'Too late to panic,' investors warned

By Jorn Madslien
Business reporter, BBC News

Stock markets have fallen sharply, along with the value of investments in other asset classes

At a time when recession fears are spreading like wildfire across the world, Investec Asset Management chief executive Hendrik du Toit has a word of advice.

"This is not the time to panic about the industry or about the world," he says.

"You should have done that a long time ago."

Alas, few did.

Until September this year, the current economic crisis still seemed containable, though the exuberance of recent years had been curbed in line with plunging returns on investments.

Yet there were still plenty of optimists around who were predicting the credit crunch to be nearing an end.

"Everyone was saying 'a few more months, a few more months'," says Mr du Toit.

"Well, clearly it's going to be longer than that."

Depression?

Most people agree that the recession will last for at least a year, and quite possibly longer.

Fear of companies failing has slashed corporate bond values

Yet the current level of pessimism may be excessive, with the pendulum having swung too far the other way.

"The markets are currently voting for depression," observes Philip Saunders, portfolio manager and head of investment strategy at Investec AM, pointing to how US investment grade corporate bonds are trading at their cheapest rate since 1932.

Corporate bonds are deemed dear or expensive relative to their spread over government bonds. In the US, this spread has widened to levels not seen since the 1930s depression.

What this means, explains Mr Saunders' colleague John Stopford, co-head of fixed income, is that "the markets are trading as if this [downturn] was something apocalyptic, something extraordinary".

"It predicts that half of all high quality companies will go bust over a five-year period," he says.

Cheap barrels

That, Mr Stopford reasons, is extremely unlikely.

It is half the price to find barrels of oil on Wall Street today than it is to find it in the ground Jonathan Waghorn, Investec

Even during the 1930s depression, when companies were generally more indebted than they are now, no more than 5% of all investment grade companies went bust, and even amongst junk-rated companies more than half survived the depression.

Consequently, Mr Stopford believes, investors should buy corporate debt.

"Your returns if you own corporate bonds are likely to be very, very high - or moderately high - depending on your outlook," he predicts.

Such confident investment advice is rare these days, after a year or so when "virtually all risky assets have fallen together," says Investec AM's Terence Moll.

The broad decline in asset values has made a mockery of recent efforts to reduce risk by diversifying investments, he insists.

"In the last few months, virtually nothing has provided diversification," he says.

Jonathan Waghorn of Investec's energy fund, who has seen the crude oil price fall by almost $100 a barrel from its peak of more than $140 a barrel during summer, has one bit of advice to investors.

Shares in energy companies have fallen sharply in value, so "it is half the price to find barrels of oil on Wall Street today than it is to find it in the ground", he quips.

And so the hunt continues for assets that might provide investors with a return on their investments.

It is a chase that matters for everyone as the asset management industry's main job is to look after everyone else's retirement income.

Mr du Toit is cautiously optimistic, predicting that "we have had the biggest portion of the damage already", though nobody should expect a quick fix.

"Positive earnings numbers will be exceptional for this industry going forward," Mr du Toit says.

The opinions expressed are those of the interviewees, who were speaking at an Investec conference, and are not held by the BBC unless specifically stated. The material is for general information only and does not constitute investment, tax, legal or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation.