Can investors find a comfort zone in uncomfortable times?

Saturday 21 July 2012

Investment strategies are being tested in the current stockmarket turmoil.

Custom byline text:

In the UK and Europe, good dividend yields and attractive valuations are on offer, but controlling risk is the challenge. Can investors profit, yet remain in their comfort zone?

Amid day-to-day volatility, it is easy to miss underlying trends. In the short term, stockmarket moves seem more driven by political announcements and hopes of a eurozone solution, than by actual company results.

The global economy is still growing, albeit slowly, but keeping invested is proving challenging for most. Yet, amid the noise, some helpful patterns can be found. Surprisingly, a few shares are making steady progress, even as others in the same sector collapse. The gap between winners and losers is widening. Companies with clear business strategies – typically with superior profit margins and strong balance sheets – are winning more fans. Investors seem to be deciding they like shares that let them sleep at night. Global businesses with proven track records look like they will weather the storms ahead. Despite the re-rating of these "quality shares", they could be set to become more expensive. Three key factors are driving this process. In a deflationary environment with weak demand, products and services need a distinctive edge to achieve good pricing and stable demand. Strategic strengths such as brands, good customer relationships or business efficiency have come to the fore. The strong are prospering, while weaker businesses are simply being driven out of the market. Compounding this challenge for the weak is the hidden cost of financing. While much has been made of the challenge for smaller businesses in getting access to bank loans, some big companies are also being hit. For example, car manufacturer BMW has just secured additional borrowing at an annual cost of 1.25%, to add to its substantial cash holding. This is financing growing sales, and its product range such as the Mini is already premium-priced. By comparison, the ailing French car manufacturer Peugeot is being forced to cut staff and the cost of insuring its debt is over 7%. This divergence is being repeated across many other sectors. Investors need look no further than our own high streets to see weak business models, challenged by internet competition and home delivery. Even hiring expensive new management may not be enough to turn these businesses around. It has become risky to bet on recovery of the losers.This outperformance by well-managed and financed businesses is being encouraged by investors that want reassurance. Companies largely in control of their own destiny, winning business from their weaker peers, are worth a big premium. They may be less impacted by slowing global growth, and certainly are better placed to weather a further credit crunch. As investors want to move into their own comfort zone they are increasingly paying up for what they perceive as quality and steady growth. Companies involved range from tobacco businesses to drinks and consumer staples, and even some industrials like Rolls-Royce. British American Tobacco, Associated British Foods, Diageo and Whitbread are shares that have performed strongly.Like canny shoppers, investors find it hard to resist a bargain. But the current competitive environment is truly punishing for businesses that lack genuine competitive strengths. Financing costs and online competition are compounding the challenge of poor consumer confidence. The risks now are in betting that weak businesses will recover, or attract bids. Quality could be re-rated still further. Colin McLean is managing director of SVM Asset Management

Contextual targeting label:

Business

Commenting & Moderation

We moderate all comments on HeraldScotland on either a pre-moderated or post-moderated basis. If you're a relatively new user then your comments will be reviewed before publication and if we know you well then your comments will be subject to moderation only if other users or the moderators believe you've broken the rules, which are available here.

Moderation is undertaken full-time 9am-6pm on weekdays, and on a part-time basis outwith those hours. Please be patient if your posts are not approved instantly.

Can investors find a comfort zone in uncomfortable times?

Commenting & Moderation

MOST READ

SPONSORED LINKS

MOST COMMENTED