Monday 9 January 2012

Strategy for the Euro?

The following question has been raised in a comment from ritsut:
 
"Market commentators are becoming more vocal about Greece bombing out of Euro, have you got a strategy should the euro change in some way?"

I can't claim to have a properly thought out strategy per se should concerns over the fate of the Euro escalate to fruition.
But I do have a number of large cap European companies with global reach that I would like to add at the right price so am looking for either the current doom laden media coverage to drive down European markets or for the value of the Euro itself to better reflect the region's perceived weakness against other currencies to make my sterling funds stronger. 

Beyond that, and rather than second guess the outcome, I am trying very hard to ignore the wider noise and media commentary that seems to stir up the fear and volatility acting as a day to day drag on markets.
I am still strongly of the opinion that we are in the midst of a rare opportunity to pick and mix well established, and successful companies who's resources and management will enable them to ride out this storm, probably coming out stronger and leaner.
This might not be immediately realised in their share prices but, I would expect them to go on to accelerate profits over the longer term when this extended credit crunch is eventually consigned to minor trough in the historic graph.

From a company earnings perspective, and as an investor, I am less concerned about the headline of  a "recession" than I might once have been.
By the time a technical recession has been declared (2 consecutive quarters of contraction), it might already be in the past. 
The real key is how companies manage their balance sheets with slowing growth prospects.
That's not to say that the effects of recession won't be detrimental to some companies (particularly in fashion fickle sectors like retailers) but I am in no doubt that it causes more pain to affected individuals and families than companies.
Unemployment is just one of the tools by which companies re-balance their costs, capacities and cashflows.

So in the main I will continue to look for companies in "relatively" resilient long term industries with good cash management. These are also likely to hold some form of competitive advantage, monopoly or global footprint.

With the US economy starting to look more positive it might prove the most profitable hunting ground for opportunities.

Recessions aside that leaves the fate of the Euro and the EU as the unknown.
As a currency the Euro has been flawed from the beginning.
If you think that the UK has a North-South divide, and/or areas of poverty and unemployment, it serves to highlight the varied effect and impact of government policies (whichever party) on different regions: jobs; taxes; interest rates etc. 
I am not an economist but It seems madness to try to manage these issues over such a disparate range of countries like an artificially expanded Europe with such strongly embedded cultural traditions, and an unequal range of skills, values and industries?
When you think about it it seems amazing that it has lasted long enough to be affected by something as seismic as the current crisis but that probably has more to do with subsidies and handouts rather than an evolving together of shared goals.
I would go so far as to suggest that the make up of the Euro and the ambition of the EU has created this problem with unrealistic expectations of wealth amongst member states. Couple this with seemingly cheap easily accessible credit and we are where we are!

Can anyone successfully argue that the values, strengths, determination, and work ethic of a Germany has been replicated in Greece?
When asked I couldn't easily bring to mind a major industry in Greece apart from tourism. Although I have subsequently read that shipping is its major export industry.
In my uneducated opinion Greece desperately needs to devalue its currency against its trading partners to give it some competitiveness but it can't because it is shackled to the Euro which has held up remarkably well.
Recent history also bears this out with Iceland quickly recovering from the woes of 3 years ago and Russia's own recovery following its partial default in the late 1990's.

Having said that, one of the biggest mysteries of the current crisis for me is the relative strength of the Euro against other currencies, but this might say more about the perceived risk of contagion to overseas holders of European debt.

It would be a positive if the crisis could be contained with Greece's exit (with hindsight this should have been agreed and managed months ago) but with little sign of a tangible plan or collective political will to resolve the EU's sovereign debt problems, it seems unlikely that the EU can now fix itself.
Instead, if we, and they, are very lucky, growth will come from elsewhere to save the Euro whilst the stronger players manipulate the crisis to increase their influence and executive control.
If there is any fall-out from an implosion of the Euro, or the EU for that matter, the debts and losses will need to be absorbed somewhere and that is the crux of the problem for markets and investors. 
In some bizarre mix of Russian Roulette and Pass the Parcel who will be left with it all when the music stops?

These are all macro concerns rather than company specific though.
Trade will continue (in my opinion) it is just at what level and whether this will force a re-rating of profit margins, costs and expectations due to the unknown quality of fledgling currencies from bankrupt states, and the resulting liabilities that would take place following default.  
It would also be a surprise if the rebirth of any individual sovereign currency in the current situation was not unplanned, chaotic, and probably shambolic.

Of course, Darwinian like, this will still throw up "premium" companies though and one company's failure is another company's opportunity. 

To summarise then, I am not looking to drastically re-position my portfolio or run for cash. 
Instead I will trust that the portfolio's investments will retain strong company specific performances, continue to pay-out a relatively decent level of dividend, and come through this.
Meanwhile I hope to take advantage of the situation by re-investing dividends into more pieces of my jigsaw should opportunities present themselves.


