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Brian Tora’s Investment View
Bringing it all back home
So much for the Dubai debt crisis proving to be an inflexion point for the market. Blink and you might have missed the fact that a sovereign state appeared to be on the verge of walking away from the obligations incurred from what was in effect a state-run business.
There are more chapters to be written in this particular saga but, for the time being at least, investors seem prepared to take the view this is a hiccup, not the start of downward leg two for the global economy.
In this assessment, they are probably right. Regardless of whether Dubai’s oil and gas-rich neighbour will eventually gallop to the rescue, albeit reluctantly, this is increasingly looking like nothing more than an example of the worst excesses of the rush to lend that created the conditions for the financial meltdown from which we are still struggling to emerge. The only difference appears to be that the properties on which the extravagant funding was lavished were in the Gulf, rather than Bournemouth or Brighton.
It does, it must be admitted, add up to a rather more benign outlook than I would have thought possible, given all that has passed before. My natural scepticism, which has emerged from these pages over the years, has found me searching for an upset that would reverse the market rally. If the potential collapse of what amounts to a sovereign wealth fund is not the trigger, then what could be?
This benign outlook was the theme adopted by Paul Harwood when extolling the virtues of the Unicorn UK income fund at a lunch last week.
Smaller companies are Unicorn’s playground. Many of them offer above average yields, so where better to look for a sustainable and rising income for retail investors? At least you would not be pigeonholed with the bulk of managers, who seek their returns from the likes of Vodafone, BP and SmithKline Glaxo.
Income funds have had a tough time of late. First, it was the collapse of the banking sector, for long the core of the income managers’ dividend store. Then the dash for trash left many of the traditional value plays languishing on the sidelines. The fact that shares, by and large, offer superior returns to cash and government bonds has not been sufficient to lift sales of these funds back to their premier position. Corporate bond and property funds have proved the income generators of choice.
But the main purpose behind buying equities, in my view, is their ability to dispense a rising income. True, this belief has taken something of a knock in the past couple of years. Dividends have been cut more aggressively than at any time in my long experience. Not only has the recession taken its toll but refinancing has also proved trickier, with banks less willing to advance cash. Preserving profits, rather than distributing them, has proved necessary.
But this could all change - and will if Paul Harwood’s scenario plays out. Seldom, in his view, has the outlook been more encouraging, even if the UK is still looking shaky. But the reality is that many companies here treat the world as their marketplace. With Asia and other emerging markets having avoided the worst effects of the credit crunch and their economies moving ahead at rates we can only dream about, opportunities are legion. Time to look for these overseas opportunities - but based here at home.
Brian Tora (brian.tora@centaur.co.uk) is principal of the Tora Partnership
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