Nick Louth: Thrice in a lifetime opportunities

In just 12 months, UK investors have been offered three once- in-a-generation opportunities.

In March last year, shares began a record- breaking rally that took prices up 57 per cent from their lows. In corporate bonds, the recovery started in October 2008 and lasted several months. In permanent-interest bearing shares (admittedly, a more obscure opportunity), it began in the summer – as I mentioned in this column in October. In fact, this third opportunity still appears to be open, as some smaller building society permanent-interest bearing shares (PIBs) are not covered by credit rating agencies, and look unduly depressed.

I took up all three opportunities, to the great benefit of my portfolio. Last year’s total return of 45 per cent was my best since 1999, and the 50.28 per cent from the UK portion was my best ever – more than making up for the poor results of 2008.

Many of the bargains that I picked up should continue to generate returns for years to come.

Although most of the price appreciation in the fixed-income investments has already taken place, the income generating effect will continue. Many of these holdings yield well over 10 per cent. I constantly remind myself that the most reliable engine of long-term growth is the reinvestment of income.

However, by the third quarter of 2009, I was convinced that shares in most cyclical companies were fully-priced, though profitability improvements should eventually allow them to earn out their extended price/earnings (p/e) ratios. I have also cut my emerging markets exposure from 12 per cent to 7 per cent.

Even so, I still have great faith in my remaining holdings in this area: Indian film producer Eros, property company Hirco, and East European warehouse venture Raven Russia. I have double digit gains in the former while the latter two broke into profit in the last quarter of 2009 as confidence in their respective property markets improved.

Oil shares still make up about 15 per cent of my portfolio. I have long believed that pressure on oil supplies is going to be a reality for years to come, and it remains a key theme in my investment strategy. The first week or two of 2010 has confirmed that ebullient economies, such as China, and a recovering US will continue to underpin demand for oil. Americans are returning to their SUVs, while the Chinese are increasingly giving up their bicycles for motorcycles and then cars.

But while most investor attention is focused on these large economies, the behaviour of smaller developing economies is significant, too. I saw Humvees in Laos and stretch limousines in Vietnam when I visited both countries late last year. These are for the wealthy, of course. But there is also change afoot among the ordinary citizens. Bicycles dominated in Hanoi when I last visited in 2000. Now there are 4m motorcycles in that city and another 6m in Saigon. Almost no one in the cities rides a push-bike any more, or so it seems. It is different in the countryside, but rural citizens are being drawn into high growth urban areas. These same effects are being replicated across the developing world.

Oil is one of the easiest ways to take advantage of this, and my money is spread across a number of companies – from the high-yielding megacap BP, through US oil and gas company Apache, to high-growth plays such as BG.

Nick Louth is an active private investor, writing about his own investments. He may have a financial interest in any of companies, securities and trading strategies mentioned.