The second half of 2011 has been dominated by risk-aversion among investors. This is why prices of safe-haven British, German and US government bonds have climbed steeply. By contrast, the FTSE 100 and Aim indices have fallen 6% and 21% respectively for the 12 months ending 18 November. This safety-first preference has hit many of my ‘Buys’ and ‘Gambles of the week’ which have declined by an average of 11% and 16%.
It hasn’t all been bad news, though. Cobol software specialist Micro Focus (hold) is up 32%, while housebuilder Galliford Try rose 72% – both on the back of improved results. Cable & Wireless Worldwide, the telecoms and data hosting supplier, has continued to disappoint (down 67%). It should be benefiting from the introduction of web-based cloud computing, yet it has markedly underperformed its rivals.
A third profit warning came last Tuesday after a series of chunky write-downs and a suspension of the dividend. The shares crashed to an all-time low of 21p. New chief executive Gavin Darby has been appointed to stop the rot and perhaps even sell the firm to the highest bidder. I still think there is value here (albeit well hidden) and, encouragingly, chairman John Barton seems to think so too – he just purchased 100,000 shares at 23p. This one remains a speculative hold.
Another area of frustration has been our high yielders. Aviva, Balfour Beatty, BAE Systems, Robert Wiseman, Legal & General, Sainsbury’s and Logica have all been hit by depressed sentiment. Despite challenging conditions, they all still look like sound income plays offering dividends well above savings rates. Buy.
Turning to Europe, the German DAX 30 and French CAC 40 have been hammered 14% and 23% respectively, due to fears over a possible breakup of the euro. Such an apocalyptic outcome would destroy Europe’s real economy and lead to rampant unemployment. So I don’t believe the politicians will allow it to happen. Brussels will resort to quantitative easing and print euros to save jobs, devalue the euro and stimulate inflation. That will also give an almighty shot in the arm to equities.
If I am right, then RWE, Siemens, Alcatel-Lucent, Polish Telecom, E.ON, Telefonica, Deutsche Post and Alstom all remain buys. However, I feel it is time to cut losses on Mouchel, Thomas Cook, Hampson Industries, DTZ and Eastman Kodak. These stocks have suffered because of their high debt levels. Sell.
• Disclosure: I own shares in Cable & Wireless Worldwide; Micro Focus; Aviva; Balfour Beatty; BAE Systems; Robert Wiseman; Sainsbury’s; Logica and Mouchel.