Is the next world stock exchange boom to be missed by Maltese investors, as they have missed so many in the past? If they miss this one, they will have only themselves to blame.
The signs of the next money trading billion dollar bonanza are written clearly on the wall, or in the daily Bloomberg screen. Interest rate rises by the FED are on the way out.
The biblical writing on the wall foretold the destruction of the Babylonian king at the height of a riotous wine feast in appropriate female company. This banquet was painted brilliantly by Rembrandt. The words "writing on the wall" have come to have a connection with impeding dramatic changes for those who care to study the warning signals emitted by a situation before it actually manifests itself.
These are to be read in such things as a Bob Bernanke statement. It is disastrous for an investor not to try to explore what is likely to be the fate of his hard-won money in the near future on the basis of appropriate research.
Will he stand to make massive losses if he immediately fails to move into those shares, which show through their published financial ratios that they will probably outperform during the next year or so? Published financial ratios are the equivalent of the biblical 'writing on the wall'.
They have had a strong record of prediction, though perhaps not equally infallible as that of biblical prophecies. Another September 11 can disrupt the signals coming from the best set of financial ratios, or it might be a tsunami in the middle of the Mediterranean Sea. We had one earlier this month in Indonesia.
Pharma companies
The international pharmaceutical companies, according to the most reliable international financial press, have come to have some of the best of chances of significant share appreciation in the near future, and thus of beating the present downturn.
This is specially to be said about pharma companies within Europe, which unlike their North American counterparts are not suffering from a mounting series of expirations of their patents.
Among these stand the drug-makers Astra-Zeneca and Sanofi-Aventis. These two companies were the European favourites of the prestigious Fortune magazine last year, rising 37 per cent and 16 per cent, respectively.
It is recommending them again for the following reasons: their price/earnings ratios are on the low side, being 17 and 14, respectively, and they are also displaying accelerating earnings and increasing margins.
Investors like Astra-Zeneca also because it is using $4.5 billion of its surplus cash to buy back stock and pay dividends. Sanofi-Aventis, which specialises in heart and cancer medicine, has a number of medicines soon coming on the market.
We might mention at this stage the company Advanced Life Sciences, which the top US financial magazine Business Week has tipped recently as a probable candidate for the doubling of its share price. Bloomberg also reported this Business Week prediction, giving it additional credibility. The casual follower of the Bloomberg screen could easily miss it for if was only reported once.
Nokia and BHP developments
Another strategy of participating in a superior way in the probably coming 'leaps and bounds' stock market advance is to keep a close watch over the behaviour of those shares which having a high growth potential are not all that susceptible to the Bernanke tightening of monetary policy. This is most probably nearing its end.
Interest rate rises lessen the amount of money in circulation by making it more expensive. As everybody knows, interest is the price of money, but it is one thing if you manufacture spaghetti and quite another if you have a degree of power on the strongly developing world market for mobile phones, like Nokia, or are like BHP Billiton, in control of 40 per cent of the world's uranium.
For Nokia and BHP, interest rates are not all that important. They can beat with a mighty merry-go-round a monetary tightening, which can trouble seriously many a much less fortunately endowed company. Merrill Lynch, the famous US stockbroking firm, was quick to point out that the metals cycle of which BHP is so obviously a part was bound to beat the downward pressures bought about by the 17th successive monetary tightening of the US central bank.
This raised the benchmark Fed funds rate by a quarter point to 5.25%. The astonishing thing, but to profound students of economic theory by no means so astonishing, was that a simple statement from the FOMC that economic growth was moderating and that inflation expectations were "contained" caused shares on June 30 to advance by leaps and bounds.
This proves what advanced economic textbooks have long been saying that finally economic expectations are more important than interest rates for the making of investment decisions.
The June 30 'leaps and bounds' were bound to be even more pronounced for companies like Nokia and BHP, which had developed possible characteristics which tended to lessen the impact of interest rate fluctuations.
It is such background economic knowledge, which helps a qualified moneyman to beat the market. This happened again on June 19 when BHP advanced 4.5 per cent on the possibility of containment by the FED of its interest rate policy.
The human element
Nokia, a firm specialising in wire communications, and Siemens, a company strong in fixed-line telecoms, agreed to form a joint venture, pooling their network equipment divisions but leaving out other units, such as mobile handsets.
This happened on June 19 on what perhaps marked a bottom of the economic slowdown brought about by the Bernanke interest rate tightening. On that day the financial announcers of Bloomberg television blew the Nokia trumpets with greater vigour than did the Jewish ones, which brought down the biblical walls of Jericho.
These announcers has been spouting mouthfuls of bad financial news for weeks, and one could directly experience their psychological relief, expressing itself in unmistakably agitated body language as they announced the Nokia and Siemens merger.
On that day Nokia advanced 4.2 per cent and Siemens 6.7 per cent. There was plenty of wonderfully engineered profit-taking on the way. ABN Amro, a Dutch bank, stated right in the middle of the Nokia-Siemens conference of June 19 that, although Nokia was ostensibly the leader of the proposed merger, Siemens had done better in the deal.
Most world financial analysts, up to June 20, were of the opinion that golden days were expected immediately for Nokia shares. The world financial press poured torrents of praise on Nokia, but it was soon to be disappointed by two announcements that appeared on the Bloomberg screen later on in the week.
One was that EU permission for the Nokia-Siemens merger was still general and that details were still to be negotiated; the other was that the mobile technology company declared on June 22, that is a full three days after it had announced its merger with Siemens, that it would incur a restructuring charge of €150 million after it withdrew from a short-lived joint venture with Sanyo.
The result of this disappointment for Nokia will prove to be that its research and development spending would have to rise and that its targets for operating margins could come under pressure.
In that last week of June after its much-trumpeted merger, Nokia shares soon lost their 'leap and bound' character, and received a crushing share downgrade from Per Londberg of Dresdner Kleinwort Wasserstein, which said that the Sanyo news was equivalent to a 'tacit profit warning' and that his famous brokerage was issuing a 'sell' recommendation and a €12 target. The Londberg downgrade of Nokia shares continues to have a massive impact.
The Nokia-Siemens merger story has been told in some detail not as a guide to the probable future performance of Nokia shares but as an educative experience illustrating the fact that a 'leaps and bounds' experience on the day of a merger announcement is no guarantee of its performance in the next week or so.
Nokia might have behaved better had they published details of their unfortunate Sanyo deal along with their Siemens merger news. They could hardly have not known about it on the day of the merger. In spite of these untoward details, there is still massive support by analysts for the belief in the future exceptional future performance of Nokia.
The main point not to be lost is that a small nod in the right direction by the FOMC caused a 'leap and bound' stock exchange experience. One can only imagine what a complete reversal of the Bernanke monetary policy strategy will result in.
But, whatever Bernanke can do with his monetary policy, he can hardly change the fact that China has embarked on the capitalist road, and that a company like BHP will continue to roar forward on that country's trade.
The share target price of BHP, according to the greatest banks, is about 30 per cent above current levels. This is not taking account of the fact that it is being rumoured that BHP will take over Rio Tinto, another mining giant.
Serious Maltese investors will rightly be intrigued by a market advancing by 'leaps and bounds', but, if they are to make money out of it, their reading of serious financial literature must also increase underpinning any investment decision.
This article is not intended as investment advice, but aims to help produce an investment culture. John Azzopardi Vella has promoted the Malta Development Fund and advised S&P. He is currently research economist at DBR Investments Ltd, which is licensed by the MFSA. E-mail: johnazzopardivella@hotmail.com