Sink or swim for companies

THERE'S an old saying in investment circles that "when the tide goes out, you can tell who has been swimming naked".
This was recently highlighted by the global recession when a number of institutions got caught with derivatives exposed to the United States housing market.
This led to massive bailouts of banks, governments having to guarantee bank deposits and, more recently, legal action being taken against companies such as Goldman Sachs.
On a more local level, it has seen the international banks reduce their exposure to countries such as New Zealand.
This also happened during the downturn of the early 2000s as these banks looked to strengthen their balance sheets by retreating to their home markets.
We have also seen a number of smaller players in the financial services sector either not survive the recession or forced to merge or sell their business to a bigger player.
Since the nadir of last March, the tide has well and truly come back in. Confidence is slowly but surely building, portfolio values are on the mend and economic data is improving.
There is a sense that all is now well in the world. It is quite often at times like these that investors need to be even more vigilant.
There are always underlying issues that may eventually come to the fore such as government deficits, asset bubbles, and many other issues.
From a long-term investors point of view, the recent recession has been helpful in highlighting those companies that have strong business models.
These companies were able to survive the worst global recession in 70 years and in some cases prosper coming out the other side.
One of the most common attributes of these companies is that they have been around a long time. If they have been through a number of business cycles, then it is quite likely they plan for extreme events like the recent global recession.
They then have the balance sheet strength to ride out any downturn and may use it as an opportunity to grow their business further.
For those people who are investing directly into the markets, this is an opportune time to seek out those companies that are still under-valued but have come through the recession well.
For those investors that prefer to outsource their portfolio management to an investment adviser, now is a good time to review your arrangements to ensure that you are getting the best advice available.
This includes a foundation of good research, experience and longevity in the markets.
Andrew Davis is a qualified investment adviser and licenced sharebroker with Forsyth Barr in Tauranga. He can be contacted on phone: 0800 367 227.