Domestic economic gloom, exacerbated by the Eurozone’s unresolved crisis and compounded by the political impasse over the US government’s debt ceiling, has not been good for investors’ nerves, on either side of the Atlantic.

What is good for gold, propelling the beguiling metal and barometer of doom above $1,600 an ounce, tends to be unsettling for equities.

Economic and financial setbacks need not always be bearish for forward-looking share markets, provided that investors believe the bad news is all out in the open and they can anticipate an eventual improvement.

But uncertainty, at present made worse by the confidence-sapping scandals involving News Corporation, politics and the press, is unwelcome and, not surprisingly, recently brought the FTSE 100 Index back through the 6,000 level to below 5,800, nearly 17 per cent below its all-time peak of 12 years ago.

There is plenty of potential value in the market, as many fund managers point out, and rallies are to be expected, especially for as long as it remains possible to keep interest rates low. But there is still scope for unsettling shocks as well as pleasant surprises, and a selective approach is still best.

Interest rate moves govern much of the business outlook, particularly, of course, for banks and property companies. All British banks have passed the European Banking Authority’s stress tests, though many wise observers question whether these have been tough enough.

Least favoured has been Royal Bank of Scotland, at a recent 12-month low of 33.08p, which narrowly scraped through and yields nothing. The bank is also seen as facing a hard struggle to exit the government’s Asset Protection Scheme by its declared target of the second half of next year.

Similarly on the ‘punters only’ future recovery list is Lloyds Banking Group, also testing year’s lows at around 42.25p and yielding nothing. Despite passing the stress test with comparative ease, the company is not finding the disposal of its 632-branch network mandated by the European Commission particularly plain sailing and is seen as exposed to one or two potential further headaches in parts of its loan portfolio.

Barclays has also been trading at a year’s low of 212.8p, as has hitherto geographically well positioned HSBC Holdings at 593p, but they do at least offer yields, of 2.1 and 4.2 per cent respectively, offering some comfort while income returns are low. The riskier may bounce further if all comes right, but caution is the current watchword.

With continued uncertainty over the fate of the banks’ property loan portfolios, property groups are sporting respectable yields, notably British Land, paying 5 per cent at 604p. Buoyed by solid defensive assets in retail and office property, the company has been trading on a premium to analysts’ estimates of net asset value, but is likely to outperform some others in the sector.

Land Securities, yielding 3.8 per cent at 866p, has risen 53 per cent from its year’s low, as followers predict rising values and profits. The company is close to having pre-let 60 per cent of its Leeds Trinity development, set to open in 2013 with an 8 per cent target yield on cost, and has secured rental growth elsewhere.

In residential building, Barratt Developments is finding some friends at around £1 after fixing a financing deal with £1 billion of committed facilities for four years. Meanwhile, bulls applaud Galliford Try at 492p for its significant expansion moves in the South East.

Interest rates have not been uppermost in the minds of the beleaguered bosses of BSkyB, as the £7.5 billion takeover bid from Rupert Murdoch’s News Corporation came to nothing. The shares, which had fallen from an 850p year’s high to 692p at one point, recently rallied to 727p, yielding 2.8 per cent.

Bulls argue BSkyB is still making plenty of money despite News Corp’s ill-fated bid, and some even speculate about a possible intervention by Richard Branson. So far, the crisis has brought scant solace to rival publisher Trinity Mirror, at 40.5p only a third of its 12 months’ high.

Gold’s surge and the continuing buoyancy of other metals, helpfully reminding investors that demand from China and India can take up much of the US and European slack, has brought buyers back into mining shares. Anglo American is finding support at £29.53, as is BHP Billiton at £23.29, helped by a 3.1 per cent yield.

Randgold Resources, at £55.50, is midway between its year’s high and low points and still looks good value long term. Higher silver prices are helping Fresnillo at £16.64, while the strong trend in rough diamond prices and an encouraging trading statement has brought renewed buying for Petra Diamonds, at 154p – two and a half times its year’s low.

Among the smaller groups, retinal imaging specialist Optos looks well placed at 170.5p after better than expected
third-quarter results. Strong performer Craneware, software supplier to the US healthcare industry, has not disappointed at 566.25p with annual profits and revenues up more than 30 per cent and two new contract wins.

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

Date of publication:
1 August 2011

Journalist:
Robert Tyerman

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