The last few weeks have been anything but boring in the investment world. For the first time in a long time, investors are questioning whether or not they should stay invested.
What is the concern? By and large the measure being used is the FTSE. Is the FTSE a true measure? Hardly. We must remember that the FTSE 100 is a measure of the top 100 UK companies. Remember, however, that many of these companies are basically global companies with considerable exposure to the US. In the late 90s there was overexposure to technology. Other bubbles have lately included banks and oil companies. So if technology shares plummet, or as has happened of late, banking stocks fall out of favour, does it therefore follow that the market as a whole is struggling? Hardly. Bubbles are created everywhere and these bubbles will clearly represent themselves within the FTSE.
At the moment we are seeing the fallout of the credit crunch and clearly it is difficult to see, with the lack of transparency, exactly what the problem is. The property bubble (commercial and residential) is long due a little deflation and its stretch marks will be around for a long time. What is most surprising is the shock from most investors that property is having a tough time. Readers of this column will no doubt remember we have been pointing the problems out for over a year, but this sector has been pumped more and more by those with a vested interest. We note that Invesco perpetual property income investment trust has had a fall of 17% to its net asset value over the last quarter.
Clearly certain assets have fallen out of favour. The yield (income you might expect) on property is pitiful, making the asset unattractive and hence most are bailing out. Remember of course that property funds can also put a six month block on you taking your money out, as well as adjusting the unit prices downwards, as has happened of late by almost 6% in some situations. This has also been followed by the property funds struggling with overall values – not good reading. But, just as we commented over a year ago that this asset was a troubled one, fixed interests are also struggling to add value over cash, and it’s difficult to see where they can.
Which now leaves very little that looks valuable over equities, so let’s see what we think of them. There is no doubt there will be further lowering of equity prices coming along in relation to the financial sector. LIBOR (the rate at which banks lend unsecured funds to other banks) is still considerably more than the normal base rate. This represents two issues: banks are clearly preserving their capital whilst also fearful of other banks’ exposure to the credit crunch and bad debt.
Banks could, in fairness, all declare the extent of their bad debt to each other. By coming clean, this would reduce their fears and they could then begin lending more freely to each other, but also at more preferable rates. For some reason (and it can’t be good) they are choosing not to. This may lead you to believe there is more bad news to come out of the banking sector. Some commentators believe it may take twelve months for the issues to flush through the system, but whilst these sectors have a tough time it must be remembered there are plenty of other areas to consider.
There are always opportunities created in scenarios like this, and many companies have very strong earnings today which have been down valued. Jupiter fund managers commented that many companies are capable of growing dividends at near double digits, and that dividend cover is at its highest level for over twenty years, which is reassuring.
There is no doubt we may see an easing of interest rates, and this, coupled with Asia taking up the US slack, mean equities are offering a more attractive value than other asset classes.
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