is simply not keeping pace.

Well, Brexit provides an opportunity for Britain to emulate Australasia’s success over the past two decades:

• A points-based immigration system targeting skilled, wealthy migrants from around the world.
• Signing of advantageous free-trade agreements. Both Australia and New Zealand run significant trade surpluses with key trade partners.
• Deregulation of industry and business to create a more dynamic and competitive economy.
• Continuous tax cuts for working people.
• Minimal taxes on capital or investment.

There are two paths for the UK

• Become a deregulated, innovative global trader with a high-quality and flowing points-based migration program. A ‘Singapore-on-Thames’.
• Give in to the Socialist/Remain/EU agenda that aligns Britain with high-tax, high-regulation Europe.

A difficult course to navigate! Pull back on too many rules to facilitate business and the EU may well deny market access. Push reforms too fast and the impacts on the British economy — particularly outside London — could cause revolt.

Here’s what I’m going to do

Boris Johnson has proven a political adeptness in achieving and shoring up the majority for a Brexit deal that Theresa May could not.

Chancellor of the Exchequer Sajid Javid has promised a significant package of spending and tax cuts to build a ‘Global Britain’. Speculation has it that his upcoming ‘Brexit budget’ will also include reforms to stamp duty — the tax that buyers have to pay to purchase a home in Britain.

Over the next 12 months, these changes offer promise for our Lifetime Wealth holdings. They will get people spending at NewRiver REIT [LSE:NRR] malls, buying homes from Crest Nicholson [LSE:CRST], and requiring new insurance policies from Avivia [LSE:AV].

Brexit is not done yet.

So I’m going to hold and maybe top-up when opportunity allows. And wait for potential further upswing. Enjoying good dividend yields along the way.

What next?

History tells us that major change and economic upheaval creates investment opportunity. It allows you to buy at value and wait for things to escalate.

We’ve just done that with the major opportunity of Brexit. And we’re not finished yet.

Now we’re looking for the next Brexit. A new opportunity where we can enter equities at reasonable prices. And wait for value to be realised.

There’s actually a worldwide ‘Brexit’ happening as we speak.

The US is leaving the global free-trade regime. In particular, this will stop low-cost producer China (and others) from flooding the American market and running a trade deficit.

There’s been something of a ‘Phase One’ agreement. But it’s hard to take it seriously until we see if China can honour its commitment to buy $16bn more agricultural goods over the next 2 years.

It seems China has bought a little respite to continue its mercantilist trading strategy. But it remains on a collision course with a US deficit.

For investors, there is opportunity within this trade war.

Among the most exposed countries are the New World commodity exporters mentioned earlier — Australia and New Zealand.

With China being their largest market, they depend on continued growth and consumption in that economy. Logs, dairy and meat from New Zealand get sent to build and feed this rapacious nation. Meanwhile, iron ore from Australia powers its factories.

Australia appears to have suffered more through the trade war. And AUD is now sitting at a weak point as the economy grapples with a potential housing bubble, high rates of household debt, sliding manufacturing, declining mining, and a wage squeeze that shows no signs of abating.

My own view is that Australia has room to move if it wants to.

It can deregulate and cut taxes in many areas. It is big enough to grow migration and boost consumption — though this is not a long-term solution. Australia has moved its export base before — from Japan in the 1980s to China today. And it can serve other Asian powerhouses looking to take up potential Chinese slack.

Furthermore, Australia has 11 strategic free-trade agreements and alliances in force: with China, Japan, the Republic of Korea, New Zealand, Singapore, Thailand, US, Chile, the Association of South East Asian Nations (ASEAN), Malaysia, Canada, and Mexico.

Brexit should also create a faster route to a comprehensive UK-Australia free-trade agreement.

Meanwhile, we see opportunity in a worried currency (AUD) and certain export and banking stocks. We may look into property stocks in the New Year once any December exuberance is extinguished.

Portfolio update

NewRiver REIT [LSE:NRR] continues its dividend strategy, providing a juicy yield near 11%.

The company updated the market as follows:

‘As previously announced, NewRiver’s third quarterly dividend will be 5.4 pence per share in respect of the year ending 31 March 2020.

‘This dividend will be paid as a Property Income Distribution (PID). The dividend payment date will be 7 February 2020 and the dividend will be paid to shareholders on the register at close of business on 27 December 2019. The ex-dividend date will be 24 December 2019.’

Greatland Gold [LSE:GGP] announced further developments with geophysical and geochemical studies identifying a range of ‘exciting, high-priority targets’.

The company stated they’re looking to fast-track exploration across the Paterson region as ‘one of our highest priorities for 2020.’

You can view the full update provided to the exchange here.

Again, be careful with this speculative holding. The company needs a string of positive updates or investor impatience will see the share price crumbling.

For now, though, the share price remains low. The geo reports suggest potential, warranting deeper drilling. The fact that $22bn mining giant Newcrest [ASX:NCM] is farming-in on their drills continues to add weight to the company’s findings.

In Australia, we see continued promise with Tassal Group [ASX:TGR] — and possibly still Westpac Bank [ASX:WBC] — at the right price. We’re also actively looking for new Aussie opportunities.

Despite the AUSTRAC nightmare, Westpac overshot its Share Purchase Plan, raising more money than expected. Outside of this, it will pay a dividend of 80c per share on 20 December to shareholders on record as at 13 November.

Still, Westpac now comes with greater risk. Besides the AUSTRAC statement of claim, APRA (Australian Prudential Regulation Authority) announced an investigation into the bank and its senior executives. And they have told the bank that it must add an additional A$500mn in capital, bringing the total risk add-on capital to $1bn.

We are retaining a ‘Buy’ since the share still offers long-term value and yield. But we are reducing the ‘Buy-Up-To’ to take advantage of ‘dip opportunity’ only. There’s heightened risk since the size of the AUSTRAC fine is as yet unsettled, and the result of the APRA investigation remains unknown.

Given recent climbs, for those who need cash — this may also be a time to sell some larger gainers. We don’t know if gains will continue. Especially in the UK. The makeup of the final UK-Brexit deal over the next year continues to pose risk. As does the global trade skirmish between the two largest economies on our Asia-Pacific holdings.

Here’s where we’re pitching current ‘Buy-Up-To’ guidance…

 Current as of 18 December 2019 at 8:30pm GMT.

As markets prepare to close for Christmas, this will be our last post for 2019. I will be back in touch on New Years’ Day in 2020. Only trading alerts deemed urgent will get sent over this time.

2020 holds much to look forward to:

• A possible Airbnb IPO.
• Buying opportunity in the UK, Europe and Asia Pacific.
• Even patches of value on the huge American exchanges and in USD as their upcoming election brings fear and loathing.

Uncertainty scares the big fund investors that move markets. And creates opportunity for lithe swimmers like you and I.

For now, I wish you a very Merry Christmas. And a time to invest in those assets which are truly the most important: your loved ones around you.

Regards,

Simon Angelo

Editor, Lifetime Wealth Investor