Transcript
Merryn Somerset Webb: Hello and welcome to the MoneyWeek Podcast. I am Merryn Somerset Webb, editor-in-chief of the magazine today and with me is Jim Mellon, who is chairman of Burnbrae limited and also a guru investor and all round MoneyWeek favourite. Welcome, Jim, thank you for joining us again.
Jim Mellon: Thanks, Merryn. And thanks for that really nice intro.
Merryn: Well deserved, every word of it, I could make it longer and more flattering if you like, but we'll leave it at that.
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Now, Jim, you were last on with us at the end of last year, thank you very much for that. One of the things we talked about a lot at the time was the UK market and how you store a lot of value in it, and how it was definitely time to start buying into some of the bigger FTSE 100 companies who've been rather neglected by the market in the last couple of years, thanks to a combination of Brexit and the pandemic, etc.
Your big call at the time, or the stock that you said that you were definitely building up a position in, was Lloyds. At the time it was 27p, now 46p, so readers who went out and bought that will have made a pleasant 70% on the holding, which I'm sure they are thrilled about.
So I wonder if you could just update us on how you feel about the UK market now, and whether you're still holding Lloyds of course.
Jim: Yes, well, thanks for that. I just think Lloyds was so ridiculously undervalued, along with things like British Telecom – at that time that we spoke it was a very happy coincidence for us that it worked out very well. But it was almost like shooting fish in a barrel, I think.
Lloyds has resumed dividends, they paid 0.7p but obviously the dividend will be a lot bigger going forward. And they reported excellent first quarter results, which were in excess of I think two billion pounds. There was some callback of provisions but nonetheless, the p/e ratio of Lloyds remains relatively small, it is a domestic behemoth in the UK, mortgage lending is going gangbusters.
But what I've done with my own holding is I had a lot in it, and I've halved the position. And I'll get back to other UK stocks in a second. But I have taken that half and, believe it or not, I'm investing it in Credit Suisse shares, where the previous chairman of Lloyds is now the chairman.
And although Credit Suisse is not in the UK obviously and has had tremendous problems with Greensill, the blow up of that fund Archegos, and, generally a disastrous period. It has a very good wealth management business – indeed, I'm one of its clients. And on an annualised basis, if you want to put it like that, on a normal basis, it's cheap. And it's absolutely ripe for the plucking, I would absolutely not be surprised if either they merged with the only other big Swiss bank, which is UBS, and there is some market rumour about that at the moment, or that something like HSBC or maybe even Lloyds, given the common chairmanship between the same guy, is a possibility. So, putting money into Credit Suisse, I think, is quite a good idea at the moment.
Merryn: That's interesting. Bear that in mind, everybody. And Lloyds you're keeping obviously quite a lot in if you've sold half and kept half. I think before you said that your target price for where you would expect it to end would be about 55p.
Jim: Yes, that was based on the view at the end of last year, but it does seem that first of all, the UK economy, I think it's back to pre pandemic levels now, which is a remarkable recovery from what was thought to be a basket case.
Secondly, the housing market's been on fire, which is not something that I would have expected, at least not to this extent. And that is all beneficial to Lloyds.
And then the third thing is that these challenger banks, which were supposed to be taking market share left, right and centre from the majors are just not getting the inroads that people thought.
So my new target price on Lloyds, if you’re patient for the next year or so, will be around 60p, which is still a good return.
Merryn: Yes, great return. It's interesting isn't it because we always look at Lloyds and say, well, it's not really particularly well run. But then on the other hand, none of the other banks including the challenger banks appear to be particularly well run either. So if they're all not particularly well run, there's not really much in the way of competition.
Jim: Absolutely. I suppose Lloyds is a bit like the civil service really, it's an institutionalised, somewhat fossilised organisation, but nonetheless, there's a price for everything. And I think the prospective dividend yield will probably be in excess of 5%. So, a good buy.
Merryn: Some of the other stocks you'd mentioned in the UK before, there was Tesco, there was BT, which I think is particularly interesting because I suppose BT could conceivably be a private equity target, Tesco, probably not.
But BT, and one of the interesting dynamics in the UK market at the moment is this idea that pretty much everything is in play. And last week, we had that bid for Morrison's which was rejected. But nonetheless, is interesting. And there have been quite a few big UK companies approached or successfully taken private over the last year or so.
And there's this question as to should you buy companies or equities that you expect, or suspect could be a private equity target on the basis that there's a lot more value in them for private equity buyers, than there is necessarily for conventional fund management buyers, and BT could be one of those potential targets.
Jim: Yes, that's true. BT was a stock at the end of last year that I really liked. Its market cap was around £10bn. It's, I think, sort of £17bn or £18bn today. But you had the backbone of the UK telecom industry in BT for a £10bn price, which struck me as being ridiculously cheap. Today, it's a bit more expensive.
And the founder of Altice, has bought I think it's a 12% stake in BT. I don't know whether the British government would ever let BT be taken over by foreigners. I'm not sure. I doubt it to be quite honest.
Merryn: They're not very good at preventing this kind of thing though are they, there British government. There's always talk about how we shouldn't let our big companies go abroad, and we shouldn't let them be taken over by foreign businesses. And, we need to control some of our core infrastructure businesses, etc. but we never actually do.
Jim: Well, maybe, but I don't think it's been tested to the same extent with the national telecom company. I think that that would be probably a stretch too far. They would find a way of preventing that.
I'm out of BT now, I think there's better value out there. But you could be right, maybe there is more upside in that. But I think we can do better in other stuff in the UK market at the moment. And, if you want me to give you a couple of examples, I'm happy to do so.
Merryn: Of course I do.
Jim: So I have been buying Aviva – again, a strong dividend generator, pretty well managed, considering its size and a low entry price. And I've been slowly accumulating that one, I think you won't go very far wrong with that.
And similarly in the insurance sector, are the sort of zombie insurance sector, Phoenix Group, where Swiss Re recently sold a 6% or 7% stake and knocked the price down a bit. I think that's a good buy. And you're looking again, at something like a 6% dividend yield on that one. So definitely load up on that one.
I think Tesco is an absolute no brainer. Tesco is the biggest online supermarket in the UK, far, far ahead of Ocado. It's really a well run company. And it's got property assets like William Morrison; it doesn't have a pension problem. And it's got a rock solid balance sheet, particularly after the sale of their Thailand operation and the payment of a special dividend. I think we're looking at something like ten times cash flow on Tesco, very close to 5% dividend yield.
And you said, oh, maybe, private equity wouldn't buy that. But they would have a go, I think, it's not that big a company in terms of market cap relative to what private equity can muster, given, they've got about $4trn of assets free at the moment, of cash, free at the moment. And it's a no brainer firm. The big issue is whether the monopolies commission would allow them to be taken over. But that's the big issue.
But I definitely think you can hold Tesco, the share price is around 224p today. I think you'll certainly see over £3in Tesco over the next couple of years, which again, is a very good return in a low return environment.
Merryn: It's interesting, isn't it, Tesco, Aviva, all these all these companies, Phoenix, etc. One of the things that we've heard over and over and over over the last four or five years is we can't get a yield anywhere, can't get a yield, low yield environment, etc. But in fact, you can get a 4%, 5%, 6% on perfectly good companies in the UK, but yet, somehow people haven't noticed that.
Jim: Yes. And, Tesco is changing its business model. As I said, it's a big online player. It's also got its bank, which is in a process of revival. Just a very well run company, and one that we're all familiar with.
So, in this household, of course, we now have to, we always have to buy stuff from the companies in which we hold shares. So it's BP for petrol, Tesco for supermarket products, etc, basically.
Merryn: OK, let's, let's go back to BP then. I was going to ask you about the commodity sector in general and whether part of your interest in the UK market was about, a high focus on commodities. And so you're a holder of BP, but not Shell.
Jim: No, I've got some Shell as well, but I kind of favour BP.
Shell has been the subject of this, I don't want to call it a hedge fund, that acts as activist on behalf of other institutions to force these companies to divest their fossil fuels. Well, obviously, divestiture means that someone else operates them. It's not like, you're putting these fossil fuels out of business, you're basically transferring one set of earners into another.
But I think BP has laid out quite a credible plan. What you're really getting with oil majors is almost like self liquidating trusts over a long period of time. We do know that fossil fuels will be over time eliminated, but they're certainly not going to be eliminated right now.
I read a pretty good article today about how it's possible that at the end of this year, our world demand for oil will be running at 101 million barrels a day. And the maximum production – even if the Saudis ramp up and everyone else ramps up, including Iran, is 100 million barrels a day. And we know that all you need is a very small deficit in terms of production to send prices through the roof, and these oil majors are going to make a very large amount of money.
The divestiture by pension funds, and by the sovereign wealth funds and so forth from these oil companies is largely complete. So I think you could see a very big upsurge in the share prices of these things.
My friend also pointed out that copper ETFs and copper stocks are up by seven times over the last year. And extracting copper is a pretty dirty process. But the oil stocks, the big oil stocks, are only up by 15%. So there's capacity for a pretty big move upwards in the Big Oil majors, not just not just BP.
But for instance, Total in France is a very good oil and gas company as well. So, I definitely think you should have some energy in your portfolio.
Merryn: It's interesting the whole divesting argument, isn't it. I've written about it several times saying that you shouldn't divest from from big oil companies, or even from smaller companies, you just shouldn't, because if you divest, as you say Jim, somewhere else simply buys the assets.
It's not like production of oil goes away, it just becomes less transparent. It goes into the kind of hands you might not necessarily want it to be in. Much better, if you believe that we shouldn't be using fossil fuels anymore over the long term, much better for them to be held by the big listed oil companies, where everyone can keep an eye on it.
Jim: Completely agree. Absolutely.
Merryn: Now, I do keep telling people, if you haven't got fossil fuels in your portfolio, you really should. It's the moral thing to do, it's the green thing to do. And odds are you'll make quite a lot of money from it.
Jim: Yes. I think Shell and BP, it's about £3.20 something at the moment, could easily see 30% over the next year.
Merryn: Nice dividend there too. Any other commodities that you're interested in at the moment, except that maybe some of the copper stocks etc, have probably done their bit.
And again, this is another area where if you want to be involved in the green infrastructure business, you have to accept that it's a pretty grubby business because it uses an awful lot of metals. There is no way you can have a green revolution without an awful lot of very grubby mining.
Jim: Yes. We did have a very good run in an Australian copper stock called Venturex, which has just been fantastic. It's up ten times in the last year. And I've still got it. It's under new management, which is one of the reasons why it's gone up so much.
But frankly speaking, I'm not big into the base metals, but I'm very, very bullish as I know you are, on the precious metals, particularly gold and silver. It just seems to me that there is no way that all this Fed balance sheet expansion and balance sheet expansion of every other central bank cannot result in anything other than significantly higher precious metals prices and significantly higher inflation.
Most governments maybe with the exception of the Chinese, one do not have the chutzpa to tighten in any meaningful way. So we are having significant inflation but it's going to get worse. And in those circumstances, particularly with crypto, with the back of crypto's bull market having been broken. You can see very powerful moves up in gold and in silver and in those areas.
I own Kinross and Barrick North American gold producers, with good dividends. And then I am the biggest shareholder and a director of Condor Gold, which is a London listed smaller company, which is expanding its reserves and it's very close to producing.
So those are my three gold recommendations. But in the meantime, you just buy the outright metals as well, or buy the futures in the metals, or ETFs or any other way you want to play it, but everyone has to have some gold and silver in their portfolio
Merryn: It's interesting, isn't it? Because only a few months ago I was being told by people that cryptocurrencies were the new gold, bitcoin is the new gold, and one of the reasons why gold wasn't going up is because gold had been replaced by cryptocurrencies. So if you wanted to hedge against inflation, hedge against the bad behaviour of the monetary authorities, hedge against the fact that it's basically impossible to raise interest rates significantly without crashing pretty much every market globally, you should hold cryptocurrencies instead of gold.
And we're a bit cynical, I don't know about that. We still don't, hard as we try, we still don't quite get cryptocurrencies. And of course, our overriding belief during the cryptocurrency bull market has been at some point, governments will stop this from happening.
The Chinese are not going to put up with it, the Americans are not going to put up with it, the British are not going to put up with it, there is no way that the world's central banks will give up their sovereignty over currency, their monetary sovereignty, in favour of a of an anonymous cryptocurrency of some kind.
So we were always a little confused about this. So we wonder if it's actually over now. The cryptocurrency, boom bust, boom bust, boom bust cycle is actually over. And now we're just in the long term bust bit. What do you think?
Jim: Yes. I'm with you. I find it confusing. I have a friend who's made lots and lots of money in Bitcoin. And I saw him in Dubai last week, actually. And, of course, he's down quite a lot from the highs in April, $60,000, down to $30,000, actually below $30,000.
And I said to him, I won't mention his name, obviously, but I said to him, the problem now is that every time it goes up a little bit, there are going to be continual sellers, who are just getting their money back all the way to $60,000. And so there's going to be a very significant wall of worry to overcome in bitcoin.
The other ones, they trade whatever way they trade, but they'll probably go up and down with bitcoin.
It does have the advantage of being a scarce resource in the sense that they can only mine a certain amount of it. And it's a finite number of bitcoin that are made.
Merryn: Yes but lots of things are scarce, but not necessarily desirable.
Jim: That's a very good point. Actually, I hadn't heard that, that's a great description.
I tried to make some money in bitcoin by shorting it in the last few couple of months. But it's just too difficult, because you are only able to short small quantities – up to a quarter of a million dollars – and it's 100% margin for shorting because of the volatility. So I did make some money. But frankly, speaking, it's not worth the effort.
I don't think it's worth people spending a lot of intellectual effort on whether they should be in bitcoin because there are so many other things you can invest in that you can make money in.
And after all, all we have to do, as you and I know, better than most people is to make a very good after inflation return of 10% to 20% a year. And we're set for life basically, after a few years. So you don't need to shoot the lights out in anything.
Merryn: Yes. Now, Jim, you just said something very interesting, which is that you were in Dubai. What were you doing in Dubai?
Jim: Well, I'm very interested in and more than interested actually very actively involved in what you might call Ag-tech or new agriculture.
And Dubai is part of the UAE. It's about ten million people altogether, the UAE, and they import 90% of their food and the 10% that they produce there is an inefficient production because they fly in cows who live in air conditioned sheds to produce milk at very high prices. And so they are pretty forward thinking and they're very interested in this agricultural revolution.
But in a broader terms in Dubai, I think that there has the capacity to be like a new Hong Kong. They are. I don't know if you've been there recently, but it's...
Merryn: Actually, I've never been there. Not even for a stopover.
Jim: Well, it's definitely interesting. And if you do go there, I've got lots of contacts now and in fact, I've got a long visa there, a ten year visa, and I bought a couple of apartments there and we've opened an office there.
It's incredibly easy to do business, there is a very favourable tax regime. They are really forward thinking in terms of new technologies and how they can improve the country, and obviously, in Abu Dhabi, which is the capital of the UAE, there is significant money from oil and gas, one of the largest sovereign wealth funds in the world.
And so yes, that's why I'm spending time there. It is not the best time of the year to be there, because it's 43 or 44 degrees Celsius. But, it's a good place at least for me to do business, I think, most people would know, Dubai has been a sort of party place for social influencers, but...
Merryn: Maybe that's why I haven't been.
Jim: Yes, I tell you what, though, I made a TikTok video in Dubai, I wasn't dancing on the beach or anything, I was talking about clean agriculture. And it's already had nearly two million views in the matter of three or four days. So maybe the influencing stuff does have some legs.
Merryn: You're in the wrong business, you should be an influencer.
Jim: Yes, I told my colleagues: find a way in which we can make some money out of this social media stuff.
