Private Investor: Without money, I'll just have to grin and bear it
Saturday 16 February 2008
Meet ultra-bear. That's me. The economic news that we've seen in the last week fills me with dread.
So, ultra-bear, what's to worry about, you may ask, as I get ready to hibernate?
It's like this. Input inflation is up, thanks to higher food and energy prices, in turn driven ever higher by the voracious demands of the Chinese. That will, in due course, lead to higher prices in the shops, but maybe not that much higher given that we're all still looking for "value" on the high street (and online), and wages growth looks fairly muted.
What may well happen, then, is that profits will get a bit of a squeeze; margins are what's going to give, even if wages aren't markedly higher.
As it happens, I think that this will be especially true of retailers, who have a tough enough job as it is. Sure, the strong will no doubt survive, and are worth a punt, but the e-retail sector as a whole is going to have a difficult year, as even their most bullish spokespeople admit.
Obviously, the housebuilders are coming under fire, and the banks are a long way from being out of those bear-infested woods. However, the bad news on the economy and profitability may well lead to some outstanding buys as share prices massively undershoot their true value, even taking all the bad news into account.
As I say, banking and retailing are probably still worth avoiding for now, but I wonder whether the housebuilders and the commercial property sectors are worth a look.
Before going any further I have to declare that by far my favourite play in this field is Savills. You may know it as a posh estate agent, which it is, but you may not realise the extent to which it is geographically diversified, nor that it has moved into the wonderful world of wealth management as well as shifting expensive real estate. Apparently, property planning and valuation consultancy, fund management, financial services, and property management contribute about 40 per cent of Savills' operating profit and should add an element of stability to the business.
The shares are trading at three-year lows and are down about a half on where they were last year, and the value of my holding and my paper profits have collapsed in line. No matter, I started buying Savills a decade ago and have been adding ever since, regarding the current travails as reasons to top up my holdings still further.
But why would an ultrabear want to buy into such a group, with its massive exposure to the finance sector, via those City bonuses and Wall Street salaries?
Well, I have a very strong feeling that, like the poor, the super-rich will always be with us, and that they will always be on the lookout for a nice spot to park their weary backsides: they're not all City traders. Savills has a good presence in most of the locations that these types favour, globally, and, importantly, has a decent exposure, via Hong Kong, to the growing class of Far Eastern billionaires. They may well be relatively unscathed by the slowdown in the West, and will help to keep Savills turning over good business in that part of the world.
Even in London, at the top end, property prices seem to be relatively firm. After all, not many £5m townhouses go to sub-prime borrowers. Even so, the market is right to the extent that Savills will undoubtedly be hurt by the credit crunch and profits will be more depressed than they would otherwise be. The point is that the long term growth story at Savills remains sound and it is more than possible that the markets have overdone their pessimism about this particular stock. Certainly it has bumped off the bottom after a sharp correction seen last month.
It will be a tempestuous ride, as the trends in the real estate market – especially commercial property – may well be amplified in Savills' share price. However, I'd be very tempted to buy, if I had the liquid funds to do so.
In fact, I wouldn't be that surprised if some bank wasn't in the same position as me: thinking Savills a bargain, but unable to lay their hands on the cash to make good the deal.
Thus I find myself in the frustrating position of knowing what I want to buy but not being able to fund my ambitions. If I could, I'd also buy into Rightmove, an excellent "secular" growth tale, and would advise you to do so if you have any spare cash. Unusually, patience is a virtue that doesn't come easily to this bear.
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