H1 Performance 0%, -30%, depending on your point of view

Thought I would give a brief update on what I have been up to the last few months. Overall I am flat, simply looking at brokerage statements, if we assume my Russian illiquid holdings are worth 0 I am down about 30%. Actually looking at this a week later I am down c8%, things are so volatile it can easily go either way.

Since the invasion my funds in Russia have been frozen. They have *mostly* risen significantly in value since the invasion due to the seldom-mentioned strength of the Russian Rouble which is the world’s strongest currency in 2022. They can’t import, the price of their exports has risen coupled with some capital controls means the exchange rate has risen (though it’s fallen back a touch recently).

Of course I still can’t receive dividends on my holdings and can’t sell. My big concerns now are expropriation, we seize Russian assets to pay to rebuild Ukraine, they seize mine or selling being allowed and IB forcing my to divest possibly into a ‘foreigners market’ for cents on the dollar. I am exploring moving to a Russian broker to avoid this. In actuality I own a few GDR’s worth far more based on MOEX prices also so may be up on the year if you mark these to a realistic valuation (I haven’t).

The large FX move leads to thoughts of hedging by selling the future on globex but Russian rates are still 9.5% and the conditions which caused the Rouble to be so strong are still in play. This may end come the winter when I expect Russia to stop gas flows to Europe.

The big ongoing Russian bet is JRS, JP Morgan Russian Securities. This holds a broad-basket of Russian stocks, valued at pretty much 0 on the balance sheet but on Moex prices worth, perhaps, 10x the current share price which is 66p and 63% backed by cash (42p) (my average cost is 89p) . I’d love to have lots more of this but with a 30% weight in Russia I just can’t from a risk perspective. I have a 2.5% weight. I might bump that up to 5%/10% if the outlook becomes clearer. As ever, I plan to act opportunistically. If it plans to delist (say) or if bad news pushes it down below cash value I may buy much more. It isn’t at all easy to trade as many brokers won’t allow it due to fear of breaching sanctions. Many professionals / firms also can’t buy it due to compliance concerns, explaining the low price. This is the sort of opportunity from which fortunes are made. On the other hand, MOEX is over owned by non-Russians c80% of the free float, why allow foreigners to own so much of your economy? Then again if if we look at what the Russians are actually doing they have actually encouraged actions such as Renault selling out of Lada with an option to buy back in for a rouble + capex in 5 years. They don’t seem to be going down the mass expropriation route at the moment, though they have expropriated some projects.

I should point out that none of this implies any support for the war in any way. My buying / selling of holdings of second hand Russian stocks does nothing to support the war, or influence anything in the real world in any material way.

On to other weights. The overall picture including Russia is below:

And, for completeness weights without Russian frozen stocks (note I sold Silver early this month).

And an overall picture, including Russia

Trades over the half year have been to sell some TGA (Thungela) , to manage the weight more than anything else. Sold some CAML / PXC /Copper ETF holdings, mostly in the last few days. The move in copper has been vicious, down 25% in a matter of weeks. Similarly I have sold some THS (Tharissa) and Kenmare Resources as with an expected recession their minerals (PGM’s and Ilmenite) will be in less demand as discretionary spending is cut. I have real doubts over some of these sells, THS is on a PE of 2.7, CAML a PE of 5, they have minimal debt, and are still earning strongly, the war has interrupted Ilmenite supply. You *broadly* don’t get rich selling very cheap stocks at recent lows. One of my investing rules is not to sell at a low without buying something else, which I haven’t been able to do due to wanting to get out pretty quickly of bulk commodities like copper and ‘lifestyle’ ones such as PGMs / Ilmenite without having a ready list of other good opportunities.

It’s a very tricky market, you have stocks like these on single digit PE’s whilst Tesla still trades on a PE in the 90s. I can’t really short the overvalued as in my view they have been overvalued forever and shorting Tesla et al has been a one way ticket to the poor-house. I have my doubts whether a 0.75% bps Federal reserve rise plus less QE will really kill this. Then again there are a lot of people/ firms out there with far too much debt and coupled with high energy and food prices there is lots of scope for a very hard landing – or more inflation.

