We have just had the worst first six months on record for markets as the gloomy mood of the global media, influenced by the war in Ukraine brings rocketing fuel and food costs, interrupted travel and shortages and the threat of recession making it very hard for an investor to manage an active portfolio.

The difficulty is well illustrated by the performance of stock market indices where in the year to date the FTSE 100, with 70% of the constituent’s output outside UK, is down 4%, but the ‘mid-cap’ FTSE 250, which is much more reflective of UK industries, has tumbled 21%. The US is similar with the S&P 500 sliding 19%, although the impact for the UK investor is much mitigated by the pound falling 11% against the dollar.

The bad news goes on: a weakening pound brings inflation with falling real incomes, weaker output and interest rate hikes that could eventually bring about deflation. Europe is mostly worse, where Germany, usually the powerhouse, now has the lowest growth rate as its frightening 40% dependence on Russian fuel imports weighs, and it struggles to source supplies elsewhere and turns to coal, rationing hot water and dimming streetlights.  

Even France, with its potential to generate 78% of energy from nuclear power, asks the nation to lower aircon and hot water settings, since 28 of their 56 reactors are currently shut down, forcing purchase from the European grid, whilst Britain’s prospective Hinckley-C nuclear station is already hocked to China.    

Extraordinary level of cash

I started 2022 with 20% of my portfolio in cash, but as the last six months unravelled, I operated my rigorous 20% stop-loss rule, which leaves me today with an extraordinary 46% in cash. That’s unheard of for me and feels wrong; but actually, it isn’t and has served me well, especially as I hold most of the money in a US dollar account. The stop-loss has saved me from some massive falls, whilst much of the 54% left in equities has fared well enough, giving a reasonable overall performance relative to global markets.

Here in Britain not all is gloom and doom. Some industries are thriving with record order books giving good investment opportunities as prices of strongly profitable companies have been dragged down by the global downturn in sentiment.

In the first quarter UK venture capital investment exceeded £9bn – apparently a record high, second only to US – as over 1,000 companies raised money for new ventures.  TV and film studios are frantically busy with the world’s media desperate for new content on screen and in the computer games sector. The City has record trade surpluses as a recent survey by EY shows London is the most attractive location for direct investment in financial services, significantly ahead of other European cities.

And it is encouraging to witness the scramble for UK prime commercial property as Singapore, China, Middle East and India property companies buy in London and the South-East to accommodate some of the world’s strongest growth companies, including Google and Tik-Tok.  

Valuations have come back a long way and some key price charts seem to have bottomed, making me wonder if the bad news is largely in the price? I’m slowly starting to drip-feed money back into the market again and bought four UK stocks on AIM last week. I am avoiding any company dependent on discretionary spending, but focusing on essential services and manufacturing, strong balance sheets, cashflow and pricing power.

The first three look particularly good value and, with the lower pound making UK companies cheap for overseas buyers, they could become takeover targets.

MS International (MSI)

This £49m tiddler deserves a bigger following. Its biggest of four divisions designs and makes specialist engineering products for the global defence industry, forming 33% of revenue and performing strongly with follow-up potential from the US Navy, Ukraine and Philippines for guns, mounts and equipment. The petrol station division, 24% of revenue, designs and constructs forecourt structures; and the forging division, 22% revenue, benefits from the China supply difficulties. Revenue for the year to 30 April increased 21% to £74.5m, profits from £1.6m to £6m, valuing it at a reasonable 12.7 times earnings and offering a generous 5% yield.

Totally (TLY)

This £82m frontline healthcare provider operates NHS 111 helplines, GP surgeries, out-of-hours phone services and 34 gyms for the Royal Mail. It offers strong growth from long-term contracts and recently announced five urgent treatment centre contract extensions for £19m. The forecast price/earnings ratio (P/E) for this year is 23, falling to a multiple of just 10 in 2024 from projected, mostly predictable earnings, on revenue of £82m. Operating profits for the year to 31 March just gone are expected to be ahead of consensus.

Crestchic (LOAD)

This £54m company recently changed its name from Northbridge Industrial. It manufactures, sells and hires specialist power reliability units comprising load-banks and transformers that are essential to utility companies, renewable energy providers, data centres, miners and oil extractors. Current global trading is well ahead of management expectations, with significant pricing power leading to a record forecast of £38m revenue for 2022 that puts the shares on a 13 P/E and a price-earnings-to-growth (PEG) ratio of just 0.6, suggesting they are undervalued.

Watkin Jones (WJG)

The developer of purpose-built student accommodation and build-to-rent housing believes it is on track for record results next year as rising tenant demand, surging institutional investor interest in the UK residential market and a lack of new properties buoy its business. The shares trade on a P/E of 12.5 for 2022, 0.4 PEG and 4% dividend yield.

JPMorgan American (JAM )

I have also bought this £1.3bn US investment trust where the six-month fall in the Nasdaq technology index of 29% looks overdone and it feels wrong to be totally out of the US when it represents 68% of world markets. Many of the US mega-caps have massive pricing power and strong balance sheets. There is a myriad of tip sheets and information on individual stocks, but I prefer to cover the market with this collective fund which, in addition to investing in larger quoted companies, also holds up to 10% in small-cap stocks. On a discount of 4%, down 11% in six months, but up 3.5% over a year, its largest positions are Apple, Microsoft, and Alphabet (Google), which is exactly what I want to own at this point.

David Kempton is an experienced investor, owner of Kempton Holdings and has been a non-executive director of several quoted and private companies, previously including Hawksmoor Investment Management and Impax Funds Ireland. He may have an interest in any of the investments that he writes about.

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