How to Profit from the Credit Crunch

Things may be looking pretty grim for the European economy, but is there still money to be made from understanding how consumer trends are shifting? Here are some opinions on which areas might be more profitable than others in the current environment. (You can watch the full video report below).

Guy Monson, Partner, Sarasin Investments

“A lot of asset managers, private banks and non-life insurance companies with little or no exposure to subprime have been marked down almost as much as investment banks, which sold the products in the first place. I think there’s plenty of opportunity there, particularly as the Middle East and Sovereign Wealth Funds have been looking for those assets to be managed.”

“The sort of tremendous earnings numbers we saw out of ArcelorMittal and Siemens are going to continue to drive earnings in the engineering sector. The luxury goods arena, which should have been decimated by the sort of credit contraction we’ve seen is again selling very well into a booming emerging world. Great numbers on the sales side from Hermes and Richemont and on the earnings side from Louis Vuitton Moet Hennesey (LVMH). So ironically, I think the luxury goods sector is going to be an area that’s going to continue to perform strongly.”

“Don’t neglect the government debt market, issuance is up.”

David Hart, Senior Research Analyst, Fat Prophets

“Good defensive plays like Inbev, SABMiller, Phillip Morris, BAT. I also like oil services companies like John Wood – it’s UK listed and benefits from oil & gas moves but isn’t as volatile, and profits are more steady.”

John Haynes, Senior Research Analyst, Rensburg Shephards

“Insolvency firms like Begbies Traynor have done very well; energy infrastructure, companies like Rolls Royce; and niche engineering firms like Rotork, Spirax Sarco Engineering - global food brands, too.”

Hugh Hendry, CIO, Partner, Eclectica

“Bonds! The credit crunch – you’ve got to go back to 1942 to last observe the contraction in lending in America to the corporate and industrial sector. You can’t go back far enough to find a period in the UK where mortgage loan growth has just stopped. There are queues outside banks to get mortgages. That is profoundly deflationary. This spike that caught everyone out in oil - when it went from 100 to 140 - got all the experts pointing the wrong way, and saying “inflation inflation”. When the banks are as insolvent as they are today, there is no dissemination. There is no ability to carry higher prices from the specific sector of commodities into the general and into general wages. You have to be willing to be contrarian at this point and own government bonds. And it’s hardly contrarian because -- would you believe -- if you had a portfolio that was solely comprised of 10-Year US treasury bonds then in the year to June this year you would have returned 15 percent. Ross, the market fell 20 percent, so you would be up 35 percent vis-à-vis the average stock. It’s ironic that we have this obsession with something, whereas the reality – the litmus test – is the Treasury bond, and it’s recording gains of 15 percent, and that’s telling you of the turmoil in the equity markets and the turmoil in the real economy.”

Nick Hodson, Head of Equities, Lloyds TSB Private Banking

“Smaller companies that are extremely well capitalized and can choose over medium term to benefit from the issues that are hitting those larger banks that are more closely regulated by the FSA.”

Ronan Carr, European Equity Strategist, Morgan Stanley

“The best trade for earnings recession is long pharma, short industrials. The key trade in our portfolio, therefore, is overweight defensives and underweight cyclicals. Specifically, our largest overweight is healthcare. The sector combines earnings that are very resilient to cyclical downturns, strong balance sheets and attractive valuations. Our key underweight is the Industrials sector where we see significant earnings risk, as outlined above. We are neutral or overweight some bombed out value and interest-rate sensitives, notably insurance and UK consumer cyclicals.”

“Buy Novartis and Roche. UK consumer cyclical stocks looking cheap. Buying opportunity later this year in commodities, especially as fundamentals look underpinned for several more years in major emerging markets such as China, Middle East and Russia.”

Ian Morley, Director, DDQ

“I think water is being increasingly recognized as the oil of the 21st century. The consumption of water is growing. It’s huge use in both agricultural needs; a growing population. There is a shortage of water, and clean water, and the pipelines needed for water. We’re taking a holistic view, in terms of traditional water companies, and the ability to use water, transport water, purify water. This is the type of commodity that is going to be particularly strategic going forward.”