MoneyWeek’s regular contributors each pick one of their favourite investment ideas from around the world for 2018 and beyond.
I think there is a fair chance that we’ll see oil prices stabilise around the $50 to $60 range for most of 2018, especially as the global economy looks to be in decent shape. This higher-than-expected level for oil prices gives North Sea oil companies a breathing space to get their finances in order and increase production. Hurricane Energy (LSE: HUR) is a (very) wild card to play this. It has a potentially massive North Sea oil field, which is being prepared for production as we speak. I’ve been struck by how many smart investors I know wagering decent sized stakes in Hurricane, believing it could be huge, including Richard Bernstein of Crystal Amber, an activist investment trust, who has a more-than-decent track record as an investor. He’s made Hurricane his single biggest bet. I don’t hold the stock at present, but it’s on my active watchlist.
After years in the doldrums, commodities started to wake up a bit in 2017, particularly energy and metals, but platinum barely moved at all. At around $975 per ounce, platinum is about three-quarters the price of gold. Platinum “should” trade at 1.25 times the price of gold – not at a discount. Fair value, and the historical norm, suggest a platinum price around $1,650. It is even trading at a discount to palladium, its sister metal. The historical average is two or three times the price of palladium.
Platinum is currently valued at its cost of production, or even slightly below. Having already tightened their belts after the mining crash of 2012-2013, producers are struggling, which points to supply shortages. Current supply from mining does not meet demand – the gap between the two is met by recycling and scrap. This has been the case for several years now. Just a tiny increase in demand and this will be put out of balance.
A change in the public perception of diesel engines and the environmental effectiveness of catalytic converters would help its cause enormously. But in a world where value is so hard to find, platinum stands out as cheap. One way to buy in is through the ETFS Physical Platinum ETF (LSE: PHPT).
From a virtual blanket ban on legal gambling until 2000, Asian governments have recognised that it is better to legalise the sector for its tax and tourism benefits rather than to drive it underground. The result was an explosion in casinos across Asia, so rapid that revenues in the tiny enclave of Macau are now a multiple of Las Vegas.
The largest firms are expensive, but one stock stands out: Nagacorp (Hong Kong: 3918), which owns what was the only casino/hotel complex in Cambodia’s capital Phnom Penh, Naga 1. This is so successful that it accounts for 3% of Cambodia’s GDP. The larger Naga 2 was completed late last year and has just opened. Nagacorp enjoys a gambling monopoly for 200km around the capital until 2035. Initially it relied on Vietnamese and Malaysian tourists; now the focus is on China, with visitor arrivals expected to double over the next three years.
The negatives? The founder and chief executive owns 64% of the company and is not shareholder-friendly. He’s going for rapid expansion, including a new casino in Vladivostok and in other countries surrounding China. There are political and tax risks. Yet it is cheap, on a price/earnings ratio of 11 times 2018 forecasts and yields 3.5%. Debt is relatively low. I own it as a high-risk, value and growth play.
Since the launch of River & Mercantile UK Micro Cap (LSE: RMMC) three years ago, the share price has doubled and it now stands on a 5% premium to net asset value. This might have led many trusts to issue shares to improve their liquidity, achieve economies of scale and generate more management fees, but the manager, Philip Rodrigs, has other ideas. The trust has just completed its second compulsory redemption of £15m in a year, leaving a market value of £120m, because he wants to ensure that it does not become too big to trade nimbly in and out of micro-cap companies.
I got to know Phil in his eight years at Investec Asset Management where he took the UK smaller-companies fund to a substantial size, achieving outstanding performance throughout. He has the ability to spot the winners early and exit promptly, which meant that he often invested profitably in dismal long-term performers, such as Quindell.
He remains optimistic, as I do, about the outlook for the UK market and, especially, for small and mid caps. He has always invested fearlessly in Aim, a market that has gained real momentum in the last two years. Phil is the right manager in the right place at the right time.
Hospitality group Whitbread (LSE: WTB) has two strong consumer brands in Costa Coffee and Premier Inn Hotels. I think that both of these are undervalued by investors.
Coffee sales have seen phenomenal growth in recent years, but there are possibly too many coffee shops on our high streets. This will make it harder for Costa to grow its retail profits, but the firm is diversifying away from high streets with drive-through outlets and stores on retail parks. The Costa Express coffee machines that you find in places such as garage forecourts or convenience stores are extremely profitable and there’s still lots of potential to install lots more of them.
Premier Inn offers high-quality accommodation at value-for-money prices and is a big hit with business and leisure customers. These hotels generate good returns on investment and have lots of scope to grow profits from extending existing properties and building new ones. Premier Inn should continue to take a bigger share of the hotel market in the UK and has an opportunity to build a big business in Germany. Whitbread owns most of its hotels, so there is substantial property value in this business.
Based on the values of similar businesses, it seems that Costa and the hotels are worth more separately than they are together. A share price closer to £50 rather than just under £40 can be justified by spinning one of them off as a separate company. With a new chairman on the board and an activist shareholder this cannot be ruled out. I personally own shares in Whitbread.
