Market commentary July 2006

Our best guess would be further falls into the Autumn, at which point there should be superb buying opportunities.

There is undoubtedly a period of economic turbulence ahead, as global interest rates edge a touch higher, yet there are clearly examples of outstanding long term value available right now, even before (in our view) the final leg of the stockmarket correction.  There are some gems amongst the large shares, such as HSBC.  The company is well diversified geographically, is exposed to high growth markets, and conservatively financed.  Since 1991 the dividend has grown by an average of 16% per annum.  Yet with the current yield at 4.4% surely these attractions are being over-looked?

The HSBC example reflects reasonable valuations and modest expectations throughout much of the UK stockmarket.  In fact the high levels of corporate cash (and lack of corporate debt) make the UK stockmarket stand out as a happy hunting ground for investors.  Even so, do be aware of rising risks in buying index trackers, where so much of the index is concentrated in a small number of stocks, and an increasing number have little or nothing to do with the UK economy e.g. Kazakhmys and Vedanta Resources.

Looking beyond possible Autumnal wobbles, this could be a mid-decade correction much like those encountered in the 1980’s and 1990’s.  Interestingly, on both these prior occasions the predominant investment theme returned with a (profitable) vengeance in the second half of the decade.  If history was to repeat itself precisely you should expect the global investment focus to return to commodities, resources and emerging markets over the next 12 months or so, with crazy bubble conditions within 5 years.  Getting on this roller-coaster will be easy.  But it will only be profitable if you figure when to get off, though that’s a problem that will not arise for some years.