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Top Stocks: a message from Derek Stuart in these stormy markets

Derek Stuart of Artemis, one of the five fund managers in Citywire Top Stocks, gives his thoughts on the current alarming stock market conditions.

 
Top Stocks: a message from Derek Stuart in these stormy markets

Derek Stuart of Artemis, one of the five fund managers in Citywire Top Stocks, gives his thoughts on this week's alarming stock market falls.

Interesting climate

We often say that our portfolio companies can thrive independently of economic conditions – because they have a high degree of 'self-help' to pull themselves out of any hole.

But there’s an important caveat: ‘within reason’. Big market dislocations raise the prospect of something more sinister occurring that forces a fundamental reappraisal of company prospects.

So the question is: are we at the point of something more sinister?

Comparisons are being made with the turmoil of 2008/09. What is worse now? Western economies are running out of ammunition for further stimulus. This time more will fail. What is better now? Sound, well-managed companies which took radical action last time around have the balance sheets and cost structures to cope. In the run-up to the latest crisis, we fully expected a period of slow growth at best and the portfolio was positioned accordingly. In this respect, nothing has changed. 

This makes for an interesting climate. The market falls have taken down the good with the bad, and there is an opportunity to top up on some of our favourites.

At the other end of things, there are opportunities to buy distressed companies. Last time, a rag-bag of indifferent prospects managed to stagger on. This time the banks are taking a more realistic view of debt and are prepared to accept write-downs in the interests of survival – often imposing new management teams. These are the circumstances in which serious money can be made.

Finally, mergers and acquisitions (M&A). Things were busy for a while, but activity has slowed abruptly. This won’t last: there is no shortage of well-financed bidders looking for a quick fix for slow growth.

So, while not at all complacent about the risks, we would summarise this as a time of opportunity for Special Situations – even if it is an unnerving and volatile time for investors.

Derek Stuart manages the Artemis UK Special Situations fund with Ruth Keattch

9 comments so far. Why not have your say?

Mr Grumpy

Sep 24, 2011 at 11:02

Well said Derek - at last some sense in the investment world !

(And I'm stocking up accordingly - have been for this last couple of weeks)

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Rob Walker

Sep 24, 2011 at 11:20

OK, so take out the well managed, the distressed and any M&A targets and what are you left with? Well, RBS and Lloyds of course. Ideal investment for the contrarian!! Check this out in 12 months and see where we are.

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Cape Town

Sep 24, 2011 at 12:17

For a good contrarian bet, go for double or broke on Greek bonds. If they go, the whole system goes with it, so wherever you have put your money (see above), you will lose shirt, horse and kingdom.

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snoekie

Sep 24, 2011 at 16:35

Ah well CT, console yourself, getting near that time, lekker by die strand!

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John Howard Norfolk

Sep 24, 2011 at 21:50

I suggest you keep your powder dry for a day or so longer.

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elizabeth wildgoose

Sep 24, 2011 at 23:55

CT,

Please could you clarify what exactly you mean by (re:Big Fat Greek wedding bonds)..."If they go, the whole system goes with it, etc?"

.....because I'm a bumbling amateur, predisposed to clutching my 'newbie' portfolio to my ample bosom, whilst fretting into my ' investment' kebab.

(apologies for eyewateringl imagery!)

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Cape Town

Sep 25, 2011 at 07:27

Elizabeth. We read of an EFSF rejigged to have two trilion, mainly for dealing with attacks on Italy and Spain, ringfencing the three weaker members Ire Por Greece (how is this to be done?), recapitalising the banks (ie nationalising them), and the Greek default is now on the agenda (now that German banks have the time to dispose of their Greek bonds). This plan will need to be severely rammed down the throats of eurozone parliamnets and the result will be all of eurolqnd looking like Greece does now.

What does this mean for us?

Greece is in big negative on its current account as a reult of its inefficeint depressed economy. It cannot remain in the union with one German euro equal to one Greek euro, but neither can it leave in order to devalue. All we get in this plan is a stopgap measure of default, it doesn't the realm isue which is not debt, but growth. Growth is absent because Greece doesn't have an economy that can compete. World demand is grinding to a halt in any case.

Why cannot Greece be allowed to exit as after defaulting?

If it is confirmed that Greece will devalue, well what would you do? You'd take all your greek euros out of the bank and get the hell out of the country. Anyone owed anyhting would want payment straightaway and everyone would try to sell their bonds rapidos. So the government there would partly shut the banks and impose capital controls.

Then what about the conversion from euros to drachmas for those caught out? Any assets and liabilities within Greece can be converted (how do you think savers and creditors will feel? So this is why they will be trying to get their money out before the conversion) But for moeny owed abroad, still in euros and dollars etc, they will have 25% (say) less reserve to pay it off, debts will take 25% more drachmas to pay off, and they'll be paying 25% more for imports. So there will be a lot of bankrupties.

Estimates for the loss to GDP in the first year of exit/devalution are around 50%.

That is just for Greece.

But of course, it is the start of the end for the neighbouring euro countries. And the shorters will have a field day. And the US is owed half a trillion by the PIIGS.

And Greece won't be let back in to any rump euroland, maybe they'll be kicked out of the single market as well.

And moving to another dimension, political now, could China come in and save the world and at what price? Could Turkey bury its hatchet in Greek debt and move its centre of gravity East? In the breakup, there'd be the Northern zone and the LAtin and France struggling to run with the big boys and this is a scenario for exactly what the European dream was supposed to counter. I can see Russia emerging again out of this as a winner. The UK would regain weight as well.

IMHO though, the relignement of currencies is the only way to find a solution now. Earlier on, there would have been time to adjust the productivity of the economy. Even earlier, it would have been possible to not lie about what they were worth (this was whore dressed up as a virgin as someone once didn't say).

All this is just about Greece, 5% of eurozone GDP.

The EU, IMF and ECB wil pick the last cent out of Greek pockets for a financial elite who pay no taxes themselves. And the euro taxpayers will pick up the tab. But more likely the whole system will collapse, ie no interbank lending, thus no money for individuals and cirporations - can you imagine a world economy without a banking system? Imagine Lehman Brothers then mulitply by 1 000.

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Andrew Stevenson

Sep 25, 2011 at 12:21

Don't suppose anybody noticed that last month the UK government borrowed the most they have ever borrowed in August ? Our debt mountain is now over

1,000 million million ? (and rising....)

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snoekie

Sep 25, 2011 at 15:37

And still Labour still want to keep high taxes, and spend.

They didn't say what they would do to resolve the problem, but the way they are talking is to cut cuts which means more borrowing over a longer period of time with much more interest to be paid.

It is unlikely that they will be near the levers of power for at least another 3 1/2 years, Hopefully another 20 years, by which time most of the damage they have done will be paid for, and that we then have a new, saner generation, but given history, that is a very forlorn hope.

By then we will have a different problem because of the open door policy of the last bunch, which the current labour leader/shadow chancellor were a part of.

By that time would think that DI's portfolio would have at least doubled. I still say he needs to add pennies of his own.

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