What MoneyWeek’s experts are buying for the year ahead

Casting their nets as far afield as Asia, Europe, Japan and Brazil, MoneyWeek’s newsletter writers and experts give their tips on how to pep up your portfolio in 2013.

Buy into Asia

Tim PriceTim Price

Markets dodged all sorts of bullets in 2012 – the train wreck of the eurozone; unexploded debt bombs everywhere; regime change in China – but there’s no escaping the lousy fundamentals for Western economies. Only desperate monetary stimulus by the central banks is keeping the day of reckoning at bay, and it cannot be deferred indefinitely. So for 2013 (and beyond) I see great potential in the part of the world mostly unaffected by demographics, debt and deflation: Asia.

Asia is returning to an economic prominence last enjoyed a century or more ago. The difference is that this time China will be joined by other, comparably vigorous economies. Unlike the West, Asia – which accounts for almost 70% of the global population – isn’t crushed beneath an intolerable burden of government indebtedness and welfare costs. Asia’s demographics and its banks are far healthier than ours: a recipe for long-term growth and wealth creation. My preferred way to harvest these gains is via the just-launched Halley Asian Prosperity Fund.

It’s managed by Greg Fisher, formerly chief investment officer of Morgan Grenfell and subsequently Deutsche Asset Management. Ben Graham, mentor to Warren Buffett, wrote the book on deep-value investing – and this is exactly Greg’s approach. He looks for great companies with low price/book and low price/earnings (p/e) ratios. Those companies will typically focus on the Asian domestic consumer (as opposed to the busted flush of companies exporting to the West), and ideally will enjoy high returns on equity with little or no debt.

The fund targets annual returns in the order of 15%-20%. Some of this is likely to come from currency appreciation, as the fund keeps its currency exposure unhedged, which should be good news for sterling-based investors. It will also target a dividend yield of around 4%.  See www.samarangcapital.com for more.

The threats to watch for in the New Year, I think, are all around Western-government-bond markets. Central banks have bought themselves time with endless bouts of quantitative easing, but they have fatally damaged their credibility in the process. So Western bonds, currencies and ultimately even stockmarkets are all vulnerable to a sudden re-entry of those long absent bond market vigilantes. l

• Tim Price is director of investment at PFP Wealth Management. He also writes The Price Report newsletter.

Prepare for a euro collapse

James FergusonJames Ferguson

In Britain, quantitative easing (QE) is likely to dominate monetary policy until the new bank governor, Mark Carney, takes over later in 2013. Here’s how QE works. It pumps more money into the system than the system needs for its underlying level of activity. The point is to prevent a deflationary depression. However, this money has to go somewhere. The ‘normal’ channels (whereby extra money gets to consumers and smaller firms via banks lending it out) are clogged just now. That’s because banks have fragile balance sheets, and so want to shrink their exposure to these sectors – they have no intention of lending more money to households and small firms.

So the money instead goes into equities, or overseas (devaluing the currency), or into hard assets (commodities). In 2012, the Bank of England trebled the rate at which it was pumping out money via QE. As a result, money supply growth went from shrinking a little in 2010, to an almost 7% annualised growth rate. Meanwhile, third-quarter GDP growth “surprised” everyone on the upside by increasing by 1% over the previous quarter. Sterling, which had previously been strengthening at a 10% annualised rate, stopped rising. So while expectations of a stockmarket crash may one day be fulfilled, it probably won’t happen while QE lives on.

In the US, QE is already technically not needed, because bank lending is growing again. So if a stockmarket blows up in 2013, it might be the US. As we’ve already seen, QE carried out against a deflationary backdrop led to none of the scares that many people fretted about (inflation, currency collapse, higher bond yields, falling equity markets, etc) because, as I argued at the time, the deflationary backdrop neutralised the impact. But in 2013 we’re going to see the US carry out QE against a neutral backdrop. This suggests that, this time, QE could indeed have an inflationary impact. So US Treasuries (government debt) are therefore at great risk until the QE programme ends. Once it does so, the US dollar will surge but the S&P 500 index will fall.

In Europe the backdrop will turn deflationary, so I think we’ll see QE there. The banks in Europe are starting to recognise losses, so they’re cutting back on lending. Falling bank lending, without artificial money printing (ie, through QE) shrinks the money supply. So it’s not a huge leap to believe that despite what they think about money printing and inflation, the Germans will quickly be persuaded to head off a deflationary contraction in the eurozone. Thus while the US dollar rises but US stocks fall due to QE ending, in Europe the exact opposite will occur. The euro will collapse as QE begins, but European stocks will be among the main beneficiaries of the flood of new money.

• James Ferguson is an economist and regular MoneyWeek contributor.

The robot revolution

Paul HillPaul Hill

Visions of the future from decades past often feature shiny robots and flying cars. While things haven’t yet panned out that way, I reckon that long-term investors should start paying attention to the robot revolution – indeed, within ten years, I expect almost every home in the country to have its own personal R2-D2.

That may sound far-fetched, but not if you’ve heard of US firm iRobot (Nasdaq: IRBT). It makes consumer robots that vacuum, sweep and mop floors. These robots can navigate obstacles, and recognise when they are running low on power, then troop off for recharging.  The firm also has a military arm (accounting for just under a fifth of revenues), which makes stealth robots, unmanned sea-gliders and devices that safely blow up enemy bombs.

Sales boomed from $54m in 2003 to $465m in 2011 (a compound average growth rate of 27%). Earnings per share (EPS) for 2011 came in at $1.44. The balance sheet is solid too, with net funds of $190m as of end-September. So why have the shares slid? It’s down to the defence unit. Amid troop withdrawals from Afghanistan and uncertainty over the US fiscal cliff, the unit is being restructured and, as a result, the whole business will lose money in the fourth quarter, according to the board.

But this looks like a short-lived blip in a long-term story. Sure, competition is hotting up, with small start-ups, domestic appliance makers and industry giants all trying to muscle in. But iRobot has a headstart: it has already invented much of the necessary technology and sells far more consumer robots than anyone else. I reckon turnover could hit $1bn by 2020, with operating margins of 20% (compared to 18% for the nine months to September). On this basis I would rate the stock on a ten times earnings before interest, tax and amortisation (EBITA) multiple. Discounting back at 12%, that gives a fair value of around $27 a share.

• Paul writes the Precision Guided Investments newsletter.

Japan: a buy for the brave

Simon CaufieldSimon Caufield

There’s a lot to worry about going into 2013. First, with four years of near-zero interest rates, investors have pushed up the prices of income-paying assets in a scramble for yield. So not only should you steer clear of government bonds, you should also be wary of most corporate bonds, property and even dividend-paying stocks.

Second is the threat of a global recession. Europe will not recover while banks can’t lend and governments won’t spend. In America, personal incomes, industrial production and retail sales all peaked in July, and are now heading down. These are three of the four indicators used by the National Bureau of Economic Research to define a recession. The fourth, employment, is still rising. But it’s more of a lagging indicator: it’s not unusual for recessions to start while employment is increasing. If there is a global recession, emerging markets won’t decouple, because they still depend on exports.

Third, US stocks are overvalued. Yes, the p/e ratios are near their long-run averages. But company profits are at record highs.  If lower earnings drive US stocks down, they could take the rest of the world’s markets with them. Finally, and importantly, company profits are at all-time highs even though the economy is sluggish, firms are not investing and unemployment is high. Record government deficits have allowed companies to shed staff and cut wages without hitting overall revenues. But this won’t last. European governments are cutting sharply. Quietly and slowly, the US is too. Any fiscal cliff deal will  still likely involve deficit cuts of 1%-2% of GDP. So it will be hard for firms to  sustain profitability. Third-quarter earnings were down on last year. But analysts still expect increases for 2013. They’re in for a shock.

