Well that was a quiet five months! Yawn! Very little in the way of subject matter so our move to Dowgate was clearly perfectly timed to take advantage of the massive news void. Don’t you just love it when a plan comes together? OK, maybe not. In truth, so much happened that the opportunities to make myself look a complete fool were almost infinite so perhaps the forced silence was a blessing in disguise. Anyway, dear reader, your break from my weekly ramblings is now at an end. You have signed up for another stretch so who am I to disappoint you? This time around the blog will be a little less rigid. Some weeks may be blogless whilst others may see more than one. Events will dictate. Also, Stuart and Neil will make occasional contributions, providing you with the musings of the younger generations in addition to the Victor Meldrew-like meanderings of yours truly. Oh, you lucky people, as Arthur Askey used to say. So here we go.

 

The Boris Bounce

The size of the Tory majority took the nation by surprise and finally puts to rest the corrosive worries about what might have been. Corbyn may still believe his policies were right but the electorate clearly thought otherwise. Boris now finds himself in an incredibly strong position to drive through real change domestically and push for a good exit deal with the EU. Every one of those Tory MPs that walked across the house (and Labour MPs too, for that matter) lost their seat but I doubt it will completely silence the remainers who will now worry again about the possibility of leaving with no deal. However, Boris knows full well that, to ensure he ends up with the best deal achievable, he must leave the “No Deal” possibility firmly on the table.

There are already signs that the stagnation of the economy in the months running up to, first, the Article 50 deadline of 31st October and then the General Election, is beginning to unwind. Commercial decisions and investments are once again being made and confidence is improving. Locally I am seeing “sold” signs outside properties that have sat unsold for months and estate agents are expressing far more confidence in the housing market.

Sterling initially hit $1.34 in the immediate aftermath of the Election although it has traded back a little in response to the “No Deal” worries. I expect the general direction of sterling to be upwards during 2020 but these concerns will ensure it isn’t a smooth ascent. After so many years of the UK stock market suffering from an uncertainty discount, I expect the gap to begin closing. We could be one of the better performers this year. The multi-national heavy FTSE 100 Index may be less punchy than the more domestically focussed 250 Index, but even here I suspect investors will get used to the stronger sterling and worry less about its impact on our overseas earners, most of which are historically quite cheap anyway. It is likely that overseas predators’ interest in our companies will become even more pronounced before the uncertainty discount closes completely.

 

Elsewhere

 Having enjoyed such a strong run already it is doubtful the US stock markets will perform quite as well this year. However, in an Election year Trump is unlikely to do anything to upset his chances of serving a second term. The impeachment proceedings orchestrated by the Democrats look nothing more than a pre-Election publicity stunt and could actually have the opposite impact to that intended. The US markets are likely to hold up well but perhaps we shouldn’t expect too much of them this year.

The run-up to the November Election would be an ideal time for the Trumpster to cement at least one further deal with China to repair their trading relationship. Their Phase 1 deal is due to be signed and sealed on the 15th of this month and further talks are due to be held later in Beijing. This is likely to have a positive impact on the Chinese markets, I feel. The Shanghai SSE Index is around 7% below its April 2019 peak whilst Hong Kong, further hurt by the student riots, is over 12% below its mid-year zenith. A continuing thaw in the US/China relationship could spur the Chinese markets on and they could be amongst the strongest performers in 2020. A strong Chinese market is likely to lend support to other markets in the Pacific Rim and I would expect these to perform well provided the US Federal Reserve keeps the lid on interest rates and continues to inject funds into the economy via the REPO market.

However, I expect Trump to continue applying pressure on Europe with trade tariffs both threatened and imposed. This area could replace China as his main tariff focus. Combined with a year of difficult Brexit negotiations with a rampant Boris, it is hard to feel positive about the EU, where some of its states, including Germany, are already teetering close to recession. Best avoided, I feel.

So, for the first time in quite some years, internationally spread portfolios should be comfortable with an increased exposure to the UK whilst perhaps sacrificing a little US weighting for the Far East. However, I suggest any exposure to Europe is in non-EU states such as Switzerland and, of course, the UK.

The last few days have, of course, thrown up a concern that could render all of this irrelevant – Iran. So far Trump’s decision to take out the Iranian general, Qasem Soleimani, has been met with much combative rhetoric and threat. It will almost certainly lead to some form of retaliation but, now the US has shown it is not all bluster, Iran may be a bit more circumspect about its actions. The potential for an Iran-based flare-up has long been present and it does not take a genius to anticipate its impact on the oil price, its supply and global growth rates should it become more than a skirmish. It is a long time since the world has been a safe place.

