This month has many interesting topics on the horizon, and I will cover a good few in this article.
If clients remember, last time, I voiced my concern over potential inflation and the rising level of state-owned debt along with a likely continual depreciation of the US Dollar. In 1980, only 40 or so years ago, the US deficit was just $1Trillion. In 2025, it is expected to be $50 Trillion. Those projections of Dollar weakness are already starting to come through.
The Pound Sterling has ticked up to $1.38 against the Dollar, after having hit £1.40 briefly and it has even begun to show strength against the Euro at1.17. Commodities are starting to increase in price, although this has not really hit the consumer yet. Timber, Specialist Polymers and Base Metals being to the fore. Our two stock selections, with a copper bias, RTZ and Atalaya both continue to look well placed, with the latter up by nearly a third.
Expect those economic trends to continue.
It has been a stark feature of the US market, that certain growth companies have achieved astronomic ratings despite the fact that they are not making profits. The Technology sector has been at the forefront here. People can see how the likes of Amazon and Google have become very profitable as they have changed people’s habits. The NASDAQ technology index, has, however, had a few nervous days and is lower now than it was in February. Is this trend over?
The UK has lacked those sorts of technology companies, with the FTSE 100 index dominated by Mining, Oil and more traditional overseas earners. More recently, the UK has got in on the act with the Hut Group, a digital FMGC business, had a very good start after floating at the end of 2020, but it too is lower than it was at the start of the year. Its value is still very high at £6.3bn.
Moonpig, the online greetings cards business had a good debut too, but the price is now not much higher than the early levels. It still has a £1.5bn market capitalisation. Is this online/ digital boom over? Certainly, these companies were definite beneficiaries of the lockdown as people changed their habits. More recently has come the Deliveroo debacle, with the share slumping by 28% on issue. It was also a lockdown beneficiary as people opted for home deliveries of meals and restaurants saw the service as the only way to trade, despite its high costs. Yet it still has a £5.2bn value and is yet to record a profit. I am sure some will still love the service, but others may return to collecting ‘takeaways’ themselves when freedom to do so increases. Some institutions refused to invest due to the employment policy at Deliveroo, especially after the recent Uber case ruling. Time will tell how the business fares, but I think it is a warning that unprofitable technology companies carry very high risks when high valuations are attributed to them.
To me, it emphasises that the market is unsure how the post-pandemic world will be. I prefer to stick with old fashioned investment criteria, growth, value, dividends and balance sheet strength. Our job now is to find value with a slight edge in the new situation. I came across one the other day in SCS, the furnishings business, specialising in Sofas and Carpets. Yes, this is not an easy sector by past records, but this £90m company has no debt and a lot of cash. Even allowing for customer deposits and seasonal factors, it probably has nearly a third of its market value in cash. Yes, it needs to see its stores open again for recovery and the ability to resume dividends, but the risk looks a favourable one. One thought might be worth considering. If people have a hybrid solution to office and home working, will they wear out their sofas and suites quicker? The average replacement cycle is currently seven years. It used to be five years before 2008.
Lastly, I thought that I would end on the subject of Rare Earths. Many people will not know how important they are to modern life. First, they are not completely rare, but they are essential in things like mobile phones, defence systems etc, but particularly for all the new generation products in the so-called ‘Green Revolution’ such as wind turbines, solar panels and electric cars. The problem is that once again luck has favoured China, which currently has a near monopoly on the supply of Rare Earths, as it supplies around 80% of the world Rare Earths.
China has been dealt a very strong hand with the supply of the seventeen elements that comprise the Rare Earth category. Nevertheless, Greenland has been identified as a rich source of Rare Earths, which is why Donald Trump tried to buy it two years ago. What is topical is that when you read this newsletter, Greenland, the world’s largest island, with a population of under 60,000 people, mostly Eskimo and heavily dependent upon Denmark for funding will have had a key election which could change the prospects of getting a significant amount of Rare Earths not controlled by China. Rare earth extraction is high on the election topics. The two main parties have different policies. One pro extraction and one against. The outcome will be important for the Chinese, in terms of pricing and supply constraints, as well as for all of us in the Western world and the cost of new technology.