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Simon Keane: Do you think the latest efforts by the central

banks will turn confidence in the credit markets?

Stephen Barber: I think we’ve probably come to think about

the government’s role in the markets in quite a different way

in the last few months. I think the latest action alone will not

be everything that’s needed – we need to see that confidence

return within the banking sector. I hope what’s been done is

now enough to at least turn the corner in terms of the crisis,

even if not for equities generally – and of course we’re still

looking at the prospect of an economic downturn in Europe

and the US.

David Jones: If we look at the market’s reaction since this has

happened with some of the banks, their share prices have

weakened since then, even if we’re not seeing the same sort

of volatility that we had a month ago on banking stocks. So it

has had an effect, but as to whether we see confidence return

in the credit markets, the jury is still out and it’s probably

going to take a few months, maybe even longer, for us to see

if that has had an impact. At the moment LIBOR, the interbank

base rate, has not exactly plummeted from where it was

before the intervention started, so if you use that as an indicator,

this suggests that there hasn’t been a massive up-tick in

sentiment. I think the governments and the central banks

should be commended for what they’ve done, but is any government

or any concerted action big enough to change sentiment

in financial markets? I think that it isn’t and you have

to let these things play out naturally.

Barbara-Ann King: I think it’s an incredibly complex matter,

and we’ve got unprecedented events happening in world markets.

We look at comparisons back to the 1930s quite often, but

our economic and social structure’s is different today. I believe

a lot of this is about fear and sentiment driving market factors

and what will help to turn this around is the market participants’

confidence in policy-makers’ ability to come good. That’s

what we’ve not seen so far. It’s getting there. I think when the

TARP [Troubled asset rescue programme] proposals first came

out in the US and then didn’t actually come to fruition very

quickly, that drove a lot of the fear and lack of confidence, but

there have been key measures to address this since and

broadly I feel we’re going in the right direction.

Paul Chesterton: Some confidence has been generated by the

fact that there’s been a real concerted effort here, a global

effort it must be said, which is unprecedented and there really

isn’t much more governments and central banks can do. I think

some of our clients have taken some heart from the very fact

that at least they’re doing something. In fact they seem to be

doing most of what the market asks for and every time they do

With the markets in turmoil, Shares gathered four experts around a table to map out the current investment landscape and discuss what

the future holds in store

The shape of things to come

Simon Keane

Shares Magazine

Stephen Barber

Head of Research

Selftrade

Paul Chesterton

Senior Sales Trader

CMC Markets

David Jones

Chief Market Strategist

IG Markets

Barbara-Ann King

Head of Proposition

Barclays Stockbrokers

Feature Multi-investment roundtable

Shares | 30 October 2008 23

it, the market seems to sell off a

bit. It’s like a body that’s been shot

a few times, but they’re stopping

the haemorrhaging in certain

places and that’s all you can really

do. There’s still plenty more to be

done and a longer-term turnaround

looks likely.

SK: So looking past this recession,

which I think we would all agree

we’re going into, how would you

encourage clients to view what’s

happening in the UK economy at

the moment in the context of their

wider portfolios?

SB: Recession in itself is a natural

part of the economic cycle. What

we’ve got to be concerned about is

how deep that recession is, to what

degree and how quickly we can recover, as well as how that

recovery will be led. If you’re investing I think there’s probably

two ways of looking at it: one is, what are the opportunities

around the world other than investing in the UK? When

you compare this recession to the last time we had one, the

sort of products that investors now have access to – to invest

in almost any region anywhere in the world – is tremendous,

so the range of exchange-traded funds and unit trusts which

invest in specialist sectors and emerging markets and the

BRIC countries is a positive factor. So the opportunities there

are huge, as are actually investing in some of the flight-toquality

investments such as gold. The other investment strategy

is to look at sectors which are traditionally the safe haven

in recession, the obvious one being utilities, which you would

expect to be trading at a greater

premium in this sort of market

than they are. If you look at water

and power companies, you can see

quite low price to earnings ratios

and mouth-watering yields, so

there are opportunities out there.

DJ: I think the way the stock market

has over-reacted over the last

couple of weeks suggests that

there’s more weakness to come.

We haven’t seen gold rally as

strongly as you’d expect it in these

times of uncertainty and of course

we’ve had this fantastic run in gold

now for a few years, so I think the

worry there is that the gold boom

has possibly lost a lot of its appeal

to people. Oil has been clobbered,

again over the last few months –

the price is about 50% down. I

think it’s very tricky to know

where to put your money, mainly

because we haven’t seen a

situation like this. Maybe one beneficiary

from all this will be the US

dollar. The dollar has been quite

weak for many years now, but

we’ve seen a turnaround this year.

