Crypto Dawn Is Facebook's Libra the future of crypto? - Master Investor
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Issue 53 – August 2019 www.masterinvestor.co.uk The UK's no.1 free investment publication Crypto Dawn Is Facebook's Libra the future of crypto? plus... Emerging markets THE BEST FUNDS AND TRUSTS TO GAIN EXPOSURE Safe as houses? IS IT TOO LATE TO BUY UK HOUSEBUILDERS? twitter ITS VALUE TO THE INVESTMENT COMMUNITY silver lining IS THE SLUMP FINALLY OVER FOR SILVER?
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WELCOME
Dear Reader,
Given that many of us look to our investment
portfolios as a source of income, it's great to see
that UK dividends reached record levels in the
second quarter of 2019, despite the ongoing Brexit
saga. According to the Link Dividend Monitor, UK
dividends rose 14.5% on a headline basis to a record
£37.8 billion, boosted by exceptionally large special
dividends and the very weak pound.
Herein lies the beauty of investing: despite all the siren calls of how bad
Brexit is for UK businesses and investors, many of the firms listed on the UK
stock market generate a lot of their earnings overseas, meaning that a weak CONTACTS
pound translates into higher earnings once income from abroad has been
Advertising
converted into pounds. Owning global companies based in the UK is therefore amanda@masterinvestor.co.uk
a natural hedge against Brexit and a weaker pound.
But the good news does not come without a caveat. Underlying dividend Editorial Enquries
growth (ie – adjusting for the effects of one-off 'special' dividend payments) james.faulkner@masterinvestor.co.uk
was much weaker at 5%. Moreover, large-cap companies, which tend to benefit
the most from a weak pound, grew their dividends the fastest, whilst the more
domestically-focused mid-cap and small-cap companies grew their dividends at
FOLLOW US
a slower rate.
Despite some strong share-price gains over recent months, the UK market
still offers one of the highest yields of any major stock market. This suggests
there is still good value to be had in the UK – and this is a view shared by other
commentators, not least our very own Jim Mellon.
Of course, the short-term outlook will depend on whether or not our new
Prime Minister can make any progress in Brussels. A no-deal Brexit – regardless
of what one might think of the long-term implications – would surely entail
significant short-term upheaval for UK markets. But for those willing to hold
their nerve and take a long-term view, the next few months could offer a
exclusive book offer
window of opportunity. To get 20% off
As always, I wish you the best of luck for the month ahead. on 7 Financial
Models...
Best regards, CLICK HERE
and use the
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Master Investor Ltd. Editorial Contributors Disclaimer
Unit 2, The IO Centre Filipe R. Costa Mark Watson-
Material contained within the Master Investor Magazine and its website is for general information
Salbrook Industrial Estate purposes only and is not intended to be relied upon by individual readers in making (or refraining
Richard Gill, CFA Mitchell from making) any specific investment decision. Master Investor Magazine Ltd. does not accept any
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Salfords David Jones of shares, spreadbets and CFDs can rise and fall sharply and you may not get back the money you
Redhill originally invested, particularly where these investments are leveraged. Smaller companies with a
John Kingham short track record tend to be more risky than larger, well established companies. The investments
RH1 5GJ Andrew Latto and services mentioned in this publication will not be suitable for all readers. You should assess the
United Kingdom suitability of the recommendations (implicit or otherwise), investments and services mentioned in
Jim Mellon
this magazine, and the related website, to your own circumstances. If you have any doubts about the
Tim Price suitability of any investment or service, you should take appropriate professional advice. The views and
Editorial Jamie Ross recommendations in this publication are based on information from a variety of sources. Although
Editorial Director James Faulkner Robert Stephens, CFA these are believed to be reliable, we cannot guarantee the accuracy or completeness of the information
herein. As a matter of policy, Master Investor Magazine openly discloses that our contributors may
Creative Director Alexandra Mueller Nick Sudbury have interests in investments and/or providers of services referred to in this publication.
www.masterinvestor.co.uk | Master Investor is a registered trademark of Master Investor Limited ISSUE 53 – AUGUST 2019 | 3
CONTENTS
Issue 53 – August 2019 www.masterinvestor.co.uk
ISSUE 53 – AUGUST 2019
The UK's no.1 free investment publication
Crypto
Dawn
Is Facebook's Libra
CoVER FEATURE
the future of crypto?
plus...
Emerging markets
010 Time to get aboard the cryptocurrency bandwagon as
Facebook launches Libra
THE BEST FUNDS AND TRUSTS TO GAIN EXPOSURE
Safe as houses?
IS IT TOO LATE TO BUY UK HOUSEBUILDERS? Facebook will launch its own digital currency in the first half of 2020. What are the
twitter implications for banking and finance globally – and how can investors profit?
ITS VALUE TO THE INVESTMENT COMMUNITY
silver lining
IS THE SLUMP FINALLY OVER FOR SILVER?
on the cover
018 Portfolio Intelligence –
The UK housebuilding
sector – as safe as
houses?
Mark Watson-Mitchell looks at the UK
housebuilding sectors and evaluates
the investment opportunities.
052 Funds & Trusts in
Focus – The best All other topics
emerging markets funds
and trusts
Emerging markets are in recovery
006 Mellon on the Markets
mode. Nick Sudbury looks at some Inside the mind of the Master Investor: Influential British investor Jim Mellon reveals
of the best ways to gain exposure via his latest thoughts on the markets.
funds and trusts.
028 From Acorns to Oak Trees – The Dogs of AIM 2019 -
064 Forensic Forex – Is
silver's slump finally
profit from these high-yielding small caps
Richard Gill, CFA, revisits his Dogs of AIM portfolio, where he seeks out some of the
over?
most unloved small-cap stocks on the market.
David Jones looks at silver and how
investors can profit from a recovery in
the price of this precious metal.
082 The Final Word –
In praise of Twitter
For all its faults, Twitter may be the
most useful form of news gathering
and information sharing to date.
