We have been providing investment management services to our clients for 3 years. In the summer of 2008 we were so concerned by the global economic situation that we moved nearly 90% of our clients’ funds into cash before the worst of the credit crisis hit the markets.
So, what is our prognosis for global markets during 2009?
In many ways, focusing on this question creates a very real danger of missing the bigger picture.
Assuming that you consider yourself a genuine investor in equities as opposed to someone who gambles on short-term equity movements, what should be your investment time horizon? Academically, most of us would answer 3-5 years as a minimum. Then why do the actions of most investors belie an incredibly short-term focus?
Our view on markets is that over the next twelve months they may rally or they may fall dramatically. Arguments for both scenarios are plausible. But this is not the point. The real question to ask is, if I invest today, am I likely to lay the foundations for solid returns over the duration of my investment timeframe? And we believe that the answer to this question is ‘yes’.
But first, the negative scenario:
There will still be plenty of bad news to come and it is entirely possible that things will get considerably worse before they get better. There is still a huge amount of debt (car loans, student loans, credit cards, home equity lines of credit) that could still sour. Much of this was secured on equity in property, equity that has now disappeared. Much of it has been securitised and sold far and wide. With unemployment on the rise the likelihood of property markets stabilising in the short term seems remote. The sheer amount of deleveraging that is required by banks, hedge funds, governments and individuals is likely to put continued pressure on investment markets.
Whereas major markets are typically grappling with property busts and too much consumption-linked debt, many emerging markets (plus Germany and Japan) are suffering from a collapse in demand in their main markets – i.e. the first-world economies. The only fundamental cure for the current situation is for the inhabitants of the first world to reduce their consumption and save more over an extended period. But this would only exacerbate the situation in the short term. We are damned if we do and damned if we don’t.
We therefore believe that it is entirely possible that markets will lurch substantially further downwards in the short term – that the fallout could last for some time to come.
And positives?
We do not invest in markets. We invest in what we consider to be the 25-35 best value companies from around the world. And therein lies an incredible opportunity for investors that act in accordance with their investment time horizons.
We invest solely on the basis of classical value principles. We emphasise companies strong in tangible assets that operate with low levels of debt. We are now seeing opportunities to carefully and gradually move back into the market, one stock at a time. We believe that some of the opportunities to invest in superb companies that are now presenting themselves will, in the future, be seen with hindsight as once-in-a-lifetime investment opportunities.
The key is to invest in companies for which there is no existential risk – that are not in danger of capitulation should credit continue to be hard to come by. Companies whose products and services will be in demand even if the global economy does take an additional downwards lurch. That can capitalise on solid global trends that are not likely to go away (such as Asian infrastructure development and an oil price that is likely to rebound given the development of economies such as China and India).
We do not know if by buying these companies we will be buying at the bottom. Indeed, no investor can know this, except in hindsight, long after the opportunity has passed. But we can identify a select group of superb businesses, investing in which is likely to provide for fabulous returns over the longer term.
And if you are an equity investor with a long-term investment horizon, what more could you want?
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