I've already pointed out how many once-sacred cows have been led to the slaughter over the past 18 months. But many will rise again. Here's my guide to the sectors, themes and ideas that are likely to make a comeback.
Slippery Oil
The more than $100 plunge in the oil price in little over six months is enough to make even a Texas oilman cringe. But the reality is that for all the talk of demand destruction, the main long-term effect of the price crash has been to undermine every attempt to make sure we have a well-fuelled future. When you can buy oil at $35 a barrel, who wants to invest in tar sands which can only make money at $70, deep sea wells which break even at $80 or remote Siberian drilling which breaks even at $100? Likewise falling crude has put a spanner in the works of wind farms, biodiesel and a myriad other schemes which still seem to be miles away from a profitable future. Yet in 18 months' time, when global demand recovers, oil prices risk zooming back up, and who knows, may even climb all the way back to previous peaks. That means that those battered oil stocks are worth holding onto for when the yo-yo snaps back.
Protecting against inflation
Hedging yourself against inflation? That is SO last year. It was only six months ago when UK inflation was 5 per cent and destined to go higher. Then suddenly, the economy crashed and burned and now we are supposedly facing deflation. However, given the trillions pumped into the global economy, it can't be too long before the dreaded beast rises again. Alastair Darling's green light on 19 January for quantitative easing by the Bank of England was a sure sign, and sterling promptly fell. Successive British governments may have crusaded against inflation, but in fact this time round letting prices and earnings rip away for a while will do a neat job of cutting the real burden of our bloated national debt and neatly aiding government coffers with a little fiscal drag. The Bank of England is sure to get the message. Investors might not think to look at index-linked gilts right now, but they are heavily priced for a deflationary world that may never arrive. That may also mean some room for gold. With an overall profit in 2008 gold didn't do too badly, even though gold bugs' best hopes weren't realised. However, at around $888 gold is already anticipating another bout of dollar weakness and some hefty inflation.
Broken China
Fourth quarter GDP figures may have shown China pausing for breath, but the world's most populous country is still likely to grow by around 7.5 per cent in 2009 after 9 per cent in 2008 and a revised 13 per cent expansion in 2007. Though exports have been hit hard by the downturn in U.S. consumer spending, the long-term growth story is intact. China is still the lowest cost provider of much that western consumers need. Helped by a $586bn government stimulus package unveiled in November, China continues to build roads, railways, airports and power stations at a rate that beggars belief. While exports will always be important, currently accounting for 35 per cent of GDP growth, the country's burgeoning middle class will in a few years an equally powerful engine of growth. Domestic consumption currently accounts for 20 per cent of GDP growth. With a middle class reckoned to increase from 80m in 2007 to 700m by 2020, the number who can afford western living standards is set to mushroom. As always with China, the biggest question is how to gain exposure with full transparency, low costs and minimum risk.
Commercial property
Commercial property was one of the most reliable investment themes of the last 30 years, underpinned by the upward-only rent reviews, the year-after-year uplift in net asset values and solid dividends. Now, however, the biggest slump for a generation has pulled the rug from beneath all those cosy assumptions. The simultaneous decimation of their biggest customers, retail businesses and City banks, is certainly a giant challenge for those who let property. However, the basic truth about land remains: it isn't being made anymore. The best and most stable stocks in the sector will not breach loan covenants and will recover sharply. This is one where it may pay not to move too soon because, according to property analysts IPD, we could get another 18 per cent fall in NAVs this year after the 35 per cent seen in the last 18 months.
Melting metals
If this is a commodity supercycle, the chain has certainly come off in the last nine months. Mining groups have expanded production at vast expanse, much of it funded by debt, for a BRIC-led demand spurt that was supposed to last 30 years. Now, however, the plunge in prices and the banking freeze are forcing projects with all but the biggest backers to be cancelled. Like oil, metals supply could be set back years by as little as a nine-month price fall, which will merely stoke up demand when economies do recover. That means that those big mining companies whose stars have fallen so far in the last nine months are likely to spike sharply upwards once the first signs of demand recovery begin to show. That could be sooner than many believe, though don't expect them to get anywhere near the highs of the last year.