4 | ISSUE 53 – AUGUST 2019 Master Investor is a registered trademark of Master Investor Limited | www.masterinvestor.co.uk
036 The anatomy of a good company – Novo Nordisk –
PARTNER CONTENT
076 Stocks in Focus – British
Land – why a refreshed
strategy makes it a
Jamie Ross, fund manager of Henderson EuroTrust, explains the rationale behind the
bargain buy
inclusion of the Danish pharmaceutical company Novo Nordisk in his portfolio.
Robert Stephens, CFA, discusses
how British Land can turn around
040 The Macro Investor – Central banks – are we going under
again?
its performance amidst challenging
operating conditions.
After more than 10 years without an interest rate cut, the Federal Reserve is set to
loosen monetary policy - but how far are policymakers willing to go?
Christian Mueller / Shutterstock.com
080 Book Review – 7
Financial Models for
Analysts, Investors and
Finance Professionals
Richard Gill, CFA, reviews Paul Lower's
new book, which provides readers
with the tools they need to better
046 Chart Navigator – Using charts to help maximise portfolio
profits
understand and analyse the financials
of a business.
David Jones uses charts to help determine when to close out winning positions −
before it is too late.
058 Dividend Hunter – Stagecoach – is it time to hop on
board?
John Kingham looks at Stagecoach and whether now is a good time to buy the shares
of the UK's leading bus and coach operator.
086 Investor Events Diary
All the hottest upcoming investor
Tupungato / Shutterstock.com events in August and beyond.
068 Quality Investor – Payment power
Andrew Latto, CFA, looks at the payment sector and the three leading, global payment 088 Markets in Focus
companies. Market data for the month of July.
www.masterinvestor.co.uk | Master Investor is a registered trademark of Master Investor Limited ISSUE 53 – AUGUST 2019 | 5
BY JIM MELLON
mellon on
the markets
Inside the mind of the Master Investor: influential British investor Jim Mellon reveals
his latest thoughts on the markets. The month, Jim looks at precious metals, dividend-
yielding companies and other investment opportunities that are likely to prosper in a
recession.
Is it better to melt in the heatwaves is now entirely and, of course, through selected mining companies.
or to mitigate discomfort by using virtuously solar, restrictions on My total and utter conviction on
air conditioning? Singapore and air conditioning would cause my this is enhanced by the fact that
many parts of Asia, as well as the summer productivity, already 'looney tunes' monetary policy
Middle East, have prospered, in severely impaired, to plummet has thrown one third or more of
part as a result of the invention and further. And I have two books to all government debt around the
proliferation of air conditioning. write, companies to nurture and world into negative territory. This
However, it is a huge user of investment bets to make. means that people foolish enough
electricity, much of it generated in And what a great time to be to buy such bonds have to pay to
a climate-unfriendly way, so Greta placing those bets. Be in no doubt, hold their cash, for any period right
Thunberg, the teenage climate the absolutely best bets available to up to 10 years, and in some cases,
activist, and her chums will no Master Investor readers right now, beyond.
doubt deploy their agitative tactics are in the precious-metals complex. The old argument against holding
in this direction soon. Gold and silver, in particular, are the gold and the like was that they
I hope they don't succeed, easiest of these to trade and can carried no yield, and indeed, there
as although my house in Ibiza also be represented in portfolios was a cost to store them.
6 | ISSUE 53 – AUGUST 2019 Master Investor is a registered trademark of Master Investor Limited | www.masterinvestor.co.uk
MELLON ON THE MARKETS
“BE IN NO DOUBT, THE
ABSOLUTELY BEST BETS
AVAILABLE TO MASTER
INVESTOR READERS
RIGHT NOW, ARE IN
THE PRECIOUS-METALS
COMPLEX.”
www.masterinvestor.co.uk | Master Investor is a registered trademark of Master Investor Limited ISSUE 53 – AUGUST 2019 | 7
MELLON ON THE MARKETS
“I ALSO URGE
READERS TO
CONSIDER BUYING
UK STOCKS
AGGRESSIVELY
NOW.”
That's another argument gone, and
I urge everyone to climb on board
the gold train; last month I said it was
leaving the station. If you run fast, you
might just catch the last carriage. I am
pretty sure we will see $1,800-$2,000
before this year ends, and see gold
miners move much, much higher. I also urge readers to consider based company, recently released of
The recent Fed interest-rate cut by 25 buying UK stocks aggressively now; a large shareholder, in the form of the
basis points was disappointing to gold which ones? Well I would suggest embattled Neil Woodford.
bulls, but this will be temporary, as no those that prosper in a low sterling On the subject of Neil, I thought he
doubt another cut is coming. environment, such as Vodafone might ride it out, but I am afraid his
(LON:VOD), Rio Tinto (LON:RIO) and PR has been dreadful, his continued
Buy British Prudential (LON:PRU). These are insistence on levying fees on trapped
The next most obvious trade to me steals, with high and generally well- investors is lamentable, and his
is the UK. It beggars belief that a covered dividends. overreliance on unquoted stocks is
country, which in part contrast to From an international point of unwise. I can't really see redemption.
the eurozone, enjoys its own unique view, I like Carnival (LON:CCL), I prematurely bought his Patient
currency, shares very low costs of listed in the UK but effectively an Capital Trust (LON:WPCT), and I note
government borrowing and also has, international business, catering to that he has bailed out of a lot of his
unlike the eurozone, exactly the right an ageing demographic; and Raven personal shares.
mix of future industries – eg fintech, Properties (LON:RAV), which has On the other hand, a year ago, very
biotech, materials and battery tech etc a high yield and a strong position few would have foreseen redemption
– should be trading at ludicrous levels, in Russian logistics. Russia may well for Boris Johnson – but now look where
with regard to both the currency and be somewhat rehabilitated in due we are! I am pretty sure there will be a
the stock market. course and this is a well-managed UK deal. Look at the chart to see why.
8 | ISSUE 53 – AUGUST 2019 Master Investor is a registered trademark of Master Investor Limited | www.masterinvestor.co.uk
MELLON ON THE MARKETS
The search for yield with strong
companies is important, as a
recession must be coming, or at least
significant slowdowns across the
globe. My friend Steen Jacobsen, an
excellent forecaster who goes to China
regularly, tells me that the Chinese
situation is dire and that growth has
ground to a halt.