Fingers and toes crossed anyway.

4 comments:

  1. Thanks for the insight. I am totally new to investing, so it's interesting reading your posts. Is this your main profession?

    I am one of those fools that bought lloyds at 50p then bought a shed load in nov for 24p. intersting today to see lloyds peaking around 29.5p. Reviewing your portfolio, you have kept well clear of the uk toxic banks. I am living in the hope that the black horse will commence dividends this year. I know these will be minuscule..but I am hoping the share price will then start moving to a upward trend...What are your thoughts on lloyds...and after tesco dropping 50p would today be a good day to buy into the grocery powerhouse..

    ReplyDelete
  2. Hi Ritsut,

    can't say that I am a professional or that this is full time but it has been a serious hobby for a long time and fascinates me. I also look forward to the day when the dividends will provide me with an income in their own right.

    Glad to see you putting some focus on dividends but it feels like it is going to be another 12 months before the "healthier" banks start to show some stability (fingers crossed there is no Euro contagion to complicate things).
    As you suggest a reinstatement of the dividend could put a floor under the share price and effectively declare that Lloyds has "dug out" and evaluated all of its toxic debts.
    Lloyds were at an advanced stage of rebuild prior to the credit crunch which meant that they had minimal exposure to toxic debt but the greed of Blank/Daniels and the deceit of Brown/King ultimately undid all that, costing shareholders: their capital, the dividend, and dilution following a taxpayer bailout that shouldn't have been needed.
    I expect them to recover eventually though and a focus on retail banking will put them in good stead particularly if a sea change to chargeable current accounts takes place.

    Tesco looks like an overreaction but will need some patience and a long term view now during what is likely to be a difficult year as it rebuilds its reputation and establishes fresh momentum for profits and the share price.
    Bottom line profits look like they will be flat for the next 12 months as they are re-invested into revitalising the UK operations but I fully expect the forecast 4% dividend to be maintained though which might prove to be the majority of shareholder returns for a while.

    There might be a bounce but rather than look for an immediate return to form (which looks unlikely)and if you think the shares might be stuck in a range for a time, you might want to consider an alternative strategy of pound cost averaging the shares to build up a stake up over a period of time whilst taking the dividend. Many brokers now offer this service on sums as low as £25 per month at a cost of £1.50 a time.

    Prior to the credit crunch I built quite a profitable high yield stake in Lloyds and Scottish Power with the same tactic using monthly amounts between £100 and £200.

    Best regards
    MA

    ReplyDelete
  3. Hi MA,

    In the above post, you talk about pound cost averaging and brokers offer this service....to keep fees down, did you use the companies share administrator to acquire new holdings? I.e. for lloyds, you had a account with Equinity?

    ReplyDelete
  4. Hi Ritsut,
    hope you are well.
    no is the short answer.

    One of the other issues with trying to keep costs down and electronic trading is that most brokers maintain your holdings in Nominee accounts which basically has the broker the brokers name between yourself as the beneficial owner and the registrar.
    As I have found lately it is an annoyance as it also precludes you from the company's dividend re-investment programs ie. taking your dividends as shares to begin with.
    It's also a bind should you wish to benefit from any rewards program that company's offer shareholders as you need to ask your broker to send a letter to the registrar informing them that you are actually the beneficiary not your broker. But thats another story.

    As it is I maintain most of my portfolio inside an ISA (still a nominee account though).

    The trailblazer, in my opinion, was HBOS which marketed an account called sharebuilder whereby you could choose to set up an automatic monthly trades and purchase blocks of shares as small as £25 with a dealing charge of £1.50. You had the choice of 4 trading days should you feel that there was a particular pattern for your chosen shares within a month.
    HBOS stated a minimum £25 (which illustrates the target demographic), however, as far as I could tell there was no limit other than your funds and the charge would still be £1.50.

    There is a small blind spot as you wouldn't know the exact price you would trade at, as it is date automatic but the strategy is to pound cost average so you should accept swings and roundabouts to achieve an average.

    Although I no longer use Halifax I found it very flexible with the choice of 4 trading dates, being able to set up/change/cancel the night before a trading day, and never found a share I couldn't trade (aim etc). I even used it for one-off purchases with more substantial amounts that were still dealt for £1.50 (+stamp duty).

    I have also used other brokers (Selftrade if I recall) which have matched the dealing charge but only offered 1 dealing date in the month and restricted to FTSE 100 shares.

    Its a strategy normally associated with Unit trusts but I found it to work well with high yielding shares(either rock solid or in recovery) as you get a reward for your patience with the dividends.
    It also helps to manage risk/exposure with smaller regular purchases and can be run alongside other strategies particularly in a sideways trading market.

    Best regards

    MA

    ReplyDelete