In this MoneyWeek interview, Alec Cutler of the Orbis Global Balanced Fund tells Andrew Van Sickle which sectors are being overlooked and where to find the best bargain stocks in the market today.
If you’d like to hear more from the fund manager, Alec will be speaking as part of our panel on the future of commodities and energy at the MoneyWeek Summit on 29th September in London.
Andrew: A recurrent theme in the past few years has been the “everything bubble”: all assets have been propelled upwards by printed money. You’ve said we have all got so used to trillions being printed that we’ve lost track of the sheer magnitude of the sums. Go back a trillion seconds, after all, and we’re back in 30,000BC. Your view is that the everything bubble has barely begun to hiss air?
Alec: Yes, there still seems to be a vast amount of liquidity, and the enthusiasm that comes with it, sloshing round the system. Liquidity tends to find a home in financial assets. While we have had some quantitative tightening, the banking crisis in the US led to a further injection of liquidity via an emergency facility. Money has been pouring into the next big exciting thing, AI stocks.
Andrew: So if much of the complacency of the past decade or so has yet to be driven out, stocks look vulnerable – unless they are already good value, which gives them a margin of safety. That brings us to the UK.
Alec: It is the cheapest major stockmarket in the world. Global investors seem to have got it into their heads that Britain is struggling and appear to have decided to ignore it. So there are plenty of well managed companies that are on a discount simply because of where they’re listed.
Balfour Beatty, for instance, would be valued twice as highly if it were listed elsewhere. The longer the discount persists, the greater the danger that an American or European construction company, or a private equity group, snaps it up.
Andrew: We keep telling readers to snap up UK stocks or someone else will.
Alec: The alternative is that British stocks relist elsewhere to secure a higher valuation. Management teams we’ve talked to have been mulling it over. The government seems aware of the danger of a mass exodus weakening the UK equity scene, but so far hasn’t come up with anything sensible to combat it. Forcing pension schemes to invest a certain percentage of their assets in start-ups won’t bolster the listed likes of Balfour – if anything it will create competition for them.
Andrew: We think it’s hard to see a catalyst that will dislodge the idea that the UK is not worth a look. But it’s worth being paid to wait in the meantime. Are there any high-yielding stocks in the UK you like at present?
Alec: We’re a large shareholder in Drax Group (LSE: DRX), the power generator. It is Britain’s biggest source of renewable energy. The dividend yield is around 4%, and it is generating a great deal of free cash. Rather than hike the dividend further for now, however, it is putting the cash in highly profitable projects, with a high return on invested capital. That will produce even more cash flow in the future.
Floor-coverings specialist Headlam Group (LSE: HEAD) is another high yielder. The stock is depressed because the housing market is struggling and investors have written off domestically orientated shares. But it will eventually recover. We like to buy shares when they are out of favour.
(Image credit: Alec Cutler)
Andrew: Speaking of buying things that are unloved, that’s been the main imperative behind your purchases of defence stocks in recent years, hasn’t it?
Alec: Yes, we have been buying defence names since 2014. Russia began its incursion into Ukraine in 2014, yet European stocks remained depressed because the EU had come up with sustainability guidelines, part of its drive towards environmental and social governance (ESG), that excluded defence stocks, so they had sold off.
We therefore bought European defence stocks, which were at big discounts to their US counterparts. And the good news is they are still cheap. The shares have risen a lot but their earnings have risen more. Investors have yet to absorb fully that we are in an unstable world, and the default state for humanity is not peace. Remember, it is well documented in global history from ancient times that a rising power and an existing power end up in conflict, so there is certainly a possibility of China and America colliding.
Andrew: When you wrote about defence for MoneyWeek late last year, you liked Saab (Stockholm-SAAB-B), BAE Systems (LSE: BA), Rheinmetall (Frankfurt: RHM) and Mitsubishi Heavy Industries (Tokyo: 7011), the latter a good bet as Japan’s defence spending ramps up. Is that still broadly true?
Alec: Yes, and we have since bought Korea’s Hanwha Aerospace (Seoul: 012450) and Hindustan Aeronautics (Mumbai: HAL), India’s national defence champion, to be consistent with the notion of defence as a global issue. We got them for single-digit price/earnings (p/e) multiples.
Another theme we like in various forms is energy. We have skewed the portfolio towards energy infrastructure, which the world will have to spend a great deal on if we are to get to net zero. One stock we like in this context is Shell (LSE: SHEL). It is always thought of as an oil giant, but it is really the largest energy infrastructure group in the world. For instance, it is the world’s leader in liquefied natural gas (LNG) infrastructure, with the most tools to transform gas into a liquid for easy transport then back into gas at the destination.
Kinder Morgan (NYSE: KMI), meanwhile, owns 40% of the natural gas pipelines in the US. It will be another beneficiary of the fact that we need gas to get to net zero. California Resources (NYSE: CRC) is a leader in carbon capture and sequestration. It takes carbon away and sticks it underground, reducing the carbon footprint of refiners and cement manufacturers.
Siemens Energy (Frankfurt: ENR) is also worth a look. It is one of the biggest manufacturers of transformers and switches, which bodes well because the average European and American electricity grid is 40 years old – and they are only supposed to last 25 years or so.
We also need to replace the high-voltage transmission lines around the US and Europe. Hence our position in Prysmian (Milan: PRY), the top manufacturer of high-voltage power lines and submarine cable. Its order book is full through to 2027. More and more current is going to go through grids and power lines as we approach net zero and try to shift from fossil fuels to electricity, yet they can barely handle what we have now.
There is also MasTec (NYSE: MTZ) in the US, one of the leading transmission-line manufacturers. It’s the company that actually goes out and buries these cables or puts them up on towers. It has a huge wave of business coming its way, yet the stockmarket doesn’t seem to care.
Andrew: So investors haven’t thought enough about the nitty-gritty of getting to net zero. Therein lies opportunity.
Alec: There’s also the big picture to consider. One estimate suggests that getting the infrastructure in place to get the planet to net zero could cost $140trn. All that spending will lead to “greenflation”. For instance, consider a cement plant that is converting from natural gas to electricity. It may be greener but it’s pricier to make cement from electricity than from natural gas. If it weren’t, the plant would already have electricity. So it has to raise prices to make up for it. Hence inflation.
It’s another reason to stay wary of bonds. There are other structural reasons to factor in higher inflation in the next few years, too: reshoring, and labour gaining power relative to capital. Add it all up and the message is to steer clear of long-dated government securities – not nearly enough inflation is being factored into
their prices.
Alec Cutler will be speaking at the next MoneyWeek Summit on 29th September in St Paul's, London. To join Alec and an array of expert speakers, book tickets now at: www.moneyweeksummit.com
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Andrew is the editor of MoneyWeek magazine. He grew up in Vienna and studied at the University of St Andrews, where he gained a first-class MA in geography & international relations.
After graduating he began to contribute to the foreign page of The Week and soon afterwards joined MoneyWeek at its inception in October 2000. He helped Merryn Somerset Webb establish it as Britain’s best-selling financial magazine, contributing to every section of the publication and specialising in macroeconomics and stockmarkets, before going part-time.
His freelance projects have included a 2009 relaunch of The Pharma Letter, where he covered corporate news and political developments in the German pharmaceuticals market for two years, and a multiyear stint as deputy editor of the Barclays account at Redwood, a marketing agency.
Andrew has been editing MoneyWeek since 2018, and continues to specialise in investment and news in German-speaking countries owing to his fluent command of the language.
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