Orbis’s director of UK Business, Dan Brocklebank, was among only a handful of London’s financial community who was openly pro-Brexit, as he shared in an interview with Biznews.com’s Alec Hogg a fortnight before the vote. In the wake of the historic decision – despite London’s 60:40 vote to “Remain” – Hogg caught up with him again to find out whether this very smart support of the “Leave” vote was having second thoughts. The answer is an unqualified no, as you’ll hear in this fascinating interview where Brocklebank works through the Brexit impact on various asset classes – and even applies his quality mind to Theresa May, Boris Johnson, Quantitative Easing and the gold price.
Well, I’m in the Orbis offices in London with Dan Brocklebank, who is the director for the UK. We spoke before the historic vote by the UK to leave the EU. When we spoke at that stage most people felt that the ‘remain’ camp would win and, in fact, the EU vote would be retaining the status quo. You might have felt the same way but you actually wanted Brexit to happen. Now that we’ve had all the consequences are you still comfortable that it was the right thing?
Comfortable is a difficult adjective because we’re in a huge period of uncertainty at the moment. Yes, I do think it will prove to have been the right thing but as it stands today there’s a lot of negotiation to happen, so inevitably with that uncertainty you can’t say I’m convinced it would be the right thing but I still think that it’s a huge opportunity for the UK and I think we will look back on this point in 10 or 20 years’ time and see it as a positive turning point.
I was reading Paul Johnson’s book, ‘The Offshore Islanders’ last night and he spoke about 410A when Rome left Britain and there was much concern amongst people at that stage but Britain seemed to come through that quite fine.
It’s a bit like listening to Boris Johnson, with you quoting historical references like that Alec. Yes, I think you’re right. I think there’s a lot about human nature with a vote like this. It did surprise and shock so many people but I think fundamentally the question really gets to the core of peoples’ identity. I don’t think it’s an understatement to say, for many people, we’re in a process of grieving (it feels similar to grieving) and emotions have certainly been raw about the decision. I must confuse I’ve been keeping a little bit of a low profile while people go through that but look, there’s lots of opportunity on the table and there has been some fascinating political turmoil, which I’m sure we’ll come to talk about but I think we’re lining up for an interesting period, and as I say, an interesting period of opportunity.
Look she’s unknown. We just don’t know what she is and the new Chancellor as well, Philip Hammond. One of the comments about him is that he’s been so successful in getting to where he is because he hasn’t put his cards on the table and said ‘what sort of politics he believes in’, so we are on a journey of discovery here, so only time will tell. I cannot tell you what these politicians stand for. We will find out.
But Britain has got its sovereignty back and that was what you felt was an important part of the whole decision, by those who wanted to leave the EU.
Well, technically Britain has not reclaimed its sovereignty from the EU yet. The next process that has to happen is that we have to invoke Article 50, which is the trigger that starts the negotiations between Britain and the UK for how we will leave. The process is designed to take, or the provisions in the Act, allow for a period of two years of negotiations. It’s not entirely clear what happens if those negotiations haven’t been completed at the end of two years. I believe the last, the only country ever to have gone through a similar process was Iceland, back from the European Economic Era, and don’t quote me on the dates, but I think it was about 1983, and it took them three years, and that was a very small country with, essentially a fishing industry to worry about, so there is a little bit of nervousness about how long this process is going to take. Some people say it could spin out for a long period of time but the key point is that we have not yet started the process of negotiation. I think the government has been very sensible in not rushing into that because with a relatively fixed window, you want to make sure that you are ready to go into that negotiation, or as ready as you can be to go into those negotiations.
The flip side, clearly is that various European politicians want Britain to start that as soon as possible, so the negotiation has in effect begun because they will no doubt be applying pressure on Britain to start that process but the real horse trading is yet to begin, and that will probably be next year, by the looks of it.
What about the comment of a potential second referendum, Gideon Rachman soon after the vote said that he maintains Britain will not leave the EU. There will be a second referendum. Is that even a prospect now?
Look, I’m not a constitutional expert on the probability of that but I think that’s an incredibly low probability. I think the cause for that was symptomatic of this shock and grieving process that many people went through. There were Facebook petitions going off and I think a petition for a second referendum had two million signatures. My understanding is that the political basis for doing that is essentially non-existent. There has been a vote and if you try and call a second referendum every time you have a first referendum all it does is underline the whole idea of having a referendum in the first place. I would not spend much time worrying about that personally.
A lot of the campaign, for those who wanted Britain to remain in the EU, was based on fear of what would happen thereafter. Perhaps we can unpack a little bit about the consequences so far. The former Chancellor Osborne was talking about special taxes that would have to be imposed. They seemed to have disappeared.