The US is absolutely slowing, and
the eurozone is in terrible trouble.
Not a good outlook for leveraged
companies, of which there are plenty.
Other companies, with what I
think are positive characteristics,
you might consider are Kraft Heinz
(NASDAQ:KHC), − very beaten up,
but backed by Warren Buffet; Gilead
Sciences (NASDAQ:GILD) − looking
healthy and with a reasonable
dividend; and Veon (NASDAQ:VEON),
a Russian mobile-telecoms operator,
with an excellent yield.
I made a pretty bad error in buying
Intu Properties (LON:INTU) in the
UK, which was a very good case of
catching a falling knife and getting a
bloodied hand. It has more or less
halved since I started buying, and is a
salutary lesson to me. My friend Will
Nutting believes that the best shorts
are when the company is crippled,
and I think he is short Intu. I'm going
The European situation is dire, The hunt for yield to ride it out, as I suspect the largest
and there is a chance, which should The hunt for yield, as interest rates shareholder, the Isle of Man based
not be discounted as negligible, that stay lower for longer, will mean that John Whitaker, might seek a buyer
the Italian and German banking investors will start moving away from for his shares (triggering a full bid), as
systems go bust all at once. This tech (and I sense this is happening Intu has excellent malls, and retailing,
would be a complete disaster for now, as rent-seeking, quasi- contrary to the perceived wisdom, is
the euro project and propel gold to monopolist companies like Amazon not dead.
unforeseen highs. (NASDAQ:AMZN) and Facebook So here we are, close your eyes,
The Europeans, I believe, are now (NASDAQ:FB) appear to have stalled) prepare for a bit of a ride, but buy
rattled by the prospect of a no-deal and seek out dividend-yielding gold, silver, gold miners, pounds and
Brexit, which, whatever the Financial companies with strong fundamentals. high-quality dividend shares. Sell
Times says, will be worse for Europe This is the view of my chum John bonds, sell tech and prepare for glory!
than for the UK. I think some fudging Mauldin, one of the great global
is coming, and the pound is going up economics commentators, who I Happy hunting!
big time. spoke to recently and is super excited
So, get positioned. about yield opportunities. Jim Mellon
About Jim
Jim is an entrepreneur with a flair for identifying emerging global trends enabling him to build a worldwide
business empire. He is amongst the top 10% in the "Sunday Times Rich List" (Britain's equivalent to the Forbes
list). He is often described as the British Warren Buffett and he predicted the Credit Crunch of 2007-08 in a book
entitled Wake Up! Survive and Prosper in the Coming Economic Turmoil. Jim followed this with The Top 10 Investments
for the Next 10 Years (2008) and subsequently Cracking the Code (2012), Fast Forward (2014) and, most recently,
Juvenescence (2017). His monthly "Mellon on the Markets" column in Master Investor Magazine has gained him cult
status among investors. He holds a master's degree in Politics, Philosophy and Economics from Oxford University.
He is on the Board of Trustees of the Buck Institute in California, a trustee of the Biogerontology Institute, and a
Fellow of Oriel College, Oxford.
www.masterinvestor.co.uk | Master Investor is a registered trademark of Master Investor Limited ISSUE 53 – AUGUST 2019 | 9
BY VICTOR HILL
cover feature
Time to get aboard the
cryptocurrency
bandwagon as Facebook
launches Libra
Facebook will launch its own digital currency in the first half of 2020. What are the
implications for banking and finance globally – and how can investors profit?
As I predicted last year, Facebook revolutionary medium of exchange. New age, new money
will launch its own digital currency They include PayPal, Visa and In June this year, Facebook
in the first half of 2020. This will be MasterCard. (NASDAQ:FB) unveiled its much-
available on its platform for users to This could turn out to be anticipated digital currency – Libra
buy and sell products and services, Facebook's boldest innovation yet. – which it hopes will go live in the
and to make payments to each While the company is known as a first half of next year. In so doing,
other. The new digital currency, to global technology giant, to date, the social-media titan has changed
be called Libra, will be a stablecoin virtually all of its revenues have the nature of the debate about the
– ie, unlike bitcoin and Ethereum, come from advertising. These future of digital, or cryptocurrencies
it will be backed by a basket of advertising revenues are possibly for good.
'real' currencies (and possibly already in decline, therefore The new cryptocurrency
government bonds, too). Therefore, Facebook is under pressure to will be orchestrated from
so it is hoped, it will not be subject diversify its revenue stream. Geneva, by an association of
to wild speculation and will maintain How much impact will Libra have 28 founding sponsors. These
a stable value. on the way we live? Will it generate include mature credit-card
Despite Facebook's hype, this huge shareholder value for companies like Visa (NYSE:V)
is a collaborative effort – these Facebook and its partners? How will and MasterCard (NYSE:MA),
ain't 'Zuckerbucks'. Facebook has it impact on banking and finance but also 'upstart' technology
teamed up with some of the world's globally? And − the most important companies like Uber (NYSE:UBER),
top payment platforms and credit- question of all – how can investors eBay (NASDAQ:EBAY), Spotify
card companies to roll out this profit? (NYSE:SPOT), British telecoms
10 | ISSUE 53 – AUGUST 2019 Master Investor is a registered trademark of Master Investor Limited | www.masterinvestor.co.ukCOVER FEATURE
“IF LIBRA WORKS, THEN
FACEBOOK WILL CEASE TO BE
A SOCIAL-MEDIA GIANT; IT
WILL BECOME A COLOSSUS OF
FINTECH AS WELL.”
www.masterinvestor.co.uk | Master Investor is a registered trademark of Master Investor Limited ISSUE 53 – AUGUST 2019 | 11COVER FEATURE
giant Vodafone (LON:VOD) and the and Pakistani nationals working in the subject to exorbitant speculation.