 

2020 Picks

 I have questioned many times why tipsters should expect the performance of their New Year recommendations to fit the chronology of the calendar year. It makes no logical sense. Nevertheless it is expected so who are we to buck the idiotic trend. This year Stuart, Neil and I have each selected a stock for your delectation:

 

Hornby (Russell)

 This well-known manufacturer of toys and models is almost 120 years old but has not made a profit since 2012. It has some wonderful brand names, including Hornby, Airfix, Meccano, Corgi and Scalextric but all tend to be regarded as more or less obsolete in the digital age of iPads and tablet-based games.

Two years ago Lyndon Davies took on the role of Chief Executive. Davies, a toy industry veteran, had come full circle. Having worked in the Mettoy factory in Swansea from the age of 16, he and two colleagues bought the business from the official receiver in 1984, changing its name to Corgi Toys, before selling it to US toy giant Mattel in 1989. Mattel sold Corgi to Hornby in 2008 and a catalogue of management errors and bad practices saw its new owner run into severe difficulties, hence the lack of profitability for the last 8 years.

Davies quickly brought common sense to the boardroom, ending the stream of disagreements, instilling ambition into the workforce and rationalising the wide range of products. One example of this is in the Airfix range, where low-priced “quick build” snap together models are now available, aimed at the younger end of the market whilst expensive, complicated models are targeted at the dedicated adult modeller and can cost up to £120. Similar age-related products are now available in the Scalextric and Hornby ranges, one example being Harry Potter-themed train sets and the positive impact on sales is evident.

There is still a long way to go but things are rapidly improving. In the opening half-year to end September, revenues increased 15% to almost £16m and losses fell from £3.2m to £2.5m. In the same period for the year in which Davies joined the company, in 2017, losses ran to £5.7m. Much will depend on the Christmas period in the short term, but break-even could be seen in the first half of 2020/21. Davies declined pension contributions to supplement his salary (itself considerably less than his predecessor’s) expressing the view that management’s rewards should not come until the company is making money – if it doesn’t “we don’t deserve rewards”. The balance sheet is in reasonable shape with net debt down from over £7m in 2016 to £1.8m and undrawn facilities of over £5m.

The share price has been in decline for more than twelve years, falling from almost £3 in 2007 to the current 38p where the company’s market value is less than £50m. It is a high-risk situation and one is putting one’s faith in Lyndon Davies to continue the progress made in his first two years in the job. For those not afraid of such a gamble Hornby could prove a good recovery play in my view.

 

IntegraFin Holdings (Stuart)

Following on from an impressive 2019, 2020 looks to be another year of outperformance for the Investment platform Transact.

Their proprietary technology allows the IFA market to access a wide range of tax wrappers and an extensive choice of asset classes. They are investment agnostic, so will not be caught out as Hargreaves Lansdown et al have been.

Yield is a little over 2% which is better than the ‘Post Office’ although it is growth we seek here. Berenberg has a target of 490p currently which should increase as the stock passes this level from 450p currently.

Domestic stocks should outperform having been muzzled by Brexit worries and political manoeuvring. Boris is pro Industry and the Service Sector should thrive.

A new CEO (Alex Scott) will take over in March and has not announced a strategic review which is, in itself, unusual and bodes will for 2020 and beyond.

 

Brickability (Neil)

Not only did 2019 lack blog posts from Russell, it also lacked new companies joining the stock market, especially the junior market (AIM) which endured its worst year ever for IPO’s. According to the Times only 10 businesses floated on AIM in 2019, down from 42 in 2018.

My pick for 2020 Brickability (BRCK) was one of those ten, joining the AIM market last August. A leading construction-materials distributor, with 25 sites across the UK and a broad customer range. The company operates through three divisions: Bricks, which is still the groups largest. Heating, Plumbing and Joinery and lastly Roofing. I’m sure this will continue to grow both organically and with further bolt on acquisitions. The management are highly experienced in this field with four acquisitions made in the period alone. All look to have been integrated smoothly and are on track to meet expectations.

Recent Interims released in November show revenue increasing 19.8% to £97.9m, and gross profit up 19.4% to £19.1m compared to H1 2018. As a result a maiden interim dividend of 0.87p per share was declared. CEO Alan Simpson owns a near 16% of the company so has adequate skin in the game to want to see the company prosper and increase the dividend. Further encouragement comes in the fact he added to his holding at the float.

The shares started life at 65p but have moved higher since the 12th December election and now stand at 72p. That represents an earnings multiple of around 10 based on market analyst’s expectations. I see both this sector and the company offering excellent long-term prospects. The Conservative Government has made it clear more needs to be done with housing and the huge undersupply of homes needs to be rectified. With good management and a clear business model, we should see more to come.

 

Russell Dobbs FCSI

Chartered Wealth Manager