Yes, it’s classic tactics to try and scare people into voting your way, a classic negotiating tactic. There seems to be no need for an emergency budget. Even George Osborne, before he handed over the reins at 11 Downing Street, even he seemed to be scaling back the need for that. There was an interesting comment I read in ‘The Prospect Magazine’ last week, with reference to an anonymous minister who had campaigned vigorously for Britain to remain in the EU. He had privately admitted that he had been surprised at the level of inbound interest that he had seen for other countries wishing to start trade talks with the UK, since that referendum. I think that is probably the most encouraging sign that this will turn out for better for the UK. The fact that we can now go out, and there is interest from other countries, in starting to negotiate trade agreements because countries like the US and Australia, and I believe New Zealand have not succeeded in getting a trade deal with the EU for many years for precisely the reasons why those of us who voted out, or some of us who voted out anyway, wanted to leave the EU, which is that it is incredibly difficult to get such a large conglomerate of states to actually agree on the terms of any one particular trade agreement.
So there is an upside, potentially from that perspective. No tax increases, or not immediately anyway. What about the reaction of the Pound?
The Pound has been weaker, not a surprise but again you’ve got to look at these things over an appropriate timeframe. The Pound had been strengthening significantly in the run-up to the referendum and it was arguably slightly expensively preceding the referendum. It fell very rapidly and in a dramatic fashion, so that is seen as a negative indictment of the referendum but really, it’s an indictment of the fact that we are in a very uncertain situation. I still think it is far too early to tell whether or not, or what the long-term impacts for Sterling have been. Those will only become apparent when we see what sort of trade deals are available outside the EU and what sort of deal is negotiated with the EU. As long-term investors at Orbis, we really don’t spend much time looking at the volatility even though on Friday, 28th (I think it was) that was a breathtaking move. You couldn’t help but look at it and say wow that is a big move.
Well, one of the people who’s going to be negotiating that is Boris Johnson, who some tipped to have become the Prime Minister first. Then there were all kinds of Shakespearean backstabbing that saw him out of the race. Is he the clown that he’s been portrayed as by the media or is this a man of substance?
That is a very difficult question to answer. Whenever I see Boris representing the UK, I must admit that I do find myself very nervous and wondering what is he going to do next. I think he’s a man with formidable intellect. I’m not convinced that he is well suited to High Office. I am relieved he didn’t become Prime Minister. I think he struggles with the difficult decisions that have to be taken at Government. I think he’s an exceptionally talented individual but I think the jury is still out, as to whether or not he’s suited to High Office. I think the decision to put him in as Foreign Secretary is an interesting one. I hope that he is capable of upholding our interests and negotiating on our behalf. If the sceptics are right and he is just a clown, then I hope that he gets out of the way quickly.
Getting back to the economy generally, there were concerns that after Brexit the UK economy would come under pressure that a recession, in fact, had been forecast. It is early days still but what’s your take on that now.
It’s still early days. I wouldn’t be surprised to see a slowdown from here. I think one of the most dramatic developments has been in the commercial real estate market. In the UK, and still a bit hard to explain how we’d managed to let this happen but a selection of funds had developed, which were UK commercial property funds and they enabled or somehow they created a classic mistake in investing, which is to have a liquidity mismatch. They were allowing retail investors, who wanted daily dealing for investment in the funds, to invest in commercial property. So you had an asset, which is incredibly difficult to buy or sell in the real market, being invested in by people who had daily liquidity in the market to market. I’m not sure if it was directly impacted by Brexit but I’m sure that the Brexit decision did not help. A perception emerged that commercial property would be significantly hit and there was a rush for exits amongst those funds. Seven funds, who offer those commercial property vehicles (I think it’s seven), did what I think is the correct but difficult decision to gate those funds and close them, so we are seeing some direct stress emerge in markets as a result of the Brexit debate. I would argue that those funds were not fit for purpose in offering daily liquidity, in such an illiquid asset class, so something was wrong in the first place and it could have been any other catalyst that caused this crisis. That is a mess that will have to be sorted out.
The other sector to get hammered, after Brexit, were banks last time we spoke, ahead of the vote you said it wasn’t a sector that you had been investing in any way but has the decline in those share prices been overdone?
That is still work in progress from our perspective. It’s not obvious. We were significantly underweight (the banks). We didn’t hold zero in the banks just to be clear. We did have small positions in a number of the banks. It’s work in progress for us. I don’t think we yet have the conviction to materially change that price but it is work in progress and our research is still subject to change, so I can’t really comment on anything meaningful.
As a value house, when you see 20% lower prices in some High Street banks, like Barclays, it must at least attract your attention.
As I say, when you see those sorts of moves the first thing you would expect us to do, knowing as well Alec is that we go and look at those areas that are being beaten up to see if there is a market overreaction. It’s too early to tell.
Overall though and just getting back to the Pound/Sterling. The decline that we saw there did make assets in the UK cheaper, at least in the short term.
