Robert Tyerman suggests that investors may need persuading that there are bargains in the market

One prediction for 2009 can be made with absolute certainty. Quoted companies will want to raise dauntingly large sums of money to repair the ravages done to their balance sheets by the traumas of the past 18 months. One leading broker expects a ‘wall of equity issuance’ and the City is braced for a deluge of financial repair schemes. Whether investors will want to oblige them after recent experiences is a different matter.

After all, governments around the world now need to raise an estimated £1.6 trillion to pay for recent bank bail-outs and reflationary packages. They and their advisers are beginning to worry how hard that is going to be, which may not leave too much room for corporate Britain. 

Pre-Budget promises
The FTSE 100 Share Index fell below 4,000 and then rallied above it after chancellor Alistair Darling’s package of ‘Pre-Budget’ measures, designed to avert, or at least mitigate, recession. But it will take a long time to regain the ground it lost since its 52-week high of 6,610.9, let alone scale all-time peaks.

In normal times, falling interest rates and yields should provide the ideal background for an equity revival. But these times hardly feel normal, and gloom-mongers point to Japan’s ‘lost decade’, when, after the bursting of a previous bubble, zero interest rates failed to get the economy moving for years.

On a long-term view, however, bargains must abound. For the moment, the talk is all of deals being pulled, whether it is mining giant BHP Billiton’s multi-billion play for Rio Tinto or Sir Phillip Green’s flirtation with Moss Bros, but those who can afford to wait or are nimble enough to play the special situations or bids that do emerge can expect to clean up – one day.  
     
Signs of relief
When the outlook is bleakest, of course, can be when equity markets start to look beyond immediate problems to the future relief that may alleviate them. After all, though real deflation would be a terrifying affliction, recent falls in commodity prices and the cost of money do bring genuine relief in many key sectors.

As ever, confidence is the key, and rebuilding that can be a ticklish business. The Darling package seemed to offer the prospect of savage damage to the public finances to pay for measures which, though costly, might still have only a marginal effect on people’s willingness to spend the way the government wants.

With unemployment rising by the minute and corporate disasters clogging the airwaves – Woolies had it coming for years but the symbolic timing of its collapse was hardly opportune – modest tinkering with VAT is hardly going to make individuals or companies cast their fears aside and splash out, with higher national insurance rates making the employment outlook even darker.

Still looking for a remedy
Homeopathic medicine for the banks, in trouble for profligate lending and now arm-twisted to do much more, provides yet another paradox for the markets. Barclays wins plaudits for not following the likes of RBS cap-in-hand to the government and is then given an institutional roasting for the terms it inevitably had to accept from alternative sources.

For years, the world economy has been unbalanced. The division between exporting countries with undervalued currencies and few of the costly commitments others have traditionally assumed and importers seeking to pay for their needs by selling financial services, raw materials and weapons has not made for stability.

Such a system can hardly be said to be in robust health. Nor does it help that the international financial institutions which, in theory, should be there to harmonise the new global economy still reflect the power balances of 40 or 50 years ago or more.

Sector view: Insurance
As we mentioned last month, non-life insurance has begun to win back friends, encouraged by signs of cyclical upturn in premium rates and the strong US dollar. Robert Hiscox, chairman of international specialist insurer Hiscox, sees ‘a period of opportunity’ as premium rates harden in key areas.

The company saw gross written premiums fall 8.3 per cent overall to £920 million in the first nine months of the year, while premium rates were still falling. But the environment has changed. Premium rates in reinsurance, offshore energy and ‘large property’ are hardening, and the credit and capital problems of major insurance competitors are combining to create a ‘greatly improved outlook for 2009’.

Hiscox, at which interim pre-tax profits edged three per cent ahead to £109.2 million, reckons hurricanes Ike and Gustav could cost it US$150 million (£100 million) and $25 million respectively, both estimates being ‘within our disaster scenarios’. A strong US dollar should enhance premium income and investment returns.

Elsewhere, Hardy Underwriting Bermuda sees ‘significant’ premium-rate increases after lifting nine-month written premiums ten per cent to £139 million. The company says it is ‘now expectant of a significant increase in rates during 2009’.

Hardy, which reported a 4.4 per cent interim pre-tax profits slide to £8.7 million on gross written premiums up 11 per cent to £97 million, says estimated losses of US$23 million (£15.5 million) from hurricanes Ike and Gustav are ‘within our expectations’.

Companies worth considering are Amlin at 366p, Novae (now free from the legacy of past problems), BRIT at 203.5p, Hardy at 267p and Hiscox at 310p.

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