Taking a bullish cue from history

Three factors have driven the rally. First, optimism grew that the coronavirus would be defeated. Second, a growing belief that government support measures would lead to a swift economic recovery. Third, monetary policy has led to increased buying of equities. Where else do you put your money in a world of very low nominal and real interest rates?

During May, the same factors that drove equities higher also led to a rapid recovery in the oil price. Well, that and an agreement from Opec+ to reduce production. Brent oil was up 41 per cent to $39.28 a barrel. In overseas equities, the Nikkei 225 and Russia were up 8.3 per cent, the Italian MIB up 6.7 per cent, the Dax up 6.6 per cent and the S&P 500 up 4.5 per cent. Gold also benefited from loose monetary conditions, with many fearing an eventual return of inflation. Gold hit its highest level in eight years, gaining 3.4 per cent to $1,704 an oz.

In the UK, the FTSE All-Share (Total Return) Index was up 3.4 per cent, but within that, small and mid-caps did better. The FTSE 250 was up 3.6 per cent, FTSE Small Cap up 3.9 per cent and Aim All-Share up 8.0 per cent.

Performance

It was another good month for the JIC Portfolio. It gained 8.7 per cent, nicely ahead of the 3.4 per cent gain for the FTSE All-Share (TR) Index. That left it down just 1.0 per cent in 2020 versus -18.8 per cent for the All-Share. In my wildest dreams, I never expected to recover to that position so fast. The longer-term picture is encouraging, with the JIC Portfolio up 228.7 per cent since inception in January 2012 (15.2 per cent annualised) compared with 60.4 per cent (5.8 per cent annualised) for the FTSE All-Share.

Only three of my holdings fell in value during May. Lundin Energy (LUNES) was off 10 per cent, following the placing of Equinor's remaining 4.9 per cent stake in the company. Going forward, I think the removal of the 'overhang' should be good news. Watkin Jones (WJG) was off 1.9 per cent and Syncona (SYNC) 0.5 per cent.

Duke Royalty (DUKE) recovered 45 per cent, helped by the general willingness of investors to seek recovery stories. It also issued a reassuring update on 14 May, in which it outlined the impact on royalty payments from its partners due to Covid-19. It was working closely with them to alleviate the negative cash flow impacts for its royalty partners during this time of financial stress. The agreements involved, for the short term, either accruing, capitalising or 'equitising' the monthly cash payments. As countries come out of lockdown, I expect business activity to recover and royalty payments from those most severely impacted will resume. In the meantime, Duke Royalty elected to conserve cash and pay the next dividend in the form of scrip.

Not surprisingly, given the recovery in the oil price, Serica Energy (SQZ) and Rockrose Energy (RRE) were strong performers. Rockrose gained 18.9 per cent and Serica +24.5 per cent. SigmaRoc (SRC), the aggregates company was up 17.5 per cent, again on optimism of recovery. Other more than 10.0 per cent movers during the month were Biotech Growth Trust (BIOG) with a gain of 16.3 per cent, Sylvania Platinum (SLP) up 15.1 per cent, Baillie Gifford Shin Nippon (BGS) up 13.4 per cent, PayPoint (PAY) up 12.6 per cent, L&G ROBO Global Robotics and Automation ETF (ROBG) up 11.0 per cent and VanEck Vectors Junior Gold Miners ETF (GDXJ) up 10.6 per cent.

I keep a close eye on holdings hitting three-month highs. There was quite a turnaround from mid-March, with many of my positions achieving the milestone. It was nice to see some stocks hitting all-time highs: namely Biotech Growth Trust, L&G ROBO Global Robotics and Automation, Worldwide Healthcare Trust (WWH) and Bioventix (BVXP).

Activity

There were nine trades in total, including six buys and three sales. I took Lundin Energy up to 4.0 per cent (6 May 229.3 SEK), in line with my medium risk/high return assessment of the stock.

