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A visitor stands beneath Ibex stock price information in Madrid. The never-ending European debt crisis has the International Monetary Fund worried. (Angel Navarrete/Bloomberg)
A visitor stands beneath Ibex stock price information in Madrid. The never-ending European debt crisis has the International Monetary Fund worried. (Angel Navarrete/Bloomberg)

TAKING STOCK

A survival plan for a world in crisis Add to ...

Sifting through the latest IMF assessment of global conditions makes for sobering reading.

Confirming what a raft of soundings has been signalling for some time, the International Monetary Fund informs us that the world economy is at its most vulnerable since the Great Recession of 2009. Global trade is faltering, Europe has shifted into reverse, China is slowing and other bright spots of the emerging world are dimming. The risks of a full-blown slump have become “alarmingly high,” warns the global monitor, which puts the odds of such a calamity at one-in-six.

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The IMF cites two specific triggers – the never-ending European debt crisis and the infamous U.S. fiscal cliff, off which the U.S. economy is sure to plunge in 2013, unless battling Democrats and Republicans reach a political compromise to prevent a slew of automatic tax hikes and heavy spending cuts from taking effect Jan. 1. Politicians also hold the key to the euro zone’s fate, and their track record so far doesn’t inspire confidence.

The latest developments have had a bit of a dampening effect on stocks, and has driven more worried money into bonds (and even back into some emerging markets). Yet considering that influential voices are babbling about the risks of another global meltdown, investors seem remarkably sanguine, which may well be the best response. After all, we’ve been down this worry road before. As Bundesbank chief Jens Weidmann put it during the IMF-World Bank gathering in Tokyo last week: “The world economy is in a difficult state, but there is no reason for painting a black picture.”

But what if those bickering and thumb-twiddling politicos manage to steer us right off the cliff, fiscal or otherwise? It’s certainly not inconceivable, given their less-than-impressive performance to date. To put together an investors’ survival guide that doesn’t require moving to a remote cave to wait out the storms, I turned to Vitaliy Katsenelson, a veteran value hunter who has written perceptively about how to survive in tough markets for years.

“[I]t is easy to get depressed about the global economy,” Mr. Katsenelson wrote in a recent missive. “Europe is on the verge of disintegration; China risks a hard crash landing; Japan is a prick away from its debt bubble bursting; and emerging economies are too linked to China. “For all its problems, the U.S. remains the least-spoiled banana in the whole rotten fruit basket.”

For all that, he remains confident that a careful investor can find more than enough shelter in the market to wait out approaching storms. “There are always bad things going on somewhere,” says the chief investment officer at Denver-based money manager Investment Management Associates and author of The Little Book of Sideways Markets. “As long we have [functioning] capitalism in general, we can survive and prosper.”

Like most value investors, he looks for quality companies whose products or services are generally insulated from the gusts of global gloom and have healthy enough balance sheets (with low debt, strong cash flow, recurring revenues and preferably good dividends) to withstand competitive pressures or worsening financial conditions. And like most value types, he would rather be parked in cash than overpay for good stocks or buy questionable ones just because they’re cheap.

The cash component in his managed portfolios is approaching 30 per cent, up from the low 20s a year ago. “Cash is a better investment than a marginal stock. That works against you when the market is rising. But at some point, the market will not rise,” he says. “The worst thing you can do is to buy stocks because everybody else is buying.”

His current list of safe-harbour holdings includes big U.S. health-care providers Cigna and WellPoint and others with large Medicare businesses ; consumer discretionary stocks like video-game maker Electronic Arts and some odds and ends such as U.S. snow-plow maker Douglas Dynamics, which controls about 60 per cent of the market, but was beaten up after last year’s mild winter. “If Europe pulls apart, they will not be impacted. If China blows up, they won’t be impacted.”

He steers well clear of equipment, materials and resource companies that have prospered because of heavy stimulus spending in China and elsewhere. Caterpillar’s current high profit margin, for example, will fall along with plunging global demand. “It’s the poster-child of the mean-reversion story.” He wraps up with this message for the fearful. “There are a lot of bad things brewing on the horizon, and I’d be the last person to tell you to bury your head in the sand, pray to the gods of blissful ignorance and just hope for the best. Bad things will happen, but we’ll survive, and if history is prologue, we’ll come out stronger.”

Follow on Twitter: @bmilnerglobe

 
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