Brexit nerves provide Bremain investment options

Current Overview

The FTSE 100 reached an intraday peak over 6400 in mid April paced by the continuing specific recovery in the price of oil (and in the prices of many metals). The ‘Brent Bounce’ has been significant from the lows of $27 to $48 per barrel (recent high) and can be explained by a range of combining factors. Heavy Chinese buying for strategic reserves has been reported alongside technically improved oversold charts and a relative weakening in the value of the dollar. A cheap dollar means more of a dollar denominated commodity (such as oil) can be bought with other currencies; this boosts demand and encourages more speculative buying. Indeed my thoughts back in February that we were likely looking at a ‘once in a generation’ opportunity to buy oil now appear to have been timely.

It now seems reasonable to assume that we have seen the lows for oil although I would caution that any current levels, the long oil position looks (short term) crowded. Reported high levels of derivative (futures and options) buying suggest too many people are chasing the trade now. Thus my suspicion is

that we will now see the black stuff consolidate between $40 and $50 for the foreseeable future. This will be welcome news for some oil companies but certainly not all. In terms of investment advice for the sector, stay large to mid cap and look for strong balance sheets with ideally net cash. I am also currently researching selective oil services companies running checklist screens for potential value in this area. Many of these companies have lagged the purer oil company names over the past couple of months and will see improving trading conditions shortly.

Turning to the market as a whole, we are now witnessing some unsurprising slippage. As reported last month, the potential for a “Sell in May and go away” scenario was genuinely real in simple terms with the US market back near all time highs, the obvious uncertainties of the EU referendum vote getting ever closer and some very overbought commodity prices. Sentiment (mood) can strongly impact market levels even if there is no direct economic reason for shares to fall. That said we have just been in receipt of a weaker than expected US monthly jobs report and global growth metrics remain somewhat lacklustre. Infact the FTSE 100 has fallen 300 points in the past 2.5 weeks alone and is seemingly lacking some conviction. Many companies are seeing their day to day operating environments being impacted by the lack of clarity regarding Britain’s place in the EU. In the blue chip space, companies such as BAE Systems. IAG, Easyjet and ITV (to mention a handful) have all come under some recent pressure either as a result of genuine uncertainty led disruption or (if nothing else) due to the belief of potential Brexit risk influencing profitability levels and hence share prices.

With us only in early May (with 7 weeks to go before the referendum vote), one could easily make the case for some further drifting of the market and most clients will be wisely holding a degree of cash in their portfolios accordingly; this is risk management personified. But having navigated within markets for over 20 years, I have also learnt that more often than not, the market will not behave in line with a consensus view. If most expect a significant fall, the chances are it will not. And herein presents a risk (or opportunity cost), that keeping out of the market does not give rise to an opportunity to invest at a lower level after all. The net result is that value (wealth) is sacrificed by waiting for a certain outcome to materialise; or possibly in this instance, to not materialise.

The market measured by numerous indices is already off the highs and many individual shares have fallen significantly more ahead of the upcoming EU vote. Most importantly here is my firm belief that Britain will actually vote definitively to remain in the EU; a cursory glance at the bookies odds is fairly convincing in this regard and without going into a debate, let us assume we stay in. As the market becomes more convinced of this outcome potentially over the next few weeks, do we see it start to rise again perhaps sooner than many may think? It is fair to say that the market has always done a pretty good job of pricing in expected eventualities comfortably in advance of their being confirmed.

A current logical strategy then is to isolate stocks which have fallen largely through fear of a Brexit and to see these as possible investments accordingly. Some sectors in particular have been hard hit over the past few months and the property space is one. In the blue chip area, British Land (730p) is an obvious pick and interestingly its shares are on the rise having seemingly bottomed at the end of February near 650p. The company has quality commercial assets and long leases providing reliable income streams.

Another possible option might be St Modwen Properties (305p), the UK’s leading regeneration specialist in the mid cap area where there seems a marked dislocation in the price relative to the fundamentals. The shares are down from over 500p last summer and since March seem to be building a base. Much concern has been placed in their Nine Elms, new Covent Garden prime London development which represents 13% of their total portfolio. Top of the market anxieties alongside Brexit concerns have meant some think the venture is an asset error. I suspect not and even assuming a zero value for the project, the shares are still at a 20% discount to assets. Other significant projects include the 468 acre Midlands Longbridge site now in its second stage of development, Bay Campus at Swansea University and Wembley Central. Rental Incomes are strong and growing, last reported at £58.4 million and 29% higher than the year before. Directors have been buying.

Consider also airline stocks and here I would mention both IAG (510p) and Easyjet (1440p) which would certainly benefit from remaining in the EU. ITV (225p) in media also looks interesting as advertising slowdown nerves (on Brexit fear) are removed.

Finally recruitment companies have been naturally impacted as hiring decisions have been back burnered and I still see value in small cap player Harvey Nash (74p) amongst many others.