Paul Murphy  on Sunday, May 18, 2008

One of the most intriguing investment calls is begging to be answered: what’s a better buy – banks or miners?If that sounds a bit random, consider this. Shares in the world’s most powerful banking institutions are trading at the sort of depressed levels not seen for at least 15 years. At the same time, the world’s leading resource companies – notably the global mining giants listed in London – are trading at the sort of elevated levels never before seen in the modern age.

Let’s put it another way. In the wake of the credit crisis in the West, do the major banks now offer outstanding long-term recovery potential, or are they so damaged that their ratings will remain depressed for years to come? Similarly, are the world’s major resources stocks simply part way through a “super-cycle” where burgeoning demand from the new economic powers of the Middle East and Asia will take these companies into a new era of ultra-profitability. Or are the big miners in particular exhibiting signs of “dot com mania” with investors bidding share prices to unsustainably high levels?

I’m wary of offering a straightforward answer here. These related questions are central to the immediate future of the financial and business world, and yet they somehow defy fundamental analysis.

What’s more, some of the very greatest investment brains disagree absolutely on the answers.

Take Anthony Boulton, the soon-to-retire superstar fund manager at Fidelity International in London – commonly considered to be the top stock picker in Europe over the past two decades. He has a firm view: banks are looking cheap; miners are looking distinctly expensive.

He told the Financial Times this week that while he expected the major equity markets of the West to face further weakness as economic slowdown cut into corporate profitability, the moment to switch out of the outperforming resources sector appeared to have arrived.

“The re-equitisation of banks is a good entry point,” he said. “The upside will come as they rebuild margins.”

However, set that against the views of one Donald Coxe, the hugely respected global portfolio strategist at BMO Financial – better known as the

Bank of Montreal. He talks of a “bipolar financial and economic power shift”, which is creating new global economic leaders, who will dethrone Wall St as the ruler of the international financial system. In a recent overview of his investment proposition, Coxe told clients: “It is our thesis that Wall Street’s two cynical campaigns to enrich itself by inflating bubbles and draining investor savings [the tech mania and housing bubble] have done more than spawn two unnecessary recessions and a global financial crisis: they force investors to rethink their risk appraisals and investment policies.

“Those Wall Street-created disasters came at a time major new economic powers were emerging across the Pacific. The investment thesis for participation in these spectacular growth stories isn’t based on something as insubstantial as the fraudulent tech accounting and flawed CDO formulas peddled by Wall Street shills and mountebanks: it is based on the global scarcities of food, fuels and metals as millions of new consumers are added to the global economy. The shares of the companies that the world relies on to find and produce what Asia must have should no longer be rated as low-investment-quality cyclicals. They deserve higher investment ratings than Wall Street banks, because they do what is necessary and they have real, clear assets and real, clear earnings.”

Catch that? A shill is a deceitful enterprise, or someone who lures you into a swindle. A mountebank is a “hawker of quack medicines who attracts customers with stories, jokes, or tricks”, according to the American Heritage Dictionary.

As I indicated above, these are polemical answers to the central investment question of these confusing times. Bolton says the world has not changed, that normalcy will return; Coxe says core economic power has shifted on a world hinge – and if you do not have a big portion of your investment portfolio in commodities of some description you will be buried. I can’t pretend of offer guidance as to which man will be proved wrong – other than saying, rather limply I’m afraid, that both will be right to a degree and both wrong in the certainty of their forecasts. At some point the application of new technologies will kick in, lessening the demand pressure on scarce natural resources. Cars will adopt fuel cells; genetic modification and the like bring down the price of rice and wheat. At some stage.

But at the same time, to suggest that economic power has not shifted in the world would be to ignore the blindingly obvious. To suggest that Wall Street will regain its arrogant swagger anytime soon would be delusional.

  – Paul Murphy is associate editor of the Financial Times.


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