October isn’t over yet, but I have already picked my number one investment idea for 2024 – and it’s a FTSE 250 stock.
Ferrexpo (LSE:FXPO), which operates three iron ore mines in war-torn Ukraine, might seem like a maverick choice. After all, who would want to invest their capital in reach of Vladimir Putin’s unrelenting war machine?
It’s certainly true that Russia’s brutal invasion has scuppered Ferrexpo’s operations. The company’s earnings collapsed by 75% in 2022.
The global exporter of iron pellets is now trading for a very low price. Its market capitalisation is £463m. For context, Ferrexpo made a net profit of £700m in 2021 alone.
The war’s impact on Ferrexpo
Ferrexpo’s half-year figures revealed pellet production decreased by 59% year on year.
Production will be strangled as long as the fighting continues. In June, Ferrexpo said 25 of its workers had been killed. Meanwhile, millions of people have left Ukraine since the war began, leaving the country not only with battered infrastructure but also short of human capital.
Peace in 2024?
My investment thesis hinges on the war ending next year. It might seem like a batty prediction, given that no one is striking a dovish tone yet.
It’s undeniable that the Ukrainians have shown tremendous bravery in the face of naked aggression by a far superior military power.
Remember, Ukraine is a country with a national income roughly one-tenth the size of Russia’s. Its tenacious resistance has been made possible in large part by international military support, especially from the US.
President Biden’s administration has sent $75bn to Ukraine since February 2022. That is roughly equivalent to the GDP of the state of Maine.
However, I don’t think that support will continue all the way into 2025. According to a Reuters poll from earlier this month, a majority of Americans surveyed either disagreed (35%) or were unsure (24%) about whether the US should continue supplying arms to Ukraine. If Donald Trump wins the presidency in November next year, he is expected to stop sending weapons to Ukraine.
Even if Trump doesn’t win, the U.S. purse strings can only stretch so far. Biden has now proposed tens of billions of dollars for Israel’s war against Hamas as well. If, as many economists forecast, a recession hits the US in 2024, Americans will feel the pinch. As a result, voters might increasingly resent big spending overseas.
Bottom line
I see the US subtly pulling the plug on its military support for Ukraine at some point in 2024, resulting in a negotiated exit from the fighting.
At which point, I believe Ferrexpo’s expected revenues and earnings would begin to recover to pre-war levels — with the possibility of exceeding them in the space of a few years. Western countries have already started to plan for what may be the largest rebuilding effort in modern history. Ferrexpo, being a national producer of iron, could be inundated with business.
Of course, I could be totally wrong; I’m no geopolitical expert. I’ll be committing less than 5% of my portfolio to Ferrexpo shares. I plan to buy when I next have spare cash, although I’m not in any rush as I don’t see my thesis playing out until mid-to-late 2024.