It's definitely worth a visit to Dubai. In terms of stocks in Dubai, I have better contacts than most people and I still haven't got my brokerage account open, because it's quite difficult to buy the local stocks. But if you can buy a single stock there, Emaar Properties is the one to buy. Again, it's 5%, dividend yield, and a very stable currency, which is the Durham. And it's actually dominant, and they're the top developer in the region. So I would go for that one.
Merryn: And did they develop the flats that you've bought?
Jim: They developed both of them. The price of property has been going up a bit, because more and more people are recognising Dubai, particularly digital nomads, as a good place to work from. But it's still cheap. You can still buy a brand new apartment for around $600 a square foot, which is a fraction of what it is in London or Edinburgh as an example.
Merryn: That's interesting isn't it, cities are beginning to come back. I was looking at the numbers for the UK this morning. And well, in the last year and a half or so it has been all about the countryside and people moving out of central London and central London property prices falling quite fast. Suddenly, the inquiries are beginning to come back in and we're beginning to see London prices come back up.
Jim: Yes, I just bought another flat in London actually...
Merryn: Is there anywhere you don't own a flat, Jim?
Jim: I'm afraid I'm – some people are shopaholics, they can't walk past the shop and not buy something – I'm a kind of propertyholic. And so when I go on my trips, I'm always looking in the estate agents windows or online at whatever the pricings are. So there are a few places I don't own a property, but not many.
Merryn: And as soon as you go on holiday to those places, you will own one there.
Jim: Well, that's right. I'll try and limit my travels now. Because otherwise I'll be too tempted to buy something.
Merryn: Dubai is the new Hong Kong, but those of us who can't actually make it to Dubai to buy a couple of flats, go and buy a developer instead.
Back to your interest in artificial agriculture. Agronomics was your vehicle for that listed in London? Right? That's performed astonishingly well.
Jim: It has and it raised about £65m a couple of weeks back of additional firepower. I have to correct you on this in the sense that it's not artificial agriculture. These are real meats, real dairy products, real materials that happen to be produced in factories and labs from stem cells from living as opposed to slaughtered animals. And it's here and now.
You've probably seen that in Singapore, Eat Just an American company has now got its chicken nuggets which are grown in the lab on sale. Vitro Labs, which is the leather company that we've invested in, is selling its leather, which is leather grown in a lab, but it's identical to the best quality cows leather or cars leather, but with no killing of a calf so to speak, and they're selling it to the big fashion houses.
Merryn: Fascinating and what's that like price wise?
Jim: That's a great question. So as you know I wrote this book called Moo’s Law, which is all about scale going up and prices coming down.
But the price of the leather is about twice that of the conventional leather, but the market is for ultra luxury goods at the moment. And these fashion houses want to have non-animal leather. Leather is a relatively small component of the price that you pay if you go in to, I don't know, Louis Vuitton or something like that. And so they're prepared to pay twice the price, but it's going to come down to the same price within a year or two.
The same thing will happen in the other key products which are fish, which will be on the market in the United States, by the end of this year; meat, which will be on the market in Europe and the US within 18 months. All these companies have, they have something that you can taste, you can eat, but they're not producing on a big scale yet.
And then in dairy, I think it's pretty safe to say that in ten years’ time, there won't be a dairy industry related to cows left, there won't be anywhere. Because the precision fermentation, which is being developed by Clara, and by Perfect Day out of the United States is so good. And actually also Formo in Germany, which is the one that we have, produces whey and casein, which are the key components of dairy, so there is no difference, it's basically milk or yoghurt or cheese or whatever produced without cows, and the pricing of that will be lower, in quite a short space of time than the price of conventional dairy products.
And of course, dairy is the biggest emitting business among agricultural products, more methane comes out of dairy than anything else. And so it's good for the planet, and no hormones, no antibiotics, none of that bad stuff.
And let's face it, I'm all for artisanal farming, as you know, and I'm all for animals being treated well, but most animals live brutal and short lives in feedlots. Chickens, 23 days on average; cows are 28 months, and they never see outside; and the same for pigs.