Yes, so a couple of things that have happened, which are quite interesting and I think in general terms I think the market has reacted rationally to what has happened. Even within the parameters of uncertainty. What you’ve seen, the peculiarity about the UK, the FTSE 100 is that the vast majority of its earnings come from overseas, so you saw this phenomenon, which is that even on a supposed negative development for the UK economy the stock market actually went up in Sterling terms. The vast majority of that though was a reprising of overseas denominated earnings back into Sterling. If you look down the market cap spectrum and if you look at the midcap and the smaller caps – there they have been significant price weaknesses as people have started to price in significant reductions in activity and declining profits over time.
It’s important when you look at the UK market overall, not to be confused with that FX effect, which is impacting the FTSE 100 but also to a large degree, the next leg down, the mid 250 as well, which is still a pretty international space. If I’m right that this helps unlock massive trade deals, long term you would expect to see lots of opportunities there for those companies who can broaden their markets but there will definitely be losers as well as winners, over the long-term.
A South African angle that is very interesting at the moment is Steinhoff’s bid for Poundland, particularly now that we have an activist investor in Elliott coming into the party and wanting to bid up that price. Given that the Pound has fallen from a Steinhoff perspective, of course, it’s a cheaper buy had they would have come in prior to that but would you be investing in the retail sector in this country?
I can’t comment on what we’re doing, from time to time, but I think on a long-term view we’ve seen significant price declines in a number of retailers, and so in the long term view it’s definitely worth doing some work and we are sharpening our pencils. I can’t comment any further. I would just say that on this view of non-UK investors taking advantage of this weakness, which I would suggest is a sign that things aren’t going to be the apocalypse that project fear would make out.
We have today seen an announcement from Japan’s Soft Bank that it’s going to be purchasing Arm Holdings, which is a technology company it’s a chip manufacturer that supplies chips around the world. They have come in and paid, I believe, 24b Sterling for a business that was valued last week or yesterday at 17b, so they are willing to pay a significant premium and I would be surprised if the weakness of Sterling, particularly given the Yen has been strong recently, has not played a factor in that decision and the timing of the bid. All of these things the Chinese have a character for it. I know it’s a bit of cliché now but the same symbol in Chinese, I believe means both crisis and opportunity. I’m a firm believer in that. All of these events, however, shocking they may seem at some level, will throw up an opportunity for some people. Our job at Orbis is as bottom-up stock pickers, just to go looking for where those opportunities lie in. It is something the investment team is very actively engaged in and excited about at the moment.
So it’s likely that you’ll see more of those opportunities popping to the surface as the rest of the world focus on potential bargains that might have been brought up by the declining Sterling.
Look, so we think in global terms and we spend the vast majority of our time on our global fund, which has, as you know has been running for 25 or 26 years. Within that the UK is something like 7% or 8% of the benchmark, so it’s not a particular big portion but we’re definitely looking around at those names to see how they’ve been affected but they have to compete. Those ideas have to compete with the ideas that we’re finding in emerging markets, for example, where we are very significantly overweight. What you see with some of those ideas is that you can buy in emerging markets at the moment you can buy very high-quality companies, like NetEase on multiples that are significantly low on what you have to pay for high-quality companies in Europe. The difference with the high-quality companies that we find in emerging markets is that the growth trajectory is much higher than the high-quality companies that you can find in Europe, like Nestle which is growing at maybe 1% or 2% a year.
Even though we are looking in the UK the bar is very high at the moment because we’re pretty excited about those opportunities we can find globally. Even though as a whole we think the market is relatively richly valued at the moment. It comes back a little bit to the overall market environment is that we’re at the back or at the end of 4 or 5 years of strongly, trending markets and what that means is the winners in one year, have tended to be the winners of the next year. That effect, that momentum effect has been in place for a long period of time now. I think that comes from quantitative using but we can come to that if you like but that momentum effect has opened up some really interesting valuation disparities around the world, so that is where our global fund is invested at the moment and it’s why this year the performance has been quite satisfying. We still think that that valuation mismatch globally is a ripe and a fertile opportunity for bottom-up stock pickers like ourselves.
When you start throwing a relatively small market like the UK, going into turmoil, it’s not like we’re tripping over ideas to displace the good ideas we’ve already had at the moment, so it’s only one area that we’re looking at the moment, amongst many. That’s the advantage and delight of being a global investor.
You did mention quantitative easing. In the UK itself of the, certainly, the popular view is that interest rates will be lower for longer, as a consequence of Brexit to try and support the economy. So once again reinforcing the whole thesis of quantitative easing, which seems to be almost, embedded now, in the Western world. At some point in time, this has to be worked out of the system. How would that happen?