I don’t believe central banks really have the will to have very high levels of bankruptcy / unemployment / social conflict. When we were last in a similar situation in the 1970s we had functioning welfare states, unions, less income and wealth inequality and people had more confidence in the system. There were hippy fringes but now contempt for the mainstream is very well spread. I firmly believe authorities will inflate more rather than deal with the problems that are likely insoluble. Don’t forget most people in the UK have less than £500 / $600 saved, to me this is evidence that the system fundamentally doesn’t work. People who are pro business talk about capitalism creating wealth but the average working man in the street is little more than a serf.

To me the problem is superstructure / base related, using Marxist terminology. The West / developed countries are increasingly all superstructure – design, tech companies etc. The less developed countries provide most of the real resources, coal, oil etc that actually matter and make up the base. In the S&P 500 47% of the weight is in IT, Financials or communications.

This doesn’t capture what actually matters for a sustainable civilisation. Living without Facebook Netflix etc is a minor inconvenience, oil / gas / cheap access to other hard resources are essential. There is delusion about this, which is widespread, many people have so little to do with the physical economy and have been so comfortable for so long they don’t realize that physical shortages and price spikes can happen as does resource nationalism and have happened in much of the rest of the world. German power prices are at c3x pre-war levels.

I’d like to buy more energy related resource stocks. I like coal but it’s difficult for me to justify buying anything. For example I agonised over Bukit Asam, an Indonesian coal producer. PE of 4, plenty of cash, 20% yield so looks cheap now, but will it look cheap if coal prices come off their record highs. The 2010-2020 coal price range was about (charitably) $100, now it’s $388. 2010-2020 share was around 2500 INR vs 3700 now so it can easily be argued that its cheap but I just can’t buy here in an industry such as coal, notorious for making and breaking fortunes.

What has been more attractive are oil and gas stocks. I trimmed IOG pre bad news but the stock is cheap given high UK natural gas prices and its completely unhedged – though its very small, there are potential production issues and management isn’t my favourite. It’s on a PE of 2 and with the UK having raised tax it’s relatively advanced exploration / developments plans could cut another firm’s tax bills – making it a likely takeover target in my view (possibly by Serica (SQZ) which I also own).

Serica (SQZ) is also cheap – oil and gas producer in the North sea, another forward PE of 2. Oil isn’t actually that elevated in price, even pre-war it was $85. If we get a move down I am far more comfortable holding these stocks on a down leg than (say) a Rhodium/ PGM producer with Rhodium trading at $14000 vs a long run average of $2000-$5000. It’s far easier for demand to be destroyed for car/production than oil, and the price is very much determined at the margin.

My other oil ideas are Petrotal (PTAL) – Peru based, PE of 4, also Jadestone energy on a forward PE of 3.5. There are quite a few more cheap oil and gas companies out there. I suspect with ‘woke’ investors still shunning oil and gas these opportunities will persist for quite a while, they generally have good reserves and low per-barrel costs. I believe investors are working backwards from the price and trying to work out why they are cheap rather than just accepting that they are cheap because investors don’t like them for ESG reasons. There may be secondary effects such as a lack of cheap funding. I suspect ESG is a fad and will die once people realize non-ethical stocks are outperforming – which they almost certainly will and the economy increasingly struggles with high energy prices. You are not going to get richer by limiting yourself to stocks doing the nice / right thing.

The main concern with oil / gas cos is that the managements insist on reinvestment / growth and investors acquiesce. If your stock trades at a forward PE of 4/5 or is trading at a price under book is it really worth investing more than the bare minimum to fund growth? I would argue, usually, not. I am also against all the ‘woke’ ESG efforts, looking increasingly to invest outside the UK I want the bare minimum done, the ESG crowd can’t be won over – so why spend resources on this? It’s part of why I own CNOOC (883 HK) (good article here) I could do with others which are not going to go down the ESG road in the same way that large-cap western firms will.

It might be possible to do something with options/futures/spreadbets – buy cheap oil co’s and hedge against a fall in the oil price, there appears to be a bit of a disconnect in pricing here – a hard winter, leading to high natural gas prices may well result in huge profits, equally peace in Ukraine seems unlikely but could lead to temporary falls. It’s not my usual activity so I’m not entirely comfortable doing this.

I want to raise the weight in Oil / Gas and coal if possible probably to around 25-35% – excluding my weight in Russia. I want to find high yielding, non ESG compliant stocks with decent management. It is proving challenging, I dabbled in Petrobras (Brazil) but 2 CEO’s in 2 months is a little much, even for me, again I am going to look at hedging nationalisation risk whilst enjoying a low PE and high yield, but its a bit outside my usual activities, I think something can be worked out though as these stocks are not being shunned for economic reasons.

Lots of stocks have performed badly, I’ve managed to creep to the performance I have with bits of trading but its been very hard going. Nothing has trended, other than TGA (South African coal producer) which having risen from £4 to almost £12 has covered for a lot of stocks which have fallen. Stocks such as Nuclearelectrica and Romgaz which I have traded (badly) have produced a little. Many have steadily paid out high yields, without going anywhere. Even things I have gone into to park ‘cash’ such as gold and silver have fallen, particularly silver. I believe fears over diminished industrial use have hit it, I’ve exited most of my silver position for now, though held at the end of the half year.

This could be a time in the market vs market timing issue, I could easily be doing the wrong thing. Things in the real economy (excepting energy prices are not that bad but there is a reasonable prospect of them becoming bad so making changes makes sense. The counter argument is that many commodities have fallen heavily so inflation could be yesterday’s news. Most stocks I own are cheap, though some such as URNM uranium ETF are likely where the future lies but the volatility is just too much for me to hold at significant weights . I think it’s actually too much speculative money flowing in and out of these stocks, based on nothing but overexcited / and temporarily wealthy investors. One could just ignore it but I’m not sure that’s what I should be doing – there are likely a lot of garbage companies in URNM which will never go anywhere – the disadvantage of going via ETF. I much prefer KAP (Kazatomprom), I can know the yield, PE and production but with it being based in Kazakhstan there is only so much exposure I want, particularly as I own other stocks based there.

The number of holdings has both helped and hindered me, I’ve really benefited from holding multiple small oil co’s there have been various holes in tanks, well problems etc which have caused plunges in individual share prices. I can’t predict these and it’s not impossible for them to be serious for individual, small companies. Spreading my risk has been very sensible – but the issue is I am able to research and monitor in less depth. I think its a reasonable trade off. As long as I am in resources I will have to hold more stocks and cover them less well as a consequence. The end result of this is that I am going to have less confidence and will ‘fold’ more easily. I have a tendency to sell out a little too easily – high levels of volatility are likely to shake me out. The main aim if we do go into a bear market is to lose slowly and have the resources available to go in hard at or near the bottom, in 2009 I was able to more than double my money.

There are disadvantages to this approach – I’ve likely suffered a 100% loss on 4D Pharma – though trading and selling highs has mitigated this. It could have been avoided had I read the latest accounts in more detail. You need to be a lot sharper and pay more attention to developing growth companies than my usual lethargic lowly valued high cashflow companies.

The aim for the next half is to slightly raise weights in Independent Oil and Gas (IOG)/ Jadestone Energy (JSE) / Coal / Oil and gas, as soon as possible, and to act opportunistically on stocks like Tharissa (THS), Central Asia Minerals (CAML) and JP Morgan Russian – probably towards the end of H2. I will explore some kind of hedging, possibly involving Petrobras / options or futures. Performance wise I still hope to end the year flat to up – even if we assume a 100% write off on Russia, there are a lot of very cheap non ESG friendly stocks out there and they can rerate very rapidly as seen with Thungela.