- Dominic Frisby - Bitcoin
- Frédéric Guirinec – Emerging markets
- Cris Sholto Heaton – Doric Nimrod Air
- Max King - RTW Biotech
- Rupert Hargreaves - REITs
- James McKeigue - First Quantum copper
- David C. Stevenson - Literacy Capital private equity
- David J. Stevenson - Mandalay gold
- Mike Tubbs - Elixirr consultancy
MoneyWeek's writers give us their top investment tips for 2024, which include a biotech investment trust, a gold miner and a copper ETF.
Dominic Frisby - Bitcoin
Next year is going to be a good one for Bitcoin. You absolutely must own some.
In January, the likelihood is that America’s Securities and Exchange Commission (SEC), the key financial regulator, will approve Bitcoin exchange-traded funds (ETFs). Then in February, the ETFs will begin trading and, with the SEC’s legitimisation of the asset, billions of dollars of capital will be invested in them, much as happened with gold and silver ETFs.
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Come the spring we will see the next halving event. This is a process whereby the reward bitcoin miners receive for validating transactions falls by 50%, slowing the rate at which new bitcoins enter the market and reducing new mining supply. Every bitcoin bull market has occurred around the time of a halving event. Then we get interest-rate cuts and easy money in the run-up to the US election. Towards the end of the year, we see perhaps the biggest catalyst of the lot.
Bitcoin has, hitherto, largely been driven by retail investors. When large corporations start holding their Treasuries in Bitcoin to avoid 10% annual currency debasement, the game changes. A few, such as Nasdaq-listed MicroStrategy (Nasdaq: MSTR) have already blazed this trail. But in December, the Financial Accounting Standards Board (FASB), the US entity that details how companies should report assets on their balance sheets, will begin to allow this, and many more will follow. Lots of catalysts, then.
But the main reason to own bitcoin is that this is a technologically superior form of money to fiat currency. Its scalability, from micropayments amounting to 1/35th of a penny to huge billion-dollar transactions across borders, at the click of a mouse, backed by the world’s most powerful supercomputer network, is such that the risk is, surely, not owning bitcoin, but not owning it.
Frédéric Guirinec – Emerging markets
Last year I recommended the food sector, notably Premier Foods, as the industry was underpinned by the inflation of commodities and food. Going into 2024, the Olympic Games in Paris will cheer us up. However, despite recent easing, the lagged effects of tighter financial conditions will continue to weigh on economic activity.
The economic outlook for Europe remains poor, with mild recessions forecast. Poland still offers very good value for investors and will profit from an improved relationship with the European Union under Donald Tusk’s premiership. Polish miner KGHM (Warsaw: KGH) offers an attractive valuation. In fact, on the subject of relative value, commodities are at secular lows relative to stocks. Low metal prices in general, and higher mining costs, such as oil, have led to strong capital discipline in the sector. KGHM carries little debt. The downside risk seems limited, and the group will be able to profit from any potential rebound in the prices of minerals.
Looking further east, a now increasingly likely victory of Russia in Ukraine will be another symbol of a structural shift in geopolitics, with power pivoting further to emerging markets. These look cheap compared with Europe and the US, but they are a mixed bag: elections in Indonesia may trigger volatility, while valuations in India are high. Buy an ETF such as the iShares MSCI Emerging Markets ETF (LSE: SEMA).
I threw a dart at a map of the Far East just for fun, and it fell on Astra International (Jakarta: ASII), a conglomerate in Indonesia. Let’s put a chip on that one too. Faites vos jeux.
Cris Sholto Heaton – Doric Nimrod Air
The Doric Nimrod Air funds (DNA [delisted], LSE: DNA2 and LSE: DNA3) are/were three London-listed trusts set up to own Airbus A380s leased to Emirates.
The leases run for 12 years, after which Emirates could renew the lease, buy the aircraft or return them to the fund. The lease on DNA’s only aircraft expired early this year and Emirates bought it for parts for $30m. The fund was wound up and cash was returned to investors. Two of DNA2’s seven planes went off lease recently and Emirates also bought them, for $35m each (also probably for parts as they are in storage). Leases on DNA2’s other five planes expire in late 2024 and DNA3’s four planes in 2025, so the pay-off depends on what happens after that (unlike the more complicated Amedeo Air Four Plus trust).
If Emirates buys all the planes for $35m each, investors should get a double-digit rate of return until wind-up. If it extends the leases, it will be at a new (lower) rate based on its current value.
Return is the worst scenario: Emirates is the only obvious buyer for these A380s, so they would probably be sold for scrap. Emirates plans to keep flying A380s until the 2040s, but it has 119 in service, and how long it needs all nine of these leased planes is uncertain. They don’t appear to be among the 67 A380s that Emirates is now upgrading, but that doesn’t stop it from needing them for a few more years of service and then for parts: its short-term need for planes seems high.
