Time for shopping, not selling

Margaret Lawson, SVM UK100 Select Fund: In the very short term markets could revisit the lows we saw last year, but there are encouraging indicators: the yield curve is now very positive, usually a sign that markets will recover, and there has been unprecedented stimulus for world economies that will be beneficial over the next one to two years.

But fiscal stimulus is only one part of the recovery. A comprehensive strategy of monetary easing and policies to restore stability in the financial market is necessary. Unless the financial system recovers, any fiscal stimulus will be of little help and the economic recovery will be protracted and weak.

After such severe asset destruction in the market there are good buying opportunities. Valuations are compelling and dividend returns are attractive compared to bank deposit rates. There are however some sectors which will not improve during 2009 so it is important to remain cautious. Investors should focus on a company's cash flow and its ability to pay a sustainable and growing dividend.

We expect there is going to be a lot more volatility which will provide the opportunity to buy good companies at lower prices. We have a shopping list but are waiting for the right price to buy.

We are looking for companies with strong balance sheets which are not encumbered by debt and that will benefit from the stimulus spend in infrastructure, oil and gas. Given the correlation of oil demand to GDP the outlook for the oil price is negative in the short term. But as demand recovers, prices will correct quickly especially in light of recent investment cuts. Oil remains an area of good opportunity over the next few years. There will also be good opportunities in selected financials but currently the financial system is starved of capital and the private sector is unwilling to support further losses. There has to be a separation of good assets which have a future and will be supported by private investors, and bad assets which must be sold or temporarily taken under Government control.

We have been holding relatively high levels of cash but expect to reduce this quite significantly, particularly in the second half of 2009. We will keep some cash aside as we are expecting rights issues across the board, and not just for companies that are impaired.

Many companies will want to position themselves for the recovery, which could involve buying cheap assets. There will be rights issues from companies that are heavily indebted and cannot go to the banks, but also rights issues for companies that want to grow their businesses into the recovery. In view of the destruction there has been in share prices we think investors will be well disposed to rights issues, and this will be an important theme for the equity market in 2009.