Brexit-free need

Chiefly, my confidence is based on the risible skills demonstrated by Messrs May and Davis. Spouting on that “no deal is better than a bad deal” is as dumb as overbluffing in poker – too soon you get found out. Tip for Mrs May: in negotiations, simply don’t mention the worst possible outcome let alone pretend it’s a bargaining chip. All you achieve is to make it more likely that you’ll be called. That possibility is more real in the case of Brexit since it seems that a worryingly large slice of the electorate – those who think that Donald Trump is brilliant and that politics is more about entertainment than dull reality – is egging on the PM to do just that.

The underlying point is that, as the odds on an unruly Brexit shorten, then the likelihood of civil unrest and all that follows starts to take ominous shape. It is a given – happily, rarely tested – that, in the wrong circumstances, even the most stable democracy is always just five days away from rioting. A chaotic Brexit might put that notion to the test in ways not seen in the UK for decades.

When things threatened to get out of hand in the 1970s, Jim Slater suggested three essential items to meet such a crisis – a brace of Purdeys, a belt-full of Kruggerands and a stash of baked beans. To what extent these items were intended to have practical use and to what extent they were a hedge, the author of The Zulu Principle and part author of the 1970s secondary banking crisis did not specify. However, like all the best investments, they may have stood the test of time, although I don’t have the data. In addition, my intuition says they would be a good way to hedge outcomes if the going gets nasty from next March onwards.

Meanwhile, what’s especially remarkable is the London equity market’s relaxed manner. Sure, about 40 per cent of the FTSE 100’s earnings come from overseas, but that also means 60 per cent are UK-derived and, thus, under some sort of threat. Despite this, the FTSE All-Share index is unchanged so far this year, 4 per cent higher than a year ago and 16 per cent up on three years.

However, translate this performance in US dollars or euros and the dim view that overseas investors have of the UK’s farce becomes clear. For example, in dollars the All-Share is 2 per cent lower than three years ago, during which time the S&P 500 index of US shares has risen 33 per cent. The performance of UK-orientated sectors has been worse – in dollars, the FTSE Consumer Goods index is down 10 per cent this year and its 19 per cent gain over the past three years is wiped out.

For equity investors, the lesson must be to get more Brexit-free earnings into their portfolios. Hence the table. It shows eight companies drawn from the Euronext 100 index of blue-chips and the S&P Europe 350 index whose dividend yield qualifies them for the Bearbull Income portfolio. On a preliminary scan – and I mean ‘preliminary’ – these catch my eye on the basis that their dividends come with decent amounts of cover based on forecast earnings, while the combination of share rating, return on equity and financial resilience looks acceptable.

There are some familiar names, notably the two from Switzerland – recruitment agent Adecco (SWX:ADEN) and building materials giant LafargeHolcim (SWX:LHN) – although it is Belgian wire maker Bekaert (ENXTBR:BEKB) that gets my attention. In a way, that’s a pity because the company is due to report first-half figures for 2018 that will be lousy – operating profits about 20 per cent below analysts’ original forecasts. Granted, without those poor figures, the share price would not have pretty well halved in the past year to its current €22.4, thus giving the shares high-yield status. It would be ironic, however, if poor trading puts the dividend under threat. Yet Bekaert should eventually come good because it is protected by the diversity of both its products and its markets. We may know more in a couple of days, then there will be number crunching to do.

I’ll report in detail next week when I must also address another issue for the Bearbull portfolio – the upcoming split into two companies of integrated power supplier SSE (SSE).