Finding the Phoenix from the Ashes

It is far more fashionable to focus on the failures and of course not very British to actually
celebrate any success. This is in fact made worse when, in times of economic difficulty, it almost appears impolite to admit that your business or enterprise might actually be doing quite well. No, we are all supposed to wear sack cloth and ashes and mutter in a Scottish accent under our breath like Private Fraser from Dad’s Army - “We’re doomed”.

However, amongst the pain of the economic failures, there will be some astonishing
opportunities, but it will take careful consideration and some clear courage and conviction to take advantage of them. Most recently of course we have seen some market lows of significant proportions. For example only last March the SP500 index in the US managed to reach the somewhat concerning number of 666. For those who may be devoted followers of Lucifer, this may have been the best buying signal since the Spanish Inquisition; for others it may merely have convinced them that the investment industry is in fact just the work of the Devil and that we are all simply the creatures of Beelzebub. Meanwhile, whilst I sit cleaning my cloven hooves with my trident, perhaps I can identify some other opportunities.

First of all, the main markets. There is every reason to think that we may again see a significant fall in some of the key indices back to some of the previous levels. After all the optimistic tenor of the markets recently, many seem to be once again happily anticipating that we are going to be returning to ex-US President Warren Harding’s “normalcy” sometime soon. Well in my view we are not and we won’t! We are in for a long hard slog but with some enthusiastic rallies. Even the Bank of England said in their quarterly report that our recovery is likely to be “slow and protracted”.

Far from being negative, this could allow both short and longer term investors to use the
troughs to buy some value, and even for regular investors it will allow them to take advantage of regularly drip feeding in their money in order to carry out “pound cost averaging”.

However, there are other areas to look at. Property, for example, has become a dirty word as valuations have dropped. For many investors this has been a painful experience - either through being caught at the wrong end of the residential boom, or being suckered into certain inappropriate buy-to-let schemes. Additionally many have seen their quite expensive commercial property funds either fall back or be closed for redemptions - either way they are probably also nursing some unpleasant falls in value.

Nevertheless this is not the end for this asset class. What we are likely to see now is the next stage of development as the values have fallen back. The next wave of interest will come from those watching investors looking like vultures flying over the market looking for failing carrion.

Firstly there will be failures and the vultures will fall upon them and pick at the assets, and secondly the effect of this will also draw the attention from other, less aggressive, investors into those listed property companies which will be seen as hugely undervalued and unloved.

The fund management industry is also likely to be going through a significant change. The past two decades have allowed investment firms to grow and prosper - as measured by marbled hallways and comfortable corporate surroundings. As we enter a period of likely leaner growth, then returns for investments may well be thinner than previous decades. The result will be that average active managers will come under pressure, not just on performance, but also on cost. Both the growing usage and number of providers of the cost effective and flexible Exchange Traded Funds will also have an effect as they snap, terrier-like, at the heels of the waddling portly fund managers. The good news will be that those that are left will be the better ones. The real phoenix that excites me, though, is the downturn effect on entrepreneurs. Now is the
time that this key breed will likely come to the fore, often as they are unceremoniously chucked out of corporate leviathans. These are the nascent businesses of the future that need the fostering and help from the government and the banks. Although the banks have come under a lot of often well justified criticism, there are some signs of success. In RBS/Nat West in their North of England region (and a sliver of North Wales), they have been able to foster 9238 new starts this year - these are treasured babies and will need careful nurturing. They didn’t all need financing from the bank but is a great measure of entrepreneurial activity. The UK is a nation of small businesses which are our area of greatest employment (after the State) and our most promising area of future growth. A hopeful sign, albeit as yet on just a small scale.

Maybe the politicians might take notice for one moment if they could take their corrupted
minds off their self-centred feather nesting expenses. Perhaps they could at last put their blinkered egos to one side and add some real and much needed value to the nation. If not, as Cromwell quite rightly said - "YOU HAVE BEEN SAT TOO LONG HERE FOR ANY GOOD YOU HAVE BEEN DOING. DEPART, I SAY, AND LET US HAVE DONE WITH YOU. IN THE NAME OF GOD, GO!” That was in July 1653 - 356 years later, seemingly nothing has changed. Where is our Cromwell today? Well maybe we don’t want a dictator - but at least a Statesman!

Perhaps I can add another rather appropriate quote from Cromwell which is just as apposite today: “Weeds and nettles, briars and thorns, have thriven under your shadow, dis-settlement and division, discontentment and dissatisfaction, together with real dangers to the whole.” Cromwell’s speech dissolving the 1st Protectoral Parliament.)

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And finally...

Buying a waffle can be dangerous in America. Police Officer Lieutenant Tommy Burgess says the fight started in a South Carolina Waffle House when customer Crystal Samuel complained about the quality of service in the crowded restaurant. "I thought I was gonna get me an All-Star, grits, sausage, toast, eggs and a waffle."

Samuel said service was slow and when the food finally arrived she began arguing with the waitress. Samuel admits throwing a waffle at the waitress. "I did actually throw some food but it didn't hit her," said Samuel. "That's when she jumped across the counter and we got into it," says Samuel. The waitress then went to her van to get a gun. Samuel was hit in the arm when the waitress fired, as those trying to break up the fight pointed the gun to the ground and a bullet ricocheted.

As the Americans keep telling us - it’s all about service.

Have a good week,

Justin Urquhart Stewart
Director
Seven Investment Management Limited

For previous editions of our Weekly Update, please click here

This article represents a personal and light-hearted view from Director, Justin Urquhart Stewart of Seven Investment Management Limited, and is based on current financial news and events around the world. Its content should not be used for investment purposes and you should contact an independent financial adviser before making any investment or financial decision. Seven Investment Management Limited is authorised and regulated by the Financial Services Authority. Member of the London Stock Exchange. Head office: 23 Austin Friars, London EC2N 2QP. Telephone 020 7760 8777. Registered in England and Wales number 4092911. Registered office: 3 More London Riverside, London SE1 2AQ.