Where to hide your cash in these pessimistic times
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MoneyWeek editor-in-chief
Merryn Somerset Webb Aug 19, 2008
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Cash is good - but put some into gilts
"Dairy farmers throughout Wales and the south west are now suffering worse than anyone else in the agricultural recession . . . it seems barely creditable that the large areas of the familiar West Country landscape of hedgerows and small fields could be abandoned. According to experts at FDP Savills, however, that could happen in the next couple of years."
The result? "The prospect of many beautiful areas of the country becoming impossible to let or sell."
So said the editorial of Country Life magazine on July 27 2000. Whoops! Land prices have been rising ever since. There's been no shortage of buyers. In fact, anyone who has put land up for sale in the past few years has had the satisfying experience of watching rich City-lifestyle buyers and real farmers elbow each other out of the way to get their hands on fields anywhere from Cornwall to Northumberland.
In the past two years, arable land prices have doubled and, according to the latest survey from the Royal Institution of Chartered Surveyors, they rose 24% in the six months to the beginning of this month alone. Want to buy your own bit of land today? It'll cost you £13,000 a hectare.
It's a timely reminder that periods of great pessimism are often fabulous opportunities to buy. I bet the editor of Country Life wishes that instead of worrying about the collapse of the countryside and berating Labour's leaders for taking their holidays overlooking the "immaculate terraces of the Mediterranean" instead of in Britain, he'd cobbled together a deposit and bought himself a mini-estate in Devon.
So here's the question: will we all feel the same way about today's most loathed sectors – bank stocks and housebuilders – in another eight years?
I think not. Had one stopped to think about it, there was good reason to be bullish about land in 2000. Commodities were just starting to show signs of life after a 20-year bear market and a quick glance at China's changing eating habits, at global grain inventory levels and at the oil price (which tripled between 1998 and 2000) would have suggested that abandoning agricultural land would have been a bad decision.
However, there is no such good reason to buy the sectors shrouded in pessimism today. Consider the banks. They may have had a reasonable stab at dealing with the losses from the subprime debacle (what the members of a roundtable I chaired at Moneyweek last week called their "gambling losses"), but they haven't even begun to face up to the old-fashioned banking losses coming their way: the defaults from mortgage holders, credit card debtors and the many cash-strapped companies that just aren't going to make it through the UK's recession or the simultaneous global slowdown.
For a hint of what might be about to come, look at the results just out from Britannia. A year ago, its bad debts as a result of mortgage defaults came in at around £15m in the first half. The comparable number this year? £40m.
Then look at the housebuilders. They're still mired in debt and selling into a market that is paralysed in volume terms and collapsing in price terms. Bellway has just announced that reservations for new home purchases are down 45% and that cancellation rates are at "unprecedented levels". It's pretty grim. But that doesn't make it anywhere near a bottom. There is no way that prices won't keep falling and no way buyers will become any less nervous than they are already.
For every early bargain-hunter Bellway is likely to see this year, several would-be buyers will retreat to the safety of the oversupplied rental market. The fact is that however much it is tempting to think that things can't get worse, they can.
Buying into banks or housebuilders right now – as many have in the past few weeks – is a triumph of hope over reality last seen when desperate tech bulls, convinced that their bubble couldn't really have burst, piled into bombed-out dotcoms in the wake of the 2000 Nasdaq crash.
I don't like much else in the equity markets, either. Nothing Asia-related – falling global growth means these are markets to stay out of for a year or so. Nor commodities quite yet (except gold) – prices are bound to overshoot a little on the downside. Not property of any kind, for obvious reasons. And not anything remotely geared to the discretionary spending of the western consumer.
Nevertheless, despite my almost entirely negative view on everything, I can't help mulling over the Country Life editorial. After a lunch this week with Jim Slater and other clever investors – a lunch in which we all admitted to holding large percentages of our assets in cash – I want to be a little more invested than I am. So I'm doing the following. I'm buying into the gilts market. If the global downturn continues to unfold as nastily as I think it will, interest rates will soon start their decline. Holding UK government bonds could therefore bring not just the 4.5% or so yield on offer but also some capital gains. You can get diversified exposure to this market via the iShares FTSE UK All Stocks Gilt (IGILT).
I'm also mulling over some reasonably high-yielding UK blue-chips. Not the ones that are only high-yielding in theory, but the ones that are actually likely to keep paying their dividends. This means small holdings in stocks such as GlaxoSmithKline, Vodafone and, despite my concerns about the commodity markets, Shell on a pe ratio of 6 times and a dividend yield of 4.3%. Its shares didn't exactly track the oil price up, and so now offer what looks like long-term value.
• This article was first published in the Financial Times
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