We all know that the City has its own language – one in which perfectly ordinary words and phrases don’t mean quite what the rest of us think they mean. Think of the way “hold” actually means “sell”; “healthy correction” really means “you just lost loads of money”; and “long-term investment” means “short-term investment that didn’t work out as planned”.
Over the past two weeks many more words seem to have been coopted into the double speak of the City. Take “contained”. When I left to go on my dismal Scottish summer holidays two weeks ago (it rained all day, every day for 14 days), the market was full of assurances from officials and bankers that the US sub-prime mortgage crisis was contained in a small sector of America’s economy.
Since then the markets have been all over the place (the FTSE 100 is still more than 10% off its highs and the FTSE 250 is down more than 11%) and sub-prime exposure is popping up not only all over America but a long way away from its shores too.
Germany’s IKB bank turns out to be exposed to sub-prime to the tune of around €17 billion (£11.5 billion); Macquarie Bank in Australia says that two of its funds may lose 25% of their value over this; and Taiwan Life Insurance has booked a $13m (£6.4m) loss, being just one victim of the failed hedge funds at American investment group Bear Stearns.
Over in France, fund manager Oddo & Cie is closing three funds, and even the much respected investment team at Harvard has lost $350m so far on a bad hedge-fund investment.
As UBP’s Tim Price points out, the rising price of credit resulting from the sub-prime fallout has even hit Tunisia, which was forced to pay 0.25% more to borrow money last week than it thought it would have to in July. Contained? Hardly.
Then there is “money market fund”. To most of us, a money-market fund has long been seen as one tiny step up from a bank account in terms of risk. The idea is that they invest in very high-quality government bonds and that’s pretty much it.
Unless you work at AXA Investment Managers in Paris, where money market fund appears to mean something altogether different. How else could it be that two of its “dynamic money market funds”, both com-fortingly called US Libor Plus, turn out to have been 40% invested in sub-prime mortgages. The funds are in such a dreadful state the group is having to funnel its own money into them to shore them up. Investors might want to ask AXA what it thinks dynamic means.
Next up is “liquidity”. Now to me, to call an investment liquid is to suggest that it can be easily and immediately both valued and traded.
But bankers from every crisis-stricken organisation from Paris to New York are repeating a steady mantra at the moment: “There is no liquidity crisis,” they say. Really? If there isn’t, how come BNP Paribas shut three funds on Thursday because it said it was “impossible to value certain assets fairly, regardless of their quality or credit rating”.
If you can’t value things, you can’t trade them and that, as far as I know, is what most people have always meant by the phrase “liquidity crisis”.
Adam Smith pointed out that “all professions are conspiracies against the laity” and the world’s bankers are clearly on a mission to prove him right. However, amid all the confusion there are things that we can know for sure, namely that the sub-prime crisis has been in no way contained – as I understand the word – and it is also nowhere near over.
Expect many more funds to be closed; many more hedge funds to be shut down; many more Americans to see their dreams of home ownership dashed; and many more sheepish admissions of massive losses from institutions all over the world as a result.
The fact is that the financial markets these days are as good an example of chaos theory in action as anything. In the same way that butterflies in the Amazon can cause snow storms in Shetland, defaulting householders in Illinois can affect the pension arrangements of middle managers in Hastings. This in turn means that there is likely to be a lot more volatility in the markets to come.
So what should investors do? What they should always do: ignore the market’s short-term gyrations, buy cheap things and sell expensive things. This isn’t that hard. Most stocks, particularly in the middle of the market where merger frenzy has been at its most overexcited, are expensive so now is as good a time as any to sell them. Yet at the very top and the very bottom of the market there is value aplenty.
The FTSE 100 itself has been neglected by investors for some time now and is trading on a low – by any standards – forecast price/earnings ratio of under 9 times and offering a current-year yield of 4.1%.
I’m not suggesting blanket buying of big stocks – there is every reason to keep being nervous about the UK’s biggest banks, for example – but inside the index there is plenty of opportunity. My favourite stocks, as ever, are commodity-related ones. China is still growing fast (GDP was up 11.5% in the last quarter) and as a result so is demand for all hard commodities. Yet the supply situation is no better than it was a few years ago.
I remain convinced that the past few years have marked only the beginning of a long-term bull market in commodities. The same is true of oil and, as the market is finally beginning to notice, for food. You can pick up exposure to the latter either viaa listed grain exchange-traded fund (such as the ETFS Grains) or perhaps by buying into the new Agriculture Fund from Eclectica.
First published in The Sunday Times 12/8/07
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