The world has been preoccupied with Brexit for the past week:what it means for the U.K., how it will affect the European Union and what the fallout will look like across the globe. For us, we have a more immediate question: How will it affect our portfolio?
Well, as I mentioned last Sunday, we’ve been preparing for fear in the markets for some time, which is why we’ve stocked up on plenty of gold positions — and those are continuing to do well, rising more than 20% on average over the last month.
This week, I want to address the impacts on our three European holdings. In the wake of Brexit, some of you have reached out with questions about them and what else we should expect.
For that answer, I went straight to the horse’s mouth — our investment director, Jeff Opdyke.
He’s been traveling through Russia and Romania for the last two weeks, conducting some in-country research, but he’s always just an email away.
Here’s what he had to say about the big picture:
The European fallout is going to take time to play out. Aside from the immediacy of Brexit, which has already passed, this won’t be a straight-down move from here. We have to see how the variables come into play.
Will pissed-off Brits force a second referendum somehow?
What will the agreement look like with the European Union?
Et cetera, et cetera. So it’s impossible to say at this moment what will happen. There will be winners and losers depending on how things shape up.
We have only one Brit position, Vodafone (NYSE: VOD, hold),and it’s in the telecom industry with far larger tailwinds that will outweigh Brexit.
As you can tell, there are plenty of moving parts to consider. So for the most part, we’re in “wait and see” mode. After all, we have months before new developments will emerge about the fate of the U.K. Before the United Kingdom can even move forward with Brexit, they’ll need to elect a new prime minister to replace David Cameron, who announced his intent to resign on June 24. The new prime minister should be in place by October.
For the moment, we’re going to let this play out to see where everything ends up.
Of course, Jeff and I already have a few opportunistic trades we may make if there’s much more turmoil in the markets. And although there’s been a recent snapback in equities, a few assets still remain undervalued.
Jeff will be the first to let you know if an opportunity presents itself from this.
Meanwhile, let’s take a closer look at our current positions. I’ll start with the one Jeff mentioned — Vodafone, the London-based telecom giant.
Shortly after the Brexit vote was tallied, the company was quick to announce it would leave London and relocate within the EU to maintain access to the union’s free movement of people, goods and capital. The company generates more than half of its revenues from countries within the EU and just 11% of sales from the U.K., so this would be a solid business move.
However, Vodafone isn’t taking any actions at the moment since the company is, much like us, in “wait and see” mode.
Depending on how the divorce of the Brits and EU turns out, many more companies may take this route. We could see a mass exodus of U.K. businesses to EU countries (if Brexit actually happens).
We’ll just have to see where the chips may fall.
As for our other European-based positions, we have Metro AG (Germany: MEO, hold) and Vanguard FTSE Europe ETF (NYSE: VGK, hold).
In the wake of Brexit, we’re placing both of these positions on a temporary hold while Jeff and I continue to evaluate the situation in Europe on a position by position basis.
Metro operates in Germany, the strongest economy in Europe. The company continues to grow sales and earnings in its quarterly reports, and I don’t expect Brexit to have much of an impact on it.
On the other hand, our European ETF, Vanguard, is a basket of companies from developed European markets, giving us broad exposure throughout Europe, including stocks located in the U.K. But as Vodafone made clear, corporations will do whatever is in their best interests — even if it means leaving the U.K. in the dust.
We’ll continue to stay on top of any new developments, and alert you immediately if any action is needed. For now, the immediacy of the Brexit surprise has passed like a brief summertime thunderstorm: The knee-jerk reaction from investors that sent global markets deeply into the red Friday and Monday is behind us, and already, the markets have rebounded.
So, for now, just know our portfolio is well-diversified, not only geographically, but across segments as well. Moreover, we have trades with commodity exposure, one of which I’ll discuss below. And at the moment, 17 out of our 21 positions are in the green.
Jeff is also in the process of putting together another research report for you with a brand-new profit opportunity. So stay tuned — I know he’s excited for you to read his latest analysis.
In the portfolio … iPath Pure Beta Cocoa (NYSE: CHOC, hold) is our play on cocoa, which remains in a constant supply and demand battle that’s set to boost the price of the crop higher (our main reason for getting into this position).
For example, in 2015, cocoa had a surplus of about 170,000 tons. But this year, experts expect the bean to drop into a deficit of about 180,000 tons.
The only thing buoying the price of cocoa at the moment is the investors who’re looking to next year’s cocoa crop, which may produce a decent surplus. The bean should benefit as the drought-inducing El Niño peters out and La Niña takes its place, bringing long-awaited rainfall.
So I reached out to Chris Orr, our in-house meteorologist, to get his take on the weather-pattern shift.
He told me that while La Niña’s storms are historically good for cocoa crops in Ghana and along the Ivory Coast, it should only lead to a slightly better crop next year. And then in the 2017/2018 season, the crop will suffer a bit from La Niña’s heavy rains, which will likely spread a devastating fungus across the region’s crops. That tells us the hype over next year’s surplus is sure to be short-lived.
Farmers and trading houses are already predicting a 24% decline in the cocoa harvest this year because of droughts. That’s helped cocoa’s price climb more than 10% since February. Once investors realize 2018’s crop will erase whatever surplus 2017 creates, that momentum should continue — handing us nice gains.
Our position is up 11% at the moment, and it remains a solid hold.
To read the original analysis for this trade, be sure to read the trade alerthere.
In dividend news … Northland Power (Canada: NPI, hold) is paying us its monthly dividend of C$0.09 on July 15. This equates to a 6.8% annual yield based on our original costs. That same day, we’ll receive our quarterly dividend payment of $0.08 from another Canadian-based stock, Cameco Corporation (NYSE: CCJ, buy up to $25) — a 3.8% increase from a year ago.
In sum … We’re waiting to see how Brexit plays out before making any big moves with our European positions. So for the moment, we’re placing Metro AG and Vanguard FTSE Europe ETF on hold. Once the fallout becomes clearer, we’ll know for sure what our next action should be. Meanwhile, our well-diversified portfolio continues to hold strong with 17 out of 21 positions in the green. More specifically, our iPath Pure Beta Cocoa position is up 11% and has nice tailwinds at its back that are sure to propel it higher.
Jeff is deep in research for your next report, so be sure to stay tuned. He’s excited to tell you what he’s discovered.
That’s all for this week. Hope you’re having a great Independence Day weekend!
Chad Shoop with Jeff Opdyke
July 03, 2016