INVESTMENT INSIGHT: Invest in HIGH QUALITY companies – strong balance sheets – cash flow rich
“Despite various forms of support from the Bank of England and from Government, it is clear that the lending capacity of the banking system, in the UK and elsewhere, is impaired and will take some years yet to recover. Some banks need to continue de-risking and de-leveraging.” (Paul Fisher – Executive Director Markets and member of the Monetary Policy Committee – Bank of England)
As discussed, the outlook for the demand for debt is not looking rosy. Consumers, companies and governments are all focused on reducing the amount of borrowing on their “books”. (See \”Isn\’t the consumer dead?..\”). On the other side of the equation, the supply of debt is also limited. Despite record stimulus packages, the amount of money that has reached the end user has remained muted.
In the US, commercial and industrial loans have fallen at an unprecedented rate.
Commercial and Industrial Loans at All Commercial Banks. Source: Board of Governors of the Federal Reserve System. Shaded areas indicate US recessions. 2010 research. stlouisfed.org
And in the UK, earlier this year, less banks stated they plan to increase supply of credit in June than March (BoE). Between Apr ‘11 and Jan ‘12 lenders are due to repay £185bn raised under BoE special liquidity scheme. Furthermore, any banks that are able and willing to lend are being deterred with the threat of stricter global capital requirements looms as well as a tightening of credit scoring criteria.
INVESTMENT INSIGHT: Invest in high quality names, those with strong balance sheets, cash flow rich and therefore less likely to struggle needing to raise finance and instead more likely to have the capital to make value-adding acquisitions / increase market share