Silicon Valley venture-capital firm Gulf region.) Their remittances are Most people who buy bitcoin, it
Andreessen Horowitz. The sponsoring often subject to exorbitant fees). But seems, do so because they are betting
entities might, according to some they – and others – will also be able to on its value rather than using it as
sources, expand to 100 by next year. buy goods online with Libra. a medium of exchange. That said,
The deal is that each association Facebook states that the principal estimates of how many people who
member pays $10 million a year objective of Libra is to deliver a use bitcoin et al to buy and sell goods
to become a 'validating node' – a stable, universally accepted currency range from seven million to 25 million.
status that enables them to validate available to people who do not have Facebook has well over two billion
transactions conducted in Libra. bank accounts. In countries with large user accounts, and even if many of
Libra will ultimately be 'controlled' numbers of people without bank those are corporate or duplicate
by the Libra Association – of which accounts, such as India, where cash identities, that is still nearly one third
Facebook is but one (though the is still 'king', users will be able to go of all humanity.
most important) member. However, to kiosks if they want to convert their Some of those bitcoin aficionados,
Facebook and WhatsApp users Libra balances back into physical cash. so it is widely thought, are either
will provide users with their own Cryptocurrencies, of which bitcoin criminals or tax evaders. Certainly,
digital 'wallets' called Calibra. This is the most famous (or notorious), a number of cyber attacks using
will enable Facebook users to make have been around for over a decade, ransomware have demanded ransoms
payments via Facebook Messenger based on the revolutionary blockchain in digital currency. Facebook clearly
or WhatsApp. Initially, the new digital technology developed by the wants to make cryptocurrency a
currency will provide a convenient mysterious Satoshi Nakamoto. The legitimate means of exchange, and
way for expatriate workers to send problem with bitcoin and its imitators in the first instance, it will probably
remittances to their families back (or competitors – depending on your be made available to more than 200
home. (Think of the millions of Indian point of view) is that its value has been million WhatsApp users in India. Mr
Zuckerberg has carefully cultivated a
close relationship with India's Prime
Minister Modi over the years, so one
expects that the authorities there will
be sympathetic.
Once it is rolled out, users will be
able to make payments in Libra to one
another as easily as they exchange
photos on WhatsApp right now. So far,
digital currency has been the domain
of online operators of uncertain
provenance; but everyone knows
what Facebook is – it has an unrivalled
user base and extremely deep
pockets. (The company has a market
capitalisation of $573 billion as I write).
The issue of trust is a delicate
one. Facebook has been pilloried
for its supposedly unethical and
unauthorised use of its users' data.
12 | ISSUE 53 – AUGUST 2019 Master Investor is a registered trademark of Master Investor Limited | www.masterinvestor.co.ukCOVER FEATURE
Why the crypto-purists
hate Libra
For the free spirits who pioneered
the bitcoin boom, Libra is a not
really a cryptocurrency at all.
They argue that, with bitcoin et
al, anyone can run a validation
programme and thus verify that
all transactions are 'pukka'. But,
within the Libra blockchain, only
the association members, who
control that blockchain, can
do that. So, these association
members effectively control the
cryptocurrency. That means that,
for example, if they think you
are a terrorist, or a criminal – or
communications (and, of course, a including my country, to follow your
just don't like your political views
former UK deputy prime minister) lead." Even Mark Zuckerberg wrote in
– they can freeze your wallet or
has been extensively deployed to the Washington Post earlier this year:
even empty it on their say-so.
articulate Facebook's philosophy in "People around the world have called
Many people would regard that
the corridors of power around the for comprehensive privacy regulation
as reasonable – but, for the
world – but especially in Europe (Sir in line with the EU's…and I agree."
crypto-anarchists, that represents
Nick speaks five European languages). According to Paul Schwartz, director
a fall from grace. That's why a
In a speech in Berlin at the end of the Berkeley Centre for Law and
lot of bitcoin enthusiasts think
of June, Sir Nick spoke about how Technology, the EU has won out in the
that the emergence of Libra will
Facebook wants to work with western battle of ideas.
actually boost demand for a 'real'
governments to regulate the internet Margrethe Vestager, the EU's
cryptocurrency – and pull bitcoin
without censoring it. One of his (or Commissioner for Competition, a
higher.
Facebook's) big ideas is that of data sworn enemy of Silicon Valley and
portability. That means that users who fined Google €7 billion, is likely
could remove all their personal to be ferociously sceptical of Libra.
But, at the same time, all of that data data and content (eg photos) from She is thought likely to remain in her
has been freely given by users who Facebook and move it as a kind of post under the new EU Commission
benefit from using the platform. package elsewhere. (Quite where is President, Ursula von der Leyen, who
The techno-conservative not entirely clear since Facebook has takes over on 1 November.
Europeans, however, are less than no true rival). Other commissioners have forced
enthralled. French Finance Minister Sceptics point out that even if this Facebook, Twitter (NYSE:TWTR)
Bruno Le Maire pronounced that it idea were practicable, it would be and YouTube (owned by Google/
was "out of the question" that Libra to Facebook's advantage. If users Alphabet (NASDAQ:GOOGL)) into
be considered a sovereign currency. could export all their data elsewhere adopting codes of conduct on fake
He demanded that the banking in one go then, by the same logic, news, political advertising and hate
committee of the G7 examine whether they could import all their data from speech. In Germany, Angela Merkel's
Libra could be used to finance other service providers (for example, government passed the Network
terrorism or other illegal activity. Google) into Facebook. Enforcement Act which sets deadlines
These days Mr Zuckerberg is saying for the deletion of illegal content. In
Regulating and taxing the that he favours "globally harmonised" France, Emmanuel Macron's minister
internet privacy laws modelled on the EU's for the digital economy, Cédric O, has
The launch of a digital currency General Data Protection Regulation convinced Facebook to provide French
comes at a critical moment in (GDPR) – even though Facebook courts with the identities of hate-
the regulation of the internet for moved responsibility for 1.5 billion speech suspects. The US remains one
Facebook and the other tech giants. users out of Facebook's operation in of the few advanced democracies
Governments are increasingly moving Ireland and back to the US last year, which does not have comprehensive
towards tightening control of internet presumably to escape the impact of privacy legislation, although the
content and taxing cyberspace. GDPR. State of California has passed its own
As I revealed last year, Facebook Surprisingly, Silicon Valley seems digital-privacy bill, explicitly inspired
acquired an EU banking licence in now to regard the EU as the model by GDPR.
