Sounding out funds
It seems that low interest rates are having no significant effect on investment in new business opportunities; an area that's stagnating regardless of industry
Everyone is, for now, waiting.
You know times are tough when one of the world’s biggest porn barons, Larry Flynt, calls on his government for a $5bn industry bail out. Mr Flynt may have had his tongue firmly in his cheek when he made the claim to Congress this week, but the fact is the take up of investment in new business opportunities across all industries remains stagnant. That’s saying something considering the remarkable impact the price of loans is having on the affordability of cash. And it might get better yet.
The Bank of England cut its benchmark interest rate by 0.5 percent on Thursday to try to prevent its economy falling into lasting downturn. It was the fourth reduction in four months and brought the cost of borrowing down from five percent in October to an all-time low of 1.5 percent - the lowest level since the central bank was founded more than 300 years ago. Analysts predict zero rates are increasingly likely over the coming months, both in the UK and across the Atlantic.
Other countries are expected to move too. Following reduction in December, rates are currently at 0.1 percent in Japan, 0.5 percent at Swiss National, 1.5 percent in Canada, 2.5 percent at the ECB and 4.25 percent in Australia. In the US, the Fed Res has targeted a funds rate in a range of zero to 0.25 percent. The Reserve began purchasing $500bn of mortgage securities earlier this week to help lower mortgage costs.
Financial institutions will be put under increasing pressure to lend as governments employ measures to introduce more liquidity into systems. Those same governments continue to play down talk of plans to print more money. The real question is exactly where are the good, sound investments should the cash become available as expected. Outside of real estate, the exploration market may be a good bet with prices at rock bottom. Avoid small-cap businesses where any new cash will arrive too late to keep businesses going.
Oilexco North Sea, with a base in Aberdeen, has already called in the administrators.
Operating several British oil fields including the Brenda and Nicol facilities, the company was recently awarded eight new licenses by the Department of Energy and Climate Change. The parent company, Oilexco Incorporated, is an oil and gas exploration and production company headquartered in Calgary, Canada, continues.
Many smaller oil companies are expected to falter on the back of reduced funding streams and the low price of oil. Most need oil to be at $40 per barrel just to break even.
When prices were at their $145 peak in July, 2008, Oilexco shares stood at 964p. The price now languishes at around 10p.
The administrators will continue to run the business, while Merrill Lynch and Morgan Stanley look for a buyer. Expect several bidders to come in.
Worth a punt? UK interest rates have never been below two percent before in Britain, even during the Great Depression of the 1930s. Don’t wait too long.