The Chinese ecommerce sector is the most vibrant in the world, with companies such as Alibaba and JD.com the main beneficiaries of the ongoing boom. The third-largest player is Vipshop (New York: VIPS), which specialises in online flash sales – essentially quick high-discount offers on famous brands. Any fashion brand that wants to sell off excess stock in China has a difficult choice. Alibaba and JD.com account for 90% of online sales in China. If a brand tries to discount on these sites, all the brand’s customers will see the discounts. Brands prefer to sell off discounted stock in a hidden manner – hence the success of stores like TK Maxx in the UK. To achieve “hidden” sales in China brands need to use Vipshop. This provides the firm with its competitive advantage, which is aided by the second-best logistics network in China. However, investors have been concerned that Alibaba and JD.com would use their market dominance to squeeze out Vipshop. Its shares thus traded as low as nine times earnings in December last year, a basement level for a sexy ecommerce company growing at 25% a year (Alibaba and Amazon trade on 35 to 45 times earnings).
However, in late December Vipshop accepted new investment from both Tencent and JD.com. Tencent is the leading social media and internet gaming company in China – and JD.com was one of Vipshop’s main larger rivals. This deal led to a 40% rise in Vipshop’s share price, but this has only partially reflected the improved prospects of the company. Vipshop can now use Tencent’s WeChat social network to promote its services and JD.com will now work as a partner rather than a competitor. With ecommerce businesses, getting new user flow across the site is key – and Vipshop has with this deal guaranteed its flow.
I hold Vipshop and expect it to unwind its still-discounted valuation over the next year, as well as see a rapid acceleration in sales and earnings growth. I think the share price will rise to at least $25 in the next 12 months – up 100% or more.
Given my views on inflation, my tip for 2018 has to be precious metals. Gold had a so-so year in 2017, while silver and platinum were even less inspiring. I don’t expect that to continue. If central banks remain behind the curve in terms of inflation and growth (ie, they don’t raise interest rates sharply enough to curb rising prices – which I strongly believe they won’t), then gold should do well. In turn, that should be good for gold miners. The sector bottomed out at the start of 2016 and enjoyed a stellar run that year, but gave back a good chunk of the gains in the first half of 2017.
I think now looks a good time to get back in.
To my mind, there’s no point in trying to pick and choose individual miners – why take the risk when a full-blown gold rally would probably send the entire sector a great deal higher from here? So I’d opt for an exchange-traded fund (ETF). In this case, the VanEck Vectors Junior Gold Miners ETF (LSE: GDXJ), which tracks the MVIS Global Junior Gold Miners index. This index consists of small-cap precious metals miners, listed mainly in Canada, Australia and South Africa.
Andrew Van Sickle
The financial press makes such a fuss of China and India that investors often overlook plenty of eastern promise closer to home. The countries of central and eastern Europe (or CEE, an acronym that includes Russia and Turkey) embraced capitalism with great enthusiasm when the Berlin Wall fell, and started closing the gap with western Europe. But this convergence is far from over. In 2015, GDP per head in both Estonia and the Czech Republic had reached less than half Germany’s level.
The strongest economic data in six years is giving this structural growth story additional pep. CEE’s GDP should expand by 3.3% in 2017 and 3% next year, reckons the European Bank for Reconstruction and Development. This is chiefly due to the increasingly robust eurozone, which is crucial to CEE’s fortunes: the single-currency area accounts for 60% of Czech exports, for instance.
The trouble is that it’s hard to invest in CEE through a fund without inadvertently placing quite a big bet on Russia: it accounts for around half the assets of both the Jupiter Emerging European Opportunities Fund and the Blackrock Emerging Europe Investment Trust. So investors who don’t want that could consider another route into CEE: through Vienna. Austrian companies swiftly established (and re-established) themselves in the old Habsburg territories when the Iron Curtain fell. Banks and insurers are especially big players in CEE. Financials comprise half of the benchmark ATX index, and they make around half their sales in CEE; major players include Erste Bank and Raiffeisen. Oil and gas giant OMV is big in the region. Steelmaker Voestalpine and engineering group Andritz are other ATX heavyweights.
Sixteen of the companies on the stock exchange derive 20%-100% of their revenues from the region, according to Raiffeisen Centrobank, which describes the Viennese market as a “proxy” for eastern Europe. So consider an exchange-traded fund tracking the ATX index, which contains 20 blue chips. One option is the DB X-Trackers UCITS ATX ETF (Frankfurt: XB4A).
Merryn Somerset Webb
Investors in Japan have long worried about what they call the market’s “iron coffin lid” – the seeming inability of the Topix benchmark to rise above the 1750-1800 level. It has bumped into the lid six or so times since Japan’s great stock-
market crash, but fallen back every time. Until now.The latest bull run has pushed the Topix to 1890 (up 19% in 2017). The lid appears to have been lifted.
That makes sense to me. Japan is not as cheap as it was, but it is still one of the few places left in the world where valuations look perfectly reasonable. It’s also one of the few that can offer the nervous investor political stability: Shinzo Abe won his snap election last year, has a super-majority, and clearly intends to carry on with his reform agenda. At the same time the corporate profit outlook is good (Japan does well in times of global economic expansion), corporate governance continues to improve (the odd scandal aside), and Japan is very much a leader in the industries that will matter in 2018 – robotics, AI and automation.