Dublin back in 2016. More tellingly, for regulation. Last year, Tim Cook, On 15 July, the Federal Trade
this year Facebook has engaged Apple's CEO, told a conference on Commission imposed a $5 billion
in a PR offensive. Sir Nick Clegg, digital regulation in Brussels that fine on Facebook in connection with
Facebook's head of global policy and "… it's time for the rest of the world, data breaches occurring during the
www.masterinvestor.co.uk | Master Investor is a registered trademark of Master Investor Limited ISSUE 53 – AUGUST 2019 | 13COVER FEATURE
Cambridge Analytica scandal in the
spring of 2018. Facebook's share
price seemed to take this in its stride
– the fine was at the lower end of
expectations. Decrease in the
Facebook and YouTube now
number of mobile
38%
systematically publish statistics on
how much content has been taken interactions made on
down. At the same time, there has Facebook's app in the
been a perceptible shift in opinion UK between June 2018
since the controversy around the
involvement of Chinese tech giant
and June 2019
Huawei in the roll out of the new 5G
network, which I discussed in this
magazine last month. Essentially,
many people, even within the Brussels
mandarinate, now believe that the may well be true. But the key driver which seems to prefer images over
threat of Russian and Chinese cyber- for revenues is the social-media text.
aggression outweighs the threat platform's ability to convert users into Conversely, the Mixpanel figures
posed by Silicon Valley's abuse of potential buyers of its advertisers' measure how interactively the
user data. Regulation and taxation of products and services. platforms are used rather than how
tech companies will remain a salient One year ago, in July 2018, an many times users log on. Their figures
political issue in Europe and America – unexpected drop in Facebook users suggest that users are behaving
but ultimately I doubt if they will much in Europe, plus some disappointing more passively. That means that
stifle the tech giants' ambitions. growth forecasts, cost Facebook about people log on, exchange messages
$120 billion in its market capitalisation with friends, 'like' a few cute puppies
Why Facebook needs to in a single day. Last October, Mr (pugs are so 2018)− and then go back
revamp its business model Zuckerberg said that Facebook's user to what they were doing anyway
First the bad news. The number of base in North America was "pretty (probably involving watching a Netflix
Britons using Facebook actively is close to saturation" and that future box set in pyjamas with best friend).
falling rapidly. The number of mobile growth in user numbers would come Unfortunately for Facebook, this kind
interactions made on Facebook's from the developing world. of interaction doesn't generate any
mobile app in the UK plummeted by These days Facebook prefers to revenue. What's more, the advertising-
38 percent between June 2018 and disseminate figures which aggregate research consultancy eMarketer
June 2019, according to Mixpanel, the user interaction across all of its announced in May that US users spent
data-analytics company. Interactions platforms – Facebook 'proper', an average of three minutes less on
occur when users click on a hyperlink Instagram and WhatsApp (which is still Facebook per day in 2018 than the
or ad while they are using Facebook. essentially a messenger service). While year before.
Facebook's own numbers show the first may now be mature, the Facebook assumes that most of
a slow but steady rise in monthly latter two are still growing rapidly and us are connected to the internet in
active users across Europe – which appeal to the younger demographic, the background most of the day. My
laptop is connected continuously −
even when I have abandoned it in
favour of the garden on a hot July
afternoon. Similarly, most under
40s are continuously connected to
Facebook through their smartphones
(literally day and night). But that
doesn't necessarily mean that we
are using the social-media giant
more actively. It's just part of the
background décor of modern life.
We prefer shopping online in the
second decade of the 21st century,
yet the payments systems we use
are firmly anchored in the 20th
century. Facebook will apparently
give discounts to advertisers who
pay in Libra. I can think of all kinds
of accounting issues that might arise
there – but no doubt that is a problem
for another day. The real point is
that if Libra works then Facebook will
14 | ISSUE 53 – AUGUST 2019 Master Investor is a registered trademark of Master Investor Limited | www.masterinvestor.co.ukCOVER FEATURE
Can the Europeans ever catch up with the US and Asian tech giants?
A recent report by investment boutique GP Bullhound argues that Europe's tech ecosystem is growing faster
than the US tech sector. It cites Swedish music app Spotify (NYSE:SPOT) and Dutch payment-systems company
Adyen NV (AMS:ADYEN) as fast-growing European tech giants. True, the Europeans have some way to go before
they can boast trillion-dollar corporations like Microsoft (NASDAQ:MSFT), Apple (NASDAQ:AAPL) and Amazon
(NASDAQ:AMZN). But, according to GP Bullhound, last year was a record year for investment in the tech sector in
Europe, with $28 billion in start-up capital raised – that's nearly 10 times the $3 billion raised just five years ago.
GP Bullhound reckons there are now 27 unicorns in Europe with a combined estimated valuation of $80 billion.
These include Deliveroo (private), Asos (LON:ASC) and the gaming company Improbable (private). The UK has 11
unicorns followed by Sweden with eight. Five new British unicorns have emerged in the last year including Monzo,
Darktrace and BenevolentAI.
But what about specialist expertise in digital currency? In February this year, Facebook acquired a little-known,
London-based start-up called Chainspace. Founded by a group of University College London (UCL) academics,
Chainspace is thought to be preeminent in designing new financial technology. UCL is a centre of excellence in
blockchain technology. Reportedly, former Chainspace employees are playing a critical role in the roll-out of Libra.
