Private Investor's Diary: Sticking with the super cheap UK

A good month for financial markets

Although the fight against inflation isn't over, we are at the beginning of the end. The markets seem to think so. Commodities were strong, with Brent crude up 13 per cent to $85 a barrel. Copper, zinc, nickel, aluminium and platinum were up between 5 and 8 per cent. Equities did well, with the Hang Seng up 6.1 per cent, the Italian MIB 5.3 per cent, Nasdaq 4.0 per cent, S&P 500 3.2 per cent, DAX 1.9 per cent and CAC 1.4 per cent. In the US, there was a broadening out of the market with smaller companies starting to do better; the Russell 2000 Index was up 6.1 per cent. In the UK, the FTSE All-Share (TR) Index gained 2.6 per cent, but encouragingly the FTSE 250 was up 4.1 per cent and FTSE Small Cap (Ex-Investment companies) 3.9 per cent. The FTSE Aim All-Share continued to struggle, but was up 1.6 per cent. Of the major equity markets, the Nikkei 225 was the only one in negative territory, falling just 0.1 per cent.

US Treasury yields edged up a little, but the better inflation numbers in the UK reduced the pressure on gilt yields, with the two, five and 10-year yields all dropping from the early July highs. Reduced forecasts for peak UK interest rates saw sterling fall; against the US dollar to 1.28 and the euro to 1.16. Gold ended July up 3.1 per cent at $1,970 per ounce, while bitcoin was down 4.1 per cent.

Performance

It was another positive month for the JIC Portfolio. It was up 1.8 per cent, which means that year-to-date, it is down 7.2 per cent. The FTSE All-Share is up 5.3 per cent this year. Since its inception in January 2012, the JIC Portfolio has gained 298.9 per cent, equivalent to annualised growth of 12.8 per cent. By contrast, the FTSE All-Share (Total Return) Index is up 122.6 per cent, with an annualised gain of 7.2 per cent. Over one year, the JIC Portfolio is down 7.0 per cent versus 6.1 per cent for the index, and over five years  JIC is up 48.7 per cent versus 18.1 per cent.

The Funds' Portfolio managed to edge in front of the FTSE All-World (GBP, TR) index over the month. It was up 2.7 per cent in July, leaving it down 1.5 per cent this year. Over the respective periods, the FTSE All-World (GBP, TR) index was up 2.5 per cent and 10.5 per cent. Since this portfolio's inception in June 2020, it is up 26.2 per cent versus 37.9 per cent for the All-World. More clawing back is needed.

The main contributors to the positive return were Niox Group (NIOX) up 17.0 per cent, Harbour Energy (HBR) 16.6 per cent, Howden Joinery (HWDN) 14.7 per cent and Serica Energy (SQZ) 13.7 per cent. Two stocks fell more than 10 per cent; IG Design (IGR) down 10.8 per cent and Sylvania Platinum (SLP) down 11.2 per cent.

Niox responded to a positive half-year trading update. Sales growth, which had been 28 per cent for the four months to 30 April, accelerated to 29 per cent for the six months ended 30 June. Adjusted Ebitda of £6.2mn was more than double H1 2022. Earnings upgrades have been coming thick and fast; the three upgrades since March have seen forecasts for 2023 rise from 0.9p to 2.15p. It is paying its maiden dividend of 2.5p (ex on 17 August). With good sales momentum, I think there will be further upgrades and dividends. The end game remains, I believe, a trade sale of the business to a larger medical diagnostics company.

Harbour Energy and Serica Energy responded to higher energy prices and perhaps a realisation that valuations were too cheap. The ill-conceived imposition of the second, more stringent, energy profits levy by Jeremy Hunt last November battered the sector. In addition, Labour's pronouncement that it would not grant any new North Sea licences deepened the gloom further. Unless things change, operators such as Harbour and Serica will look to do deals and further investment outside the North Sea. 

Serica's gain was even more pleasing given that it had gone ex its final dividend of 14p a share on 29 June – a yield of 6.2 per cent on the final alone. 

