When the head of humbled and taken-over Wall Street colossus Merrill Lynch suggests today’s markets face a re-run of 1929 and legendary investment mover George Soros tells a US congressional committee that ‘a deep recession is now inevitable and the possibility of a depression cannot be ruled out’, any investors who were not already thinking the same must now have pause for thought.

Recently hovering near 4300, the FTSE 100 Share Index is 35 per cent off its 52-week high, despite a bounce from even lower terrain, while the AIM All Share Index has fallen 60 per cent in a year.

Drastic measures
The Bank of England’s drastic 1.5 per cent cut in base rate to three per cent, their lowest level in 53 years, has acted like a double-edged sword. It offers potential relief to both companies and individuals, provided banks desperate to restore their balance sheets can be cajoled into passing it on when, more importantly, they can also be persuaded to resume lending.

But the cut also signifies how seriously the Bank of England views the economic situation. The ‘Old Lady’ having been stripped of its former role of trying to curb the excesses of the banks, governor Mervyn King now has the thankless task of helping pick up the pieces their folly has left.

As we have said before, universal gloom can be the signal for a stock market revival – and robust investors with long pockets and equally long time horizons have an array of bargains from which to select. But ordinary mortals remain appropriately cautious, focusing on special situations, consolidating bids and the like.

Courage under fire
Confidence is the key. For as long as companies and people are too scared to take decisions and make commitments, the economic and commercial agony must be prolonged, even though a reawakened faith in state intervention might offer some balm.

Mounting unemployment, with thousands laid off at BT in recent weeks and in the building and finance sectors, can be a bullish indicator, prompting monetary easing and fiscal stimulus by the government, which has indeed been signalled. The fall in three-month sterling London Interbank Offered Rate (LIBOR) from more than six per cent to 4.3 per cent, the continuing slide in oil to below US$52 a barrel and the weakness of the pound suggest some thaw could be in prospect, though US interbank rates ticked up the other day on the administration’s abandonment of plans to buy the ‘toxic’ assets of banks.

King has given his blessing to tax cuts and increases in public spending, and the signals are for further falls in interest rates on both sides of the Atlantic and in the eurozone, though the implications for government borrowing could be serious. Whatever a
weak pound does for the UK’s remaining manufacturers, it only makes financing the government’s deficit even harder.

Nothing doing
For now, the talk is all of deals stalled, bank facilities removed or renegotiated, jobs cut and flotations pulled. Financial groups around the world are estimated to have lost some £674 billion from the credit crisis itself and the ramifications are still spreading through the system, while gold, briefly in vogue as a doom hedge, has recently been trading around $200 an ounce below recent peaks at $720 or less.

A new US president in waiting, committed to eschewing the errors of his predecessor, has encouraged many to hope for great things. Doubters, however, have noted the possible protectionist implications of Barack Obama’s commitments to revive the stricken parts of the US economy and recall how retaliatory protectionism prolonged the Great Depression of the 1930s.  

Investors looking for chinks of light have gone to traditionally non-cyclical or counter-cyclical areas. These include pharmaceuticals, where GlaxoSmithKline has risen nearly 20 per cent in a month to £12.41, and, ironically, tobacco, where BAT, at £17.09, is 35 per cent from its year’s low after nine-month profits up 18 per cent to £2.7 billion on turnover 19 per cent ahead at £7.3 billion.

Insurance policy
Another sector finding favour has been non-life, London market-focused insurance, which, despite recent premium rate falls, is seen by some as counter-cyclical and should draw significant benefits from a strong US dollar (while that lasts). Amlin has risen from a 235p 52-week low to 365.5p, Hiscox has advanced from 191.5p to 312.75p and Jardine Lloyd Thompson has gained 66 per cent to 508p.

Elsewhere, defence giant BAE Systems has stirred some attention with talks about selling up to 24 Eurofighter Typhoon fighter aircraft to the Gulf state of Oman. Such a deal could be worth at least £1.4 billion and lead to lucrative maintenance and support work on top, and should do no harm at all to BAE, whose shares, after falling from 515p last year to 302p in October, have recently rallied to 358.5p.

Oil’s weakness has not stopped a still-depressed BP from rallying 30 per cent in 13 months to 497p; while property sector weakness and postponed break-up plans have left Land Securities nearly 60 per cent off its 2007 high at 982p.

Sector view: outplacement
A time of recession, as companies ‘shake out’ staff with increasing urgency, can offer useful opportunities to outplacement specialists. One such, Penna Consulting, speaks of ‘continuing growth’ in ‘scale and profitability’ after lifting pre-tax profits from £517,000 to £2.1 million in the six months to September – £170,000 more than for the whole of the previous year – on turnover up 29 per cent to £28.9 million.

Britain’s market leader in ‘career transition’ (helping companies advise staff facing redundancy or other issues), Penna recently finished a large restructuring and downsizing job at music group EMI and undertakes hefty long-term public sector relocation contracts. With cash more than doubled to £5.1 million, chief executive Gary Browning points to other strengths, such as consulting and coaching, which should flourish in an eventual economic upturn. Analysts suggest Penna could more than double full-year pre-tax profits to £4.3 million. At 157.5p, the shares should outperform the averages.

Perfectly positioned
Among other candidates, ‘talent management’ specialist Savile Group, at 27p, has turned a £186,000 loss into annual pre-tax profits of £724,400. Executive chairman Jonathan Cohen claims upheavals in the City find the company ‘perfectly positioned’ to help corporate clients ‘nurture their best talent and ease the transition brought about by restructuring’.

Elsewhere, headhunter Hexagon Human Capital presents more speculative possibilities at a depressed 70.5p. The company, which recently bought US executive searcher Winchester Group, is strong in ‘interim management’, supplying senior people under short-term contracts to manage crises.

Robert Tyerman is news editor of Growth Company Investor, the UK’s leading magazine for AIM and small-cap analysis.