Assuming we’re in for a prolonged period of QE, then possessing some assets that provide an inflation hedge is important. Precious metals, oil, commodities and index-linked bonds have been favourites so far. Unfortunately, these are now expensive.
A cheaper approach is to buy stocks that own plenty of assets, such as 3i Group, Europe’s largest listed private-equity house. Its bread-and-butter business is to snap-up distressed firms that have fallen on hard times, improve their trading performances and finally flog them off to bag handsome rewards. This has been successful because even after the credit crisis, the industry has delivered healthy 18%-a-year returns for the five years ending March 2010.
Better still, 3i, under the tutelage of chief executive Michael Queen, is back on track as well. On 30 September Queen reported steady first-half figures. He believes the firm is poised to enjoy “a strong resurgence of deals” across Europe, and to reap the benefits of its recent synergistic acquisition of Mizuho’s £3.7bn loan management arm for £18.3m. The debt market in particular is attractive to 3i because as new capital requirements from Basel III take effect, the associated regulations are likely to create much greater demand from debt investors.
Gamble of the week: 3i Group (LSE: III)
However, the stock is not for the faint-hearted, since it is in essence a geared play on the equity markets. This is reflected in both the debt carried by the companies that 3i has backed, and the £450m of net borrowings on its own balance sheet. This double leverage means results suffer disproportionately during a downturn, but offer excellent upside for investors prepared to hold across the economic cycle. Another risk to consider as well is the wide selection of non-quoted investments in its investment portfolio – which by nature reduces transparency. All the same I’m not deterred, and I would rate 3i on one times estimated net assets for the period ending March 2011 – which should be around 350p a share, thus offering 17% upside. Interim results are out on 11 November.
Recommendation: BUY at 300p (market cap. £2.9bn)
Paul owns shares in this company.
• Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments