Sell, sell! Buy, buy!

We all know that markets and share prices are governed by fear and greed whereby bull markets are characterised by greed and bear markets by fear.  We also know that markets overshoot on both the upside and the downside – often within a short space of time.  Surely this is exactly what we are seeing right now.  If the banks were overvalued just a few months ago, surely they are undervalued now, similarly with builders and miners.  Most of us remain in a state of hung over trauma having seen a buoyant market and economy fall off a cliff in very short order.  Of course the falls have not been consistent across all sectors, as implied above, and the trick now is to determine what sectors should be backed if, and when, we can anticipate the pendulum swinging back into more positive mode.

 Not that the investing public is feeling any more positive yet.  Presently all news seems to be bad news, even when it is good!  Inflation falling would normally be considered good news but currently it is a harbinger of the dreaded deflation.  Interest rates falling would normally be considered good news but because up to a half of mortgage payers will not receive the full benefit then it is considered bad news.  Falling Sterling making our exports more competitive would normally be considered good news (look what it did to stimulate our economy in the early nineties) but because our imports will cost more and overseas investors will have less confidence in the UK then it is considered bad news.

 All this ‘bad’ news makes our market fall.  When interest rates fall, when inflation falls and Sterling becomes more competitive the market falls.  When Gordon Brown announces there will be substantial fiscal measures to stimulate the economy the market falls.

 This does not make any sense.  The fact that RBS spent more acquiring ABN Amro recently than the total current market capitalisation of Barclays, Lloyds TSB, HBOS, Marks & Spencer, J Sainsbury and WM Morrison defies logic.  Sure they may have paid too much but not so much that realistically they could have bought all those other major UK companies instead!  Many companies today are ‘dirt’ cheap. 

 The fact that many shares can be purchased at less than last year’s earnings defies logic.  The fact that our own natural everyday consumption habits will underpin the financial future of most major UK companies means that there are some terrific bargains out there.

 In managing a broadly based portfolio, managers will normally have an eye to combining undervalued assets (to achieve competitive performance) with a wide diversification (to harness and restrict volatility).  The current environment makes this task particularly important and exciting over the months ahead.  WAY Group is unusual in having its portfolio funds managed by a selection of external managers.  Not surprisingly its three main, but entirely independent, managers agree on the prospects for the next market phase.

 John Husselbee at North Investments, manager of the WAY MA Cautious portfolio which has recently been moving from cash back into the markets warns “There is no doubt that the past few weeks have given investors a white-knuckle ride that would test anybody’s faith in financial markets. There may be some who want to get off now, some who are concerned but will stick it out and even those fully prepared to take more. What you need to avoid being is the investor who gets off near the bottom, taking a large loss and giving up any potential for recovery and future growth.”

 Meanwhile Jason Britton of T. Bailey, running the more adventurous WAY MA Growth portfolio, is already working out a broad strategy going forwards.  He agrees “Returns may be volatile but one of the most important factors in relation to equity investment is when one invests and when one sells, and if you are investing for the long term then equities appear to be offering good value at the current time.  A lot of bad news has been priced in from recession, through to the financial crisis and the de-leveraging of hedge funds.  There may be further to go as the consequences of the financial crisis filter out and create ripples in even more unexpected places, or as the recession proves deeper than currently envisaged, but there is a real danger of looking back in a few years time and kicking oneself for not taking advantage of recent falls, even if markets may yet be cheaper next month.”

 On strategy Britton says “Currently we are weighting the equity portion of the WAY MA Growth Portfolio to the US and Japan.  The US was the first into a slowdown and is likely to emerge first too.  Outside of financials, the earnings reporting season is generally providing good news and whilst the outlook may be deteriorating corporates are coming from a position of strong cash flow and low-ish leverage.  But investing in the US also comes with a safety net for UK investors, namely a rapidly strengthening Dollar.  Whilst the extreme moves of recent months may not continue, we anticipate there being a bit further to run here.   Japan is also providing a mix of buy-signals none of which in isolation would be sufficient to get excited about, given its propensity to disappoint, but the weight of data suggests that Japan may move more quickly than other markets when things settle down globally.”

 Meanwhile Paul Kim of IMS Fundquest, who manages the WAY Global Portfolio range, reminds us of the benefits of the managed portfolio style adopted within WAY,
“I believe funds of funds provide a good spread for investors, with a variety of expert managers ‘at the coal face’ picking stocks that should weather the storm and emerge stronger. This diversification avoids having too much specific risk, in any one stock or sector. However, many very well-managed companies have been tarred with the same brush and have seen their share prices knocked disproportionately and now represent excellent long term value.  We seek to back those managers best likely to identify and run with undervalued companies and sectors.”

 The message is pretty clear.  There may be more downside yet to come in the market but attempting to finesse timing to hit any such further fall is far too dangerous.  The general market represents excellent value right now but for the talented manager there are some real gems out there where performance of hundreds of percent are on the cards over the next couple of years.  The clear message then is to be committed to the market right now and to get in while you can at these bargain basement prices.  Not only will we all make money (including recouping some of our recent losses) but we can bring much-needed confidence back into the market and into the economy – you could say it is our duty!

In any case and in spite of rumours to the contrary, the property market, which was allegedly the initial cause of this fall-out, is actually not dead.  Recent figures from the National Association of Estate Agents indicate that sales per agent are up from 5 per month in August to 6 per month in September, climbing again in October to 7 sales per agent.  Unless one is mistaken that seems to represent an increase of 40% from the bottom.  Is this good or bad news?

Paul Wilcox,
Chairman & Technical Director, WAY Group.

Posted in News |
Comments: Have Your Say

Leave a Reply