The vision to identify breakthrough products, leaders, and brands.
The knowledge to spot an undervalued gem in a sea of glass
The courage to buy and hold when others are running scared
Occasionally, you’ll come across an investor with one of these valuable characteristics. And it’s likely that person does quite well. But I can’t imagine a person who can offer all three.
That would take two very different and even contradictory approaches…Fortune favors the brave only!!
The global economy looks set for a rocky ride in 2008. But for investors with enough cash in their portfolios this year will offer many opportunities to pick up undervalued assets. Equities in developed markets look particularly cheap.
While economists believe that the US is already in recession, other parts of the world are still enjoying good growth. Nonetheless, lower corporate profitability, inflationary pressure decreased liquidity in international markets and the slow pace of interest rate cuts are likely to spell modest returns across many asset classes.
Opportunities will crop up for private investors to buy undervalued assets. The cheapest asset class is equities, raising the prospect of decent buying opportunities for investors with cash in their portfolios.
Nonetheless, even the best-performing equity markets are expected to offer modest returns. Developed market equities, however, are likely to outperform equities in emerging markets. This is underpinned by the expectation that interest rates will be cut sooner in developed markets. Valuations in developed markets look more compelling than in emerging markets.
Globally, opportunities are starting to crop up for brave investors. Value is emerging, for example, in the bonds and shares of companies in financial services and property companies. Some property firms, trading at a 40-50 per cent discount to net asset value, look attractive.
The whole world has experienced a major expansion in the availability of credit. This has been followed by a significant retraction in the availability of cheap loans. Banks have become more risk averse in an environment where $700 billion of sub-prime debt sits at the foot of a $10.7 trillion pyramid of debt.
Liquidity in international markets fell during the last quarter of 2007, slowing growth and limiting returns across asset classes. This weakness is likely to linger well into 2008 with inflationary pressure limiting the ability of central banks to aggressively cut interest rates.
Looking ahead, global economic growth will struggle to pick up steam without the support of broad interest rates cuts. The decision by the Federal Reserve to cut its federal funds rate by 75 basis points to 3.5 per cent delivered what the economy needed..
It is important to remember that cuts in interest rates take time to work. While cuts in interest rates will alleviate some of the economic pain, the huge amount of household debt in the country-region will take some time to unwind. The reality is that consumer debt has never been higher. Based on past experience, we should also expect further pain as a result of the housing crisis and sub-prime mortgage lending.
Our hope is that reasonable growth in other parts of the world will offset the recession in the country-region> to some degree.
All the benefits of interest rate cuts will be undone if the financial system suffers further stress. The markets will remain fearful of more bad news until the full earnings reporting season for financial companies has come to an end and they have identified their credit related write downs. Reduced liquidity in global financial markets could also put pressure on the value of property, metal prices and emerging market assets.
The dollar appears to have suffered its biggest decline in this economic cycle but sterling could be vulnerable. A downturn in the housing market could lead to slower growth and lower interest rates, in turn prompting sterling to fall against the dollar and the euro.
How events play out in the global economy in 2008 remains to be seen. Market concerns about a more significant slowdown outside the country are increasing. Even in China there is potential for a slowdown.
The “muddle through” scenario – in which in the recession is offset by good growth in other parts of the world – is still a favourite, with a probability of 45 per cent. Global recession is viewed as high as high as 35 per cent. The third scenario is one in which the Federal Reserve takes a risk with inflation and cuts rates aggressively to stimulate growth but stores up for the future by stoking inflation.
Be vigilant for such a moment.