Born on the 4th of July

Will the UK steer calmer with Keir Starmer? Is an AIM market rally going to follow?

Will the UK steer calmer with Keir Starmer?

Dear reader

I wrote recently in the Statue Moved of tentative signs of improvement in the AIM (Alternative Investment Market). Since that article there’s been a >10% increase to the AIM all share index.

AIMING HIGH

With so much bad news in the price what persistent uncertainty still exists and hinders the recovery of the London stock market? No fear except fear itself? A key factor has been the timing of the general election. So Rishi Sunak’s decision to schedule a snap election for 4 July could potentially accelerate AIM’s recovery, regardless of the election outcome.

10 year view of FTSE all share (red) and AIM all share (blue)

If you overlay election dates over the above index, an election makes a fairly convincing precursor to a strong AIM market move up - AIM is the blue line, while the FTSE all share is red. Strong moves up except in December 2019 where I hope you’ll allow me to argue that Covid blipped that move, but it came once the initial covid panic has settled.

So should we feel very positive about 2024?

It’s fair to say the December 2019 general election centred on the UK’s exit from the EU and Boris’ “getting it done” (whatever “it” was). What exactly is today’s uncertainty? Unemployment, inflation, balance of trade are all relatively low. Debt to GDP is higher over 10 years but over a longer time period 97.6% is actually lower than pre 1970s. GDP growth, I argued, could surprise to the upside. In fact since my article - it already has! Even the IMF have revised their forecasts up. The UK composite PMI is 52.8 indicating expansion. The UK is 50% more productive than 30 years ago and 5% more than 10 years ago. We are bombarded with negative news and crises that when you look at the data empirically it’s far more positive than most people believe.

The explosion of Human Productivity

I remain convinced that AI will “copilot” human productivity. I’ve seen it in the many businesses I work with. To further evidence that, look at the pace that AI is being built out by reviewing NVIDIA’s results. This should give you an Ah Hah moment.

NVIDIA 1Q24 results

• Revenue up 262% year-over-year to $26 billion

• Adjusted earnings per share up 461% to $6.12

• Cash dividend of $0.10 per share, up from $0.04 in Q4

• Expects second-quarter sales of around $28 billion 

I have been thinking this week of how NVIDIA is a “picks and shovels” play. Of course in the Western US 19th Century Gold Rush the story was that many prospectors prospected - yet few found gold. The guys selling picks and shovels grew rich, while prospectors faced terrible conditions, not least, the chilcoot pass pictured below where a stream of men trudged towards untold riches, which remained untold (Parker Schnabel recently adventured to complete the same walk his forebears had).

Here’s a key question to think about. What if each prospector HAD found gold? Who would be wealthier? The Picks and Shovels guy - or the gold miner? We use these concepts assuming history always repeats itself, but instead it always rhymes.

If AI can make a person and a business let’s say 10% more productive then for the UK economy that’s a $300bn upside per year. Or put another way that’s a £3,525 per British man, woman and child recurring per year. Arguably AI and Robotics could drive productivity by 100%. And if you think that’s fanciful Ark Invest speaks to 250%-650% increases. In each of our own lifetimes we have witnessed the transformation of work in ways we couldn’t have dreamed about. I witnessed the WWW in 1994. At the time I concluded 30 minutes to download a web page - what rubbish - it will never take off. The foolishness of that assumption has never left me and it taught me a powerful lesson.

Yes, Nvidia has made $6.12 per share in its quarter, but the value of the productivity could be worth far higher. So for investors, I believe the application of AI with robotics is going to be far more lucrative than making chips and am positioned accordingly.

Implication for Investors:

I see CHRY, GROW, IPO, TMT, AUGM, NSCI, ICGT, DGI9 as ways to play this theme. Energy will need to power AI so I cover energy later on.

AIM vs FTSE100 vs FTSE250

It is also interesting to note that we are well used to seeing pictures of the AIM index lagging its big brothers the FTSE100 and 250. Over 5 years that’s true (except during 2020 and 2021 when it left its pedestrian siblings plodding behind).

But if we look over 6 months the lag has disappeared. On a 1 month view AIM outpaces the larger indexes. Is that the start of an upswing?

I completely accept AIM has much ground to cover to catch up but historically its disconnected value now appears to have connected. In 2010, AIM made a substantial 36.4% gain from election day to year-end. Over the past four elections, AIM consistently outperformed the FTSE 100. In 2019, despite pre-election underperformance, AIM rebounded significantly within days, achieving an 11.6% rise over the year—only slightly lower than the FTSE 100’s 12.1% gain.

AIM’s gains during election years have varied widely, from 4% in 2005 to an impressive 42.9% in 2010. The 37.6% decline in 2001 was influenced by factors beyond the election, including the aftermath of the internet share boom and a weak economy.

Looking ahead to the upcoming election, there are reasons to be optimistic about AIM’s prospects. Although the junior market has been depressed for nearly three years, recent months have seen a one-fifth rise since last October. However, sentiment remains negative, and companies continue to leave AIM, citing cost, liquidity challenges, and difficulty raising capital. But as Paul Scott of Stocko has recently pointed out, much of what’s leaving the UK stock exchanges are either complete rubbish (good riddance are his words) or are genuinely good companies being taken out at 60%-100% premiums - indicating how much value there is)

It’s true there’s been a dearth of IPOs on AIM. But many say that’s due to change and numerous experts are speaking to a 2H24 revival. It’s also interesting that of the companies that’ve listed in FY24 if you’d invested in those you’d be 11%-77% up (you’d be 77% up if you’d decided to follow the Oak Bloke’s idea when I first spoke about participating in the Microsalt IPO last October)

Commodity moves explain at least part of the UK’s stock market success and I explored this in It’s All Going Up.

