I've been asked by several people since Thursday what is the best thing to do in these markets and in my experience the best thing to do is to stick to one's strategy and focus on one's own stock picking skills. This morning the FTSE100 touched 4,791 at the low and in my view this was precipitous territory. Ignoring the market for a second it's clear that the UK has entered a 'Dead Zone' with little prospect of real growth or significant shifts in employment.
Last night I watched a BBC documentary entitled "Great Thinkers" and I would recommend everyone to search and locate this superb analysis of economic doctrine on their i-Players or whatever system they have. In the left corner was the former Hoblyn & King client, the one and only John Maynard Keynes, generally regarded as the greatest economist of the 20th century and one who believed in applying more oil to the system. It seems that Ben Bernanke, the Federal Reserve Chairman, is a fan of Keynesian theory which admittedly may have worked for the good of all 'socially liberal' economies since WW2 but seems to be failing miserably at the moment. It seems that applying Keynes principles in the current dire economic scenario is sheer madness as unemployment is already high and increasing against a potentially disastrous tax hike across western democracies. The other corner had two men, both of whom seemed to be supporting the more sensible Austrian school as prescribed by my old friend Ludwig von Mises. They were Nobel Laureate Friedrich Hayek and the esteemed american economist Milton Friedman. Both seemed to be suggesting that the best fate for capitalism is to free up markets, cancel out as much bureaucracy as possible, and allow the markets to evolve spontaneously.Thatcher started in the Friedman camp but her lasting legacy could well be the introduction of REGULATION in 1986 and the abject failure of the privatisation schemes that have burdened tax payers with inefficient monstrosities. We all know where this has led us to. The UK is now on the proverbial garden path.
So back to present day markets. It's interesting that not one single analyst nor indeed securities firm other than Deutsche Bank really prepared investors for the global sell off over the last week. DB suggested that failure within EU could extinguish 35% from equity valuations and on this basis there's some way to go from here. Despite this mornings rally on FTSE100, it's now 5,081 I think that one can expect S&P to continue downgrades of US municipal debt (over $2 trillion of debt) and possibly France too from its AAA status. This event alone would set the cat amongst the pidgeons.
My strategy therefore remains. Stay LONG of oils (despite their short-term softness), stay LONG and increase exposure in global Precious Metals stocks (Randgold alone has remained resilient in London at over £60 now 6140), retain HIGH cash positions, avoid banks (there's likely to be a bank failure at any moment in Europe), hord Krugerrands and any gold/silver, pick up selective blue chips (Glaxo now 1213p, BAE 253p, SBRY 283p, RDSB 1889p) and especially some of the listed investment trusts which appear to be the best way to play UK equities. In essence GOLD is going much higher and if I had to give Mervyn King one piece of advice, I'd forget about the gilt market and focus QE3 on buying back some of Brown's $280pto gold positions before it's too late. The new world order (after Obama & Sarkozy that is) will demand some sort of pseudo Gold Standard and it's evident that many countries already recognise that their currencies need some backing from Gold. The pound certainly needs the same.
So the markets are cheap if you're in the Bernanke camp and arguably expensive if you're NOT.
1 comment:
Richard, thank you for stimulating the little grey cells.
How about looking at the situation from a slightly different angle? I think there are three broad scenarios - (i) Global recession (for which I assume very low single digit growth in the BRIC subsector); (ii) Europe and US flat to 1% growth, China etc as now; and (iii) global growth (developed economies 2.5%+ and China et al as now.
We can disregard (iii) for at least a couple of years and probably longer - due to, apart from the obvious refinancing of the profligate European and US Governments, the costs of green power, bank reconstructions (exacerbated by all the leveraged debt used in the buy-out binge that is coming up for repayment/renegotiation) and rising commodity prices. Option (i) has say a 5% to 10% chance, but unlikely as it is in no country's interest, including China (it is not too extreme to suggest that China may ultimately end up supporting the Euro, but that is a subject for another time). So it is some permutation of (ii).
Looking at Europe, it’s buggered (a technical term). The aforementioned constraints broadly outlined above as the reasons not to expect global growth will weigh on investors, banks & other financial institutions and of course Governments. So a long hard slog for the domestic European economies. Regarding the US, the previously used solution of recapitalising the banks through generating excessive profits from a steeply upward sloping yield curve is not available. Material increased Government spending is obviously out, so it will have to be a devaluation of the US Dollar that provides a catalyst for US growth. This is expected and will be something else the Chinese will complain about (but the Yuan is over valued, so the criticism will be ignored by Washington) – and lends support to the view that Beijing will eventually end up supporting the Euro. Re China, they need to see at least 7% to 7.5% growth just to stave off social unrest – which they will engineer (note how they reacted during the 2008 crisis) – so put them down for a minimum of 8%. India is to some degree a crude immature replica of China, and Latin America will continue to grow (Chinese and Indian demand for natural resources, including food commodities, combined with their growing indigenous demand growth).
Thus a very similar conclusion to you for investors – accumulate natural resources (I would also add certain technology stocks, for obvious reasons).
Gold certainly – with a weakening US$, it is only going one way. Don’t be surprised to see $2,500/oz within the next year/18 months. Silver can/will have its day, but will lag gold (note: In my view wait until the silver-to-gold price ratio tests previous extremes before buying it rather than gold, and don’t run a short gold/long silver trade as history dictates that this works only for brief periods and is thus very risky.
Oil&Gas certainly. Oil is obvious, but with the price differential between the US and Japan/Asia for gas, there is an interesting medium to long term play on US gas producers.
Copper, Iron Ore, Nickel, are all in the attractive camp. I would also consider looking at Lithium.
I am not as positive on high yield stocks as some commentators – I start from the premise that the yield is paid to compensate investors for the lack of capital growth - but certain convertibles are preferred.
In the words of the Chinese curse, we “live in interesting times”
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