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Comment: Opportunities beckon to exploit market weaknesses

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Bruce Stout, senior investment manager for global equities at Aberdeen Asset Management, says the firm’s nostalgia for the days of the bull market is limited, since few quality companie

Bruce Stout, senior investment manager for global equities at Aberdeen Asset Management, says the firm’s nostalgia for the days of the bull market is limited, since few quality companies on offer then were trading at attractive prices, whereas now long-term equity investors have the opportunity to invest inexpensively in companies with sustainable business models, healthy balance sheets and trustworthy management.

‘Unprecedented’ may be an over-used term in investment, but few periods in financial history compare with 2008. Grid-locked money markets, high profile bankruptcies, historic actions by governments and authorities, and last but not least, a world economic slowdown, have provided a grim backdrop for global equity investing over the past 12 months.

The MSCI World Index has dropped by 46.9 per cent since the beginning of 2008, and in a stark illustration of the extent of investors’ panic, volatility, as measured by the VIX index, has spiked to levels untouched during the Asian Crisis of 97, the TMT bust, or even the period following September 11, 2001.

Meanwhile, despite comparatively healthy fundamentals, emerging markets have proven to be no safe havens, and hopes that they could decouple from developed markets have foundered.

As evidence of slowing global growth accumulates, it is difficult to be positive about the macroeconomic outlook. The West – especially the US and UK – is likely to witness a long and painful downward adjustment in living standards, as consumers are forced to deleverage.

Meanwhile the prospects of tightening regulation and deteriorating company profits and dividends are further areas of concern for equity investors, albeit that some regions, such as Asia, may fare better than others in terms of earnings and ability to reward investors.

Today’s pessimism contrasts sharply with the optimism of the bull market of 18 months ago, when interest rates were low globally, economic growth was strong, and the only fly in the ointment was the worry that Western economies were over-burdened with unsustainable debt.

But our nostalgia for the days of the bull market is limited. Although plenty of quality companies were on offer back then, few were trading at attractive prices. For equity investors with a long-term perspective, panic and market volatility has led to – and continues to lead to – opportunities to invest in companies with sustainable business models, healthy balance sheets and experienced, trustworthy management, at inexpensive prices.

For example, we have been underweight the US for some years, finding better opportunities elsewhere, such as in Europe and emerging markets, but in recent months an increasing number of high calibre US companies have begun to pass our price criteria. We recently initiated positions in three US companies, insurance company Aflac, consumer products company Proctor & Gamble, and Dow Chemical, at attractive prices.

Market weakness has presented opportunities elsewhere, too. Having had no exposure to miners for the last five years, we recently took advantage of the sell-off in resources companies to introduce high-quality UK-listed Rio Tinto, a business we had eyed for a long time but which had been trading on a high valuation amid the commodities bubble. We have since taken advantage of further price falls following the collapse of BHP Billiton’s bid for Rio Tinto to add to this holding.

As always, we have also used market movements to manage our portfolio weightings, and extreme market volatility and risk aversion has kept us pleasingly busy in late 2008, adding to existing holdings globally on price dips and reducing strong performers on strength.

Given a poor macroeconomic outlook, 2009 is going to be much tougher for investors in all asset classes. As far as equity markets are concerned, investor revulsion is running at an all-time high, but the more markets fall in the near term, the more quickly they can bottom out. This will only happen when investors finally become numb to all the bad news.

Thanks to our long-term investment horizon and stock-picking style, we believe we are ideally placed to take advantage of the market weakness that is inevitable in 2009, rather than being victims of it.

In fact, we see this weakness as a remarkable – perhaps even unprecedented – opportunity to further upgrade the quality of the holdings in our portfolios, by building up positions that will bear fruit for patient investors like ourselves over the longer term.

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