Comment: Parallel universe offers buying opportunities

AMIDST the alarm and panic of recent days, it is hard to avoid the impression that we live in parallel worlds. Stock markets have plummeted on fears that a collapse of the euro would trigger a worldwide recession.

But last Friday the social network site Facebook floated on Nasdaq with a staggering $104 billion (£66bn) price-tag – equivalent to the combined stock market worth of Barclays, Lloyds Banking Group and Royal Bank of Scotland. Put another way, the market capitalisation of Facebook, Groupon and LinkedIn comfortably dwarfs the total of bad loans in the Spanish banking system reckoned to have climbed by a third over the past year to €148bn (£120bn).

Last week the Bank of England halved its already-meagre economic forecast for the UK while politicians warned of a potential major hit to an economy already in recession. But the prominent business item of the week was an announcement by General Motors of a major investment in Vauxhall’s Ellesmere Port plant to build a new generation of Astra cars. The investment of £125 million is expected to create 700 jobs and trigger an uplift reckoned at £1bn across the UK components sector.

Given the bleak economic backcloth, has GM, you might ask, lost its senses? Who is going to buy the annual output of 160,000 cars – and more to the point, what with?

London, a city that has thrived on its reputation as one of the world’s three great financial centres, stands to be plunged into depression by a systemic European banking collapse. The city – and much of the UK economy – is heavily exposed to the 17-member eurozone.

Yet the biggest concern of businesses in the capital is how it will cope with the logistical demands of a visitor influx for the Olympic Games, and in particular how to organise deliveries of beer through the night to ensure 800 pubs along the 109-mile Olympic route network don’t run dry.

Stories of “business as normal” – or in the case of Facebook, “business as abnormal” – continue to punctuate the rising Greek chorus of financial Armageddon ahead.

Few should be in any doubt that a banking and economic meltdown in the eurozone would have massive consequences here. Indeed, you only have to look at markets over the past week – the US Standard & Poor’s down 3.3 per cent, the UK market down 5.6 per cent to a six-month low, the EuroFirst Index down 5.15 per cent – to see how the fear gauge has jumped.

We now appear to be living in two parallel, disconnected worlds: the everyday hassle and hustle of getting by in business; and a world in which the assumptions on which our daily business is based is about to be scattered to the winds.

What can now be considered a safe asset? “Cash” is the universal cry – providing, that is, you have confidence in the banks in which your cash is kept and that the amounts deposited do not exceed the government deposit guarantee.

Comfort could surely be taken from the informal, dress-down G8 summit at Camp David with President Barack Obama hailing “an emerging consensus” that Europe must focus on jobs and growth.

Only two things are wrong with these relaxed scenes and these quotes. First, they are the opposite of the emergent consensus that, until recently, insisted we could not borrow our way out of deficit and debt and that Europe – and Greece in particular – had to put its house in order.

And second, the assurances of progress and consensus came without any evident sign of IMF, central bank or government intervention that would lend some credibility to these pronouncements. Here the G8 summit and financial markets seem to be in parallel worlds. And the markets will keep on falling until they see some practical, concrete, positive action – and on a scale big enough to halt a capital exodus out of the eurozone.

As the crisis intensifies, investors have scrambled into what are perceived to be low-risk assets, such as US government bonds. The yield on US ten-year treasury bonds fell last week to 1.69 per cent – lows not seen since at least 1945. UK ten-year gilt yields touched a low of 1.81 per cent.

But what these countries also have in common are record levels of government debt. In the case of the US, the need for severe debt reduction action will be unavoidable after the presidential elections in November. The words “stimulus” and “growth” may come to freeze on Obama’s lips.

The longer these parallel worlds persist, the less sovereign bonds look like a safe asset at these levels and the greater the risk that inflation will make nonsense of those ultra-low yields. In the meantime, the dividend yield on the FTSE 100 is now poised to cross 4 per cent. Many utility companies are on yields of more than 4 per cent. BP is yielding 5.4 per cent, Shell 4.9 per cent, GlaxoSmithKline 5.1 per cent, Standard Life 6.8 per cent, Sainsbury 5.5 per cent: businesses we use each day, every day.

We may not be at the low point of this crisis, but a buying opportunity may not be far off for investors who take a view that the world, parallel or otherwise, is not about to end.