In our interview this week, Russell Napier notes that for the first time in his career he is finding that fund managers are “flummoxed”. They have no idea what is going on, or what to do about it. The point is nicely proven by Alex Hammond-Chambers in the annual report of the Hansa Trust (a niche special situations trust heavily invested in a marine services company operating in Brazil).
Alex has been knocking around the City for 40-plus years and never has “the outlook been more uncertain, the tea leaves more difficult to read”. The fundamentals of markets are constantly being trumped by politicians and central bankers, making it all but impossible to know how to invest.
But in all the mess, Alex thinks there is one safe haven. It isn’t gold or wine or bonds. It’s equities. In times of both deflation and inflation, good companies have the “ability and flexibility” to protect their balance sheets, profits and dividends in a way that other asset classes don’t. Russell agrees. Equities, he says, are run by people, and if they are run by good people, that makes them adaptable enough to survive over the very long term.
Remember the bit in Catch-22 when a US soldier argues with an old man in a whorehouse, says Russell. He’s lived through poverty and a couple of world wars, through Mussolini and through the arrival of the Germans and the Americans with really very little changing in his own circumstances. The soldier thinks he is a “shameful opportunist”. The old man just knows “the secret of life”: he is 107 years old. The same goes for a good many Italian corporations, says Napier. They’ve made it through the last 100 years. They’re still there.
So if you are going to up your equity holdings (note the risks remain huge), what should you buy? It isn’t US or Chinese equities: in the States, firms are beginning to miss earnings forecasts and in China “stagnant export markets”, overcapacity and the over-influence of the state make the market all but uninvestable.
However, as we have said before, it might be Europe. A recent report from BCA Research has a chart showing that, relative to the US market, European equities are near a 40-year low, which suggests a “once-in-a-lifetime buying opportunity” is close.
Those Italian corporations? They are, says Russell, “decidedly cheap”. And as for the Hansa Trust? I’m told by Simon Milne of Aubrey Capital Management that we should buy shares in that too. Its ‘A’ shares are non-voting and are soon to exit the FTSE All-Share. As a result, they have been sold off by index trackers and now trade at a 32% discount to the net asset value of the shares.
That seems cheap, given it’s a good trust and its other class of shares trades at a smaller discount of 22%. But I wouldn’t go in too heavily. Why? Brazil might be about to suffer a “nasty hangover of its own”.