And the pandemic risk from all those animals in close confinement is substantial. So we've had the swine flu, we've had the avian flu, we've had this particular pandemic, don't know what the origin is, but it's probably related to agricultural malpractice. But just imagine if we had a bacterial pandemic, it wasn't a viral one.
And the antibiotics which we're getting increasingly resistant to because 80% of antibiotics go into animal use. Just imagine if we had that, that would be like the Black Death. There's absolutely nothing to stop that happening. And that's why I'm a big, big proponent of trying to move intensive farming into factories rather than into feedlots.
So if you regard the cow as a factory, which it is, it's a very inefficient factory. It takes 25 times in more than it puts out. And the new type of stuff that we're doing is two and a half to one.
So the capacity for food, which is perfect, without any toxins or anything like that, to come out of factories cheaper than conventional farming is absolutely here and now. So, I think the ride or the journey for agronomics and other companies such as that is just starting.
Merryn: That's fascinating and also, so much faster than I would have expected. I mean, it will be a huge social and cultural change apart from the, in the agricultural industrial complex, that change is massive. And sounds like it's going to be much quicker than I think most people expect. Millions and millions of cows will be almost entirely redundant in a decade.
Jim: Yes, that's correct. Look, in terms of meat, I think about 50% of the meat market will become plant based, or cell-ag based within a decade. And then fish about 50% will be cell-ag based.
I don't know if you've watched Seaspiracy. But it's a disturbing watch. The case for changing fishing practices is even more compelling, I think, than changing animal farming practices.
But just let's put this in perspective. At any one time, there are ten billion animals alive, which are destined for slaughter. There are about 7.8 billion of us and we eat 60 billion animals a year and two trillion fish. And it is the biggest single source of carbon and other noxious emissions, more so than transport. So something needs to be done, and we're trying to do it.
And the money is beginning to come in, which is always an important feature of development of the new industry. Last year I think about $1.2bn came in; this year, it'll be between three and $5bn, but the money is really beginning to flow in
Merryn: Brilliant. I've used up a lot of your time, I want to use up a tiny little bit more just to ask you about the US tech sector. One of the things we talked about last time was the Faangs and the extent to which they could continue, the share prices could continue to rise or at least stay high, given how much they've risen so far. Are you still a little anti-them, or anti investing in them, should I say?
Jim: Yes. And actually, they have lost momentum. If you look at the market in the last six months in the US, those stocks have not done nearly as well as what you and I call value stocks or old economy stocks. And, they continue to pump out record profits.
But we've seen that Lisa Khan, for instance, being appointed as the head of the FTC in the US and now talking tough about these companies. We've seen the European Union beginning to get very vocal – even more vocal – about the US tech companies.
And I do believe that, notwithstanding their army of lawyers and Nick Cleggs and people like that, that they are vulnerable to government raids on their businesses, and particularly at a time when the government's want to raise money all around the world.
They're going to be the new banks. The banks were taxed extremely heavily and fined, and all that sort of stuff in the last decade. And why wouldn't it be the turn of the tech companies?
Meantime, yes, they continue to grow during the pandemic. But I think that they're going to suffer – you can't grow when you're so so big at the same rate that you once grew.
So I actually I wouldn't hold any of them. I wouldn't be a holder of any of these companies at the moment.
Merryn: Okay, brilliant. You've given us lots of ideas of things that we should hold instead. Jim, thank you so much for talking to us today. We appreciate it hugely. And I know all the readers will be very grateful for all your insights.
Jim: Thanks, Merryn, and lovely to talk to you and see you soon, I hope.
Merryn: Hope to see you again soon, too. Jim, thanks so much for joining us. Now. If you'd like to hear more from us, of course, you can go to our website at moneyweek.com where you can sign up for our daily newsletter Money Morning, often written by the brilliant John Stepek. If you want to follow us on Twitter, we're @MoneyWeek. If you want to follow me on Twitter, I'm at @MerrynSW, if you'd like to follow John on Twitter he's @john_stepek. Thanks very much. And if you'd like to leave a review, of course, please do, we prefer positive ones. Do so at your chosen podcast provider. Thank you very much.
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