Private investor’s diary: the year that was

In the UK, the Brexit process rumbled along in the background, while the economy continued to grow at a healthy pace. Strong retail sales in both October and November suggest the UK consumer is in fine fettle. Further robust employment figures and evidence from key economic surveys point to strong economic growth in the fourth quarter. Growth for 2016 is forecast at +1.8 per cent, the highest in the G7. Apart from an increase in the UK government’s borrowing requirements and a little tinkering here and there, Chancellor Philip Hammond’s Autumn Statement was largely uneventful.

Currency markets were active with the Japanese Yen falling 9.4 per cent against the US dollar much to the relief of the Japanese government and exporters. Sterling recovered some of October’s losses, gaining 6.0 per cent against the euro and 2.3 per cent against the US dollar. Against the euro, sterling has recovered to the levels seen in the immediate aftermath of June’s referendum. Gold was friendless, falling 8.1 per cent to $1174 per oz, its lowest level since February. Oil, on the other hand, was given a boost on the last day of the month by Opec’s agreement to cut production by 1.2m barrels per day, around 3.5 per cent, from January. Brent crude gained 6.1 per cent, taking it back above $50 per barrel at $51.50.

In the UK, the FTSE All-Share (TR) Index fell 1.6 per cent, in stark contrast to the gains across the Atlantic where the S&P 500 was up 3.4 per cent, the Nasdaq, +2.6 per cent and the Russell 2000 +11.1 per cent. Japan benefited from Yen weakness, with the Nikkei 225 up 5.1 per cent in local terms. The German Dax was off just 0.2 per cent, but in India the market fell 4.6 per cent on concerns about the short-term economic consequences of the government’s decision to withdraw 500 and 1,000 Rupee notes from circulation.

Performance

The bunting can stay firmly in the box for another month. The portfolio was off 1.4 per cent during the month, a little better than the All-Share, but that doesn’t pay the bills! With one month to go, the portfolio is down 6.7 per cent in 2016, compared with +11.2 per cent for the All-Share. Since inception nearly five years ago, the portfolio is still up a healthy 106.8 per cent, an annualised return of 15.9 per cent, comparing favourably with the +54.1 per cent (+9.2 per cent annualised) of the FTSE All-Share. I have found this year fascinating, but from an investment point of view will be glad when it’s over.

The star performer last month was aircraft leasing company Avation (AVAP). It gained 16.6 per cent, helped on its way by its announcement that it had received an approach form a third party to acquire its fleet of 22 ATR turboprops. The company is considering the offer, but said it will only go ahead if it “delivers significant value above book value”. I have been patient with this holding. Having first bought in November 2014, it traded sideways in a narrow channel for almost two years. I was convinced that the market was undervaluing the stock and so stuck with it. Results in September provided the catalyst for performance to resume with this latest announcement giving it a further boost. I am holding on in expectation that a sale of the turboprop fleet will go through, demonstrating the undervaluation of Avation compared to its peer group. The holding is now up 30 per cent on my average in-price. Biotech Growth Trust (BIOG) was a beneficiary of Trump’s win. It gained 12.4 per cent on relief that the sector would be spared the introduction of punitive drug price regulation from a Clinton administration. Long-time favourite AdEPT Telecom (ADT) was up 10.6 per cent following robust interim results in which the dividend was raised by 25 per cent. Renew Holdings (RNWH) also published strong results, pushing the share price up 10.6 per cent to a new all-time high. It increased its full-year dividend by 14 per cent.

Recent poor performers in the portfolio continued their downward path. Crawshaw (CRAW) was down 35 per cent on renewed selling, with the market remaining sceptical about its business model following negative like-for-like sales earlier in the summer. A statement showing an improving trend was not enough to allay these fears. Next news is in early January when, at the very least, a marked improvement in sales over the festive season is required. Fairpoint (FRP) fell 15.9 per cent and Gattaca (GATC) 15.8 per cent, although 5.0 per cent of Gattaca’s drop was due to it going ex-dividend at 17.0p per share.

Statpro plc’s analysis, which takes account of the size of the holdings in the portfolio, shows Crawshaw cost the portfolio 1.1 per cent in November, the DAXglobal Gold Mining ETF (AUCO) 0.8 per cent, and Fidelity Asian Values (FAS) 0.6 per cent. The top positive contributions came from Avation, +0.6 per cent, Renew Holdings,0.5 per cent, and AdEPT Telecom, 0.5 per cent.

Activity

Following Trump’s election, expectations of higher inflation and stronger growth led investors to trade out of stable defensive stocks in search of more cyclical areas. The UK was no exception, with many of the overseas-earning defensive sectors, which were in such demand after the Brexit referendum, falling back. Pharmaceuticals, household goods, beverages, utilities and tobacco were all weak. I can understand the market’s move out of so-called ‘bond proxies’, but in some cases, I think the sell-off is being overdone. Amongst several trades during the month, I bought Imperial Brands (IMB). It has fallen 20 per cent since its August high leaving it on a valuation of just 12 times consensus forecasts for the financial year ending September 2017 and offering a prospective dividend yield of 5.0 per cent.

In its latest results, it increased the dividend by 10 per cent for the eighth consecutive year and confirmed that it was committed to similar growth in the medium term. It also announced a further series of cost-cutting measures, aiming to reduce annual operating costs by £300m per annum by 2020. Analysts were a little disappointed by the results and guidance, but I think the negative reaction has been overdone, providing a good entry point. The dividend yield is especially attractive and at this stage in the long bull market, introducing some defensive stocks might not be a bad thing. I have already had one quarterly dividend and look forward to more to come.

With the attractive yields currently on offer from other high-quality defensive consumer stocks, I will be looking for opportunities to add some new names to the portfolio in the months ahead.

I noted a fair amount of scepticism from commentators concerning the Opec production cuts agreement. Nearly all felt that it would not stick and pointed out that even if it did, it only covered six months from January. Others reckoned that higher oil prices would stimulate a jump in US shale gas production, keeping a lid on oil prices. An alternative narrative might be that after two years of sub-$60 per barrel oil, which has hurt the finances of many an Opec producer, not least Saudi Arabia, there might be a little more determination to make it work this time. Russia, a leading non-OPEC producer, which has suffered financial strain from low oil prices, has also agreed to reduce production. The planned flotation of Saudi ARAMCO might also stiffen Saudi Arabia’s resolve to see a higher oil price. In addition, markets are clearly excited about the prospect of Trump reflating the US economy; maybe if US and global growth is a little higher next year, demand for oil might beat current forecasts. In any case, the oil price is trading at the highest level since August 2015. I think this might be a case of it being wise to follow the money. If I’m right, the likes of Royal Dutch Shell (RDSB) on a prospective dividend yield of 7.1 per cent might prove a good buy.

Looking forward

This year has proved just how difficult it is to predict the results of elections/referenda, let alone the ramifications. One which the pollsters did get right was the ‘No’ result in the Italian referendum on constitutional reform.

As such, the markets, having discounted the result, bought Italian equities with the MIB rising 6.1 per cent in the first week of December. It will be interesting to see if the ‘No’ result is an important step towards the eventual break-up of the euro that so many are predicting.

I can’t help feeling that while US indices look a little extended in the short term and, as always, there is plenty to worry about, equity markets look the best place to be if there is an uptick in growth and inflation in 2017.

For the time being, I am sticking with my exposure to gold to provide protection, should, for example, inflationary pressures prove stronger than currently forecast and/or the eurozone is thrown into chaos by the result of next year’s presidential election in France.

John Rosier’s portfolio (end-November 2016)