The best bit of the story is that most international investors still haven’t caught on: according to a Goldman Sachs survey, they are very underweight Japanese equities, something that suggests there are more gains to come. For a growth-orientated Japan fund with an excellent performance record look at Baillie Gifford Japan Trust (LSE: BGFD).
Cris Sholto Heaton
There’s no guarantee that Cyril Ramaphosa, who is almost certain to be the next president of South Africa, will succeed in putting the economy back on track after several years of mismanagement under Jacob Zuma. But he has a decent chance of doing so – and if he does, foreign investors should benefit from a stronger rand in the short term and better economic growth in the medium term.
My main long-term South African holding is Tiger Brands (Johannesburg: TBS), the country’s largest food company, which owns many popular consumer brands. After a few shaky years for the business – including a costly failed attempt to expand in Nigeria – a new chief executive has focused on improving its performance in its home market. That’s now starting to come through in the results. The shares have rallied and the firm is no longer so cheap (it trades on around 18.5 forecast earnings for 2018). But it’s still one of the less expensive high-quality emerging-market consumer stocks and I think it should do very well in the years ahead.
Dr Mike Tubbs
Biotechnology is one of the key technologies of the 21st century and offers careful investors rich rewards. Care is needed in selecting investments since there are many smaller biotechs with promising pipelines, but little revenue and not always enough cash to develop their pipelines. The best investments are often growing medium-sized biotechs with revenue streams deriving from strong positions in market niches supplemented by promising pipelines and cash piles.
A good example is Vertex Pharmaceuticals (Nasdaq: VRTX), with its monopoly position for drugs to treat cystic fibrosis (CF), a rare hereditary genetic disease that clogs the lungs and obstructs the working of the pancreas. The drugs have six-figure price tags. The first two CF drugs launched reach only part of the CF patient population and peak sales are likely to be $4bn, compared with total Vertex 2016 sales of $1.7bn. However, new double and triple combination drugs are in the pipeline that have delivered very promising clinical trial results and lower side effects, and these could lift CF peak sales to about $8.5bn, according to Morningstar. Then there are pipeline drugs for acute spinal cord injury, pain, oncology (outlicensed to Merck Germany) and influenza (outlicensed to Janssen) in Phase II trials, with others in Phase I. Vertex also has a cash pile of $1.8bn, giving added confidence.
Vertex has shown non-GAAP quarterly net profits since the end of 2015 (rising to $136m in the third quarter of 2017). With expected sales growth of around 25% per year for the next five years, this is an attractive growth stock with a patent-protected dominant position in its main market.
My top pick for this year has to be Mexico. It already has one of the strongest, most diversified economies in Latin America, with a huge energy boom set to drive growth over the next 20 years. Best of all, every now and then some outspoken attack from President Donald Trump helps to drive down the peso and create buying opportunities for international investors.
The reason that investors place so much emphasis on Trump’s words is his threat to derail the North American Free Trade Agreement (Nafta). Renegotiations are underway, and it seems likely that the deal will be redrawn in some way that’s unfavourable to Mexico. But even if Nafta were scrapped completely, the fear is overdone. A mix of local and international companies have built a sophisticated manufacturing chain in Mexico’s northern states that would be competitive without Nafta. Even if Mexican exports have to pay a WTO tariff of 3.5% to enter the US or Canada, it won’t make sense for most factories to relocate.
Moreover, there is a new factor, which will more than compensate for any slight drop in manufacturing. In 2013, Mexico opened up its state-controlled hydrocarbon and electricity market to the private sector. The International Energy Association estimates the reform will attract $40bn of investment per year between now and 2040. This will reverse Mexico’s declining oil production. Oil output fell by a third over the last decade, but with the new investment it is projected to rise 40% by 2040. The massive boom in investment and production will create jobs, support consumer spending and drive economic growth. The rising oil production will also push up the peso over the long term.
Mexico’s market isn’t cheap and it’s skewed towards consumer-facing firms, which aren’t a big part of this story. But the falling peso has made it cheap for international investors – it has fallen by 20% in sterling terms since January 2013 – so now looks a good time to buy and hold for a few years. You can track Mexican stocks through the iShares MSCI Mexico Capped ETF (LSE: CMXC), which replicates the performance of the MSCI Mexico index, with the weight of the largest companies capped to improve diversification.
Looking for value in today’s markets is like looking for a polar bear in a snowstorm. However, Russia is the cheapest major market today for a wide range of reasons, as I discuss on page 22. At the same time, the price of many commodities are recovering. Putting these two factors together, Russia energy giant Gazprom (London International: OZGD) , which is the largest supplier of gas to western Europe, looks a good high-risk bet for the year – even considering the number of potential traps including US sanctions, the cyclicality of commodity prices and Russian politics. The firm trades on 4.4 times forecast 2018 earnings, and still yields 5.5%, even though the dividend payout ratio is miserly.