Part of the moves in commodities is a direct result of chaos theory. No, not a butterfly flapping its wings in China but a property developer reneging on its bond payments. In the UK we say “Safe as houses” but the Chinese believed that too. Now, they don’t. On Wall St street this morning the chap from KKR spoke of 25-30 unsold homes. Many Chinese have lost vast amounts of money on housing, or own property which is nothing more than a building site and a mortgage around their necks. That’s part of why Gold is on a tear.

But the Chinese government, too, is driving gold. In cahoots with other BRICS nations they have resolved to not trade in US Dollars, and to unwind their dollar assets. The Americans have provoked that through its aggresive trade policies and large budget deficits. Trade is increasingly being settled in gold instead of USD. So that means the BRICS Central Banks are buying up gold and arguably on a new gold standard.

While housing in China remains a mess the government are seeking to resolve the situation forcing developers to sell property and incentivising people to take on credit to clear the overhang. Meanwhile industrial production grew 7.6% over the past year.

The KKR fellow was very positive about the prospects for China.

Implication for Investors:

PAF, MTL, HOC, CEY, KAV, BSRT, POW, GMET, ECOR, TRR are all ideas to play this theme.

Energy:

I believe North Sea Oil and Gas will face a difficult 2024 and 2025 but improvement will come as reality sets in for Labour. Meanwhile the Labour Party will go on a green spending spree:

“Britain has the potential to be a clean energy superpower” they claim. We have huge advantages: our entrepreneurs, our coastline, our scientists and our workforce.

A proper windfall tax on oil and gas companies. It starts by tackling the cost of living crisis. That’s why we have fought for a proper windfall tax on the excess profits of oil and gas companies, so we can support families with the cost of living.

Great British Energy. We will create a new publicly owned champion – Great British Energy, to give us real energy independence from foreign dictators. It will be owned by the British people, built by the British people and benefit the British people. It will invest in clean energy across our country- for example by making the UK a world leader in floating offshore wind.

National Wealth Fund. Alongside Great British Energy will be a new National Wealth Fund that will invest in the jobs that can rebuild Britain’s industrial strength, and crowd in private investment in our ports, gigafactories, hydrogen, and protect our steel industry.

Key to the success of our plans is upgrading the national grid so that we have the infrastructure we need to move forward.

Warmer Homes. Labour would upgrade Britain’s cold, draughty homes, cutting bills and creating thousands of good jobs for electricians, engineers, and construction workers across the country.

Clean Power by 2030. A Labour government say they would:

• Pioneer floating offshore wind, by fast-tracking at least 5 GW of capacity.

• More than double our onshore wind capacity to 35 GW.

• More than triple solar power to 50 GW.

• Quadruple offshore wind with an ambition of 55 GW by 2030.

• Get new nuclear projects at Hinkley and Sizewell over the line, extending the lifetime of existing plants, and backing new nuclear including Small Modular Reactors.

• Double the government’s target on green hydrogen, with 10 GW of production for use particularly in flexible power generation, storage, and industries like green steel.

Implication for Investors:

I have spoken recently of numerous ways to play this theme: FIPP, IX., IPO, HGEN, JGC, IES, BMN, NSCI as all relevant. I would particularly point out this could be a huge tailwind for Net Scientific’s Ventive and QBot, and for FIPP’s Pulsiv. Also POS (Plexus) will do well with decommissioning if Labour genuinely do put a knife to North Sea O&G.

Some North Sea operators could find support under Labour, possibly. The likes of ORCA who are promoting near zero Scope 1 emissions (i.e. they operate the wells using renewables basically) as well as CCUS.

A different question is whether the likes of Serica, Shell and BP are going to be hammered - Labour speak of O&G excess profit - not the North Sea. Perhaps even DEC - which will send firms delisting London possibly?

I also believe opportunities in the renewable energy investment trusts (currently bombed out with eye-catching yields) offer some intriguing possibilities too. I will be writing about those soon.

Get outta Dodge

As much as I like to invest domestically, I also am conscious to not leave 100% invested in the UK. If the Labour party crash the economy it’s an idea to have investments focused elsewhere in the world.

I’ve spoken recently of Japan and the deep value still found outside its Nikkei 225. (up 35% Year on Year).

Deep value plays all around the world can offer intriguing value.

While KKR chappie likes China, I’m not sure I trust the rule of Law and risks of expropriation. Then there’s the whole moral question too.

RE.B offers palm oil in Indonesia, KDNC iron ore in Brazil, DEC oil & gas in the US. Lots of ways to be offshore while remaining listed in the UK.

Brazil offers some very high dividends via ITs like BRLA or ETFs like SDIP. I may look at those more closely.

Vietnam (VOF, VNH, VEIL) and South Korea (WKOF) are others I feel deserve a look too.

Conclusion

2024 will be a strong year for UK markets I believe. History rhymes and I believe the election will be a positive no matter which side wins. But since it’s likely to be a Labour win, energy and commodities offer some interesting ideas. Labour’s commitment to Net Zero will have strong implications for investors. The green transition remains an investment theme I feel has become unloved and overlooked. Increased interest rates and elevated discounting of future cash has created a leper colony of holdings. Yet they offer strong yields, often inflation protected, with growth, future government support and are ESG friendly.

Meanwhile productivity and AI is changing the world, and applications of AI are a less expensive and potentially more lucrative way than direct investment in the likes of Nvidia. Nanocap technology whether standalone or through VC/PE trust vehicles offer incredible value and potentially world-class products/services.

Finally international opportunities provide a route to diversify and seek value.

Regards

The Oak Bloke.

Disclaimers:

This is not advice

Micro cap and Nano cap holdings including those held in VC stocks might have a higher risk and higher volatility than companies that are traditionally defined as "blue chip"