Painful year but opportunities show for the brave
Oliver Knott Brewin Dolphin Investment Banking
THE last year has seen extremely volatile market conditions, unprecedented to all but the most experienced of investors.
They have highlighted both the risks and potential rewards of share ownership. The statistics speak for themselves, with only four of the companies in our index managing to record share price increases in the review period (year to April 30, 2009).
However, the overall figures mask some compelling trends.
The full magnitude of the credit crunch was realised during the course of the year and, alongside the collapse in the oil price, stocks as an asset class were unilaterally derated leading up to Christmas.
As banks turned to the Government to secure their capital ratios, companies with high levels of debt, unfortunate enough not to have refinanced during the bull market, saw their value slashed over fears that they would be unable to find funding over the medium term, or would be unable to cope with the high interest costs imposed by cash strapped banks.
While the fall in raw material prices should ordinarily have supported demand, the universal lack of credit and more cautious attitude towards cash conservation led to a sharp decline in global demand.
In these conditions industrial manufacturers such as Romag and Tanfield were hit hard and share price declines of 70% and 83% respectively reflect the severity of the conditions we have been experiencing.
Defensive stocks such as Immunodiagnostic Systems and eaga benefited from more robust demand in their respective markets (pharmaceutical and energy efficiency).
So they did not suffer in line with the rest of the market (returning -2% and +10% respectively).
The last two months of the review period, however, saw a fundamental shift in market momentum, giving investors a chance to lick their wounds, and opportunity to those with a high enough risk appetite the chance to breathe life back into their portfolios.
Companies such as Northgate, which recorded a 75% fall in its share price over the full course of the year, saw its share price rise 237% in March and April as fears over its debt levels eased.
The outstanding performer was Animalcare Group with a 30% return – a full 20% higher than any other stock in our index.
The veterinary and livestock pharmaceuticals provider benefited from a combination of new product launches and stable demand for its existing offering, creating an all- too-rare safe haven for investors over the past year.
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