Bulls May Resume Charge Soon?

Source : The Business Times, September 11, 2007

THE next bull market in equities is just around the corner despite the current turmoil in financial markets, a top US investment manager said here yesterday.

According to Ken Fisher, founder and chief executive officer of private money management firm Fisher Investments, which looks after US$35 billion of assets, investors should be 'aggressive' in buying shares.

He recommends that the materials, industrials and energy stocks but not big blue chips. And he expects 'a big up-move ahead later in the year tied to takeovers and share buy-backs'.

He also reckons the current uncertainty in the financial markets is encouraging companies and investors to hoard cash, which 'at some point comes out'.

Mr Fisher, who writes a regular investment column for Forbes magazine, is in town for the three-day Forbes Global CEO Conference which started yesterday.

Another guest speaker at the conference, Prof Michael Spence, who won the 2001 Nobel Prize for economics, said that the problems in the US sub-prime mortgage market are unlikely to have an 'excessive impact' on the global economy or Asia. 'I don't think Asian countries are particularly vulnerable now,' he told reporters.

Mr Fisher argued that despite fears of a credit crunch, the cost of borrowing for an average company with a triple-B credit rating is still cheaper than in June, before the current financial market turbulence started. 'The only part of the world where the rates have gone up is at the junk-end.'

On average, corporate earnings yields, or a company's earnings per share as a proportion of its share price, are still above 6 per cent for a typical company that trades at 15 times earnings per share, he said. This compares with after-tax borrowing costs of about 4 per cent for an average company with a triple-B credit rating.

The difference in borrowing costs and earnings yields still makes it highly attractive for companies to issue debt and buy back their own shares or acquire other companies, which Mr Fisher predicts will drive the next round of share price increases once investor confidence returns, which he expects will happen by Christmas.

Meanwhile, with investors demanding higher returns for staking money on 'junk' or high-risk bonds, smaller companies with poor credit ratings will be less able to defend themselves against a takeover by borrowing to raise cash, he said. 'Sub-prime actually sets the stage for the next level of takeovers.'

Rather than buying blue chip shares, he advises investors to look at 'companies that seem a little junkier' because these are the most likely to see their share price rising when the takeover wave resumes.