A professional investor tells MoneyWeek where he’d put his money now. This week: Jonathan Compton, managing director, Bedlam Asset Management.
The penny has dropped. We are in a bear market that affects most asset classes. The absence of significant controls on the flow of capital, trade, or even labour, ensures that the world’s economic cycle is more synchronised than ever. A ‘dash for cash’ by investors is inevitable. Yet high-yielding deposits, given rising inflation, guarantee a real loss. Government bonds, another traditional haven, are also a sure loser.
The British government, like most others, must print many more IOUs (also known as gilts) to cover years of excess spending. The flood of new paper used to plug budget deficits, along with rising inflation, will cause bond yields to rise and capital values to fall. Property, the other usual refuge, remains a sick joke in a credit crunch as banks cut lending. Of all the usual hiding places in a recession, only farmland and forestry offer good returns – but this suits only the very rich, direct investor, as various related fund launches do not appeal.
So, surprisingly, the best place to invest may be equities. I don’t recommend ‘bottom fishing’ among bank or property shares – they are doomed to disappoint further. Nor buying trackers or exchange-traded funds (ETFs), which will fall as the indices they track tumble. Nor the similar ‘pretend active’ funds, whose target return is the index performance plus a couple of percentage points.
No, the place to hide is larger stocks in sectors enjoying sales growth, which have the ability to control profit margins – those companies that are unaffected by the general deterioration in profits in both the advanced and emerging economies. One example is power generation. Wind, wave and bio-energy cannot plug the current gap in power generating capacity, so a boom in nuclear and conventional plants has begun.
One of the best plays is Japan Steel Works (Tokyo:5631). The firm makes the giant vessels in which the nuclear reaction takes place (which are larger than its competitors’ and thus more efficient), as well as huge rotor shafts and turbines.
Next is agriculture, now in a two-year-old bull market following a 40-year decline. The era of cheap food is over and increasingly wealthy grain farmers are buying shiny new toys. One of the largest makers of combine harvesters and tractors is America’s AGCO (US:AG). Order books are full and there is no spare capacity, so prices are likely to rise by 20% before the year end. It is also cheap and carries little debt. Four weeks ago, the chief executive mused over whether his 2007 sales forecast of $10bn might be too low by $2bn. That still sounds conservative.
Finally, don’t overlook pharmaceutical shares, which have been in a bear market since 2002. The problems of patent expiry, competition from generic drug makers, and tough licensing rules by America’s all-important Food and Drug Administration (FDA) are well known. But today’s prices virtually discount Armageddon. Dividend yields are near-record highs, cash generation is strong, and debt relatively low. An ageing, health-conscious world will spend more seeking immortality and good looks, not less. GlaxoSmithKline (LSE:GSK) has a strong pipeline, a broad range of drugs with patent expiry several years off, and scope for cost savings. With a decent 5.0% yield and expected earnings growth in 2009/2010 of 12%, the shares are cheap.
The stocks Jonathan Compton likes
Stock, 12mth high, 12mth low, Now
Japan Steel Works, ¥2,425, ¥1,335, ¥2,035
AGCO, US$71.95, $36.66, $51.19
GlaxoSmithKline, 1,403p, 987p, 1,177p