"We think it's the top of the market, but it's a long top" says former Asda boss, Archie Norman in an interview in The Times. Hubris in the build up will amplify the crash he says; "People tend to believe they are great investors because they made a great return in a rising market. Many of this generation of financiers have not experienced a crisis, a recession for many, many years and so they are not prepared."
After writing my last quarterly review in a very bearish manner I feel as though I’m beginning to sound like that chap who cried “wolf wolf”. The long overdue correction has just not materialised and FTSE trades today at around an astonishing 6,700. I said then that “the current scenario in stocks, property and art prompts me to believe that 2007 could pan out similarly to 1987” and have heard others in the media repeat just this comment. The heading above from Archie Norman appeared in today’s Times. The big question is, are we in a super-super-cycle? I don’t think so. It is my belief that the world economies and markets are in a massive crossover with stupendous growth on one side balanced out by real commercial and political headaches on the other. Shelves throughout the USA are today floodied by cheap asian goods, China has over 25 major car manufacturers but I don’t think you’ll find Detroit mentioned amongst the array of holiday destinations. The extreme shift in capital power towards the far east, mainly China, will eventually smash the US$ to possibly 3:1 parity. I can remember $2.40/£1 in the late ‘70’s so why shouldn’t things get really bad for US economy again?
With all this new world growth the demand for energy is immense and markets have seen oil burst the important $70 pbo level again recently. The US consumer will eventually have to pay real prices for oil putting even more pressure on a tested US economy. The likelihood of a $100 oil price is unquestionable as the majors try to resolve the shift in the demand curve.
My recommended weightings to equities 85%, cash 15% and fixed interest zero remains the same and I continue to emphasise positions in Royal Dutch Shell, BP and a small exposure in general miners. The precious metals shares mini-sector has had a rocky period over the last quarter but I continue to recommend exposure here. Goldman Sachs initiated a ‘BUY’ stance on 23rd February for Randgold with a target price of 1635p and have now been joined by Citigroup. Hochschild now has a 453p target from JP Morgan with an ‘Overweight’ recommendation. Both companies appear safe havens to me in an inflationary environment. What inflation you may say? Well, of course, property prices are conveniently omitted from government statistics and with the knock-on effect from the US sub-price debacle a put on UK property is subscribed. ABN-AMRO’s recent report suggested that UK retail is 50% overpriced. In London and South-East prices are perhaps overcooked by as much as 70% in my view. Those that listen to buoyant estate agents who in many cases are unqualified to comment on values and markets really need their heads examining!
The interest cycle has clearly turned and as investors of all shapes and sizes analyse asset classes the conclusion is that there is little value left except of course, in Gold. There are selected equities outside the above-mentioned sectors that I am advocating but like 1987 many are break-ups, Private Equity targets, etc and likely to be much cheaper next year.
Many of you perhaps are bemused by the weather. In UK/France the sun has not been seen this year. If anyone does see the sun (not the newspaper) please let me know as I’ve got a few disgruntled colleagues who would prefer to locate to this rare luxury rather than watch the daily market drudgery. Someone said to me this week, “Climate warming, what warming?”.
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