Silver Lining to the Fall in the FTSE 100

The dramatic falls in the FTSE 100 (UKX) of last week demonstrate in my opinion that every cloud has a silver lining, which in this case will be that we have a better understanding of the real challenges that face Western economies - it is only by having this understanding that we can develop realistic strategies for dealing with those challenges. The reaction of politicians, governments and central banks over the last three years to the banking crisis has been to try to insulate us (eg through the use of quantitative easing) from the fact that a deep rooted problem exists, which has the drawback of deferring the recognition by individuals of the problem and hence delays the time when we alter our behaviour in order to address it. I despair when I hear politicians in the UK suggesting that spending our way out of recession is a solution for either the short term or the long term.

The reason for my optimism about the silver lining is that respected commentators are now beginning to refer to the major shift in economic power from the West to the East and, more importantly, that if the West does nothing to respond to this change, its populations will need to change their expectations (ie become relatively poorer) in the light of this changing reality. Some commentators picking up on this theme are recommending increasing investment directly into Eastern economies and reducing investment in Western companies. Whilst I agree with the principle leading to this suggestion there are a number of other objectives to be met as well, such as:

a) shrinking central government and reducing taxation.

b) shrinking reliance on the state.

c) generating increased employment in wealth creating businesses.

d) shrinking the trade gap.

In the UK, we have spent the last few decades expecting the East to manufacture an increasing proportion of products to satisfy our needs. We now need to decide what we can sell to the East to assist their burgeoning middle classes meet their expectations. To this end I would repeat the quote from Dr Mike Lynch (the CEO and founder of Autonomy) which I used a few weeks ago, namely:

'If creative, innovative brain power was a natural resource, the UK would be sitting on vast, mineable reserves. But, like an undeveloped country, we have not been able to convert this bountiful gift into sustainable prosperity.'

If we seek to build mini-multinationals which sell to, inter alia, the East, we stand a better chance of both successfully accommodating the transfer of economic power from West to East, and also simultaneously making progress in achieving the objectives set out above - in my opinion, this approach represents a much more efficient use of capital because of the number of benefits which can be derived for the UK from a given amount of investment compared with investing the same amount directly in companies in the East. A positive aspect is that AIM contains a meaningful number of such mini-multinationals, many of which are much more attractively valued than a week ago!

Because of the investment template which LCFR uses for identifying companies of interest, LCFR and its owner, Lesmoir-Gordon, Boyle & Co., are well positioned to bring to investors' attention emerging mini-multinationals - the UK needs to increase the number of such companies operating out of the UK, in anticipation that out of that universe a few major multinationals are likely to emerge - Dr Lynch has demonstrated the ability to achieve this with Autonomy (LON:AU.), which was founded in 1996 and is now a FTSE 100 company with a market cap of £3.7 billion.

Charles Breese