Editor’s Note: This Thursday, the British will hold a landmark vote to decide whether to leave the European Union. In this Special Edition of Bill Bonner’s Diary, Chris Mayer, master stock-picker and Chief Investment Strategist for Bonner Private Portfolio, shares what Brexit means for the markets. And the hidden opportunity many panicked investors are missing…
The market is in turmoil over “Brexit,” the potential British exit from the European Union (EU). But for smart investors, it’s an opportunity…
As many of you know, the UK will hold a referendum on June 23 to decide whether it should leave the EU. The drive to leave seems to be mostly led by anti-immigrant sentiment. Leaving the EU will allow the UK to set its own migrant policies.
But as part of the EU, the UK benefits from trade agreements that make it easy to do business in any other EU country. These would go away. And the market doesn’t like it. UK stocks have fallen as polls suggest Brexit will prevail.
The British pound has also fallen against the U.S. dollar. (The UK is not part of the euro monetary union. Its currency is still the pound.)
The reason for these selloffs is that Brexit introduces new uncertainties…
Warrant East, the CEO of London-based Rolls Royce said:
The long-term consequences of leaving the European Union are not clear… Uncertainty is unsettling for business as it limits any company’s ability to plan and budget for the future.
Rolls Royce deals with 9,000 suppliers across Europe. It also employs 14,000 people in Europe, excluding the 23,000 people in the UK.
As part of the EU, you have one general rulebook to follow for doing business throughout the EU (analogous to doing business in the U.S. across state lines). If Brexit prevails, you could be back to different rules for every country. You won’t know what taxes you might have to pay or what additional costs there may be.
For some businesses, this could be an enormous pain in the neck. But as an investor, I’m delighted. This is the kind of uncertainty that creates panicky prices as investors hit the sell button.
There are two areas that I think are interesting: One is real estate.
Many businesses make London the site of headquarters for their European operations. Insurance giant AIG is an example. The CEO of AIG said if Brexit happened, AIG would look to move its operation center on the continent.
If many businesses follow suit, it could depress real estate prices in London and other parts of the UK.
Kennedy Wilson (KW), for example, is a company that owns property in the UK. It’s a stock I like a lot, but it’s been weak of late – probably because the market fears for its real estate portfolio.
It seems unlikely that Brexit would topple the London real estate market. London has been among the most expensive markets for a long time, well before the EU existed. And it is likely to remain one of the world’s most important financial centers.
But if the property market does drop, Kennedy Wilson is in great shape to buy more property at lower prices. In the meantime, investors enjoy a 3% yield. And the insiders own about 18% of the company, which I love to see. They are motivated to increase shareholder value. I peg Kennedy Wilson’s intrinsic value at $30-plus per share. It’s the kind of opportunistic firm I’d favor now.
Another is Oaktree Capital (OAK).
Oaktree is an asset manager that specializes in credit. It buys and sells bonds, often in distressed companies. By owning the bonds, it can also acquire stakes in companies when they go through bankruptcy. (This is kind of like taking over a property as a mortgage holder when the borrower stops paying.) Oaktree owns about 15% of Tribune Media, for example, which came out of bankruptcy in 2013.
The EU has been a rich source of deals. Many economies are still hurting in Europe, and there is still a big pile of bad debts. Oaktree just bought $5.3 billion in bad loans from the National Asset Management Agency (NAMA), now one of the largest property groups in the world. The Irish government established the firm in 2009 to bail out its banks.
According to Reuters, NAMA paid $31.8 billion euros to rid local banks of $74 billion in risky loans made before the property market collapsed in Ireland.
Buying these loans will allow Oaktree to acquire property at discounted prices. This process is part of Oaktree’s standard playbook. It’s led to solid returns in the past across its various funds.
To the extent that Brexit contributes to more bad debts, Oaktree will have plenty to do. In the meantime, the stock is not up much from 2012 when it went public, and it pays 5%. (Note: You’ll get a K-1 if you own Oaktree. If you don’t know what that is, I don’t recommend buying the stock.)
Plus, co-founder Howard Marks – the famed author of Oaktree’s celebrated client memos – and other insiders own about 42% of the stock (through special units). They have “skin in the game.”
Neither of these companies are official recommendations today. But they’re among the promising stocks I’m researching for Bonner Private Portfolio. Both exhibit characteristics I like to see. And they’re operating in two areas I expect to survive and prosper in a turbulent EU…
Sincerely,
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Chris Mayer
P.S. Tomorrow night, I’m teaming up with two of the most powerful figures in financial research… Bill Bonner and his longtime friend and business partner, Porter Stansberry.
We’ll talk more about the impending “Brexit” vote and what it means for the global economy… how Donald Trump or Hillary Clinton could impact the stock market… how to react to the financial media’s obsession with negative interest rates… and how to invest if they do come to America.
But the best part is, we’ll tell you how to create a wealth-generating portfolio that will support your family for years to come… no matter what happens in the markets.
It’s all happening Tuesday, June 21, at 8 p.m. Eastern Time. To instantly register for this FREE event, go here.