Classic Financial Solutions SA/NV

News

September/October 2008

Overview

Following our paper of 18 September, we decided not to add to your inbox with a further publication of Views from the Park (VFP) until there was some semblance of visibility through the murk that descended from the extraordinary events of the last two months.

It strikes us, that for this issue of VFP, rather than focus on our normal asset class and macro economic round up, there may be more value if we address the issues of the day head on and provide some clear predictions for what may be coming next.

We would like to think that normal VFP service will resume in November and the team here remain at your service doing all they can to manage money effectively in a patient, thoughtful and creative manner.

The position as we see it on 15 October 2008 ...

• The global financial system genuinely looked over the edge of the abyss and very nearly fell in.

• We have an unprecedented global government response via the 'bailout' packages announced in recent days.

• But, Governments must be held to account for their appalling laissez-faire approach to the worsening challenges to the financial system that started appearing in early 2007.  Finding scapegoat CEOs at the banks or blaming consumers for their debt appetites to fund avaricious consumption is all well and good but playing the white knight coming to the rescue of us all only now, just doesn't play at all.  Lenders of last resort the BoE and Government may be, but lenders after the resort has already closed was never our understanding of their role.

• The enormous government bailout of the banks and global headline interest rate cuts should enable banks to tread water, but not walk on it.  There cannot be an immediate abundance of credit, and this will be reflected in modest asset prices (once prices settle down over the next 6 months).

• The scale of the bailout is so significant that the impact on public finances will be felt for decades - in the case of the UK, over 19% of the country's GNP has been dedicated to the cause.  In a time of declining tax receipts and lower economic activity, where will this money come from?  Who would want to be the next British Chancellor of the Exchequer - for UK readers - Vince Cable anyone?

• Notwithstanding market rises this week, stock market related investors have suffered a short, very sharp shock in the last month or so.  Knee jerk selling in such a market is rarely a good idea; in fact it only compounds the problem if everybody does it.

• Many markets around the world do offer buying opportunities at current levels in that they have anticipated a level of forthcoming recession in the real economy that has not yet arrived.

• However, let's not be naïve here.  We are already heading into a painful economic adjustment for Western nations and investors have been right to be very cautious about the lasting impact of simply getting the banking system back on its feet.

• Aggressive interest rate cuts and forcing banks to return to 2007 lending levels are NOT the answers to these problems.  In fact they only serve to add octane to an already heady mix of combustive problems.  Global interest rates were cut aggressively just after September 11 2001 and the largest boom in consumer credit began - in fact more credit was created between 2000-2007 than in the 50 years until 2000 - fools' paradise ...

• What we need is; available but fairly priced credit card, car finance and mortgage interest rates.  We do not advocate or support loss leader rates, 0% finance or 100% loan to value mortgage offers.

• The future is not actually as bleak as many paint, but the landscape will be very different.  A new world order is here to stay.  The US influence will wane and that of the USD with it.  Financing the world's activities will come from the new players; Sovereign Wealth Funds, Petro-dollars, and Japanese banks (who would have thought that just 5 years ago), to name but a few.

• As every bubble pops (property, credit, commodities), we can see a return to fair value in asset prices.  For example, global emerging markets are showing a composite price to earnings (PE) ratio of 10, down from 20 a year ago (the lower the ratio the cheaper the price of stock markets).  The economic story hasn't changed so substantially to warrant such a decline; particularly when you consider the share of global GDP the emerging markets will have when several billion people wake up and find they can still buy; cars, mobile phones, health insurance, computers ...

• Many listed investment companies are trading at prices well below their sum of parts valuations.  This is always a precursor to cash rich buyers entering the market seeking to release the value that isn't recognised in share prices.  We consider ourselves 'value' investors i.e. more interested in finding a low price for a good asset than chasing a go-go story of high growth.

• This certainly isn't the end of the world: it's a tectonic shift of economic plates and the resulting dust hasn't settled yet.  It is always darkest just before dawn!

The Small Print.

This document is issued by S C Davies & Company Ltd (SCD&Co) which is authorised and regulated by the Financial Services Authority (FSA No. 431206).  Investors and their advisers should be aware that the value of investments and the income from them may fall as well as rise and an investor may not get back the amount originally invested. Past investment performance is definitely not an indication of future performance. Depending upon the investor's currency of reference (viz. the currency in which they are used to working), currency fluctuations may adversely affect the value of investments and the income from them. Any forecasts or opinions are SCD&Co's own at the date of this document and may change. Those forecasts should not be regarded as a guarantee of future performance and readers are expected to take appropriate and reasonable advice before taking any investment action. All asset price data is normally sourced from Lipper Hindsight, unless otherwise stated.  The commentary and statistical data contained in this document have been prepared on a best efforts basis using sources which we believe to be reliable, although we cannot guarantee the accuracy of the information on account of possible errors or omissions in the constituent data.  SCD&Co is not authorised to give financial advise on the best way of structuring investments from an income, capital gains or inheritance tax mitigation perspective, nor on the most appropriate trust and other structures to achieve the best outcome, and investors should therefore consult their usual financial adviser, accountant or other appropriate professional before proceeding with an investment.