At Aventus Capital Management, we feel that finally we may have reached the low point in the market and that the case for investors to return to the market is becoming compelling.
Many stockmarkets around the world are at decade-plus lows. The UK is at its lowest since 1995, the US since 1997 and Japan is at its lowest since 1982.
Many markets are at levels of 50 per cent or more below previous highs.
Dividend yields on equities are at incredible levels. BP, hardly the most distressed company out there, was on a near 10 per cent net dividend last week. Well managed companies with strong finances are available with dividends of 5 to 8 per cent net.
Investment-grade corporate bonds offer 7 per cent plus, as opposed to government securities paying 2.5 per cent.
The current price of higher- yield (non-investment-grade) bonds implies that the market is expecting default rates of anywhere up to 40 per cent, many times what was the worst level in the Depression of the 1930s.
Sentiment is appalling. How many people do you hear saying saying, buy? Contrast with how many people are saying the world economy is doomed.
Investment funds, pension funds, etc have very high levels of cash and/or gilt-edged holdings – the selling pressure should be mainly done and there is a veritable wall of money waiting on the sidelines.
How long will these institutions be happy to receive near 0 per cent on cash and 2 per cent or so on gilt- edged stocks? Sooner or later, they will look to the much higher returns on equities.
The state of the banks is key. RBS and Lloyds have kitchen- sinked their results, writing off as much as they could to take advantage of the opportunity to blame it all on previous management teams. Well, wouldn’t you?
Worldwide the big banks are now underwritten by governments. In the UK, nationalisation is off the Government agenda following the recent loss insurance schemes and new capital being pumped in.
We are of the view that nationalisation was never on the cards – we could not see it being in the interest of the Government. They could achieve everything they wanted by just keeping on pumping money in and taking an ever bigger stake in the banks.
In the US, we have seen announcements from Citigroup and Bank of America that they were profitable over the first two months of the year and will not need more bailouts.
Finally, some sanity in that accounting standards are being reviewed, especially the ludicrous rule compelling banks to write down their assets to a theoretical market value when they were never intended to be traded but held to maturity where they will repay for much more than the distressed levels implied by the market.
Governments around the world are pumping trillions of dollars into their economies via various schemes of support or spending or tax cuts.
We fail to see how that cannot have an impact on economic growth. Already, there are signs that China is responding, with its growth set to rise from a “low” 5 per cent to around 8 per cent.
Historically, markets tend to lead any recovery as investors start to anticipate an end to recession and on average they have moved nine months ahead of a recovery in the economy.
If we assume that the economic recovery starts next year, then we are probably near to a turning point in the market.
The old market adages, while perhaps a bit trite, are proven over time. “Buy at the time of maximum pessimism” and “buy when all seems darkest” are the two that spring to mind.
Undoubtedly, we will see a lot more grim news from the economy over the coming months but we feel that, for investors, the worst should now be over and we believe the time is right to start accumulating.
We are reminded of the 1973/74 recession when the US Dow Jones index bottomed out at 577, a drop of 45 per cent off its peak, in December 1974.
In February, it was at 717 and by May it was back to 855, a gain of 48 per cent off its lows in just five months.