Howden, a relatively new purchase for me, benefited from the better-than-expected inflation numbers. Many companies sensitive to consumer spending bounced as forecasts for peak UK interest rates moderated. In addition, in its results for the 24 weeks ending 10 June, Howden said it was on track to meet forecasts for the year. That, of course, includes the busier autumn period. 

IG Design continued to be friendless, drifting following its 20 June publication of results. The market has chosen to focus on the cautious lilt of its outlook statement rather than the recovery in margins, higher cash flow and improved balance sheet. The newish management is doing all the right things. Markets are not reflecting further operational improvement in the valuation. On current forecasts, at 130p, the ahres are valued at 18.2 times March 2024 earnings, falling to just 5.4 times March 2025 earnings. A forecast dividend of 9.6p (2.5 times covered) in the year ending March 2025 yields 7.4 per cent. I expect my patience will be rewarded. Sylvania Platinum fell due to the weak rhodium price. It was down 16 per cent during the month and is back to levels last seen in September 2019. Fourth-quarter results to 30 June steadied investors' nerves. Production exceeded guidance, and year-end net cash amounted to more than half of the market capitalisation. It's cheap on around five times earnings per share and, after stripping out cash, four times cash flow. While inexpensive, platinum group metal prices probably need to recover to get the share price moving. The forecast yield is 7.9 per cent for the year just ended, falling to 6.2 per cent in June 2024. On Stockopedia, it passes no less than 13 of its "guru" screens covering all bases – quality, value, growth and income. It has been a long-term holding, and the total return is 73 per cent. Again, I expect my patience will be rewarded.

The Funds' Portfolio

It was nice to see a better month in the Funds' Portfolio. Global X Copper Miners ETF (COPX) was up 10.6 per cent, benefiting from the robust copper price. Likewise, BlackRock World Mining (BRWM) was up 4.8 per cent and BlackRock Energy & Resources Income (BERI) 4.6 per cent, responding to higher commodity prices. The predominantly UK-exposed holdings did well; Temple Bar (TMPL) was up 6.3 per cent, Schroder UK Mid-Cap (SCP) 6.4 per cent and Strategic Equity Capital (SEC) 2.9 per cent. The main disappointment was BH Macro (BHMG), down 2.3 per cent. The share price has suffered recently, with the shares moving to an 11 per cent discount to net asset value (NAV). Over one year, the NAV has been flat, but the share price is down 22 per cent. The move to a discount is due to the merger of Investec Wealth and Rathbones, both significant shareholders in BH Macro. The market fears that there is now a big overhang. Historically, BH Macro has been smart with discount control, but I understand that while the merger is going through it can't do any share buybacks. Once the merger completes, I expect BH Macro to look at options to deal with the Rathbones/Investec holding. Although I am sitting on a 23 per cent loss, now is not the time to lose faith. 

Activity – a quiet month

Another quiet month on the dealing front. I added to two existing positions; Sylvania Platinum on 5 July at 70.2p and IG Design on 26 July at 124.5p. The decision to add to Sylvania Platinum followed a ‘falling price review’, which I had set at 72p. For the reasons set out above, a move towards my target weight made sense. I added to IG Design for much the same reasons.

There were no trades in the Funds' Portfolio.

Outlook

It’s worth repeating last month’s outlook: the UK badly needs some encouraging news on the inflation front. The good news is it shouldn’t need much to get things moving. With negative sentiment towards the UK, valuations are very attractive relative to other markets and history.

Apple’s $3tn valuation is now more than the FTSE 100 and FTSE 250 combined (total market capitalisation of $2.83bn). In other words, the markets value Apple more highly than the UK’s largest 350 listed companies. On a five-year view which would you rather own? I know what I would.

We received some good news on inflation in June, and equity markets responded. Rinse and repeat in August would be nice. July’s inflation numbers show some progress with headline inflation falling to 6.7 per cent. The UK remains anomalously cheap, a situation unlikely to persist forever.