George Danezis, co-founder of Chainspace, was a fellow of the Alan Turing Institute. What Chainspace has created
is a method of making transactions in digital currency more private. With bitcoin, all transactions are recorded
on the blockchain – the digital ledger. Chainspace's technology provides additional layers, called shards, to the
blockchain. These layers include an execution layer and a verification layer.
cease to be a social-media giant; it costs. The internet, as we know, Even Facebook has admitted
will become a colossus of fintech as tends to facilitate the creation of that Libra could be exploited by
well. That could propel Facebook into monopolies. Just as Facebook is the fraudsters. On 16 July, David Marcus,
a league of its own amongst the tech natural monopoly in the domain the Facebook executive who is leading
titans. of social media, so Libra is likely to the project, told a Senate hearing that
become the monopoly digital currency Libra's governing council will leave
Likely consequences of because its user base will be many fraud prevention to the associated
Libra thousand times that of the exotics entities which provide digital wallets
Let's just speculate on how the world like bitcoin and Ethereum. Travellers in which to hold Libra 'coins'. The
might change if Facebook's new digital will no longer need to take foreign issue is whether there will be an
currency were widely adopted as a currency when they go abroad on adequate vetting process before those
medium of exchange. business or holiday: they'll be able to entities are allowed to provide Libra
First, banks, which are already settle hotel and restaurant bills with wallets. "It will be the role of the Libra
much out of favour with investors, a swipe of their smartphone – and Association to ensure that there's
would face a serious challenge. What indeed their cab rides, using Uber proper education so that consumers
ails the banks now is that they have (NASDAQ:U). Of course, there are can make informed choices", said Mr
been in retreat at least since the huge security implications associated Marcus. The eminent senators were
financial crisis of 2008 and their levels with this. not impressed.
of customer service and satisfaction
have been in freefall. As they lay off
staff (without adequately enhancing
the advantages of AI), this can only
get worse. One of the inherent
advantages that banks have is that,
until now at least, we all need a bank
account before we can subscribe to
a mobile phone or apply for a credit
card. Libra will appeal not only to the
1.7 billion adults in the world who do
not have a bank account but who do
possess a mobile phone – of which
several hundred million are in India
– but to all those, particularly the
younger demographic, who prefer to
bypass the banking system altogether.
Second, Libra will be a truly
international currency, which makes
cross-border transactions more
efficient with much lower transaction
www.masterinvestor.co.uk | Master Investor is a registered trademark of Master Investor Limited ISSUE 53 – AUGUST 2019 | 15COVER FEATURE
Concerns about privacy
In June, cryptography expert Peter
Todd, who was a bitcoin pioneer,
declared that Libra was poorly
designed. He said that Libra's
privacy features were "even worse
than bitcoin's". Facebook claims
that Libra is designed such that
individual Calibra wallets cannot
be linked to people's Facebook
personas. The company says
that it will not share account
information or financial data
with third parties without their
consent. This is qualified by the
statement that there may be
"limited cases" where data could “QUITE APART FROM THE RISK THAT LIBRA
be shared to prevent fraud or COINS MIGHT BE STOLEN, THERE IS THE ISSUE
ensure compliance with the law (a
reference to money laundering).
OF DATA SECURITY.”
The company says that it will
make future decisions about the
future of Calibra transparent. The really want Facebook to be 'Chief begin to offer credit in Libra. But who
fact is, however, that the details Nanny'? will set the interest rate? And would
surrounding Libra's blockchain Although Libra, a so-called reserve requirements be imposed as
architecture are scant. stablecoin, will be linked to the value on conventional lending? Monetary
of a basket of major currencies policy – the main characteristic of the
(certainly including the US dollar, contemporary economy as I explained
Quite apart from the risk that Libra the euro and the yen), it will not be recently − will be rendered marginal.
coins might be stolen, there is the long before the value of those old- That is why some central bankers are
issue of data security. As a member of fashioned national currencies are quietly muttering about banning Libra
the Commons Digital, Culture, Media widely expressed in Libra. – if only they could.
and Sport Committee, Julian Knight Thirdly, if people choose to receive The Governor of the Bank of
MP, asked: "What are they going to do their wages in cryptocurrency, then England, Mark Carney, said last month
with the data?" Of course, Facebook the contraction of the global-banking that Facebook's cryptocurrency Libra
users' spending patterns will be fed system could happen quickly. That "should be approached with an
back into the increasingly subtle will have huge consequences for open mind, not an open door". Mr
algorithms which will soon be able monetary policy and would be Carney added that if Libra was widely
to predict the product you are going deflationary. It would reduce the clout adopted, this would be "systemically
to buy next even before you know of the central banks to manipulate important" and that it would need to
that you want or need it. Certainly the economy by setting interest rates be regulated. His remarks coincided
Facebook and others will learn more and printing money. Eventually, digital with an interesting new regulatory
about our spending habits and foibles banks and fintech champions will development. Historically, only
than they know even now.
Also, currently with bitcoin et al
you can buy illicit drugs (narcotics) The Libra Association they are trading at $275 at time of
online without censure. Facebook writing. PayPal (NASDAQ:PYPL)
has stated that it will prevent Libra This Association offers a line-up is probably the dominant global
users from buying even prescription of some stellar companies. Visa payments system on the internet
drugs let alone illegal ones. That's (NYSE:V) is a truly global payments with about 277 million users. Its
fine – except that there will always platform which processed 100 shares have gone from $82 at the
be ethical disagreements concerning billion transactions in 2014. Its beginning of the year to around
the use of medications, just as there shares have done well year to $118 at the end of July. Uber
are about dietary supplements, eg date and the company is now (NYSE:UBER), the global taxi-
anabolic steroids. If bodybuilders trading on a P/E ratio of about hailing app with about 110 million
want to take them, is that really the 40. MasterCard (NYSE:MA) regular users worldwide, had its
business of the state? In which case, had revenues of $12.5 billion in debut on the stock market in early
why don't we ban sugar, which is by 2017. Its shares have followed a May. Its shares are trading only
far the leading cause of the obesity smooth upward trend year to date. just above the initial offer price as
epidemic? Such debates around Opening at $180 on 3 January, of the end of July.
health are inevitable, but do we
16 | ISSUE 53 – AUGUST 2019 Master Investor is a registered trademark of Master Investor Limited | www.masterinvestor.co.ukCOVER FEATURE
Competitors
“IF YOU BELIEVE AS I DO, THAT LIBRA WILL
The question is not whether BE TRANSFORMATIVE, THEN THERE MUST
Libra will happen – it has been
a long time in gestation – but
BE A CASE TO PUT TOGETHER A LIBRA
how the other tech behemoths ASSOCIATION PORTFOLIO CONSISTING
will respond. Amazon, Apple and OF ALL OF THE LISTED ENTITIES IN THE
Google are not likely to sit back
serenely while Facebook takes
28-MEMBER CONSORTIUM.”
