TSCO
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ULVR
With liquidity hit by the sub-prime crisis, Russ Mould asks what the fallout has been on prices and looks for the stocks that should survive these tricky waters
US stock market commentator Ray DeVoe once noted ‘Liquidity is a coward, there’s always too much when it’s least needed and it’s nowhere to be found when needed the most.’
In 2006, all the talk was of how waves of cash were sloshing around the world looking for a home. The idea was this ‘liquidity’ would keep prices moving onwards and upwards across multiple asset classes, including equities, property, art and even wine.
But in late 2007, after further revelations concerning billion dollar losses in the US sub-prime debt markets and frightening stock market stumbles, several potential sources of liquidity seem to be drying up.
According to Trimtabs data, share buybacks in the USA in October came nearly half the average level for the year to date. Merger mania is also cooling. A $22 billion Qatar-backed bid for Sainsbury (SBRY) failed and although BHP Billiton (BLT) has approached rival miner Rio Tinto (RIO), it has so far offered stock and not cash.
Credit is becoming harder to come by, too. Banks battered by losses on sub-prime debt and credit derivative obligations (CDOs) are becoming more reluctant to lend. The European Central Bank and US Federal Reserve have both again injected additional cash – liquidity – into the overnight banking markets, because banks have become wary of even lending to each other, let alone heavily indebted consumers. A 37% plunge in new mortgage applications in the UK in October is a direct result of British mortgage lenders tightening up loan criteria.
Increased risk awareness has seen liquidity ebb away from other markets. Residential property prices in America have begun to plummet, according to the Case-Shiller index, and appear to be teetering in the UK. Commercial property prices have already begun to weaken in the UK, prompting worried investors to withdraw cash from property investment funds.
The summer and autumn’s major thoroughbred yearling auctions showed falling prices for the first time in years, with the Keeneland, Goffs and Tattersalls sales in Kentucky, Ireland and England recording average selling price declines of between 0% and 15%, according to Thoroughbred Owner and Breeder. A return to the heady days of 2005, when the all-powerful Coolmore Stud of Ireland outbid its rival, Dubai-backed Darley Stud, to land an unbroken yearling for a world record $16 million looks very unlikely.
The Financial Times has reported weakness in the fine wine market and sentiment has also taken a knock in art. Sotheby's (BID:NYSE) share price crashed from $50 to $36 after a disappointing Impressionist art auction earlier this month. The sale garnered $269.7 million in bids, way below the presale low estimate of $355.6 million, let alone the high estimate of $494.2 million. One lot, a Van Gogh, failed to attract a single bidder.
Multi-trillion dollar sovereign wealth funds (SWF) in China and the Middle East could swoop on what they consider to be undervalued assets at any time. A $7.5 billion investment in Citigroup (C:NYSE) by the Abu Dhabi Investment Authority will inject fresh liquidity into the bank and could put welcome life into flagging equity markets.
But if even the super-rich are buying less art and fine wine, equity investors should take heed. Luxury goods stocks such as Burberry (BRBY) and Theo Fennell (TFL:AIM) and purveyors of yachting equipment such as Raymarine (RAY) should be avoided. Investors should focus instead on those firms who provide life’s essentials, such as Tesco (TSCO), Unilever (ULVR) and Reckitt Benckiser (RB.).
Shares says:
BUY Reckitt Benckiser, Tesco, Unilever
