Two housekeeping points first.
1. Congratulations to G. Kimber, winner of the Christmas quiz. He donated the prize of £250 to a children’s hospice that was very appreciative of the funds.
2. A number of you noticed that there was no market commentary in January, as our efforts were being focussed on client valautions and reports, and the latest Topfunds Guide plus new research on property and emerging markets. If you have not yet requested any of the latter research, and would like a copy, do email back. Similarly if you need ISA applications (or extra applications) for this tax year.
Moving on to the market commentary, it has been interesting to observe that fund managers with a roving brief (e.g. they don’t have to invest in certain types or sizes of companies) have been prepared to increase their weightings in UK smaller companies, though this has not been well publicised. What is well known is that such managers have been increasing their holdings in the very largest UK companies for some time the likes of the big banks, Vodaphone, Glaxo SmithKline), and all at the expense of the medium sized companies that occupy the FTSE Mid-250 index.
Valuations in the latter area seemed to be running ahead of events, buoyed by merger and acquisition – those of you who read the busines pages will have seen many pages devoted to the private equity cult that is behind this, (allegedly) lining the pockets of clever City financiers while destroying shareholder value.
Concerns over the latter, coupled with a hangover from the market falls last May/June, have created pockets of value for discerning fund managers amongst the smaller companies, where merger and acquisition is largely driven by their peers and competitors, who appear to be increasingly confident about the economic outlook, and their ability to grow businesses (rather than just saddle them with huge amounts of debt, as with the private equity model).
While on the subject of pockets of value, you may recall that this time last year we suggested that those of you with internationally diversified portfolios (all of you, in theory!) should be wary of Japan. This was at a time when many were tipping Japan to take-off in 2006. Our negative analysis was based on our simple, but regularly effective indicator, showing that the Japanese stockmarket index was running more than 25% above the long term trend (identified by the 200 day moving average of the index). The Japanese stockmarket subsequently fell 20%.
It has been our view for many years, through the ugly bear market of the 1990’s, that Japan PLC would gradually re-invent itself, in particular as older business owners and managers literally moved on, and were replaced by a new generation more focussed on shareholder value. This process is well under way, aided and abetted by a re-invigorated Asia, spurred on by booming Chinese and Indian economies.
There is now little enthusiasm for Japan, which feels like a buy signal. Japan could be the surprise package of 2007