Business | Opinion
Orient Express scenario looms
Wealthy investors, like everyone else, are facing the Murder on the Orient Express scenario.
- By John Authers/Financial Times
- Published: 23:38 January 7, 2009
Wealthy investors, like everyone else, are facing the Murder on the Orient Express scenario.
In Agatha Christie's famous mystery, a man is found dead in his compartment on the Orient Express. During the night, he has been stabbed 12 times. Hercule Poirot has to work out who among the 12 other occupants of the carriage is guilty.
The evidence seems to point to all of them. And indeed, he reveals, all of them were guilty - they plotted together to kill the man and each stabbed him once.
In the same way, if you are looking for an investment that will not lose you money, it seems that all the opportunities open to you will, in fact, put a knife through your wallet. Even with US equities alone having lost something like $10,000 billion (Dh36,720 billion) in market value during the past year, there is nothing that looks appealing, at least in the short term.
Cash will offer a barely positive return, as central bank target rates appear to be converging on zero. Juicing up that return a little bit by dabbling in short-term debt markets will, after recent months, be very difficult indeed.
Bonds, particularly of developed countries, should be appealing but they have been heavily bought. They also face the risk that increased supply (or issuance) of bonds will depress prices. And they are vulnerable to a return of inflation.
Commodity prices have halved, and most of the points that were made to justify their rise only a few months ago - that the emerging world is demanding more of everything and that supply of many commodities is constricted - remain valid.
If the world gets through the coming dose of deflation reasonably quickly, and all the pump-priming measures lead to renewed inflation, commodities could pay off. Yet if the deflation persists, as it did in the 1930s, they have further to fall.
Equities are cheaper than they have been in a decade. Various metrics show they are cheaper than the historic trend, which can be derived by looking at the underlying value of equity on their books, or by taking a multiple of their average earnings over an extended cycle.
The problem here is that equities tend to overshoot in both directions before they turn. If they overshoot from here, they could get much cheaper before they turn upwards once more.
Structured products, which offer minimum guarantees in return for slicing something off the "up-side" of an investment, have obvious attractions for investors in this environment.
But they do not have much appeal for those supplying them. The economics of offering them become expensive when it is harder to fund the guarantees.
Hedge funds and private equity funds - sectors that have in recent years allowed the wealthy to profit more than their peers - are unlikely to do so in future. Hedge funds have incurred nasty losses in recent months.
While there are honourable exceptions, many of which will continue to prosper and will want to put limits on how much money they receive, both hedge funds and private equity had become overcrowded with "me-too" players relying on cheap leverage. It will be hard to place money in the fittest survivors.
The surest bet may be on the accountants. After a year such as this, wealthy investors will be sitting on historic losses and anyone who can work out how to maximise the tax benefit they derive from this will be most useful - even if this does not much help governments' attempts to launch a new New Deal.
So what can wealth advisers offer to their clients now - beyond suggesting that the wealthy do the same as everyone else and dribble money into stocks at steady intervals that minimise timing risk?
Perhaps the best bet will be in investments that exploit the ability of the wealthy to think for the truly long-term. Even with oil prices falling, alternative energy looks like a better bet than many.
Investments in wind farms and the like should grow more popular. In a New Deal-like climate, infrastructure investment also becomes more attractive - whether it is repairing the crumbling US infrastructure or building in the emerging world, government money should help the sector's long-term prospects.
And active fund management could return to vogue. The sell-off of the past year has been indiscriminate. Almost by definition, this will create bargains, for those who have the patience both to do the analysis needed to find them, and to wait during the turbulence and the rest of this bear market for the anomalies to correct themselves.
But in the short-term, this is not the time for big contrarian or unbalanced bets. The Orient Express rule applies - almost any asset class could lose a lot of money.
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