So what can you do? First, keep a big slug of cash while you wait for better opportunities. Consider holding some in US dollars. It’s less ugly than the euro and the pound. In stocks, take a look at Johnson & Johnson (NYSE: JNJ), one of the few undervalued equity-income stocks. It pays a near-3.5% dividend, which it has raised for 50 consecutive years at an average rate of 8.7% over the last five. And it tends to outperform in bear markets – especially for UK investors.

If you feel brave, buy Japanese stocks. You’ll need to be patient, but they should do well over the long run. One option is the Neptune Japan Opportunities (www.neptunefunds.com) fund, which invests in Japanese global giants that benefit from a lower yen. The manager, Chris Taylor, hedges the currency back into sterling to maximise the potential reward. Above all, be patient. These are frustrating times.  But chasing returns would be a mistake.

• Simon writes the True Value newsletter.

A punt on Brazilian oil

Bengt SaelensmindeBengt  Saelensminde

The FTSE 100 has traded within the 5,000 to 6,000 range for over two years. If 2013 is the same, it’s going to be another year for stock-picking. So here’s my tip for the year. It’s a bit of a speculative punt, but I reckon the risk/reward ratio is now well in favour of shareholders. HRT Participacoes (TSX: HRP) is a Brazil-based oil explorer. The main listing is in Brazil, but British brokers are more likely to trade it on the Canadian Venture Exchange. Having flirted with $10 in 2011, HRT has lost some 90% of its value. Now, trading at just over $1, it’s hopelessly oversold.

There are four potential stories that could set this stock alight in 2013. Much of HRT’s price collapse is down to fears that it’ll run out of cash before it finds oil.  Oil exploration is an expensive business. To lay off risk, HRT needs to farm out some of its projects to the oil majors. HRT has two big drill programmes – the first in Brazil’s Amazon basin, and the second off the Namibian coast. The company already has a partner (TNK-BP) in Brazil, and is also working with Portuguese oil company Galp in some of its Namibian fields. My hope is for a major deal to farm out more of its Namibian assets early in 2013. That would put HRT on a sounder financial footing.

The second driver for HRT relates to significant gas discoveries it made last year in the heart of the Amazonian jungle.  As things stand, there’s little it can do with these fields. Considerable investment in infrastructure will be needed to make use of the gas. HRT is currently working with the government and Petrobras (Brazil’s national oil company) on a plan to monetise its gas finds. News of a credible plan would cheer up shareholders.

The next two drivers relate to HRT’s 2013 drilling programme. While it’s found loads of gas in the Amazon, the Holy Grail will be striking oil. That’s what the market wants to see. Oil will start to bring home the bacon almost immediately. And management feels it’s getting closer – 2013 would be a good year to make a discovery. But the event that could really send these shares into orbit will be what, if anything, HRT discovers offshore in Namibia. It starts at least three wells in early 2013. Come spring, the first results will be coming in. Any positive news could set the stock alight. Here’s looking forward to a very exciting 2013.

• Bengt writes The Right Side free email.

Stelios moves into Africa

Swen LorenzSwen Lorenz

If you’ve ever tried to fly from one African capital to another, you may have experienced one of the strangest conundrums in the airline business.  The cost of internal travel within the world’s poorest continent is up there with the most expensive in the world. Short-haul flights that in Europe would cost you £50 will easily set you back £300 in Africa.

That’s because, like Europe in the late 1990s, Africa’s airspace is controlled by national carriers charging premium rates. Huge inefficiencies have likely built up in the industry over decades of local monopolies and inert management.

Enter Stelios Haji-Ioannou, founder of easyJet, one of the world’s most successful budget airlines. The Greek-born financier recently got involved with FastJet (LSE: FJET), which is trying to do in Africa what Ryanair and easyJet have done in Europe. In its past incarnation as a unit of Africa-focused conglomerate Lonrho, FastJet made some headway, but remained stuck in a small niche. After the firm reincorporated underneath an Aim-listed shell company, and news broke that Stelios had come on board, the share price rocketed from 1p to as high as 9p. The hype has since died down. At around 3.5p now, it’s one of the most attractive punts for 2013.