Corporate bonds
At the nadir of the commercial bond market in November, investment grade bonds were being priced assuming a default rate of around 26 per cent, more than 10 times the level of defaults seen in the so-far record year of 1986. Though 2009 defaults are likely to be worse than the 2.5 per cent seen then 1986, they are not expected to exceed 5 per cent. However, the recent recovery in corporate bond prices spurred by interest rates falls has taken away some of the edge. If you like the idea of an Abbey National bond yielding 11.5 per cent or an Aviva one yielding 10.5 per cent, you should keep your eyes peeled. There are likely to be some further downward lurches in prices when a new spate of corporate bankruptcies emerge and that will certainly throw up some bargains. And, as the Bank of England is going to start buying $50bn of them soon, that could put a floor beneath prices.
Another round of privatisations
A few years ago, most investors had already concluded that there was nothing left to sell. Following the agreed sale of the state's stake in British Energy this year to EDF, that almost seemed to be true. But now, following a hasty nationalisation of many of Britain's banks there promises to be an awful lot of things cluttering up the Treasury cubby hole in years to come. It may take a while, but eventually in a time when banks are once again stable, some Chancellor of the Exchequer will decide to raise money by selling down their holdings in banks. Then investors will no doubt be ready to look for any excessively cheap assets up for sale.
Banking for profit
It is hard to get any kind of positive perspective about banks after the last year which have seen the value of the sector fall by more than three quarters, but they used to be an investor favourite. Our customer relationship with banks is complex, and 'sticky' because of the perceived difficulty of moving accounts. It is certainly nothing to do with brand loyalty, as many of us detest our banks, but cannot face the hassle of moving. Yet, there were always barriers to entry on banks in the British high street which was why so many new entrants considered buying an established name, as Santander did with Abbey in 2004. Setting up afresh, as Prudential did with online bank Egg, has never been as successful. Once the dust settles from the current banking disaster, reshaped or even new banks will emerge to fill gaps in the market between the state-owned dinosaurs. They will be less ambitious, more closely regulated and initially treated with caution by customers, but they are ultimately likely to end up being as profitable as their forebears.
Don't forget buy-to-let
Being a landlord isn't something to be undertaken lightly, and for many who fell for get-rich-quick property purchase schemes the last two years has been a chastening experience. Yet for those with the right experience and plenty of capital, buy-to-let is going to become as attractive by the end of 2009 as it ever was. Quality properties in good areas close to public transport and other facilities are already going for bargain prices at auction in many parts of the country. Investors will need to have at least a 25 per cent deposit, preferably 50 per cent, to access a reasonably-priced mortgage though. While the number of mortgage deals available has dropped by 90 per cent in the last year, once property prices reach their nadir and there is less of a risk of equity loss, expect to see more providers, and a gradual fall in the cost of finance.
SOME IDEAS THAT WON'T BE COMING BACK IN A HURRY Emerging Markets Decoupling The idea that emerging markets would continue to perform well when stock markets fell off a cliff was always a bit optimistic. Certainly, given that developed economies stock markets were tanking because of a combination of a banking crisis and a gathering recession, it would have been odd indeed in this globalised world if emerging markets had somehow proved resistant to such troubles among their customers. China, the workshop of the world, depended ultimately on the US consumer, Russia on the West's thirst for oil and gas, and Brazil on the entire range of commodities. The truth is that emerging markets can only decouple when it isn't very important that they need to. The MSCI Emerging Markets Growth Index fell 56 per cent last year, more than the FTSE 100 or S&P500. Hedge funds Hedge funds won't disappear entirely, but the idea that they had some magic formula that allowed them to fly while other funds waddled was always a bit rich, like the fees they charge. Most hedge funds outperformed by taking extra risk. Principally this was by using extra leverage, smarty-pants carry trades with currency and interest rate risk, or like those that served Bernard Madoff, by passing on money to others who appeared to have a good track record. Hedge funds legacies aren't all bad: Absolute performance, long-short techniques and the innovative use of capital are among them. However, the era of non-regulated offshore funds is surely waning, with assets under management shrinking by $782bn to $1.2 trillion last year according to consultants Hennessee Group. The Celtic Tiger Ireland's long trajectory from EU entry boom to property-led slump was more spectacular but just as ungraceful as Britain's housing boom-to-swoon. However, for Ireland, with an economy dependent on housebuilding and tourism, the stakes are a bit higher. At the peak, two thirds of bank lending was for property, and with 350,000 empty houses, those values are going to be a long time recovering. With a population little over half of that of London many will remain empty for years to come. Unemployment is already 10 per cent, with jobs being lost to Eastern Europe where costs remain much lower. Moreover, as a member of the euro, Dublin cannot reflate at anything other than an ECB-led pace. Still, it least it's not Iceland. |