over the world. Jamie Dimon, the
long-time chief executive of JP
Morgan, told shareholders in his How the central banks Association portfolio consisting of all
annual letter a few years ago,: might respond of the listed entities in the 28-member
"Silicon Valley is coming…There are Given all of the above, it is possible consortiumi. Whatever reservations
hundreds of start-ups with a lot that with the launch of Libra – and you may have about the direction of
of brains and money working on if it is rapidly and widely adopted, Facebook's share price, the payments-
various alternatives to traditional which I expect it will be – the central platform sector has been having an
banking…". At least one bank banks will be girded to respond by amazing run this last year, which will
chief executive is aware of the accelerating their own programmes only be enhanced by Libra.
challenge to traditional models to launch state-sponsored digital The risk is that excessive regulation
and is preparing to adapt. Watch currencies. Agustín Carstens, chief may hold back Libra's potential,
this space. executive of the Bank for International but countries like India with large
Settlements, is a keen supporter of numbers of unbanked citizens are
digital money – so long as it remains likely to adopt a permissive stance.
commercial banks were required under state control. And if Libra works in India, what
to maintain overnight deposits or Let's just remember that the use justification would the authorities
reserves with the UK central bank in of physical cash is in terminal decline have for restricting it in Europe and
proportion to their loan portfolios. across the developed world. In North America? The worst-case
But, from now on, payments Sweden few retailers even take cash scenario is that the Libra Association
companies will also be included in the any more – and the Bank of England's will have to suspend the roll-out
reserve system. recently published Future of Finance of Libra – which will not damage
But the most immediate report suggests that the UK is only its existing revenue streams at all.
consequence for investors is that about five years behind Sweden. Add (Perhaps because numerous big
– fourthly – Facebook could easily to that the secular decline in the role central banks advance their plans for
cease to be that nebulous thing, a of banks within the international monopoly digital currencies – which
social-media hub (giant that it is) financial system which central banks is quite possible in the medium term).
and become a financial, or at least may regard as their duty to reverse. The upside opportunity, therefore, is
a fintech, stock. In this respect it That said, the Bank of England said much greater than the downside risk.
is behind the curve. The Chinese last month that it has no plans to In contrast, this development
messaging app WeChat (owned issue a digital currency. It said its main is very bad news for traditional
by Chinese tech titan Tencent focus was to ensure the resilience commercial banks. I explained back
(HKG:0700)) has already become a of the next generation of electronic in January why I am very bearish
financial colossus which enables users payments systems. about the banking sector. Since then,
to pay bills, summon taxis and much if anything, the outlook for banks has
more. Action become even gloomier with Deutsche
Fifth, there will be people for whom If you believe as I do that Libra will Bank (ETR:DB) a sobering case study
all this feeds into a credible, global be transformative then there must in how the mighty can fall.
conspiracy theory. Alex Mashinsky, be a case to put together a Libra The direction of travel is clear.
chief executive of Celsius Network,
a kind of cryptocurrency bank, has
i For the full list see: https://www.theblockcrypto.com/2019/06/
written: "From the people who
14/facebooks-cryptocurrency-partners-revealed-we-obtained-
brought you fake news and fake
the-entire-list-of-inaugural-backers
friends and a fake president…now you
get a fake blockchain…" Ultimately,
Libra has to be the anti-globalists'
worst nightmare. It means that About Victor
nation-states – including emerging
multinational states like the European Victor is a financial economist, consultant, trainer and writer, with
Union – which issue fiat currencies extensive experience in commercial and investment banking and fund
and enact fiscal and monetary policy, management. His career includes stints at JP Morgan, Argyll Investment
become beholden to global digital Management and World Bank IFC.
corporations.
www.masterinvestor.co.uk | Master Investor is a registered trademark of Master Investor Limited ISSUE 53 – AUGUST 2019 | 17BY MARK WATSON-MITCHELL
portfolio intelligence
The UK
housebuilding
sector
Safe as houses?
Mark Watson-Mitchell looks at the UK housebuilding sectors and evaluates the investment
opportunities.
Is it crumbling or is it building? Annually 340,000 new 28,000 were built by housing
Are prices collapsing across the homes required, but only associations and 2,600 by local
country? 165,000 built authorities. The balance of the total
Will Brexit – whether 'No Deal' A research survey by Heriot-Watt is made up by private enterprises,
or with a deal – bring about the University stated that in England the majority of which are quoted
financial 'Armageddon' that alone, the backlog of homes companies.
Remainers have been required stands at 3.9m. Their
forecasting? conclusion was that a total of Plans to scrap Help to
Unfortunately, I do not have 340,000 new homes need to be built Buy and the 'buyer's tax'
a crystal ball to answer these per year for the next 13 years. This woeful lack would surely show
questions. Yet the UK government has only that the unsatisfied demand almost
However, I remain convinced set a target of 300,000 homes a guaranteed the housebuilding
that there is a massive demand year. And to date that is far away sector years of work and profit
for houses in the UK, and that the from being met. ahead.
demand is not currently being The number of new builds last But government has been reining
satisfied. year was around 165,000, of which things in financially, across the
18 | ISSUE 53 – AUGUST 2019 Master Investor is a registered trademark of Master Investor Limited | www.masterinvestor.co.ukPORTFOLIO INTELLIGENCE www.masterinvestor.co.uk | Master Investor is a registered trademark of Master Investor Limited ISSUE 53 – AUGUST 2019 | 19
PORTFOLIO INTELLIGENCE
achieve higher values, there is still a
massive amount of land available for
building new homes.
“IT IS ESTIMATED THAT JUST 6% OF In the UK more than half of the
UK LAND IS BUILT ON, INCLUDING land area is farmland, including fields
and orchards. Over a third of UK land
ROADS, BUILDINGS, AIRPORTS, could be called 'natural' or 'semi-
natural', covering moors, heathland
QUARRIES AND THE LIKE.” and natural grassland.
