News Archive

The following is one in a series of timely market comments by City Financial fund managers. We hope you find these thoughts informative. – Andrew Williams, Chief Executive, City Financial

“If you can keep your head whilst all around are losing theirs…”

As far as I have been able to make out, one of the few benefits of getting older is experience. Having been around the track a few times does provide a different perspective on world events.

I remember all too well the last time global events were making life this uncomfortable in the financial world. Eight years ago we had the technology bubble bursting followed by 9/11. It seemed that the world was going to hell in a basket with the devil taking the hindmost.

During that time, I was working at Henderson Global Investors and remember taking a call from an adviser who was in ‘sell everything’ mode.

The combination of world events and their impact on global markets together with evaporating investor confidence, had taken its toll. The upshot was that the adviser stuck with us – when, to be fair, the easy choice would have been to sell everything and go to cash.

Part of the reason why I remember that conversation is that, by sticking with us, the adviser and his clients avoided selling at the bottom – as the concerns dissipated and the financial world stabilised and growth re-emerged.

It reminds me of the present day situation albeit for different reasons. Big global events dictating financial sentiment and returns make the world feeling like a very unforgiving place.

Earlier this summer, we noted the bleak picture being painted by the newspapers and market commentators concluding that, although stock markets were likely to get worse before getting better, there was a strong case for taking the contrarian stance of buying into the long term value offered by equities.

The dominant concern was the rapidly rising price of oil and food – which threatened to put the brakes on global growth. These increases compounded existing problems in the western world resulting from the collapse of the US subprime market and subsequent credit crunch.

The West was waking up to the fact that the liberal availability of cheap money and the subsequent worldwide growth it had fuelled, had come to a very sudden end. The party was well and truly over for banks – and probably many businesses that have come to rely on easy credit and the increasingly unpredictable consumer.

External inflationary pressures were seriously hindering the ability of the Central Banks of the developed world to intervene in any meaningful fashion, perhaps dropping interest rates. Stagflation threatened.

Our view was that either a dramatic fall in the oil price, a bailing out of Fannie Mae/Freddie Mac or surprise economic data would provide that catalyst to spark life back into the equity markets.

We have now experienced all three. From a high of $147 a barrel in early July, the oil price has dropped dramatically. This morning, it’s trading near $100. Seasonal weather patterns aside, there has been a clear break in the upward momentum. Speculators have seemingly been flushed out of the market.

Commodity prices generally, including food, have dropped off and this should offer consumers some breathing space, shore up spending power and allow central banks to consider cutting interest rates.

The credit crunch appears to have been successfully contained within the West and as inflationary pressures subside, growth in the emerging economies of the Far East, China in particular, should continue. Demand for natural resources from these regions still exists, so we may find that the commodity ‘supercycle’ goes on. Expect the markets to be more wary of any speculative bubbles this time around though.

Equity stock markets are currently oversold on almost any historical valuation metric. To put it bluntly, these markets are cheap: cheap historically and cheap versus other asset classes.

Long-term value is evident in many markets and asset classes and it is a question of when, rather than if, that value will be realised. Our long-term commitment to delivering superior long-term returns through our strategy of investing across a range of assets remains as valid as ever.

In the short term, that does not prevent us from taking tactical action to enhance our performance by reacting to these global events. For example, on Friday 12 September, before the weekend of the Merrill Lynch and Lehman news, we raised our cash positions to over 12% in both MultiManager Growth and Income portfolios.

For those who have weathered the storm so far, there are brighter skies ahead. And for those with cash, buying into weak markets and assets has always proved to be a winning strategy over the long term.

Best regards,

John Husselbee
Fund Manager

Here's an addendum filed by John on September 30th

“Remind me, why do we invest in equities again?”

Well these are indeed extraordinary times and I am sure that a lot of your clients are extremely worried about the current market events. As you know, I try only to provide you with my views and comments when I think they might be helpful rather than just bombarding your already-full inbox by pointing out the obvious.

Firstly – I have a confession. I made the cardinal sin of watching BBC, Sky, CNN, CNBC, Bloomberg etc courtesy of my satellite connection as the events unfolded last night. I should have listened to my wife’s advice “switch off the telly and do something more useful instead!” She was quite right, we must never forget that these financial TV channels are businesses at the end of the day. Their viewing figures swell on these events as does their extreme, and I might add, often irresponsible reporting which just fuels further fear and panic across the markets. Just have a look at the headlines in your local newsagents this morning for businesses looking to cash in on greater circulation. I would be willing to bet that the Sky repairman arrived on time to replace that cable this morning!

So, taking my wife’s advice, I went to my own inbox to weed it out and share with you some of the best comments from some of the best in our global industry.

Starting with why the vote failed yesterday, I think it is best summed up by Bennet Sedacca of Atlantic Advisers based in Florida:

“Handing over US$700 billion of our money over to a bunch of fiscally irresponsible financial institutions is sickening. I have spent the better part of the last ten years trying to steer clear of the most complicated financial mess ever created and what happens? I end up the proud owner of all the garbage I stayed clear of, namely Fannie/ Freddie/ AIG and US$700 billion of nuclear waste. And then I get to watch the long list of executives at these institutions reward themselves with tens of millions of dollars! What a country!”

His solution to all this is summed up by two further statements:

“What is needed is for the Government to get out of the way and let the market be a market.”

“Let Darwinism back into the markets, let companies fail, let the system work it out.”

These sentiments were clearly shared by 228 who rejected the bailout proposal in US House of Representatives. In particular, the Republicans who are founded in a strong belief of the Free Market Economy. The blame game between Republicans/ Democrats that followed, covered in depth by BBC, Sky, CNN, CNBC, Bloomberg etc, did nothing for market confidence both in the US and around the Globe.

Perhaps in the long run yesterday’s rejection was right. “Haste makes waste” written by Michael E Lewitt of Hegemony Capital Management makes this point very well.

Returning back to the subject of this email “Remind me, why do we invest in equities again?” on Friday I sent my “market minute” and standby the long term case for equities. We are looking for the credit markets to ease, the VIX (the index of fear) to fall and inflation to drop further before we commit further cash to these markets. Please remember that sanity and clarity will return to the markets, it always does after times of panic.