News

15/09/2008 - Time to Keep Your Head

Two months ago we commented on the bleak picture being painted by the
newspaper headlines and market commentators, concluding that although things
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.
At the time, the dominant concern was the rapidly rising price of oil and food
which threatened to slow global growth. These rises further compounded existing
problems in the western world resulting from the collapse of the US sub prime
market and subsequent credit crunch. The West was waking up to the fact that
the party it had enjoyed on the back of cheap and plentiful credit, had come to an
abrupt end. The additional external inflationary pressures were seriously
hindering the ability of the Central Banks of the developed world to intervene in
any meaningful fashion. Stagflation threatened.
Much has changed in the past two months. From a high of $147 a barrel in early
July the oil price has dropped sharply. As we write, the oil price stands at $104 a
barrel. Dramatic weather patterns aside, there has been a clear break in the
upward momentum of the oil price and the speculators have seemingly been
flushed out of the market for the time being. Commodities generally, including
food, have dropped off and this should offer Central Banks and consumers some
breathing space in which to consolidate, shore up some spending power and
allow Central Banks to consider cutting interest rates.
Our view, two months ago, was that either a dramatic fall in the oil price, a bailing
out of Fannie Mae and Freddie Mac or surprise economic data releases would
provide that catalyst to spark life back into the equity markets. Having
experienced all three, equity markets have recovered but not to the levels
investors had hoped for. The market is looking for a further catalyst to provide
additional upward momentum. Their current focus is on interest rate cuts which
will only be possible once the inflation genie has been firmly placed back in its
bottle.
The mood in the marketplace is definitely changing and there is plenty of scope
for optimism. Most commentators agree that things are not as bad as they are
currently being portrayed. The long bond market is pricing in an environment of
falling inflation and this is certainly the sort of positive signal that the markets look
to. The “conservatorships” of Fannie Mae and Freddie Mac were necessary, well
received and should prevent a major downturn in the US which will comfort those
other western governments currently facing similar issues. The credit crunch
appears to have been successfully contained within the West and as the
inflationary pressures subside, growth in the emerging economies of the Far East,
China in particular, can continue. Demand for natural resources from these
regions still exists, so we may find the commodity “supercycle” goes on, but the
markets will be more wary of any speculative bubbles this time around.
Stockmarkets are currently oversold on almost any valuation metric used by fund
managers or global strategists. Put bluntly, these markets are cheap, cheap
historically and cheap versus other asset classes. Long-term value is there to be
found and it is a question of when, rather than if, that value will be realised. We
are not selling, or should I say, giving away good value at these levels and cannot
see why anyone would. Markets are clearly nervous and it will take more to
dispel the general malaise of negative sentiment. But for those that have
weathered the storm so far, there are brighter skies ahead and for those with
cash, buying strategically into weakness is a compelling long-term growth
strategy.
John Husselbee
North
September 2008
North Investment Partners Ltd is an Appointed Representative of Neptune Investment
Management Ltd which is authorised and regulated by the Financial Services Authority.
This document is directed only to persons who are professional investors, market
counterparties or intermediate customers. Persons who do not fall within these categories
should consult their independent financial adviser or other authorised intermediary. The
content expresses the views of the contributor and should not be construed as specific
advice to individuals or as an enticement to invest in any of the strategies mentioned.
Recipients of the document are reminded that investment may only be made on the basis of
the information contained in the Prospectus relating to the particular Fund or Company in its
final form and therefore this document must be read in conjunction with the relevant
Prospectus. The Offer is not being made directly or indirectly in any territory where its
distribution is prohibited by law and copies of this document may not be distributed in or into
any such territory. Issued September 2008.

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