So maybe in terms of absolute

uncertainty across the board and

across all sorts of asset classes,

people will start switching into the

US dollar as a safe haven. We’ve

seen the pound get absolutely clobbered

against the US dollar. The

pound dropped 10% over a couple

of months in the summer, so

maybe that’s where it would go.

It would be easy for me, working

at a spread betting company, to

recommend that investors put all

their money in a spread betting

account and sit there and jump in

and out of the Dow 30 times a day, but again I think even

though we’ve seen some fantastic swings it can be very difficult

to ride them, because the market can move so much

against you before it goes the way you thought it was going

to go in terms of volatility. So while volatility gives shortterm

traders greater opportunity, from a longer-term point

of view it is very difficult to manage. If you’re not sure

where to invest your money in the long-term, then doing

nothing and just shoving it in an interest-bearing account is

as much an investment decision as investing in the mining

sector, for example. So if you’re not sure, I’d say don’t be

afraid to just sit on your hands and re-visit the situation

every two or three months.

PC: I think it all depends on

timescales. I mean, I think there’s

plenty of stocks at the moment

that do look ridiculously cheap and

I have been chatting to clients who

are not going to throw all their

money straight away into the stock

market, but they’re starting to

average in, for want of a better

expression, and they’re trying to

avoid shares such as the financials,

where they feel there are doubts or

still don’t know what might be

lurking in the background. They’re

picking up shares with pretty visible

cashflow, some of the telcos for

example – Vodafone (VOD) generates

an awful lot of cash, and companies

like this are not going to

have a load of toxic rubbish in the

drawer there.

If you’re looking at assuming

some risk, and as a business rule

you have to, I think you could do

worse than just build into a little

Multi-investment roundtable Feature

24 Shares | 30 October 2008

bit of an equity portfolio at the moment – just don’t throw

everything at it, and have a mix of assets around. I don’t think

you can rule out equities. I remember when we were coming

out of the dot.com burst and everyone was really negative,

talking the FTSE down to near 3000 [it troughed at 3287 – ed]

– ‘I don’t see any reason why I should buy equities’ – and then

we had the start of a massive bull market run, so you never

know what might be the

catalyst for equities rising.

BK: Smart investors will take a

period of consideration and not

make any knee-jerk decisions.

People need to sit back and look

at the fundamentals and not be

thrown off by the macro factors

and the sentiment in the market,

because that’s something that

can sway you in the wrong direction.

Cash is definitely king for a

lot of clients and I agree with

what was said earlier – there’s

absolutely nothing wrong with

that. There are opportunities out

there, however, such as

exchange-traded funds. If you’re

looking for investment that capitalises

on global opportunity with

flexibility of trading, using ETFs

or iShares is a great way to go.

You can use these products to get

across lots of sectors and geographies.

You also have the safety of trading, so you can get out

of those instruments if you want to – I think that’s important.

Depending on whether you’re looking for safety rather than

‘best’, I think you can also look at the funds world – absolutereturn

investments that will steer you

away from direct market correlation. So

there’s a lot of opportunity out there,

the key thing is to sit back, understand

what your needs are – including how

much tolerance or composure you have

for the risks involved – and then compile

a portfolio that’s going to protect

you during market cycles like this.

SK: Do you think now’s the time to start

buying as a value investor?

PC: I think in some areas, certainly,

there’s an opportunity. The difficulty is that the ‘E’ part of the

P/E ratio is variable, so it isn’t necessarily a guide historically

that there’s value out there. There are plenty of companies that

are well worth a look at the moment. But something that’s hitting

home for me is just how important the financial markets

are, because I could name so many stocks that are just ridiculously

at the wrong price, but they’re not moving because people

aren’t trading them, they’re not willing to get in there and

you can’t get the finance or the management buy-out together

to actually take some of these companies off the market. In a

properly-functioning financial backdrop, however, a lot of these

companies would be just screaming to be bought out, so I think

there are plenty of opportunities out there. Certainly if you are

looking in the right areas, valuations are cheap – just don’t

throw everything at it straight away.

SB: You’ve got to look at the sectors that meet the right conditions.

I think we’re faced with a

particularly volatile and difficult

market and calling the bottom of

that’s going to be very, very difficult

and we’re going to see more

casualties across a number of sectors,

not just the financials, as we

go along. But saying that, I think

there are sectors that remain

good value and with good

prospects. Utilities have been

mentioned, but infrastructure’s

another that is largely uncorrelated

with a lot of the current crisis

and has good long-term

prospects and dependable, predictable

returns.

