15th April 2011

Artemis: The Hunters' Tails

Antisthenes' antitheses ...

Are you concerned by the complacency of investors; or reassured by their resilience? Largely on fears of Chinese inflation, Asian stocks closed down this week, the first such in four. On low volume, markets are trading listlessly at best -- or is that, in these days of antithesis, a result?

Of his well-born former pupil who went on to found the Cynic school of philosophy, Socrates said that he "could see rank peering through the holes of Antisthenes' rags." In like wise, Ireland's unemployment has risen from 4% four years ago to 15% now. Its credit rating is now the same as those of Iceland, Tunisia and Romania. Yet at the corporate level? Groupon, a 30-month-old website specialising in digital coupons and discounts, is being valued at $15-25 billion even as metals trader Glencore looks set to IPO for a lot of noughts. This proves that commodities have either peaked -- or have not.

Notwithstanding its €110 billion (£97 billion) bail-out last year, Greece may now have to default. Yet worldwide the junk bond market raised 40% more last quarter than the $84 billion issued in the same quarter last year; and that sector's 4.6% average extra yield over US Treasuries compares with a 22% premium when credit crunched. Gold is now up 460% since 2001 (in $: a mere 400% in £.) Yet at $121 for Brent the oil price is ticking down -- for now.

So, in very many ways, does antithesis abound. On which, if either, side do we stand? Ahead of the hols, we asked some of the men who have your money.
With stocks ...
Firstly, young Tim Steer of UK Growth: "Given continued growth from emerging markets and recovery in the US, our outlook for equities is generally positive. The IMF has reduced its forecasts for some countries, but the global economy is still expected to grow by more than 4% this year. We have bought into Xstrata and increased our holding in BG Group. Due to the problems in the Japanese nuclear industry, there will be more focus on power generation from alternative sources. Both companies should benefit from their high exposures to rising prices for coal and LNG."

He of UK Special Situations, Derek Stuart is no less sanguine: "The market will continue to be volatile: there is too much uncertainty for this not to be so. But equity valuations are not stretched and certainly offer more attractions than other asset classes in an increasingly inflationary world. Takeover activity is rising as a result of strong corporate cashflows and more confidence in the world economy. So we carry on as normal. There is a significant amount of corporate change; and this means opportunities for investors."

For Income, Adrian Frost is Antisthenene, as in philosophical, as he muses: "If the portfolio yields 4% and can grow dividends by 6% per annum, then in three years time the yield on the portfolio will be 4.8%. Assuming the market values these companies 'tomorrow' as it does today (i.e. a 4% yield in three years time), then by our calculation that gives a dividend return of 13% and a capital appreciation of 19%, or 32% in all.

“So the real question is the level of dividend valuation three years hence. If interest rates rise, that might suggest that economies are 'recovered' and therefore that dividends may grow faster. Conversely a weak economy suggests continued low interest rates; and then the 4% yield would continue to look pretty attractive relative to bonds and interest rates. Either way we think that a three year return of 20-30% is plausible -- but of course not guaranteed. There are many large European companies whose share price performance over the last 10 years has been pitiful: returns of next to nothing. Their chief executives would be embarrassed to have such a share price chart in their offices. These companies have plenty of financial fire-power that ultimately belongs to shareholders."
Yes, so are the antithetical threats. But as stock-pickers it seems to us, in short, that the potential is also clear.

Speaker's corner ...

“The problem with people who have no vices is that you can be pretty sure they're going to have some pretty annoying virtues."
- Elizabeth Taylor (1932 -- 2011)

And finally ...

The offer period for the new Artemis Global Energy Fund closes next Wednesday, 20 April. Verbum sap. (A word to the wise is enough.)
Our epithalamia will be individual rather than corporate, or even collective. With Good Friday ahead and a certain wedding the week after, our Tails will wag next only on 6 May. Until then, from all of us to all of you, may the holidays be happy ones for you and yours.

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