Each week, a professional investor tells MoneyWeek where he’d put his money now. This week: Sandy Cross, head of the Edinburgh Office of Standard Life Wealth
Perhaps it’s because of the speed and severity of the deleveraging in the financial system and the wider economic effects, but expectations among investors still seem over-optimistic. The consensus is still forecasting aggregate European corporate earnings per share (EPS) to grow by 8% in 2009. This seems unlikely on many levels, particularly with corporate margins of the recent past already at historic highs. While efforts to prevent a total collapse of the banking system seem to be working, the immediate crisis in the deleveraging process has moved on to emerging economies. The unwinding of hedge-fund positions as redemptions come through is another likely source of the volatility which we expect to remain an ongoing feature of markets.
I favour a reasonably defensive stance in the equity part of your portfolio. This makes established international franchises such as the food and consumer goods producer Unilever (LSE:ULVR) look quite attractive. Lower raw-material prices should benefit the company, despite some risk from the emerging-markets business. Gearing below 60% in a resilient business of this type looks sufficiently prudent.
Falling speculative interest has hit the oil price hard, as has the probable continued fall in marginal demand we can expect as global growth slows. However, it bears remembering that oil has only fallen to levels seen little over a year ago. Oil company shares by comparison are well below where they were back then. While production costs have risen, the world economy remains dependent on hydrocarbons. The UK, for example, is committed to raising the proportion of its energy consumption from renewable production to 15% by 2020 to meet its EU target. But renewable production as a percentage of UK electricity generation rose from 4.5% in 2006 to just 5% in 2007. Costly alternative energy subsidies will probably look less appealing to governments trying to focus on managing their ever-expanding fiscal commitments, so demand for hydrocarbons (and nuclear power) looks assured. BP (LSE:BP), on a p/e of around seven and with a yield of 5.9%, looks like a value holding. It also has low levels of borrowing, with gearing under 25%.
As the dramatic 1.5% cut in base rates attests, it looks likely we have seen the worst of inflation in the short term as commodities, foodstuffs and other input prices have fallen markedly. Labour costs are also likely to stay under control as unemployment rises. So we could even see further monetary easing. The spreads on highly rated corporate bonds (the gap between the yield on these bonds and that of gilts) still look very wide, and we see some value there despite the likelihood that defaults will rise. A pooled vehicle such as the M&G Corporate Bond fund (0800-390 390) is worth consideration.
Standard Life Wealth also uses an ‘advanced overlay strategy’, which allows us to access specialist opportunities, as well as managing market volatility, through the prudent use of derivatives. Among the diversified investments we hold, we have been positioned to benefit from a fall in short rates and longer-term inflation. This complements the corporate bond exposure, which is the kind of debt I like as I believe we will get paid for owning it.