With FTSE100 producing its worst ever performance for 2008 with a decline of 31.49% over the year and mostly factored during the September-November period I am not going to predict how FTSE100 will end in 2009 suffice to say that I do not expect an economic recovery for quite some time yet. Although every Wall Street strategist is ‘bullish’ for 09 it is important to remember that the very same ‘experts’ were bullish for 08; as my stockbroking father always said, “there are no experts in this business!”. My gut feeling though is that FTSE100 may well trade nearer to 4,000 than 4,600 where it is currently hovering and I wouldn’t be surprised to see S&P retest 800 during 09 despite Barack Obama’s economic stimulus.
The last quarter saw some extraordinary events many of them predicted by market observers. The bail out (TARP) of the world banking system was indeed unprecedented (a word that has been overused many times since) but like many market professionals I saw little merit then (and still do) in throwing tax payers future earnings at dubious balance sheets surrounded by black holes and ongoing derivative failures. The credit crunch, albeit predicted by many, did not play out as many thought. Whilst bank shares were crunched and hedge funds were forced to liquidate (where they could) positions the bottom fell out of base commodities dragging even precious metals prices and stocks across all sectors down with them. This was not meant to happen but it did. Furthermore the oil price once touching the high of $147pbo remarkably fell off the cliff next door and lost $100pbo in the same time frame; strangely the two oil majors on the FTSE100, BP and Royal Dutch held up pretty well over this period. The lesson to be learned I think is that many of the falls were liquidity driven so today there are plenty of opportunities for value investors and true fundamentalists adopting technical disciplines alongside differing strategies.
With the ban on short-selling of financials being lifted imminently (and many disagreed with it in the first place including myself) I wouldn’t be surprised if many more financial calamities occur (or get exposed like Bernie Madoff’s ponzi designed to scalp hedge fund investors). Whilst politicians call for more regulation it is important to note that rules are in place already. Although Sir Andrew Large (ex-Deputy Governor of the The Old Lady) calls for a new independent body that would provide early warnings of systemic problems and have the tools to discourage excessive borrowing many other people in the City would say that that is the Bank of England & FSA’s role in the first place. I gravely doubt more regulation is the answer whereas more emphasis on leaving practitioners to adjust the nuts and bolts and more expert oversight by these regulators is what is required. Hedge funds need to be regulated just like asset managers and private client stockbrokers. Quite why it has taken so long for governments and regulators to work out why Hedge Funds grew so alarmingly in the last few years surprises quite a few of us in the industry. The lack of regulation has clearly been the main attraction for boffins to leave investment banks and join the ‘hedgies’ on attractive 2/20 terms. That game is over as investors now try to escape the clutches of these over-priced illiquid operations. The fall out has already started and perhaps many will leave the hedge fund industry and reignite the investment banking industry which has been pulverised (Merrill’s and Goldman’s have become commercial banks; Lehman’s and Bear have disappeared) and written off even by the Sage of Omaha who’s own flame has flickered after he bought $5bn of preferences shares in Goldman’s. I don’t agree that the investment banking model is ‘dead’. The problem occurred when gearing and lending occurred in the late ‘90’s favouring the early birds in the hedge industry and it then outgrew itself; there are clearly skills needed from the redundant investment bankers but any new organisations do need to get back to basics where they fully understand their customers. The same could be said for commercial banks in the UK!
The strategy for 2009 should be therefore for UK domiciled investors to avoid financials, retails and industrials and focus on value plays (companies with strong transparent balance sheets, with well-covered dividends), precious metals stocks and funds, international earners (most base metals and oil stocks should be tradeable throughout 2009 as
Generally speaking I would favour a portfolio weighting such as 30% Fixed Interest (incl bond funds,etc), 20% cash, 50% equities (overseas earners mainly incl. up to 25% in precious metals) until a clearer picture emerges throughout 2009. I believe it is too early to make a call for a basket of UK equities; some observers have already made incorrect calls on UK equities (eg. Anthony Bolton ex-Fidelity). There’s every likelihood that an avalanche of earnings downgrades and profits-warnings, rights issues (I suspect Rio Tinto is gearing up for one very soon), other failures (both corporate, hedge funds and even private equity troubles) may sink FTSE100 below 4,000 (possibly as low as 3,300) in 1Q 09 so I remain extremely cautious for long-term investors. There are, however, many trading opportunities presenting themselves at present and in particular I am getting excited by the potential moves in Gold and Silver; Platinum remains difficult to call with the Detroit situation delayed until April/May. Gold resistance is being touted at $936pto (currently $843pto) and I think once this level is breached then the previous $1033 high could be tested quite quickly and the following levels tested, $1163, $1332 & $1461; a trading range of $1200-2000 is forecast for 3rd and 4th Q’s 09. With Woolworth’s and a host of other retailers having already failed I suspect that even the larger operations will be suffering by the summer. The outlook for property is still dire and I would guesstimate that another 20-30% fall could be seen this year but the real eye-opener will be in commercial property where it rather looks as though the semi-national banks have cooked up potential losses in the ballpark of £75-100bn which Mr Darling has to contend with shortly. It rather looks as though the only truly independent UK bank will be Standard Chartered going forward; the outlooks for Barclays, HSBC & Lloyds (with HBOS regrettably) is truly difficult to fathom although it looks as though a full-blown bailout of RBS (NatWest and Bank of Scotland to be repackaged and sold off within 2 years) by UK plc is on the cards.
As the anonymous senior partner mentioned in the above heading implied, if any of us could consistently predict the future we would indeed be spending more time with the successful hedge fund managers who’ve cashed in their chips already and own a fleet of gin palaces in Dubai, Monaco and all points east and west.
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