“When one bubble pops, the next one always appears somewhere else. So don’t even think about buying back into the finance sector. That trend is over. George Soros says it’s the end of the road for cheap and easy borrowing. That is to say, it’s the end of a trend that has been going for the last 28 years. We may not see another boom in the financial industry during our lifetimes.” -The Daily Reckoning April 2008
I apologise for yet another quote from my friends at the Daily Reckoning but it really does look as though the bear market has finally started to impact on people’s lives. Stockbroking firms are being taken over (see the acquisition of Hichens Harrison) and quite a few are “up for sale” (WH Ireland). In the property world March prices fell and estate agents are closing their doors. Inflation has reared its ugly head (now around 3 ½% in Eurozone) and central bankers are losing room to manoeuvre viz-a-viz the lowering of interest rates. Stagflation is nearly upon us although commodity prices remain buoyant. The FTSE100 trades on a prospective p/e of 10.9x versus an average of 14x but let’s not forget that things are likely to get worse before they get better. Households in UK are receiving utilities bill increases above inflation and buy to let investors are struggling to stand still. Sales of all types of property have almost ground to a halt and my predicted fall of up to 70% in the south-east looks possible. Although official statistics show only marginal declines the real picture is much worse as Brown’s housing demand policy turns in to an oversupply policy almost overnight. The impact of the credit crunch arguably has hardly occurred yet as banks struggle to admit more liabilities. Conservative estimates indicate up to another US$400bn of losses being impacted later this year combined with a massive unwinding of credit derivative instruments. Expect more hedge fund failures going forward.
To summarise this last quarter has been the worst quarter in the history of FTSE100 with a decline of 11.68% although at one juncture on 16th March it was showing a decline of 16.1%. The FTSE All Share index by comparison fell 9.85% over the same period whereas gold rose around 6% over the same period having peaked at around US$1032pto. The likelihood of oil and precious metals prices rallying from the current levels appears positive with most analysts predicting $1,200pto for gold this year (may be too conservative) and $125pbo for oil.
As far as individual stocks are concerned I continue to recommend BP, Royal Dutch Shell ‘B’, Venture Productions, Aviva, Prudential, Reuters (becoming Thomson Reuters shortly), Randgold, Anglo American, BT Group, British Airways (can things get any worse?) and on further weakness, Tullow Oil and Templeton Emerging Markets Investment Trust. I still believe that the risks outweigh the rewards for bank and building shares. I have been investing in a small AIM company recently, Blavod Extreme Spirits PLC (now 4p), and if anyone would like to discuss the merits of investing into this company then please contact me in due course.
As many of you are no doubt aware Personal Equity Plans (PEP’s) merged with ISA’s on 6th April and I attach a Redmayne brochure accordingly. This is an opportune moment to review any PEP’s and ISA’s managed by institutions as at long last there is a one stop shop for Self-Select Stocks & Shares ISA’s. Many of the Cash ISA’s simply don’t have the flexibility that stockbroker’s ISA’s have and it should be stressed that cash and cash funds can be held within a Stocks & Shares ISA whereas the products offered by the banks just don’t have that degree of flexibility (or expertise as it would appear).
As April arrives with snow may I wish you all a prosperous summer and can I suggest that a small investment in an umbrella may be useful for Wimbledon and Royal Ascot this year.