Another 2.5% is classed as 'green
urban' including parks, gardens, golf
courses, sports pitches and similar. It
board. Although it requires a 45% recent Cabinet reshuffle by the new is estimated that just 6% of UK land
uplift annually in new homes, it is not UK prime minister, Boris Johnson), is built on, including roads, buildings,
really helping to achieve that target. was not happy with companies like airports, quarries and the like.
Yes, the government started the Persimmon. He is quoted as saying
Help To Buy scheme, which has that: Brownfield and
encouraged hundreds of young "For most people, buying a home contaminated land
buyers into the marketplace, but, on is one of the biggest financial I have recently featured several
the other hand, it continues to apply a and emotional investments of quoted companies that are specialists
punitive 'buyer's tax' for anyone in the their lives. And for that to go in identifying 'brownfield' land
housing sector. from being a cherished dream to that had previous industrial or
In the recent political hustings, it becoming a nightmare of snagging mineral uses, where new planning
has been mentioned that perhaps problems months after moving in applications can now be made for
the buyer's tax will be abolished. That and with punitive costs is simply residential use.
would certainly be a great help to unacceptable." Old coalfields, military bases or
more young couples needing to get on Brokenshire later went on to warn even contaminated property such
the housing ladder, easing their cash the housebuilders that, if they want as old petrol stations can all be
requirement for getting their own roof to continue to benefit from the Help treated and later regenerated as
over their heads. to Buy scheme, then it was very useful landbanks for future housing
The Help to Buy scheme has important to end the unacceptable developments.
proved to be a big help for the UK's punitive costs and the snagging
housebuilders over the last few years. problems in new homes. Easing of planning
Unfortunately, because big profits permissions
have been made, it has also helped Where is all this new-build Drive around Britain's road system,
to push up land-sale values, which in land coming from? especially on the motorways, and it
turn pushes new-build prices higher. Although it is correctly being becomes apparent just how much
The average asking price of a home, suggested that developers are new build is underway, especially on
courtesy of Rightmove, is around hoarding their land stocks, in order to former farmland.
£308,692.
Big profits push leads to
lower standards
In the developers' push for greater
profits, a number of them have
apparently lowered their standards of
construction and finish.
Persimmon (LON:PSN), Britain's
most profitable housebuilder, has
been regularly featured in the media
for building faults and regulation
violations. Considering that it builds
one in seven of all UK houses, that
is not an impressive fact. But it is
actually quite scary, because if all the
developers see that the big profits
are made from poor quality control,
then this could well become the norm.
Persimmon is said to make £66,000
profit on every house that it sells.
James Brokenshire, Secretary
of State for Housing, Communities
and Local Government (until the
20 | ISSUE 53 – AUGUST 2019 Master Investor is a registered trademark of Master Investor Limited | www.masterinvestor.co.ukPORTFOLIO INTELLIGENCE
Furthermore, Hugg Homes, a new
south-east based modular-housing
concept, has completed 22 stylish and
efficient properties with Southampton
City Council. Those affordable homes
were all let within six weeks of
completion. Hugg Homes is a wholly
“THERE IS A STRONG DEMAND FOR owned subsidiary of the London-
RENTAL SPACE AND A GROWING quoted Inland Homes (LON:INL).
NUMBER OF PLAYERS ARE INVOLVED OR The build-to-rent' sector is
ARE ENTERING THIS MARKET.” fast-growing
Elsewhere, the build-to-rent (BTR)
sector is showing continued strength,
with over 140,000 units completed,
The gaining of planning permissions that in a disorderly Brexit, house under construction or in planning
has got noticeably easier over the prices could fall by as much as 30%. by the end of March this year.
last few years, leading to some quite I disagree and believe that the Schemes cover the country – with
large urbanisation. However, as yet, Remainers will soon be proved wrong Leeds, Liverpool, Manchester and
central government has done very in that assumption. Birmingham leading the way.
little about imposing a correct balance BTR homes are developed to
of infrastructure space, such as areas Other players in the sector generate rental income, as opposed
for doctor's surgeries, chemists, post As was seen in the new-build to capital profit. There is a strong
offices, schools, shopping and other figures previously stated, operators demand for rental space and a
amenities, and making it a required in the UK housing sector include growing number of players are
planning condition for new-build publicly quoted companies, private involved or are entering this market.
quotas. development companies, housing Both British Land (LON: BL),
Local authorities have yet to realise associations and local authorities. with projects for 4,000 homes, and
that they could benefit significantly Other corporates are now also Grainger (LON: GRI), in a Transport
from the development of such parallel getting involved. For instance, Ikea for London 3,000 homes scheme,
infrastructure. and construction firm Skanska, who are showing an active interest in the
have built 11,000 homes across BTR market, while Legal & General
Government and the Scandinavia, have recently tied has launched its own UK BTR Fund
economic impact of new up a deal with Worthing Council and is already working on a £500m
build to construct 500 of their BoKlok development of 1,000 new homes.
From an economic point of view, affordable factory-built homes. Telford Homes (LON:TEF) is
hopefully the government realises that Japan's biggest housebuilder committed to the BTR sector, and
there is an almost instant 'pick-up' for Sekisui has also moved into the has already partnered with Invesco
every 100,000 new homes that are market, in a £90m investment boost. Real Estate and M&G Real Estate on
developed, in that the gross domestic It has taken a 35% stake in Urban 400 properties. However, it may well
product of the country is boosted by Splash, a modular-house business, develop an even deeper interest in the
another 1%, and it also supports over which is in a partnership with Homes market following its £267m cash bid
150,000 jobs. England. from the US giant CBRE.
Unfortunately, the impact of Brexit In addition, Croydon Council Other large players coming into
has been pushed by Chancellor Philip has established Brick by Brick, a the BTR fold are PfP Capital, which
Hammond and his 'Project Fear' development company with the aim of is raising £550m for a new fund, and
team, including the Bank of England building 2,000 new homes on multiple Greystar, which is seeking £750m for
Governor Mark Carney – by saying sites across the borough. its first BTR fund.
www.masterinvestor.co.uk | Master Investor is a registered trademark of Master Investor Limited ISSUE 53 – AUGUST 2019 | 21You can also read
