When going gets tough - buy

Rob Stock, Sunday Star Times | May 11, 2008

Investors are being offered access to big but battered
firms expected to again fly high, writes Rob Stock.

Home-grown capital-protected funds issuer Liontamer has begun taking money for a “Fallen Angels” fund to encourage investors to take advantage of huge collapses in share prices of some of the world’s biggest companies.

The Fallen Angels fund, the latest of 30 capital-protected funds launched by Liontamer, gives investors exposure to the future recovery and growth of 16 companies whose shares have crashed as a result of what has become known as the credit crunch, and the economic slowdown it has created.

It is calling this basket of 16 shares the Liontamer Fallen Angels Index.

The shares of many companies, banks in particular, had been beaten down to unfairly low prices, said Janine Starks, Liontamer investment director.

Starks said Liontamer searched for companies that had suffered huge falls for the Fallen Angels fund, but included only shares which its parent bank, Belgium-based KBC, had pegged as good companies with strong businesses.

They include eight banks (see table) which have seen their combined market capitalisation fall from $185.7 billion on April 30, 2007 to just $85.1b on the same date this year.

They are not alone. A study by Liontamer of 18 major global banks, including the eight featured here, shows they have lost a combined $794b from their market capitalisation in the past year.

To put those falls into perspective, the IMF estimates total losses as a result of the sub-prime loans scandal at $US275b ($324.5b), the total paper write-downs they expect banks to make on the back of the junk bond market collapse. Currently, only $US32b ($40.4b) are actual real loan losses.

Starks said: “It is our view that selected banking stocks represent good value at current levels and therefore 50% of the Fallen Angels fund is made up of companies operating in that sector.

“One example is a solid company like UBS, the premier bank of Switzerland, which has lost over 50% from its 2007 highs. Despite writedowns, we believe a company with a balance sheet like UBS is well positioned to recover strongly from the credit crunch, and currently represents good buying.”

The remaining eight companies in the fund are well-known giant multi-national firms which have been caught up in the general market sell-off, but remain global leaders and have a good chance of staging a recovery.

Starks said: “Companies like the US conglomerate General Electric and pharmaceuticals giant Pfizer, who are in the process of restructuring their businesses, have lost over 16% [GE] and 11% [Pfizer] over the last six months.

“We believe that current prices provide bargain-basement buying opportunities for savvy investors.”

Global sharemarkets usually bottomed-out when there is no doubt recession has set in, Starks said.

“This point in time is looming as the US recession is now largely undisputed, with the Federal Reserve governor, Bernanke, confirming this position. A normal recession lasts around 10 months, so a bit more bad news could still be in the wings. But for investors, Liontamer believes now is the time to overweight equities, “Starks said.

Investors get between 90% and 100% capital protection, depending on which of two unit classes they buy.