Stelios gets a generous remuneration package, but his real incentive is a 5% stake and the option to buy another 10% by August 2014. If he exercises this, he will have to pay 5.2p a share. By then, buying the share at this price or even less could already have proved to be one of the smartest investment bets around. Africa has an incredibly tough business environment, but those who succeed are usually rewarded with above-average profit margins. The middle class is also on the rise. For tens of millions of Africans, the goal is no longer escaping poverty, but to grow prosperous. More than 300 million Africans are now considered middle class and 22 African nations are considered middle-income economies. Total passenger traffic in Africa is projected to grow at an average annual rate of 5.7% between 2010 and 2030, well above the 4.8% world average rate.

To claim a stake in this market, FastJet recently poached several senior executives from Ryanair, easyJet and Air Uganda. The firm will focus on Kenya, Tanzania, Ghana and Angola, four countries that alone have 100 million residents. But Stelios is unlikely to stop there. In its effort to become a pan-African operator, FastJet recently started talks for a partnership with Emirates, and is negotiating to take over an insolvent airline in South Africa for a nominal sum. Stelios’s involvement is no guarantee of success. But the swathe of high-calibre executives that followed him to FastJet should make investors listen up. And if anyone can claim to have extensive experience in conquering a diverse, heavily regulated set of markets, he can.

The current share price is about on par with the price that two institutional investors recently paid for a placement, when shares were issued at 3p and 3.6p respectively. At below 4p, this is a bet on a risky entrepreneurial venture, but one that could pay spectacular dividends if it works out. If just a small percentage of the African population catches on to the no-frills revolution, and if the firm can overcome the challenges of operating there, the pay off could be as high as 10:1 over the coming years.

• Swen is a private investor, entrepreneur, and author. He publishes his own blog, www.undervalued-shares.com.

Gold will hit new highs in 2013

Dominic FrsibyDominic Frisby

Gold looks as though it’ll end 2012 priced at somewhere between $1,650 and $1,700 an ounce. Although that’s a 10% gain for the year (about 5% in sterling), 2012 is a year gold bugs will be glad to see the back of. Given that gold has had average annual gains of more than 18% versus both sterling and the US dollar since 2000, 10% and 5% is rather disappointing. But it’s still a gain. Gold miners, however, have been a disaster. The large caps are down almost 15%, the mid caps nearer 20%, and the small-cap explorers more than 35%. That comes after an equally bad 2011. Given the high gold price you’d think producing companies would be making more money and that non-producing companies would be attributed more value for their ore bodies in the ground, but no.

Gold is still consolidating the stupendous gains it made between 2009 and 2011, when it moved from about $700 inthe days after Barack Obama was first elected, to $1,920 by September 2011. The worst of the consolidation is, I think, now over. The fact that gold has held strong above $1,500, with sentiment being weak, is a good sign. There’s a lot of overhead resistance at $1,800. But if we get through that, we should get back to the old highs at $1,920 pretty quickly. A re-test is barely a 15% gain from here. Gold could easily do that in a month, if it goes on a run.

The problem is that gold is still seen as a speculative asset, not a haven. Perhaps we need a government bond crisis in Britain and America for that view to change. Maybe that will come this year. Either way, I’m looking for this period of frustration for gold investors to end and for gold to break out to new highs. For some reason, gold excels under Democrat presidents; and particularly during a president’s second term. I’d like to see $1,920 by the spring, but maybe I’ll have to wait until later in the year.

• Dominic writes for our free daily email, Money Morning.

Natural gas – the oddball commodity

David StevensonDavid Stevenson

Natural gas has been the commodity oddball in recent years. While oil prices have soared, US natural gas prices have dropped by around 75% since early 2008. Last winter’s warmer weather reduced demand from US domestic consumers, while drillers increased output, creating a gas glut.