Yes, that’s the multi-trillion-dollar question, Alec. The simple answer is that I just don’t know. If someone can explain that to me then I’m all ears. I think people and central bankers have been looking for an exit route for quite some time now. We don’t try and figure things like that out. We try and be macro aware and we try and be aware of where the risks are, from the macro environment. We spend our time looking for companies that can survive and thrive, regardless of the macro prospects, so that’s really what’s on our radar at the moment.
Your cousins, if we can call them that in Cape Town, the Allan Gray Group down there has been big in gold. The gold bet has paid off very well, so far this year. Is that something that appeals to you as well?
Well firstly, I would just say they’re a little bit closer relations than cousins. I think of them more as siblings and we have a good relationship with them. Yes, I have spoken about gold with them and Andrew has done a great job down there I think with his exposure, in gold and some of the commodity names. We do share that view. We have spent… I think we ramped up our exposure in the gold miners in the second half of last year. I think the macro thesis, but not macro investors – there is inevitable, a macro element to any thesis about gold or frankly any commodity. I think in a nutshell how we think about it is that there’s a macro case for owning gold, which is that the confidence in fiat currencies will, at some point be lost because of what is going to happen. As a result, people are going to look for another asset class, which is a reliable store of value.
The problem with that argument is that you could have made that argument at any point over the last 5 or 10 years, and I think it did become a very, fashionable and crowded trade on Wall Street about, if I remember correctly it was in about 2010/2011, after when people started denominating classes of the hedge funds in gold. The problem back then was that the gold mining industry was badly run, and when I say badly run I mean shockingly badly run. They were pursuing growth for growth sake. They were throwing capital at all manner of projects, just to feed investors demands for higher production growth. When you see that happening, what you always see is just capital discipline going out of the window, at that, happened. What we struggled with at the time is even if we felt the macro debate for gold was a valid one we couldn’t be comfortable with the way that the companies were being run and relying on those management teams to be good stewards of R-Investors capital and that’s how we’d like to think about things.
When the gold price crashed from about 1.800 through 1.200 down, to I forget where it bottomed out, but it was about two years ago. That was the moment of truth for the gold mining industry. It forced all of those companies to have a well overdue reality check. All of these crazy projects that had been sanctioned assuming that prices would only ever go up, and the costs will only ever stay down were re-assessed. I think that’s when we started looking at the industry again. We were a little bit early as usual but we increased the position and Barrick Gold has been the top 10 position for us over a period of time. It’s done very well. Now obviously with the gold price having rebounded the risk-reward is less extreme than it was. I think the shares have trebled since November last year. We do have some gold stocks in our portfolio and they’re roughly 5% at the moment. I think of them as an insurance policy.
If we go through this Armageddon scenario with feared currencies then gold would probably do very well and those stocks will do extremely well, particularly relative to the market, so it comes down to how much you want to pay for that insurance policy. I think there’s still value as an insurance policy at the moment.
Just to close off with UK property outside of commercial property or London property if you like. There were again forecasts that residential property was going to fall sharply. That London property prices would come under pressure, post-Brexit, it seems to be a logical conclusion. Is it something that is likely to happen, though?
I don’t know if it’s likely to happen but the first thing to state is that London property prices are truly insane and I think it’s causing significant problems for the country, social problems. The transfer of wealth that’s occurring, essentially from young people to old people because of the inability of young people to get on the housing ladder now is nothing short of a tragedy. London is not alone in that. This goes back firstly, to quantitative using but most fundamentally it comes back to the fact that we haven’t been building enough houses in the country, so it is a basic supply and demand problem. When you think about what the house prices are going to do. Really, the 3 components are – what is demand going to do? Are we going to close the doors to immigration in this country, I think that would be a mistake and I think that would be the wrong course of action for the country in the wake of the referendum? Are we going to build substantially more houses? I think that is least bad of the options. I think we have to force through some changes to the planning process in the UK, which leaves too much power in the local councils, which then leaves those elected politicians very vulnerable to the NIMBY (not in my back yard) lobbying, so the resistance to building new houses is incredibly strong.
I think that’s the real problem we have to tackle to solve the overall problem, which is that we don’t have enough houses in this country. The third element is obviously where interest rates are going to be, which obviously drives affordability of those houses and, again, that is a macro question, which I don’t know. Assuming they don’t change the biggest problem today is the supply of houses and if the government can fix one thing, I think fixing that would be a significant positive for the country.
That would mean a positive for home builders.
It has also the possibility of creating a virtual circle within the economy, you stimulate activity and various people are proposing infrastructure projects, which will have very much the same effect, so yes the wonderful thing about investing and economics is that the rules just… It’s very different to sport and I remember Simon Murray always used to say this, if you start a game, it’s a game of tennis or a game of football. During the match, the rules don’t change – you know what they are. In economics and investing the rules are constantly evolving because the rules depend on what everyone else is doing in the match, so I hope that this will evolve and actions taken by the government could help reinforce the current environment.