There’s also bonds – which I

think for the first time in years

are starting to be looked at as a

staple portfolio component

again, partly because Alistair

Darling is going to have to borrow

a shed-load of money to be able to

finance a lot of his plans, and also

because we’re seeing interest rates coming down and predicted

to come right down. Inflation, although we’ve seen it spike

in the last couple of months, is probably going to fall off into

2009 and, of course, that’s all good news for bonds – particularly

for gilts and good quality bonds.

DJ: I’m a technical analyst so for me value

investing is something of an alien concept,

but if you can mix up both approaches it

could definitely help you pick through

what’s happening in the markets.

Currently, the problem is that even if you

find a stock that’s cheap, in a week’s time

it could be 10% cheaper still – and I’m a big

fan of not running losses and trying to

make investing or trading as easy as possible.

I am a much bigger fan of buying a

market that’s going up rather than trying to be Billy

Smartpants and pick a market that’s plunging ridiculous

amounts and trying to catch a falling knife.

SK: Let’s try and imagine we’re two or three years down the

line and we’re coming out of recession. Which stocks would be

leading the way? Which sectors do you think are going to be

the next leaders?

SB: Well, I suppose the first point to make is the economic

cycle and the market cycle don’t run in tandem. The market

cycle runs ahead of the economic cycle. So it goes into the

downturn first but typically we see it recovering first as well.

And typically the sector that leads recovery is the financials,

the banks and we’re not going to see that this time. So it’s

very difficult to pick the heroes of the next boom, the next

bull market if you like. What’s key is

that investors look at sectors both in

terms of industrial sectors and geographical

sectors and instrument types

and make sure that they have a fully

diversified portfolio which can take

advantage of whatever the upside is.

And the second thing to say is that I

think when we start seeing the likes of

oil or raw materials starting to come

back into favour then you’ll know that

things are starting to look up. In that

vein, quite possibly the mining stocks,

the resources and things like that, if we start seeing those

coming back into favour I think again that will be an indication

of renewed confidence, but that may be some time off.

DJ: It’s always dangerous making predictions like this, but I

think it’s fair enough to say that

we will probably see the commodity

stocks come back. If we go back

to oil, one of the reasons it’s dropping

is the outlook for the economy,

the economies around the

world. If and when we come out of

the economic slump and production

picks up again, then you’d

expect demand for commodities to

pick up. You’d therefore expect

some of the oil exploration companies

and the traditional mining

stocks – companies such as Xtrata

(XTA) and Rio Tinto (RIO) –

would do well out of a recovery.

Hopefully go over the brow of the

hill and things start looking a bit

rosy and those traditional commodity

stocks start picking up,

they could be interesting. I think

finance will play its part as well. If

the economy starts getting going

again and businesses want to

expand and all of that, then of

course the banks are going to do well out of it.

BK: I don’t think we should make sector recommendations per

se, because I think this is unprecedented territory and markets

are moving quickly and it may be too early to call what will lead

the pack into recovery. You look at our usual comparative

benchmarks and you think about areas such as pharmaceuticals

and utilities. What some investors will look to, I think, are more

defensive earnings, profitability, and perhaps stay away from

leverage in the shorter term. I also believe that rather than taking

a sector-specific view, I suspect it is the position of global

markets and how they play their role in the bigger picture and

that is what’s going to lead us forward. The “news” focus on the

US and the UK is an obvious one, but actually we’re very reliant

on what happens in the BRIC countries and in the developing

countries more broadly rather than just specific sectors.

PC: You can probably argue that the

homebuilders – or a homebuilder,

whichever one is standing – could do

very well. It’s either they’re not going to

get the funding and there’s going to be

a lot of consolidation. If any of them

can come through recession, then when

the housing market picks up again, I

think whoever’s around to complete the

builds that have started over the last 12

months could do very well. And some of

the valuations on those homebuilding

stocks does suggest that they’re not going to be here in 12

months, but as a going concern I think they’re all trading at

completely the wrong price.

But the reason they’re doing that is that the credit market

isn’t functioning. For example, Taylor Wimpey (TW.) is at a

ridiculously low share price at

the moment. That’s because

people are worried that it’s not

going to get the financing, but

what is the alternative for banks

at the moment? I don’t think

banks really want to call those

loans in, but it is a worry. But

even with quite heavily writtendown

land values at the

moment, you’d think that

there’s plenty of security in

those homebuilders, but without

that credit market functioning

properly you’ve got to factor in a

huge probability that they might

not be here. But if you can pick a

stock that is the least geared

homebuilder, perhaps they’ll do

very well when we turn around

because if demand for houses

takes off again then the homebuilders

will have to go up

because the value of the land,

the value of the homes will just

go up as well, so in theory the share price should go up quite

nicely as a result. So I’ll throw that one out there as a sector.

