Commentary

The view from anywhere else in the world puts the Anglocentricity of Brexit-consciousness in perspective: the Cape Town Mail and Guardian, in its 40 page preview of the year ahead, contained not a single mention of the UK, and indeed the only mention of Europe was of the Paris climate agreement. South Africa’s concerns are about the US, China, India, Russia, Brazil and Latin America, and, not surprisingly, South Africa and the rest of Africa.

But for those of us in the UK the general election and Brexit remain the focus. Some of the fog of the last few years has been removed by the election result. Attracted by valuations in the UK which had been depressed by the despair-inducing political impasse and short-term uncertainties, we have held a significant portion of the fund in UK shares. All performed strongly in December, helping the fund’s performance for the year to edge ahead of the relevant index. In sterling terms, the return of the fund during 2019 was +17.4%.

Reach was the outstanding performer in December and in the year as a whole, up 42% (in local currency terms) and 123% respectively. Online revenues continue to grow satisfactorily (up 14% over the previous year), mitigating the continued slide, down 7%, in print revenues. Costs continue to be well under control. The result has been strong cash flow which has eliminated net debt. At purchase, the shares were remarkably cheap, on a price-earnings ratio of between 3 and 4, reflective of, but exaggerating, the tremendously difficult outlook for newspapers as classified advertising vanishes and hard copy sales fall. With the integration of the Express newspapers, the Reach management has shown how to adapt and to maximise cash flow.

Of the other UK holdings, Stagecoach was up 17% in December, Tesco up 11%, easyJet up 6%. The outperformers in the year included Alpha Bank (+75%), the Greek economy and banking sector having made a good recovery; and Nomura and Kyocera, both up 39%.

The portfolio has suffered double Deutsche damage during the year: from Deutsche Bank and from Deutsche Lufthansa. We continue to feel that the strength of Lufthansa in long-haul flights will provide good profits and that the short-haul market, currently overcrowded, will consolidate so that losses will reduce. In the short term the rise in the oil price will not help. As for Deutsche Bank, it remains very problematic. We have had faith in the resolve of the management, led by Christian Sewing, to cut costs ever since the strong statements of intent that he made at the time of his appointment. But it is an uphill task, with, to date, revenues falling as fast as costs or faster. We have not lost faith, easier to sustain with shares on a price-book ratio of well under 0.5.