With the If market sentiment runs on the high octane of fear and greed, then we have swapped over from one to the other with great rapidity in just a few months. I can still recall the bullish statements of the late Summer from certain stockbrokers talking the stock markets up to the new “Elysian Fields” of all time highs (not to mention their trading commissions and year end bonuses).
One day they will, in time, turn out to be right, but first we have one or two other rather pressing issues closer to hand to resolve, such as a weakening global economy, certain inflationary pressures and an international credit squeeze. No, I am not going to write any more about that for the time being, as so much has already been written by those far more knowledgeable than I. Better therefore that I should search for some possibly more positive areas where at least we might find a small light to warm us in this chilled Winter of discontent.
Such attacks of investment volatility have a habit of creating their own opportunities and our current events are no exception.
The first to come to mind is that of currency levels. The investment herd has, for example, unanimously condemned the US Dollar as damaged goods for the time being, but I would suggest that when market sentiment is so wholly facing in one direction, that this is a perfect signal to glance in the opposite direction. The Dollar, especially from the position of a stronger Sterling, may well be looking more attractive. In fact the strength of our Pound can certainly provide us with an opportunity to buy overseas assets at a lower cost than we have seen for some time.
Secondly there is another area which for reasons of other difficulties, could provide some interesting opportunities.
The “Buy to Let” phenomenon of the past decade has mushroomed and often attracted those seeking an apparently easy method of making money at low risk – after all “property doesn’t really go down in value” – or so I have been told so often over the past two years (often by rather smug individuals who were obviously Friday night property bores).
Property is of course an excellent asset class but at the right price, and the impending pain of a falling property market could provide some excellent opportunities for the brave at heart to buy flats and houses at fairer values.
Thirdly don’t write off the private equity market quite yet. The heat of the credit crunch may have evaporated much of the liquidity but some of the more dramatic falls, certainly amongst some of the FTSE 250 companies, have thrown up some interesting opportunities. As share values have fallen the potential for management buy-outs and buy-ins has certainly become a greater possibility. Both Clinton Cards and Marchpole have been mentioned, along with Carpetright, as all being potential candidates. In the unloved retail sector there are definitely those who can see value, as perfectly illustrated by the Icelandic retail raider Baugur with rumours of it further increasing its holdings in the UK sector.
One final area that we should take some comfort from is the wave of reinvestment that we are seeing flow back from those exporting nations flush with excess foreign currency reserves.
Primarily of course we think of China, but to that we can add Singapore, Abu Dhabi and Dubai, as well as Russia and India.
This wave of investment is taking various forms but primarily it is via the increasingly familiar Sovereign Wealth Funds (SWFs) of some of these nations.
Some seem to be fearful of foreigners buying up our assets, but I would call it free flow of capital in a free trade environment – a core part of capitalism. We in the UK have always been familiar and open to investors. After all, that is what we have been doing to others since Sir Walter Raleigh went off potato hunting.
However maybe our ardour for free trade may have some barriers when, for example, Gazprom might launch a bid for BG Group (British Gas)?
However, the flow of these funds is an encouraging sign of confidence in both the investment structure and corporate valuations. The current level of investment we believe stands at some $55 billion, which although large, should be put into perspective against the current estimation of China’s reserves of $1.46 trillion. However, these investments will certainly have the effect of providing at least some form of comfort for investors knowing that there are a number of potential buyers lurking in the shadows.
This recycling of surpluses is to be welcomed, though no doubt there will be protectionist squeals from those of a more isolationist inclination, but in most cases I suspect that will be from populist politicians. What I think may be more beneficial for those companies on the receiving end of such overseas approaches will be the type of investor they will be getting.
These SWFs seem to have a far more strategic view for their investment decisions and thus may well provide those public companies with a superb counterbalance to the potentially bandit style attacks of aggressive investor activists. A great example would be Barclays who after successfully losing out to RBS in the ABNAmro deal, managed not only to get their costs covered but came out with 2 strategic shareholders from China and Singapore. I think John Varley can quite rightly regard that in local parlance as a “result”.
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And finally…..at last a solution to any of your personal power shortages. An aquarium in Japan has discovered that it can run its Christmas tree lights by dangling a copper wire into a tank containing an electric eel. So with a number of eels strategically placed throughout the house we could potentially not only cut our utility bills but also replace our carbon footprint with a more ecological carbon fin.
Have a good week,
Justin A. Urquhart Stewart
Director
Seven Investment Management