In the space of just three months, investor Jim Rogers has warned that sterling is “finished”, investment bank Société Générale has predicted that the “Greek crisis will lead to the break up of the euro”, and Japan, Britain and America have been told by the credit-rating agencies to cut their crippling budget deficits. No wonder the $4trn-a-day foreign-exchange markets are in turmoil, not knowing when or where the next bomb will go off.
So how do wary fund managers protect themselves when investing abroad in such turbulent times? They call in the experts, such as Record, a specialist forex dealer founded in 1983 by CEO Neil Record. It manages the risk of currency fluctuations for 93 institutions located across Britain (41%), Europe (33%) and the US (26%). These clients include charities, corporations, governments and pension funds, and at the end of March covered a total asset base of $34bn.
So why is the stock down 60% since floating at 160p in December 2007? Firstly, the recession triggered a flight to safety, with many customers repatriating assets back to their home territories, which hit demand for Record’s services.
Record (LSE: REC), rated a BUY by Numis Securities
Secondly, its flagship Absolute Return fund, in line with the rest of the industry, has suffered due to the appreciation of low-yielding currencies. I believe this will reverse as government debt levels are at breaking point, and income investors will insist on higher returns for buying government paper.
Thirdly, with the likes of Barack Obama rattling cages on Wall Street, law-makers around the world are discussing ways to shift many over-the-counter activities on to centralised clearing houses. In the end this could mean driving some, or all, of Record’s bread-and-butter forex operations onto regulated exchanges.
But in itself this shouldn’t be a big problem. The City fears that increased transparency could undermine Record’s competitive position. Yet the move could also boost forex activity, as it should improve confidence in buying assets abroad. With emerging economies offering better investment prospects, I believe that, over the long term, clients will allocate more capital to Brazil, Russia, India and China. This will expose them to greater currency risk, so they’ll need more expert advice. This is especially relevant for fixed-income funds – forex has a much bigger impact on bonds than equities.
The City is forecasting turnover and underlying earnings per share (EPS) of £33m and 5.2p respectively for the year ending March 2010, rising to £35m and 5.6p in 2011. That means the stock trades on an undemanding 11.7 times earnings and pays a generous 6.9% yield, which is supported by net cash of around £20m. There are potential threats from tougher competition, tighter regulation and slimmer fees. Yet with turbulence on the forex markets set to intensify, demand for its specialist services should only improve. Numis has a 515p price target on the stock, with preliminary results due out on 15 June.
Recommendation: BUY at 61p
• Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments