Putting my financial hat on today, I decided to trawl back over the past eighteen months and look back over the global financial crisis and see if I could learn any lessons and mitigate my risks in investing generally. Forestry is often quoted as being uncorrelated to financial markets and so it seems sensible to look back over the crisis to see what figures have come out so far from the eighteen months meltdown.
“Defensive” stocks are always being tipped as being the place for investors to turn in times like these, but sadly (for me at least) many of the stocks that would normally qualify as “defensive” took an absolute hammering. Who would have believed the banks stocks would fall off a cliff? Many investors were wiped out.
An elderly neighbour of mine was tempted to “top up”, after his bank shares had tumbled from 8 pounds down to 4 pounds. How could they go much lower? This was one of the UK largest financial institutions after all, so when he received a fundraising notice offering a rather tasty “discounted offer to existing holders” almost 40 percent off to the existing share price, he gave into temptation.
His 25k is now worth about 4k….. His wife still doesn’t know.
“Utilities” are another sector tipped by the city boys in troubled times . There is no discretionary spending here, we all need gas, electricity, water…so the profits will still come pouring in surely? Dividends were at an unprecedented high of 9 percent… plus capital growth, blimey! Price per earnings ratios etc were at historic lows. Fill yer boots! Sadly the market spits out all such analysis in times like this and all logic goes out of the window.
Don’t get me wrong, I’m not saying all defensive stocks went down the pan, but the market meltdown took no prisoners.
The thing that triggers “Black Friday” moments is unrelated to the individual stocks unfortunately. A kind of synchronised sinking takes everything down with it. Institutions become forced sellers in all stocks as their stop losses are automatically triggered….Once this process begins, all bets are off and the “shorting” brigade smell blood. Shorting stocks was where the hot money came in (effectively selling stocks in advance), confident that they would be able to buy back the same stock at a much lower price and make a quick killing.
Even the regulatory markets stepped in at one point to stop some stocks being shorted. Some of the most soundly based banks fell victim to this kind of speculation. Barclays being a notable case, with its share price hitting 60 odd pence down from well over 6 pounds, ouch!
Despite numerous assurances from the bank that’s its finances were sound, directors purchasing their own stock to reassure us all that all was well in the Barclays house, the market bullied the price lower and lower. The fact that the share price has recovered nicley is no consolation if you were forced out.
Anyhow, getting back to the rather more sedate world of forestry investing. Trees remained relatively unperturbed by all this turbulence. The foliage flittered in the chill economic winds, but nothing else happened really. Gordon Gekko said “greed is good”, but maybe “boring” is good sometimes? Ok, I’m getting carried away, but looking across the United Kingdom for instance, according to the IPD UK forestry, investment in forestry outperformed domestic commercial property and equities, producing a positive annual total return of 7.0%, beaten only by bonds. By comparison, commercial property plunged -22.11%; UK equities -29.92%, while listed property companies and trusts were the most vulnerable to the global market downturn, returning -46.63% over 2008. Gulp.
The performance of the forestry sector remains significantly lower than the record levels seen in 2006 and 2007, when total returns of 20.6% and 31.6%, respectively, were seen. Over a three-year annualised basis to end of 2008, forestry investment outperformed the three main asset classes, returning 19.3% per annum, while mid to long-term performance improved, returning 16.2% per annum in the five years to end of 2008 and 5.2% per annum since the start of the index back in 1992.
Simon Hart, a woodland investment advisor at UPM Tilhill, a sponsor of the IPD UK Forestry Index said, “2008 was a tumultuous period for the global economy with major price corrections for many asset classes. However the value of UK commercial forests held and with very low leverage in the UK forestry market”
Source: IPD UK Annual Index 2008
Source: FTSE All-Share Index
Source: FTSE All-Share Real Estate Index
Source: FTSE UK Gilts Index 5-15 yrs
Forestry Invest is sponsored by Greenwood Management. For more information on investing in Forestry please click here
