The Chinese use the same symbols for crisis as they do for opportunity. Similarly, at Insight Investment we believe the credit crisis is a fantastic investment opportunity – particularly in the credit issued by financial institutions. When weighted against the risks, returns are compelling. Long term, stocks have beaten cash by about 4% a year. Subordinated bonds from AA- and A-rated financial institutions are much lower risk than equities, but offer equity-like risk premiums.
Increased risk aversion and deleveraging have seen spreads on subordinated debt move to Libor +5% a year at the end of the first quarter of 2008, up from less than a 1% spread last summer. Central banks won’t let the financial system collapse, so financial bonds are a safe investment and current spreads more than compensate for the small risk factor. BlackRock Global Capital Securities Absolute Return Fund (020-7743 3300) gives retail investors exposure to this market.
Natural gas is another interesting area. Everyone’s talking about the price of oil, but if you like oil at these prices, you must love natural gas. American natural gas prices lagged oil, coal, petrol, and European and Asian natural gas prices in 2007. In the first quarter of 2008, US natural-gas spot-prices have rallied significantly, but longer-dated contracts remain depressed.
This has opened up a great potential investment. Natural-gas futures for 2011 are now as cheap as coal on an MMBTU (million British thermal units – essentially the heat value of fuel) basis. Natural gas produces half the emissions of coal-fired power generation, and there will be strong political pressure to move to cleaner natural gas because of this.
We also expect American natural gas prices to rise as it becomes more of a global market. With liquefaction technology, US natural gas is increasingly being shipped as liquid natural gas to Europe and Asia, where prices are higher. Finally, oil and gas exploration and production firms are shifting capital expenditure towards oil because of the price spike, at the expense of natural-gas exploration.
For retail investors, buying longer-dated natural-gas futures may be difficult. Exposure to stocks that make the bulk of their revenues from natural-gas production may be an easier option. One fund to play this theme is First Trust ISE-Revere Natural Gas Index Fund (US:FCG).
We think the next big topic may be the scarcity of water. When the baby-boomers were born, there were just more than two billion people on the planet; by the time the last of them die there will be more than nine billion. This will put tremendous pressure on many areas – from commodities to food, the environment, and water.
Water infrastructure has been neglected for decades in many countries and global urbanisation has put more stress on this ageing infrastructure. Investors can’t trade water like other commodities; it’s not priced on a global market and is driven by regional supply and demand factors because transportation is not cost effective.
We believe stocks involved in many aspects of the water industry will be well positioned in a slowing economic environment because capital spending will have to occur regardless of the economy’s strength. We expect strong earnings growth potential from equities involved in water treatment, purification, infrastructure and distribution, as well as desalination. One exchange-traded fund offering broad-based exposure to this trend is iShares S&P Global Water ETF (LSE:IH2O).
The stocks Patrick Armstrong likes
Stock, 12mth high, 12mth low, Now
First Trust Natural Gas, $28.02, $17.65, $27.13
iShares S&P Global Water, 1,500p, 1,225p, 1,383p