SK: Should investors still be thinking of short selling? It’s

become a bit of a dirty word now, hasn’t it?

DJ: Not for me it hasn’t, no. The FSA implemented the ban on I

think it was 33 financial stocks and it came into force about three

or four weeks ago. The easy way to look at what effect did the ban

have is if we have a look at the share prices of financials and they

have slipped lower. So this would suggest that it’s not the short

sellers who have driven these prices down. I would be the first to

‘Currently, the problem

is that even if

you find a stock

that’s cheap, in a

week’s time it could

be 10% cheaper still’

Feature Multi-investment roundtable

Shares | 30 October 2008 27

admit that possibly short selling exacerbates a move and you may

see higher than normal volatility, but I think unfortunately – as

happens in all market crashes – short sellers have been held up

as the whipping boy to what’s gone on in the markets.

So should investors still be

thinking of using short selling

techniques? Of course they should,

because there’s still an enormous

chunk of the market you can short

sell – most of the market, apart

from these protected species the

FSA have cordoned off for a little

bit. So of course you should short

sell the market, the same way if a

market was roaring upwards, what

would you want to do? You’d want

to be a buyer. The volatility at the

moment means that you need to

think, pay even more attention to

the risk than you normally would.

If you look at the Dow, let’s say you

were short the Dow, the market

could easily go 500 points against

you in the blink of an eye, so I

think investors and traders need to

give extra consideration to how big

they trade, use stop-losses, but

maybe give the stop-loss a bit more room so they’re not taken

out by this day to day volatility. The publicity short selling has

received has been great, because it’s put short selling out

there in the public eye. Unfortunately the spin given by certain

uninformed commentators about it, you would think it

was the only thing that made markets go down and of course

what’s happened since the FSA ban has proved that’s really

not the case.

BK: Shorting is very important for market

liquidity and transparency and I don’t

think that will be lost on the regulators.

However, it is also appropriate that measures

are taken to effect the right controls

and this is what has happened. It gets lost

sometimes that the restriction was on

financial stocks and that actually investors

who know how to use instruments properly,

are in fact knowledgeable enough to use

investment instruments in such a way to

enable them to balance their portfolios. In

the broader industry, you’ve seen uptake in

CFDs and this type of investment to hedge

against equity portfolios and make investments

work in volatile conditions. People

will short – it’s important to short – and it’s

important for the industry. When the dust

does settle down I do think this will be revisited and we have

seen that the impact has not been as dramatic as people

feared when the announcement first came out, whilst maintaining

appropriate controls.

SB: First of all, I make no criticism of the regulators or the

government in terms of the ban on shorting financials. I

think that was a perfectly sensible thing to do in the circumstances

of the environment that we faced. But shorting is a

legitimate strategy for investing. It allows you to take a view

on the market, whether that’s a

positive or negative view, and see

that reflected in the valuations of

your investment. And of course it

can be used to reduce risk and to

hedge a portfolio. And what we’ve

seen is a serious increase in volumes

of the core shorting instruments

– CFDs, spread betting and

also covered warrants – during

September. Given that you can’t

short financials at the moment

and you can’t short them in these

instruments either, it means that

people are shorting the indexes,

they’re shorting other sectors and

other underlyings. So it continues

to be used, it’s a legitimate method

and one which has a part to play in

all sorts of market conditions.

PC: It’s a very difficult environment

for trading and investing

right now. You can get a position on these days and in no

time you can be 5%, 10% off by the end of the day. You might

also be 5%, 10% in profit as well, but I just think that sort of

risk/reward just isn’t sitting with a lot of investors. A lot of

wise money is just sitting on the sides and just letting the

situation play out, and then these people will make some

decisions once the dust starts to settle. I’ve never seen anything

like it and I think the volatility points to the fact that

no-one knows with any confidence

these days what a stock is worth. Is it

worthless? Is it a going concern? And

that’s why you’re getting this almost

binomial path, certainly in the financials

and to a degree, some of the

homebuilders, and this is creating

huge volatility.

A lot of our clients have certainly at

least wound their bet size or trade

size in a bit and are just saying ‘It’s

too much for me, I can’t really get a

handle on it, the traditional measures

and yardsticks have gone out of the

window.’ So it is putting a lot of people

off from investing in these markets.

We always talk about opportunities,

which there are, but it’s not for

the faint-hearted. Have a go, try and

enjoy some of the volatility if you can, but just don’t throw

everything at it because you might just as well otherwise go

down the casino and have a punt on black or red.