There were nine trades in total, including six buys and three sales. I took Lundin Energy up to 4.0 per cent (6 May 229.3 SEK), in line with my medium risk/high return assessment of the stock. I added three new positions. The first of which, 4basebio AG (GER:4BSBD) was brought to my attention by highly successful and now full-time private investor Leon Boros. He was the man who introduced me to Bioventix back in 2014, a stock that has increased in price more than sixfold since I bought. Also, it has paid substantial dividends along the way. 4basebio is a Frankfurt-listed company. Following the sale of its Proteomics and Immunology business to Abcam in January, it comprises a DNA genomic business based in Cambridge and Madrid and its proprietary TruePrime technology. 4basebio will focus on manufacturing DNA for research, therapeutic and other uses requiring large amounts of high-purity DNA. The plan is to sell DNA to the fast-growing market of novel gene therapies and gene vaccines. The attractions to me are: the chief executive, Dr Heikki Lanckriet, has a proven track record; the sector is forecast to grow by 30 per cent a year with gene therapies expected to become widespread; it is employing a ‘picks and shovels’ approach, which should be much lower risk than those developing the new treatments and, probably most importantly, following the sale to Abcam for €120m, it stands at a 20 per cent discount to cash on the balance sheet. I rate it as high-risk/high-return and have bought a 2.0 per cent position (7 May at €1.77). 

I added a 4.0 per cent position in Venture Life Group (VLG) (three purchases between 56p and 67p). The manufacturer of healthcare products such as Dentyl mouthwash and UltraDex looks excellent value given current rapid growth. It has an order book around 2.5 times larger than a year ago and has signed a lucrative long-term deal with its Chinese distributor. Also, it is ramping up production of sanitising hand gel at its Italian factory, which should lead to further earnings upgrades. If those upgrades come through, I think the valuation based on current forecasts of 14.7 times December 2021 earnings falling to 13.2 times December 2020 will prove attractive. I rate it as medium risk/high reward, pointing to a 4.0 per cent position. 

My final purchase was a 4.0 per cent position in iShares NASDAQ 100 ETF (CNX1). One of the glaring omissions in the JIC Portfolio these last eight years has been the underexposure to US equities. I have had some exposure to the US through the likes of Biotech Growth Trust, Worldwide Healthcare Trust, L&G Robo Global Robotics & Automation and Scottish Mortgage Trust (SMT). Had I held the Nasdaq 100 ETF since January 2012 I would have made nearly six times my money. Will it make similar gains over the next eight years? I doubt it, but possibly. The US remains the home of technology innovation, and there is a vast pool of 'risk' capital available to companies with ground-breaking ideas. I think there is a case for robust returns continuing long into the future. Hopefully, I haven't just signalled the top of the market!

The three sales were all for good profits. Anglo Asian Mining (AAZ) was reduced to 5.0 per cent (at 141.5p on 20 May). Aberdeen Standard European Logistics Income (ASLI) and Bloomsbury Publishing (BMY) were entirely sold on 26 May at 96.8p and 226.25p, respectively. At Aberdeen Standard European Logistics Income, the share price discount to NAV had narrowed to only 2-3 per cent. Bloomsbury Publishing's valuation no longer looked attractive to me given uncertainties about the speed of recovery of physical book sales.

Outlook

I admit to a slight change of heart since last month. I said then that "I suspected that after such a strong recovery the summer months will be harder going" and that I expected to increase my cash position from 7.6 per cent. At the end of May, cash stood at 3.5 per cent and is now even lower. Why the change? Sentimentrader.com commented on the rapid recovery in the S&P 500, leading to 90 per cent of stocks trading above their 50-day moving average. It said: "When it cycles from one extreme to the other like this, it has preceded further medium-term gains every time." Also, "the risk/reward ratio was ridiculously positive". Along the same theme, Mr Authers showed that "the two previous strongest 50-day rallies, in 2009 and 1982, both came after major lows, and were followed by long bull markets". When so many are still so fearful, I think it better not to bet against history.