Professional Investor: The conditions are perfect for bargain hunters

It was not a good week for nervous investors. Monday's diving equity markets were followed by the US central bank being forced to cut interest rates on Tuesday. That doesn't sound like a very inspiring investment environment. But contrarian thinking can help to pinpoint exciting opportunities.

This was a fundamental crash brought on by the bursting of the credit bubble. US financial institutions have had to take substantial write-offs linked to the collapse of the US sub-prime mortgage market, while concerns have risen about European and Asian banks. These are real fundamental issues that have triggered an aggressive repricing of risk.

Last week, a number of issues deepened the crisis of confidence. First, the troubles in the monoline insurance sector, where Ambac became the first major triple-A rated bond insurer to be downgraded, showed that the sub-prime problems have spread. Weak US macroeconomic data forced market participants to face up to the reality of a serious slowdown – most likely, a recession – in the US. Poor earnings reports by some major US banks, in particular Citigroup, spooked the market. On Monday, investor nervousness turned to panic.

The Federal Reserve's response on Tuesday, cutting the fed funds rate by 75 bps, was resolute. Its action helped to steady the market. This isn't the first time that the Fed has acted between its regular meetings. It made an emergency intervention in October 1998, after hedge fund LTCM collapsed, for example. But Tuesday's intervention revealed a decisive Fed. Its action also allowed investors to take profits on bonds and to move back into equities.

It is strongly believed that the Fed will cut rates further, ultimately taking the fed funds rate as low as 2.0-2.5 per cent. We also expect the European Central Bank to cut rates later on this year as the economy slows, despite its tough talk on inflation. These moves are helping to make us reasonably upbeat about the outlook for equities. True, markets are likely to remain nervous for some time. In the near term, consumers and corporates are likely to tighten their belts. It may require a clearer picture of the strength of corporate earnings for equity markets to regain any significant forward momentum.

But there is a palpable sense of relief now. The capitulation selling is largely over. We feel that most of the damage has been done. What is behind this quiet confidence? Interest rates are being eased aggressively. Banks have taken all the pain of write-downs in one go, while their actual losses may be much more limited. We also feel that a nervous market is over-reacting to the problems in monoline insurance.

Valuation is another support. Equities are certainly not expensive. Indeed, we feel there are tremendous opportunities at the moment. As an example, look at what has happened in the UK house-building segment over the past couple of weeks.

The share price of Persimmon had fallen by almost 60 per cent from its high at the beginning of last year by 9 January this year, battered by declining UK house prices and high UK interest rates. By then, it offered tremendous value. Its dividend yield was 8 per cent. In the next nine trading days, the share price rose by over 30 per cent as investors realised the sell-off had been overdone.

Who would have thought that house builders would do so well at such a time? That is the key. We try to remain contrarian at all times, especially in a bear market. But we are contrarian only where we have trust and conviction. That approach feeds our view on financials, where we see similar opportunities. Clearly, this is the sector that has been affected most by the bursting of the credit bubble. And financials remains one of the sectors most at risk.

Against that backdrop, we still don't like the larger companies in the US. We are also wary about financial risk in Asia. And in areas where there is a lack of clarity, such as in European banking stocks that have either engaged in takeovers or have not yet fully disclosed all their credit exposures, we do not have conviction and thus remain cautious. But in Ireland, banks are trading at a P/E of just five, and have dividend yields of some 7 per cent. That makes them attractive. We also like some US regional banks, mid-sized operations with traditional business models that are not involved in investment banking. It might look bleak but there are genuine opportunities for those who are prepared to take a contrarian view.

Wouter Weijand is the manager of the Global High Income Equity Fund at ABN AMRO Asset Management in Amsterdam

Independent Partners; request a free guide on NISAs from Hargreaves Lansdown

John Travolta is a qualified airline captain and employed the pilot with his company, Alto
people'That was the lowest I’d ever felt'
Life and Style
healthIt isn’t greasy. It doesn’t smell. And moreover, it costs nothing

Other places that have held independence referendums
Jonas Gutierrez (r) competes with Yaya Toure (l)

Newcastle winger reveals he has testicular cancer - and is losing his trademark long hair as a result

Arts and Entertainment
Blossoming love: Colin Firth as Stanley and Emma Stone as Sophie, in 'Magic in the Moonlight'

