A note from fund managers at Artemis reminds me of philosopher and inventor Anacharsis of Scythia. He is said to have invented tinder, the potter’s wheel, and proper anchors – although there is no actual proof of this – and is often quoted as saying that all vines “bear three grapes: the first of mirth, the second of drunkenness, and the third of repentance”.
Anyone who has already suffered their office party will instantly see the truth in this. Translate that to markets, and it is clear in many cases that we are at best a little tipsy.
Most people are bullish, and even those who are not bullish on the basis of earnings growth or valuations – that’s most people with a sense of history – are bullish on the basis that endless money-printing is likely to keep people dancing on tables for longer than usual.
Within all this there are a few respectable dissenting voices. I spoke to market old-hand Angus Tulloch of First State this week. We talked about one of the funds he runs, and he noted that it has unusually high levels of cash at the moment. I asked why. “Prices are too high, ” he said. That’s not an unusual view – but thinking that the answer is to hold cash is unusual.
Société Générale’s Albert Edwards is another. You can always rely on him to see the downside of a market rally, but, as he likes to point out, if the recovery is accelerating “how come Thomson Reuters has just reported the fastest pace of US earnings downgrades on record?” Good question.
Then there is one of my favourite strategists, Russell Napier. He thinks there is a major deflationary scare around the corner that will bring markets to their knees, since stock markets hate the way deflation destroys profits.
The almost ridiculously large fall in the yen over the past year – it’s at a five-year low against the dollar – is already making Japanese exports cheaper and sending deflation America’s way.
Regular readers will know that I am rather torn on this. I fully accept the bear case, but I can’t help joining the reluctant bulls in feeling that more hints of deflation will just mean more quantative easing, and hence – for markets at least – more bubble than bust.
So here’s my great challenge at the moment: trying to find things for us all to invest in that will give us Anacharsis’ second-grape upside without too much of the third-grape downside. After all, the FTSE 100 is down nearly 6% since October, so an endless bull market is hardly a given.
This isn’t easy. But, as ever, I think we might have something. How about very big global energy companies? Look at a chart of their performance (as tracked by the MSCI World Energy Index) and you will see that relative to everything else (as tracked by the MSCI World index) they are trading at about the same levels as they were in 1999. The oil companies listed in the UK have underperformed the wider market by a good 8% so far this year too.
That hasn’t made them quite as rubbish an investment as the miners (which I am also getting keen on), but it does make them one of the few uncrowded trades around. There isn’t a easy immediate fundamental case to make for holding big oil companies, since if you worry about recession and deflation you have to worry about energy demand, but there are two good reasons to look at them.
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The first is that they have defensive characteristics, and the second is a possible shift of sentiment in their favour.
For a word on the first, I turned to one of the most risk-averse value fund managers I know, Charles Heenan of Kennox Asset Management. He’s been slowly buying into the energy sector – it now makes up some 15% of his portfolio.
He’s doing it for macro reasons. It is worth noting how resilient big oil can be even in horrible circumstances: BP has been hit for tens of billions of dollars since its oil spill in the Gulf of Mexico, but it is still with us.
But he is also doing it for operational reasons: the big energy and commodity companies have been spending too much on inefficient capital expenditure, but that’s tailing off now, something that suggests better margins and hence dividends in the future.
And finally he is doing it for valuation reasons: there isn’t anywhere else to look for good companies trading on price/earnings ratio of less than ten times and yielding near 5%.
His favourite is Statoil for its low debt and dividends paid in everyone’s favourite currency, the Norwegian kroner. It might be dull, says Heenan, “but dull as a risk is not bad.”
I know what you are thinking. Cheap is all very well, but things can stay cheap for a long time. This might not be the case on this occasion.
I also caught up with David Urch of the tiny TB EEA UK Equity Market Fund. Mr Urch looks at both value and momentum before he invests. He has held practically nothing in the energy sector since the fund launched in May 2012. That is now changing.
He is yet to be convinced that the sector is absolutely on the turn, but sees “early signs of promise” given the market’s pathetically low expectations for the sector and hence scope for positive surprise.
How do you invest in big energy? You can buy shares in companies such as BP and Shell directly. There are also plenty of energy funds around (look at Guinness Global Energy perhaps), and if you want cheap straightforward exposure to the biggest firms in the sector just buy an exchange-traded fund – Lyxor and Deutsche Bank both have one tracking MSCI Global Energy.
You might find you get a little mirth from your stockbroker as you buy. But I suspect you won’t be repenting your portfolio quite as soon as he will.
• This article was first published in the Financial Times.
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