DNA3 is trading at 55p per share: residual lease income plus “half-life” payments, if Emirates returns the planes, amounts to 65% of that, plus scrap value. That helps cap the downside, so I think the bet that Emirates buys or extends is worth taking.
Max King - RTW Biotech
It’s been a decent year for stockmarkets, with the FTSE 100 flat but the S&P 500 up by 18%. Within that, there are wide variations – the information technology sector is up by 50% but the healthcare sector is down 6%. Biotechnology has been even worse.
In the words of Woody Stileman, business development director of the RTW Biotech Opportunities (LSE: RTW) trust, the Russell 2000 Biotech index is “three months short of the longest-ever bear market and down 75% from its peak”. The share price of RTW Biotech Opportunities is back at its October 2019 issue price and the fund is on a discount to its net asset value (NAV) of more than 30%. With assets of £280m, it is a small but growing part of the $6bn managed by RTW, whose main fund has returned a compound 24% a year since 2009. RTW is a “full-cycle investor” – it is involved from an early stage in private companies until sale or profitability.
Its most conspicuous success has been the sale to Merck earlier this year of Prometheus, then accounting for 15% of the trust’s portfolio, for 12 times the capital invested in 2020.
Despite very difficult markets, four portfolio companies have listed this year, two have been taken over (including Prometheus) and distributions are already being received on two royalty investments. In November the trust made an all-share offer for biotech group Arix Bioscience. Arix has net assets of £232m, including £106m of cash, £56m in 15 listed but immature biotech investments, and £68m in seven unlisted ones. RTW believes it is better positioned than Arix to realise the upside. With “a unique opportunity to buy into a depressed market while innovation is booming”, the enlarged trust will be well placed to multiply investors’ money.
Rupert Hargreaves - REITs
Investors have been giving real estate assets the cold shoulder over the past two years as higher interest rates have introduced uncertainty about asset values.
While sentiment has recovered over recent months, many real-estate investment trusts (REITs) continue to trade at a discount to underlying net asset value (NAV), reflecting the market’s view that companies are being too optimistic about property prices. This seems unwarranted. Those companies that have sold assets recently have not seen a big decline in the price buyers are willing to pay, suggesting NAV values are reliable.
Indeed, the index-linked cash flows property provides remains highly attractive. There have been some distressed sales, but these are mainly limited to over-leveraged owners struggling with high borrowing costs. A good way to play this theme is PRS REIT (LSE: PRSR), owner of 5,100 rental homes across the country.
There is a structural shortage of rental housing in the UK – bad news for tenants, but good news for companies like PRS. The company has constructed a portfolio of high-quality dwellings: purpose-built, energy-efficient estates of rental properties, owned and maintained by the company. This helps PRS maintain quality and keep costs low, something tenants appreciate.
The company’s properties are virtually all full, and it pushed through an inflation-busting rent increase of 9.8% in the year to 30 September. There’s no reason why it cannot repeat this sort of growth in future.
Despite this, the stock is trading at a 30% discount to NAV, suggesting the market believes the properties are not worth their balance sheet value. Considering the shortage of rental homes in the country, the portfolio’s occupancy rate and rent increases, that is unlikely. The stock also yields 4.9%.
James McKeigue - First Quantum copper
This year the most-read story – by far – on LatAm-Investor.com was an interview with Tristan Pascall, CEO of First Quantum Minerals, the world’s sixth-largest copper miner. The good readership numbers will be scant consolation for Tristan, who was using his interview to counter protests against First Quantum’s vast copper mine in Panama. The country’s president recently vowed to shut down the mine following a Supreme Court ruling that it is unconstitutional. Given the mine produces 1% of annual copper output, its closure would have a tangible impact on the global market.
But First Quantum’s travails reveal something even more important: it is becoming very difficult to build large-scale copper mines in Latin America. There are more than $100bn-worth of copper mining projects across the region that are being held up by environmental permits or processes.
Latin American states, most of which have weak legal mechanisms for building strategic projects, are struggling to balance the need for new mines with increased environmental activism and the historical legacy of disaffected communities.
Latin America is normally on the peripheries of the world economy, but now the intricacies of its internal politics have global significance. Peru and Chile account for more than 40% of world copper production, while Ecuador and Argentina could become top-ten producers by 2030. The region’s inability to build new mines is bad news for the copper-intensive energy transition, but good news for the copper price.
The easiest way to play it is through the WisdomTree Copper ETF (LSE: COPA). Or if you think miners will outperform the price in the coming bull market, then you can pick the Global X Copper Miners UCITS ETF (LSE: COPG).