Actors star in Woody Allen's 'Magic in the Moonlight'

peopleThe Times of India said actress should treat it as a 'compliment'
Arts and Entertainment
Maxine Peake plays Hamlet at Manchester's Royal Exchange
theatreReview: Maxine Peake brings emotional ferocity to Shakespeare's most starring part

Watch this commuter wage a one-man war against the Circle Line
We are phenomenally good at recognising faces; the study showed that humans have been selected to be unique and easily recognisable

Human faces unique 'because we don't recognise each other by smell'

Home body: Badger stays safe indoors
lifeShould we feel guilty about keeping cats inside?
A male driver reverses his Vauxhall Astra from a tow truck

Man's attempt to avoid being impounded heavily criticised

Arts and Entertainment
US pop diva Jennifer Lopez sang “Happy Birthday” to Gurbanguly Berdimuhamedow, president of Turkmenistan
musicCorporate gigs become key source of musicians' income
Arts and Entertainment
While many films were released, few managed to match the success of James Bond blockbuster 'Skyfall'
filmsDaniel Craig believed to be donning skis as 007 for first time
The Guildhall School of Music and Drama is to offer a BA degree in Performance and Creative Enterprise

Arts and Entertainment
Pulp-fiction lover: Jarvis Cocker
booksJarvis Cocker on Richard Brautigan
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Trainee Recruitment Consultant - Birmingham - Real Staffing

    £18000 - £23000 per annum + Commission: SThree: Real Staffing are currently lo...

    Recruitment Consultant - Soho - IT, Pharma, Public Sector

    £20000 - £25000 per annum + OTE £35,000 first year: SThree: The SThree group i...

    Sales Executive

    £20 - 24k (Uncapped Commission - £35k Year 1 OTE): Guru Careers: We are seekin...

    Payroll & Accounts Assistant

    £20 - 24k + Benefits: Guru Careers: This is a great opportunity for an enthusi...

    Day In a Page

    Mystery of the Ground Zero wedding photo

    A shot in the dark

    Mystery of the wedding photo from Ground Zero
    His life, the universe and everything

    His life, the universe and everything

    New biography sheds light on comic genius of Douglas Adams
    Save us from small screen superheroes

    Save us from small screen superheroes

    Shows like Agents of S.H.I.E.L.D are little more than marketing tools
    Reach for the skies

    Reach for the skies

    From pools to football pitches, rooftop living is looking up
    These are the 12 best hotel spas in the UK

    12 best hotel spas in the UK

    Some hotels go all out on facilities; others stand out for the sheer quality of treatments
    These Iranian-controlled Shia militias used to specialise in killing American soldiers. Now they are fighting Isis, backed up by US airstrikes

    Widespread fear of Isis is producing strange bedfellows

    Iranian-controlled Shia militias that used to kill American soldiers are now fighting Isis, helped by US airstrikes
    Topshop goes part Athena poster, part last spring Prada

    Topshop goes part Athena poster, part last spring Prada

    Shoppers don't come to Topshop for the unique
    How to make a Lego masterpiece

    How to make a Lego masterpiece

    Toy breaks out of the nursery and heads for the gallery
    Meet the ‘Endies’ – city dwellers who are too poor to have fun

    Meet the ‘Endies’ – city dwellers who are too poor to have fun

    Urbanites are cursed with an acronym pointing to Employed but No Disposable Income or Savings
    Paisley’s decision to make peace with IRA enemies might remind the Arabs of Sadat

    Ian Paisley’s decision to make peace with his IRA enemies

    His Save Ulster from Sodomy campaign would surely have been supported by many a Sunni imam
    'She was a singer, a superstar, an addict, but to me, her mother, she is simply Amy'

    'She was a singer, a superstar, an addict, but to me, her mother, she is simply Amy'

    Exclusive extract from Janis Winehouse's poignant new memoir
    Is this the role to win Cumberbatch an Oscar?

    Is this the role to win Cumberbatch an Oscar?

    The Imitation Game, film review
    England and Roy Hodgson take a joint step towards redemption in Basel

    England and Hodgson take a joint step towards redemption

    Welbeck double puts England on the road to Euro 2016
    Relatives fight over Vivian Maier’s rare photos

    Relatives fight over Vivian Maier’s rare photos

    Pictures removed from public view as courts decide ownership
    ‘Fashion has to be fun. It’s a big business, not a cure for cancer’

    ‘Fashion has to be fun. It’s a big business, not a cure for cancer’

    Donatella Versace at New York Fashion Week