Yet I firmly believe that natural gas is one of the single most interesting commodities for investors today. The planet desperately needs a reliable energy source. Coal is too messy, nuclear energy too risky, and solar and wind too pricey. That makes natural gas – the cleanest-burning fossil fuel – a good bet as the fuel of the future. The potential supply is huge. Hydraulic fracturing – or fracking, ie, pumping pressurised water, sand and chemicals into underground rocks – has enabled producers to access vast gas volumes trapped in shale rock formations that had previously been uneconomic to extract. Natural gas price

Fracking has its critics. But given that cheap natural gas has helped make US manufacturing globally cost-competitive again, it’s hard to see it being banned. In fact, within the next few years, America could become a net natural-gas exporter. And the Energy Information Administration thinks that by 2035, 80% of America’s new electricity generation capacity will be provided by natural-gas-fired power plants.

Meanwhile, natural-gas vehicles are set to play a huge role in the transport industry’s future. High petrol and diesel prices will mean more vehicles being converted to gas, while new models will be developed. Even Britain could benefit from the shale revolution (see page 16 for more). This could help offset falling North Sea oil and bolster our energy security by reducing import needs. But this isn’t just a long-term story. I don’t see natural gas’s recent price weakness continuing. On the one hand, America’s gas drillers are curbing output. And on the demand side, with this winter likely to prove much colder than last, natural gas prices in the States should increase next year. So how do you profit? Total (FP: EN) is the fourth-largest global listed producer of natural gas and one of the world’s top three liquefied natural gas (LNG) suppliers. On a 2012 p/e of just seven, and prospective 6% yield, it’s very cheap.

• David writes for The Fleet Street Letter newsletter.

What the finance gurus predict

You’ve read what our experts think. What is the rest of the financial world predicting for 2013? On the optimistic side, UK fund manager Anthony Bolton, who now runs the poorly performing Fidelity China Special Situations investment trust, thinks Chinese shares will rebound. China’s A-share market has seen huge losses over the last three years, but Bolton told Investment Week that “the bear market will change soon”. Noting that credit growth is picking up, he feels “the economic cycle is now in its favour”. Consultancy IHS Global Insight agrees with Bolton, and expects more stimulus now that China’s leadership transition is out of way.

IHS is also bullish on the US. “Housing is, finally, showing signs of life, and can be expected to keep improving over the next year. As global growth begins to re-accelerate… exports will follow suit.” IHS also expects worries about America’s fiscal cliff and the eurozone debt crisis to ease in 2013, providing a boost to shares.

There are plenty of pessimists too. Nouriel Roubini, a leading economics professor, has repeatedly warned that the world economy will be hit by a ‘perfect storm’ in 2013. Roubini thinks the fiscal cliff will send America into recession, while slowdowns in China and Europe will continue.

He also predicts that tension over Iran’s nuclear programme will lead to higher oil prices. Ray Dalio, one of the world’s most successful hedge fund managers, is also downbeat. He thinks interest rates are likely to rise in 2013, pushing down prices for almost every financial asset class, and government bonds in particular.

As one of Saxo Bank’s ‘outrageous predictions’ for the year ahead, chief economist Steen Jakobsen suggests that crude oil prices could shock the world in 2013 – by falling as low as $50 a barrel. While it’s not the bank’s central prediction, Jakobsen says if US crude production keeps rising, then combined with already-high levels of domestic inventory, crude prices could “come under renewed selling pressure”.

One Response

  1. 01/01/2013, Tim wrote

    Message for Tim Rice

    I do agree that Asia – mainly small caps – companies selling to the local market is one of the better investment opportunities – but I am having dificuky finding very much detail about about the Halley Asian prosperity Fund.
    I appreciate that the fund is new but Bloomberg have very little information – I want to know how the fund has invested, the top 5 or so investments, no of employees etc

    I am planning 20% of my ‘pot’ invested in Asia this year and your recommendation on Halley does it for me – just need more information

    Thanks

    Tim

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