“Successful investing is anticipating the anticipations of others.”------------------John Maynard Keynes
I’ve been looking for a positive quote that I can apply to the current Q review, something that might liven up the proceedings and may actually amuse or provide some good news. Alas I haven’t found one suitable for the current malaise that we find ourselves in. On several occasions recently I’ve been asked for some good news. On one level alone there does appear to be some value in equities with S&P trading on 10.2 x earnings versus an historic average of 13.7 x during the previous nine recessions going back to 1957 but the current backdrop perhaps should be compared to the ‘30s. But then again this market scenario is something that we have never seen before. In the aforementioned previous recessions corporate profits declined on average 12% but there’s every chance that the current recession or depression may take a different degree of attack that may alarm everyone. The western banking crisis may be taking a different twist as I write. Alarm bells are ringing in Europe with Dexia and Commerzbank joining the ranks of the walking wounded such as Credit Agricole, BNP Paribas, Societe Generale, the greek banks, the portuguese banks, Bank of Ireland and a host of others. In UK both RBS and Lloyds continue to meander below the bailout breakeven thresholds and there’s little chance of tax payers recouping their investment unless the magical rabbit miraculously appears. Last week Santander UK issued a severe profits warning and with the backdrop of a failing retail market (other than Central London) prospects look extremely uncertain for owner occupiers. In US even MorganStanley are embroiled in the cleansing process; their CDS (credit default swaps) insurance premium is now higher than Italy which implies there are hidden problems there too. Of course, no-one knows if a Lehman mark II is imminent but my feeling is that the derivatives timebomb is ticking louder. How much is the global exposure in derivatives? Well it’s estimated at $500-600 trillion via the clearing process but so much is synthetic (socially and financially useless in my opinion) and it doesn’t help that the Bank for Int’l Settlements based in Basle is not exactly transparent with the state of global derivatives against a backdrop of friction amongst the global clearers which is coming to a head according to the FT. So it would appear that the problems now surfacing in the global clearance of derivatives is not that different to the frictions appearing in the EU doctrine as millions are being asked to pay for bailouts. The transaction tax (“tobin”) imposed by the Eurozone can only damage markets and investors hopes in the medium to long term. What perhaps is more alarming is that there are clear divisions between politicians, regulators, central bankers and economists who all appear to be acting in a cartel against the wisdom of markets. This does not bode well. Last week’s Euro450 billion (capped) support for the EU banks from Germany pales into significance against the call from IMF for at least Euros2 trillion of (QE) support. It remains to be seen too whether the EFSF (European Financial Stability Fund) can gain enough momentum to raise enough Euros to bail the debtors out. There are even those calling for a Euro 3 trillion bailout. Where and when will this all end?
It’s clear at least that these market conditions do not favour investors. Traders meanwhile face extraordinary volatility as the newsflow is mesmorising; the casino mentality that has been so heaviliy criticised is still with us. Arguably it’s too late to sell anything and too early to invest but there have been indicators that private investors and institutions are putting their toes into the ‘hot’ water on occasions. There is some value appearing especially in emerging and frontiers markets and some outstanding value amongst precious metals stocks even despite the recent gold correction from c.$1,900pto to low $1,600’s. Incidentally this 15% correction was made more severe by increased margin calls on gold traders at CME in the midst of the initial sell off. The trend for Gold has NOT been broken here and it’s still feasible that $2,000-2,500 could be reached if more QE is triggered in the final Q. Meanwhile generally speaking the consensus view about oil is that higher prices will be seen hereon.
With regard to stock selection amongst the majors I still continue to look to buy Royal Dutch Shell (yield 5.5%) in £20 down to £16 range and quite like BP at around £4 as there is talk of more asset sales (JPMorgan 575p & Merrill’s BUY 580p) as well as recurring stories of RDS looking at them. I don’t think that Tullow 1298p are that compelling at the moment despite the positive Ghana news; I’m still wary of the Uganda investment. Vallares are suspended currently pending a reverse takeover by Genel of Turkey/Iraq and an entry into FTS100/250 is anticipated. The mid-range oils have yet to close the n.a.v gaps and still offer some good upside hereon. Cairn, Soco, Hardy O&G (484p n.a.v. also Arden target), Premier Oil (Deutsche BUY 605p target & UniCredit BUY 615p) and Heritage have traded sideways in the last Q. Elsewhere In FTSE I am extremely cautious although some previous targets to buy at have been reached. Arguably there is some value here in BAE Systems now 260p yield 6.7% p/e 9 (going lower perhaps after recent redundancies), GlaxoSmithKline firm at 1315p yield 4.9%, Sainsbury now 275p yield 5.4% p/e 8 (Seymour Pierce have HOLD 270p target), HSBC now 485p yield 4.7% and Standard Chartered now 1222p yield 3.6% as well as a few others but I am still hesitant to go aggressive here just yet so the selective investment trust approach seems more prudent. Investments in JPMorgan Claverhouse (4.7%), Henderson Far East (5.2%), Schroder Oriental (4.0%), Scottish American (4.4%), Securities Trust of Scotland (4.4%) and Merchants Trust (6.3%) are still compelling for income investors whereas emerging markets trusts such as Templeton Emerging now 505p, JPMorgan India now 354p, JPMorgan Brazil 81p (just a hunch but this is tempting against a n.a.v of 84p), JPMorgan Russia now 425p and BlackRock Latin America now 505p yield 3.0% could also be considered. There isn’t a suitable trust for the Final Frontier, Africa so a selected basket of equities is preferred here. In particular I still like Randgold now 6455p (the Ivory Coast problem is now behind them), African Barrick now 513p and Shanta 22 1/2p (Fairfax increased its BUY target to 74p last week) are attractive african exploration plays whereas elsewhere globally I am still persevering with Patagonia Gold 52 1/2p, Norseman 15p, Orosur 53p, Peninsular 31p and Nyota 7 3/4p. Anglo Pacific at 249p yield 3.6% is a classic royalty play that provides some variety.
These are extremely difficult and dangerous market conditions as the capitulation moment dubbed as the SPUTNIK MOMENT by PIMCO is possibly nearly upon us. A disconnect amongst metals is quite likely with base metals and precious metals divurging. The recent flight to US Treasuries and the US $dollar has surprised quite a few as the liquidity argument increases. Eventually though the rationale should point to a big bull move in Gold and other precious metals.
With all this bearishness I continue to favour portfolio weightings such as 0% Fixed Interest (a bond implosion is forecast), 20-35% cash, maximum 80% equities (overseas earners mainly incl. 25%-40% in precious metals stocks, a spread of investment trusts). It’s important to stress that investors are entering a new era where stagnant growth (or even negative growth) in the west could be offset by continued growth in emerging and frontiers markets. Even though China’s growth of 7-10% is forecast to slow to 5% its long-term effect on the rest of the world will imply high growth rates elsewhere. Africa a.k.a the Final Frontier presents amazing opportunities today with a 7% GDP growth rate whilst I still feel that India, Brazil & Russia present excellent value whilst the western developed markets undergo a restructuring process. One interesting angle right now is the North American market as somewhere to invest and I am keeping an eye on US Smaller Companies Funds and the Canadian resources market. As Louise Cooper of BGC Partners suggested on Bloomberg this week equities are “cheap as chips” as gilt yields are below 3% versus the average FTSE yield approaching 4%. My own view is that average equities yields could well reach 5-6% in UK ; some investment trusts are already approaching 5%. The correlation between deflation and inflation needs to be watched closely which is why there’s a growing case for increasing equity exposure especially on any decline across markets. The level of the coming decline is the key and I still feel that 10-30% is possible which implies 4,400 down to 3,500 on FTSE100. I think we are about to witness the SPUTNIK MOMENT as has already been discussed.
As Hoblyn & King’s former client JM Keynes reportedly suggested before WW2, the skill and art of “successful investing is anticipating the anticipations of others” even though we don’t necessarily agree today with the way that markets are being led. Easier said than done.
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