Finance regulation is like airline security – defending against the last threat – Anthony Hilton, Evening Standard
When picking an investment focus on the ‘R’s… Regulation…. Ready for change…. Robust…. and then lets not forget Rotation…!
Regardless of the validity of the above quote, a higher level of regulation should be a serious consideration when picking stocks. Which sectors are most at risk? And what qualities should a company have to be able to flourish in this environment and provide an attractive vehicle in which to invest?
Let’s focus on the 3 ‘R’s which will help guide our way…
REGULATION – Within the financial sector, this may make banks more stable but less profitable….
READY FOR CHANGE – in contrast, those firms able to adapt will flourish (implementing new technologies, entering new economies (e.g. EM), exploiting niche opportunities)
ROBUST – whilst at the same time, the need for a strong balance sheet remains crucial in order to cope with, for example, the previously mentioned less predictable Emerging Markets. In addition, in this credit-starved environment, the firms with cash to burn are in a stronger position to buy cash-strapped competitors and build market share.
Note: The Economist this month published their 2011 themes, one of which summed up the latter 2 ‘R’s by coining a new term – forecasting of the dominance of “Multinationimbles” – combining multinational reach with nimbleness in strategy. Sited as an example was IBM, celebrating its 100 year anniversary this year, shifting its focus from hardware to selling services.
Another stock example: Nokia, originally a paper manufacturer back in the 19th century, with stints in rubber and electricity generation before entering the telecommunications industry. With products winning approval for sale in China, they are continuing to look for the next opportunity from which to profit.
Ok, before we end the article, there is one more ‘R’ to watch, on a shorter time horizon you should be aware of:
ROTATION – out of defensives and into more cyclical stocks as investors gain confidence and put risk back on the table….