"Pandemic fears may create a buying opportunity"by John Redwood, Evercore Pan-Asset, 28th April 2009

May 1, 2009 - PRLog -- Yesterday markets wobbled thanks to Mexican swine flu. It served as a reminder to active investors just how difficult it is getting a portfolio right, when random events like illness can make a difference to relative values. Airlines and hotels suffered, pharmaceutical stocks prospered. All hinges on whether this outbreak of flu escalates gravely, or whether as we hope it turns out to be a mild illness outside Mexico, as it has proved so far.

Asset allocators are not immune to the impact of such events. What we do is cut out the specific stock risks and judgements compared to the economies as a whole. Why try to do two difficult things, either or both of which can go wrong, when you only need do one difficult thing?

So far we do not see the flu outbreak as a reason to change our fundamental view of the world economies and markets. If fear and alarm grips markets again owing to the impact of flu on economic activity, we might take that as a buying opportunity to increase our clients’ equity positions. Were this epidemic to become a pandemic then of course it would do some additional economic damage on top of the credit crunch. It would delay recovery a little longer, and could intensify the depth of the recession.

We are at that point in the cycle where business people and financial market people seem most divergent in their views. To many in business the economy is still in freefall. They cannot see an upturn in orders. They are fire fighting, planning the next round of cuts in staff and output, or looking yet again at which costs they can cut.

Meanwhile in share markets investors see green shoots in the most unlikely places. They reckon the rate of decline is softening. They latch onto one month’s random figures for house prices or more mortgages. They listen favourably to government talking things up. Share prices rise, persuading more investors they must not miss the boat.

It is a time to look at the underlying position, and to try some historical perspective. We are especially interested in investment in real assets with growing income. It is usually such investment which makes people and institutions decent returns.

We ask ourselves has it usually been a good idea to lend to the UK government at 2% or 3%? The answer is “No”. So why take the risk?

Have rents and capital values of UK properties stopped falling? Do we think the next move is likely to be up? The answer is “No”. We think it is still too early to go back to UK property investment.

If UK shares were really on a yield of 4.8% that would be good value, but how many more dividend cuts will there be?

Do Asian equities after last year’s big falls look good value?  Of all the asset classes where growing income and growing assets are an important part of the case, we think they look the best placed.

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We belive that carefully considered asset allocation decisons is the cruicial part in the investment management process and argue that identifying the correct asset classes in which to invest is more important than selecting the underlying stocks.