Shares to watch

In 20 years' time, the present market turmoil will be looked upon as one of the greatest share-buying opportunities of the 21st century. This is how veteran players in the investment game look on the stock exchange crash of October 1986. The present downturn is, by no means, as severe as that of 20 years ago. Since the dark depression days of the 1930s our knowledge of economics has grown. No economics textbook will however teach us much about the present crisis. This has been caused by exceptional banker generosity and not as one might expect by the opposite.

In the past, bankers were criticised not for generosity, but for usury. Their present money 'sin' has now become diametrically opposed. Bankers' lending was copious and cheap. Investors were enticed into bank business by the transformation of loans into tradable securities. The present trouble is further compounded by foreclosure legal contradictions which have emerged already. The very word 'subprime' is a neologism which central bankers at Davos have admitted was not even mentioned in last year's great gathering at the Swiss mountain retreat.

The shares which are to be pinned down for profit-taking on a gargantuan scale are those which have a relationship to the prevailing exceptional economic situation. The subprime 'tsunami' is, after all, a financial phenomenon, and by no means turbulence in the real side of the economy. There is in the world no mass unemployment and high inflation. One has only to watch the present share price performance of such companies as Nokia, BHP Billiton, Kazakhmys and Peter Hambro Mining. These companies reflect the fact that China has become as great a flywheel of the world economy as the US. It is growing at about 10 per cent every year and it is providing a great market for Nokia mobile phones, great demand for the copper supplied by BHP and Kazakhmys, and what is most important, a new demand for gold as a rising currency.

Over two years ago I wrote that gold was back in a big way on the world economic scene. Since then, it has advanced by 400 per cent, with silver registering corresponding progress. Listening to the stentorian voice of Philip Manduca on Bloomberg and CNBC, we will realise that gold has far to rise before it peaks. Manduca is, however, too optimistic. The US might decide to fight the price of gold as it did in the 1970s as gold as a currency is destroying the dollar.

Low rates and even a declining dollar are the best underpinnings for a rising gold price and to the gold linked shares of the like of Kazakhmys and Peter Hambro Mining, but as Mizuho Corporate Bank has very accurately pointed out, we have no knowledge of how deep the reserves of the International Monetary Fund , largely controlled by the US, are.

Gold will continue to shine as long as the dollar will continue to flounder. It will not flounder forever. US productivity growth is much higher than Japan's and much of Europe's.

A bank share to watch is certainly that of Socíete Generale, which was given a target of 94 by Lehman Bros way above the present one of 78. This was confirmed by 24Ore of Milan. Its high P/E is evidence of an ongoing artificial financial crisis, rather than of fundamental structural difficulties. SocGen has exhibited a bonfire of vanity of incredible dimensions.

An expanding demand for energy will underpin the share prices of companies like ABB, KBR, AGGREKO and CPFL.

This article is cultural and not advisory. John Azzopardi Vella, economic consultant with DBR Investments Ltd, has promoted the Malta Development Fund and advised S & P (johnazzopardivella@hotmail.com).