Don’t misinterpret short term business cycle as economic strength, fund manager warns Government

7th October 2013

The Government should not misinterpret recent growth in the economy as demonstrating more strength than is actually the case says David Crawford, manager of the City Financial UK Equity Fund

Crawford says that the biggest feature of the economy is that “We have seen a huge credit cycle, with the associated build-up of debt, which began post WW II and has now peaked.  The peak for the private sector was 2007, whereas for the government it is more likely to be 2013-2015. If debt is peaking, the deleveraging process will have huge ramifications in the real economy and for policy makers.  Secondly, there is the business cycle, where expansion started in 2009 and which could now be in its latter stages. Recent noises about Fed tightening are in response to a stronger economy.”

“My concern is that governments might misinterpret recent growth in the economy, which is part of the short term business cycle playing out, as a more marked portent of strength than is actually the case.”

He says this carries a warning for investors too.

“The simultaneous effects of a slowing business cycle and a deleveraging from the credit cycle would be extremely painful.  It is highly likely that the policymakers would quickly seek to alleviate this pain with new easing; the period up to that policy response, however, could be highly destabilising for asset markets.”
For his fund, he says this means he will “continue to run the fund on a prudent basis; we will not pay more for a stock simply because it looks cheap against bonds or cash.  We take long positions in businesses with attractive long term prospects and where we can buy them on a free cash-flow yield to equity in excess of 6-7%”. He says this includes multi-channel technology solutions company Premier Farnell, which supports the electronics industry in particular and operates globally.

He says he is also looking for opportunities to take short positions in companies with structural issues where investors are not being fairly compensated for that risk.

One such example is African Minerals, a West African iron ore producer, who have large costs associated with bringing their mine to development phase, and who have had to meaningfully dilute their future operating margins by offering discounts to a Chinese trading partner, in a deal to fund their capital expenditure spend.

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