I need to address this quickly as the markets are sending a pretty strong signal. The equity herd is making a bold bet that a double dip is on the cards, and the message from the bond market is grimmer still. Ten-year yields in the UK have fallen to 2.24 per cent, the lowest level for over a century, while the cost of borrowing in the US is even cheaper at 1.97 per cent, the lowest yield since 1950.
The spike in risk aversion aside - the FTSE 100 volatility index has doubled since the end of July, credit spreads have widened markedly and money has been flooding into safe havens such as gold and the Swiss franc - at these levels, bond investors are also betting the bank that a recession is a strong odds-on possibility. They have good reason, too, as the appalling second-quarter growth figures from France and manufacturing powerhouse Germany - flat and miniscule growth of 0.2 per cent, respectively - and the slew of negative data emanating form the US, show that at the very least the world economy is facing a severe economic slowdown in western developed markets. It is also one that is being exacerbated by contagion in eurozone sovereign debt markets and a European banking crisis, as my colleague John Adams .
De-risking cyclical investments
So, given this negative economic backdrop, and the potential for a severe equity bear market to play out - and I don't think another dose of quantitative easing will prevent it - then it is only sensible to rotate out of cyclicals. For this reason, I will be looking to offload holdings in electronic distributors Acal (240p) and Elektron Technology (28.5p) and specialist fabrics group, Fiberweb (48p) when the markets have their first decent multi-week rally. True, they all look attractively priced on current earnings estimates, but it would only take a small drop in sales for those forecasts to come under pressure.
Fortunately, the 70 per cent gain on Acal offsets the 20 per cent loss on Elektron and 25 per cent hit on Fiberweb, although those losss are still stomach churning - earlier this year, I was sitting on a profit of 25 per cent on Elektron and a hefty 50 per cent gain on Fiberweb. I don't want to dump these heavily oversold shares at such depressed levels, so I would advise trying and recoup some of the paper losses by using the first major market relief rally to take risk off the table.
Banking luxurious paper profits
I would also recommend banking the hefty gains on luxury wallpaper company, Walker Greenbank. If you followed my advice to buy the shares at 22p (Luxury at a bargain price, 8 February 2010), a recommendation I reiterated when they were at 30p (Happy Anniversary, 20 September 2010), then you will be sitting on 120 per cent and 60 per cent gains, respectively, with the shares at 48p, close to their 12-month high. Admittedly, they are still lowly rated, but given the potential headwinds I think any upside from here could be pretty hard going and I am playing safe.
A glistening investment
Not surprisingly, Royal Bank of Scotland Gold Sterling Tracker, RB81 (http://ukmarkets.rbs.com) has surged since I advised using this instrument as a way of profiting from the unfolding eurozone sovereign crisis (Bailouts and fiat currencies, 12 April 2011).
Movements in RB81 have exactly mirrored the gold price, which has shot up 30 per cent from $1,445/oz in mid-April to a high of $1,862/oz at the time of writing, during which time the FTSE 100 has lost 17 per cent of its value. In the event of a full-blown European banking crisis, I see scope for the yellow metal to go parabolic and I would therefore continue to hold the tracker as a hedge against further market turmoil.
A resourceful Polo
Finally, the decision of the board of Polo Resources to double its special dividend to shareholders to 2p a share looks very sensible in light of the £100m of cash the company will receive when the takeover of Caledon Resources completes shortly. The proceeds from Polo's holding in Caledon equates to 4.36p per share and, when added to the 0.6p a share of net cash on Polo's balance sheet (adjusted for the $7.5m purchase of a 51 per cent interest in Axmin's Sierra Leone gold assets earlier this month), means that the shares, at 5p, are completely backed by cash. This means that listed investments of £30.7m (1.34p a share) and non-listed investments of £18.1m (0.78p a share) are in the price for nothing. So, although the value of those investments will have fallen since their last valuation eight weeks ago, there is clear value here and I remain a firm buyer.
Given the forthcoming companies reporting season my next column will be published online on Monday 5 September.
