Don Wise, one of the great foreign correspondents of Fleet Street, drew a circular map of the world with Moscow in the middle. It was 1980 and he was working, as I was, at the Hong Kong-based magazine Far Eastern Economic Review. It was remarkable how starkly the Soviet Union seemed to be surrounded by enemies, including at the time China, albeit a fellow Communist country.
Now shorn of most of its Eastern European allies, several of whom are in the European Union and Nato, how much more the shrunken Russia must again perceive itself as surrounded by enemies.
That does not excuse Russian interference in the affairs of a foreign country, but such a map produced today would suggest that Russian President Vladimir Putin has rather more cause for paranoia than the US and UK leaders had over Iraq and Afghanistan.
The big, really pleasant surprise is that Putin has shown as much restraint as he has. One can see why, on the Western side, the sabre rattling has fallen to the United States, which has a surfeit of cheap gas from fracking and doesn’t much care if Putin turns off the supply from Russia. Much of Europe is heavily dependent on Russian gas and the UK additionally earns valuable export orders from supplying Russia with arms.
Centrica chief executive Sam Laidlaw pointed out this week that UK production of gas is declining rapidly and within six years we will be importing more than two-thirds of our gas. We need Russia.
It looked at the start of the crisis as if Putin would simply send soldiers in to Eastern Ukraine, including the Crimea, ostensibly to protect Russian speaking citizens there, and would sooner or later annex the territory thus occupied.
It is hard to see what stopped him other than the collapse of the rouble and the Moscow stock market. Putin for all his power depends heavily on the oligarchs who control the Russian economy. Perhaps, on the whole, economic sense prevailed over political sense, even in Russia.
Whatever the reason, we are in a better, though admittedly fragile, position, than we could have reasonably hoped for when stock markets around the world were crashing and the FTSE 100 index lost more than 100 points in a day. Well done anyone who had the nerve to buy on that dip. I’m ashamed to say I hadn’t.
The situation in Ukraine will continue to hang over stock markets but we should invest on the assumption that we will muddle through.
Stock Markets Will Rise Regardless
Within this context I was interest to hear the views of Henderson fund manager James Henderson this week. Like me, he believes that equity returns will outstrip investment such as bonds and gilts with fixed returns.
I have cautioned readers against putting cash into investment or unit trusts where the manager churns the holdings to try to generate short term gain and was initially concerned when he remarked: “Dying companies die faster these days. The life cycle of companies is getting shorter.”
However, he soon made it clear that, also like me, he buys shares in companies he believes in and holds on until he has genuine reason to sell. That is an attitude I commend to all private investors.
Another interesting point to emerge was that more than 50% of companies held by Lowland Investment Company and Henderson Opportunities Trust, whose portfolios he handles, have net cash. I have often argued in favour of backing companies that have prudently slashed their debt while they had chance to do so.
Running up debts in a low interest rate environment is tempting but those that did so will be badly hit when rates start to rise, as they inevitably will despite this week’s decision to take 0.5% base rate into a sixth year.
As Henderson put it: “You’ve got to make sure that a stretched balance sheet doesn’t go with a stretched business.”
More than a quarter of the holdings in Lowland are industrials, a heavy overweighting considering that only about 10% of FTSE All-Share index stocks are in this sector. He looks for “good quality UK industrials that can control their own destiny” such as high tech manufacturers.
Aerospace is one such area. He pointed out that the UK is the second largest aerospace manufacturer after the US.
He sees the current situation for quality companies as “an exciting time when the top line is growing, costs are under control and margins are improving. If there is a bit of weakness in the economy they are going into it with very strong balance sheets.”
One final comment from Henderson is worth pondering: “Cash generation is very strong in corporate UK but it’s not causing complacency. The money is not burning a hole in the directors’ pockets so that they will go out and buy another company because they think they were such good managers they are sure they can turn it round. Any acquisition is debated and talked through.”
Rodney Hobson is a long-term investor commenting on his own portfolio; his comments are for informational purposes only and should not be construed as investment advice.