David C. Stevenson - Literacy Capital private equity
I think there is a decent chance that the old private-equity (PE) model is now not fit for purpose in the new world of higher interest rates. That glorious era of cheap money is over, and the market is being saturated with new players.
But there is still opportunity in the right niche, and I think small to medium-sized deals (in the £1m to £50m range) involving private UK companies is one such niche. These deals involve established, mostly profitable smaller businesses looking to scale up, but the scale of these deals means they are too small for the large PE shops, while venture capital (VC) companies tend to look at sexier, tech-influenced names.
This is where a small UK-listed private equity fund called Literacy Capital (LSE: BOOK) fits in. Its classic deal involves entrepreneurs looking to scale up their business but also cash in on their business success. The fund also has a symbiotic relationship with a charity funding school reading initiatives. The fund’s record to date is excellent, there are lots of opportunities in its sector and unlike its bigger peers, the fund doesn’t rely on lashings of debt or selling on portfolio businesses to other PE firms. The only slight catch is that its shares don’t trade at a big discount to net asset value (NAV), unlike outfits such as Hg Capital and Oakley Capital Investments (both of which I rate highly as well).
David J. Stevenson - Mandalay gold
A year ago I selected Canada-based gold miner Mandalay Resources (Toronto: MND) as my 2023 stock pick. Yet, despite the price dropping by 35% so far this year, I’m doubling down on MND as my tip for 2024. Here’s why.
Mandalay has metal-producing assets in Australia (the Costerfield gold-antimony mine) and Sweden (the Björkdal gold mine). And this year’s bullion price rebound was expected to revive Mandalay’s shares. Indeed, gold’s US dollar value has risen by 10% in 2023. However, gold miners haven’t really got the message.
The HUI Arca Gold BUGS index (basket of unhedged gold stocks), a gauge of big names in the industry, is down by 3% this year.
Factors such as a lack of confidence in the durability of gold’s rally, rising mining costs, dilution of shareholders (through equity issuance to fund capital expenditure), and increased political risk in some developing countries (making gold assets more vulnerable to seizure) have hurt bullion miners, in particular the industry’s smaller players.
While only the first two factors have affected Mandalay, higher metal extraction costs have damaged its 2023 earnings and share price. Indeed, the stock’s been dire over the last decade, plunging more than 85%. Yet it’s now very cheap on a 2024 prospective price/earnings (p/e) ratio of just 3.2. The market value is $130m, which compares with net assets worth $182m. What’s more, the latter aren’t intangibles resulting from, say, an overpriced acquisition, but physical assets such as property, plant and equipment. Even including lease liabilities, there’s almost no net debt.
As a global recession looms, the Fed may soon be forced to start cutting rates again. And with the world’s debt mire getting ever deeper, central bankers are – ultimately – likely to print even more money. That would be excellent news for gold and miners such as Mandalay, which I still believe will make investors multi-fold profits.
Mike Tubbs - Elixirr consultancy
Last year I tipped Begbies Traynor, the insolvency specialist, as rising interest rates and a struggling economy would cause a sharp rise in insolvencies. That duly occurred, with insolvencies reaching their highest level since 2009 in the second quarter. Yet Begbies Traynor’s shares are still down over 2023 by more than the FTSE All-Share index.
This year I am recommending a riskier small company with experienced top management, excellent growth prospects and a number of blue-chip clients. The company is Elixirr International (Aim: ELIX), a consultancy with a market value of £220m and a 2022 turnover of £70.7m, up by 40% on 2021.
Elixirr was founded in 2009 by the current CEO, Stephen Newton, who had been a managing partner at Accenture. Newton says Elixxir’s ambition is to become the best digital, data, artificial intelligence (AI) and strategy consultancy in the world, with a globally recognised client base. It already numbers Diageo, HSBC, LVMH and Tesla among its clients.
Elixirr features in several categories of the Financial Times’ 2023 list of the leading UK management consultancies. Its emphasis on digital, data and AI should shield it from the recent turndown in general consultancy. Elixirr grows organically and through bolt-on acquisitions such as US generative AI firm Responsum, which has enhanced the group’s AI capabilities.
Revenue rose by 23% to £41.1m in the six months to 30 June, with pre-tax profits up 17% to £9.9m and net cash at £19.5m. Newton, who holds 28.7% of the shares (aligning his interests with other shareholders’), expects this strong performance to continue for the rest of the year, with full-year sales of £85m-£90m.
The trailing 12-month p/e is 17.5 and the forward dividend yield is 2.23% at the recent share price of 472p – well below analysts’ one-year price target of 868p.
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