CUTTING THROUGH THE GLOOM
A lot has been mentioned in the news about the fear of contagion in the Eurozone if one of the countries defaults on its debts. However, the truth is the real financial contagion happened in the last decade. This was when the belief among many Western Governments, that long established economic rules regarding living within ones means could be torn up, spread like Bird Flu. Unfortunately, this has ended up having far more serious consequences than the Bird Flu epidemic.
Even in the UK, the supposedly "savage" cuts, as the media are so keen to call them, are in effect merely reductions in planned future increases in Government spending. I suppose it shows how immune the markets are to the huge debts nations are accumulating that the UK is now seen as one of the more prudent countries in the Western World even though our debt levels have once again increased this year.
The main problem we have with the financial crisis engulfing Europe and the US is that it is politicians that are managing the countries and they are more interested in getting re-elected than doing what is best for the country in the long term. If they were businesses, would you want to buy shares in any of the countries they run? Democracy's reputation is in danger of being tarnished forever after the antics we have seen over the last few months. Now we have Berlusconi trying to convince the world that Italy is safe in his greasy hands. What a total shambles!
The truth of the matter is during the banking crisis of 2008 most Western businesses made a lot of tough decisions that, although providing pain in the short term, were designed to ensure their long term sustainability for the benefit of the owners i.e. shareholders and employees. These included swift reductions in costs, including labour, reducing inventories and continuing increases in productivity. In effect the complete opposite to the approach adopted by a lot of Western Governments, who decided to continue spending on the never-never, and immerse their heads in the sand hoping some fairy godmother would wave her magic wand and make it disappear.
What has been the result of the two approaches?
I doubt I need to tell you about the consequences of the ostrich approach, but in the case of businesses, we are seeing a significant increase in the level of dividends paid this year, as well as more cash being held on balance sheets than has been the case for decades. We are also seeing increases in employment which in the case of the UK has resulted in a further net 309,000 jobs being created in the last year virtually all of which have come from the private sector.
However, as a result of the pussy footing around that we are continuing to witness on a daily basis from the world's leaders, and the drip, drip effect of the Eurozone crisis as the focus moves from one country to another we now are seeing falls in global stock markets, as investors become nervous.
However, have any of the fundamentals of the companies who's share prices have fallen changed significantly? With the exception of Banks and companies that have relied on Government contracts the answer is no. Is the demand from Asia and other emerging economies going to fall if Italy or even the US defaults, or the Euro, as I have long believed is inevitable, breaks up? In fact, ask yourself, what impact is any of this going to have on your own spending habits?
Only today General Motors (GM), which if you recall had to be bailed out in 2008, announced a doubling in profit over the last quarter, which was well in excess of estimates. Oh, and you probably missed this in the news, but GM have now repaid ALL of the money they received from the US taxpayer when they were bailed out as well. In fact, they have so much cash, $40bn, they are working out how best some of this be repaid to shareholders. Good news you would think, but no, as I write this their shares are down by over 3%!
It just proves that when sentiment is negative reason goes out the window. For an investor it is a great buying opportunity, a bit like the stock market version of a January sale, and for those already invested it is not a time for panic as the great thing about markets is that when prices get too cheap they start going up.
Have a happy August!
For and on behalf of Alan Steel Asset Management
Authorised and regulated by the Financial Services Authority
Award Winning Investment Advisers