18th July 2011

Artemis: The Hunters' Tails: Six reasons to be cheerful ...

Of course the whole world could still go to blazes in debt's handcart. It might well. But on balance, we prefer to remember that the FTSE 100 is (just) above its level as 2011 began. And that's despite, it's worth remembering, Japan's tsunami, war in Libya, Arabian unrest, nemesis in Greece and the end of American QE.

There will be more, extreme volatility. But we're positive because of:

Corporate health. Sure, there's more bad news to come, we reckon, for most UK retailers. But there's still much less credit risk in most companies than there is in governments. Take a stock like Hunting (oilfield services). It has cash of £300 million -- a third of its market cap. Or publisher Reed. It's priced at 11.5x, has a 4% yield, diversified earnings and improving margins. Japan's NTT Docomo (mobile telecoms, 3.8% yield) has more cash than it knows what to do with.

None of us can remember, or find in history's books, a time when (much of) the private sector stood in greater contrast to the public. Chiaroscuro, indeed.

M&A. Weaker sterling makes UK assets even more attractive to foreign (war) chests.

Negative real interest rates in the west. These force investors, reluctantly or otherwise, into (high yielding) equities.

Pessimism. It's pronounced. If history has any predictive power, the gloom suggests this is a 'buying signal'.

Emerging markets. China seems to be Goldilockian. The prospects are patent, and the growth is good. The best western companies will continue to make their money there, not here.

QE2. Its positive effects will take time, but will benefit the US economy.

Versus debt's demands ...

That 'wall of worry' ... The latest ephemerality is the result of 'stress tests' to be released at 5pm today by the European Banking Authority. Some 15 banks may be "outed with fatal weaknesses" as, with the customary elegance of analese, the analysts are putting it.

[Y]our Strategic Bond Fund continues to have a high holding (37%) in financials. Is James Foster concerned? "Not really. We have no exposure to the peripheral Eurozone. And anyway, the banks have simply been the transmission mechanism for the crisis. The fundamental problem is that several European countries are bust and have no way of meeting their financial obligations. The only way this is going to end is through the ECB printing money. In time we will get there, but the tortuous European political process is dragging its feet."

The effective lending power of the European Financial Stability Facility (EFSF) is 'only' €255bn, and half of that will be needed for Greece, Ireland, and Portugal. So, an increase in the EFSF to the necessary €2 trillion? After all, this week a remodelling of the UK's finances to accord with a limited company's has shown that total UK debt is just shy of £2 trillion. This figure includes for the first time some £1.1 trillion to fund public pensions, in itself a 30% increase in just two years. Also included were schools and hospitals built through the PFI, which added an extra £35 billion to the book.

Yet such astonishing and very alarming numbers are commonplace - as Congress continues to wrangle, against the clicking clock, about increasing the US 'debt ceiling' above $14.3 trillion. Perhaps public debt is just 'the new normal'; and, as the world's economic axis shifts from west to east and south, the politicians, europhiles - and German taxpayers -- will somehow muddle through. AAA ratings may no longer mean "risk free". But there is, as Adam Smith said, a great deal of ruin in a nation.

While at the coalface ...

It's almost a relief this week to mark the march of regulation and what passes for progress in our industry. Enter the Key Investor Information Document (KIID) - which replaces the familiar TER with the term "ongoing charges". Requiescat, Simplified Prospectus. Welcome Packaged Retail Investment Products (Prips). Come RDR? A feast of further acronyms; and committees on Case alone.

Speakers' corner ...

“Governments' view of the economy can be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it. - Ronald Reagan, 1981.

“Why should we all lose our freedom just because France is afraid of Germany and Germany is afraid of itself?" - Margaret Thatcher, 1983.

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