A Cold and Miserable August
Despite a strong finish to the month that saw the FTSE 100 index gain more than 5% in the final two days, August has been a pretty tough month for investors. It may, however, have presented the best buying opportunity we shall see for a very long time.
Several readers of this column have castigated me for undue optimism. Phrases such as ‘a rabbit caught in the headlights’ and ‘the writing has been on the wall for some time’ stand out among the e-mails I have received. My repeated phrase that investors should buy on the dips has brought the taunt that I encouraged investors to buy when the index was around 5,800 points while those who sold at that level have been able to buy back in at a much lower level.
This column has to deal in realistic expectations, not astrology. We did NOT know, when the index was higher, that we would see a fall of 700 points at one stage and a drop of 421 points over the month as whole.
It is true that the economic recovery has been slowing in the US and the UK while Europe continues to fudge the issues surrounding Greece and other Club Med countries. My argument is that despite all the doom and gloom many companies quoted on the London Stock Exchange are offering very juicy prospective yields.
Even if the slowdown means that results fall short of expectations, the yields on solid companies will exceed returns you can get elsewhere. And dividends form by far the larger part of total returns, easily beating share price gains over time.
It is too early to say that the last two days of August constituted the start of a bull phase but congratulations to any investors with the courage to buy shares last week as the market bottomed. Perhaps they recognised that we have been through this sort of thing before. Markets fell just as heavily in May last year and we lived to tell the tale.
August did mark the fourth consecutive monthly fall but the same thing happened at the start of the financial crisis in 2007-8 and markets recovered. Those with the courage to invest at that time were rewarded with substantial total returns.
So yes, I stick to my view that shares represent the best investment at the moment and, at the risk of attracting more taunts from readers, I say once again: buy shares with good yields on the dips.
Russian Roulette
The misery that BP (BP.) has suffered in Russia shows no sign of abating. It was always risky trying to do business in a country with, shall we say, a different outlook on commercial law from here. The potential rewards from a country rich in oil and gas may have been worth that risk initially but BP needed to tread carefully and the foolhardy move to sign a deal with Rosneft behind the back of BP’s existing Russian partners tipped the balance the wrong way.
This week Rosneft finalised an agreement for Arctic exploration with ExxonMobile to replace the one with BP that unravelled so spectacularly. As if that were not bad enough, the following day minority shareholders in TNK-BP, the joint venture that is supposed to handle all BP’s Russian exploration, got a court order to search BP’s Moscow office.
BP complains that the litigants are looking at confidential information that has nothing to do with the case in question. The court ruling, BP says, would mean that any party can raid a company’s premises at will and examine all its documents. Well, this is Russia we are talking about. It is not the first time that local courts behind the old iron curtain have allowed local businessmen to camp out in a foreign company’s offices.
The one curious aspect of this affair is that investors seem determined to stick with BP, whose shares rose during the two days of woe. I really cannot see the attraction of a company that has produced so much bad news over the past three years.
The Bank Strikes Back
Former Chancellor of the Exchequer Alistair Darling says in his memoirs that the ‘prickly and strained’ relationship between Bank of England Governor Sir Mervyn King and Financial Services Authority chairman Lord Turner was one reason why the regulators failed to prevent the banking crisis. Darling considered sacking King but could not find a suitable replacement.
Now I have been a firm supporter of Darling, who was a far better Chancellor than Gordon Brown and who cleared up much of Brown’s mess. However, we must be glad that he was unable to make the mistake of sacking King. Brown would probably have sacked King anyway out of petulance.
The problem was not King but the tripartite system that was set up by Brown and the lax attitude that Brown took to regulation. One can hardly blame King for being, in Darling’s words, “amazingly stubborn” and “exasperating”. You can hardly blame King for a little truculence as he watched the FSA make such a mess of wielding powers that had been taken away from the Bank.
So the relationship between King and Turner was prickly and strained. How could it possibly have been otherwise? With power over the banking system handed back to the Bank of England, we have a far better chance of avoiding another banking scandal.
