Category Archives: John Townsends market comments

John Townsend’s Investment Opinions June 2017

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Henry Ford was right. A prosperous economy requires that workers be able to buy the products that they produce. This is as true in a global economy as a national one. – John Sweeney

Despite all the happenings in the political world, now is actually an excellent time to invest in equities. The financial crises happened 10 years ago and companies are once again running profitably and investing. International and domestic trade has picked up again and there is no point – at all – in investing in the fixed income markets or keeping money with the banks where the returns are negative. Investment in real estate for letting, which is in or near big cities has become wildly over-priced, is incredibly inflexible and is no longer a profitable alternative.

It is the loudest trumpet that most often has the least meaning. The United States of America under President Trump is fast losing its credibility as a world power. The Russians, Chinese and Saudi Arabians, having learned that flattery was extraordinarily productive in gaining the friendship and attention of Mr. Trump, soon realized that the benefits of such flattery had only a short life span.  Mr. Trump seems be growing old disgracefully; one can use the analogies of the Queen of Hearts in Alice in Wonderland (off with his head) or the Emperor’s new clothes by Hans Christian Anderson, where the courtiers are too afraid to say that the emperor is, in fact, naked. Then there is Shakespeare’s play the tragedy of Julius Caesar where a dominant and arrogant Caesar is murdered by his courtiers. Each work has its parallels in the court of Donald Trump. The effect on the outside world is however minimal.

Mr. Trump’s announcement that the United States of America is to walk away from the Paris climate accord has much to do with the fact that this agreement was negotiated and signed by former President Obama.  It makes absolutely no economic or social sense at all to leave the accord and merely leaves the way open for other countries to fill the economic and leadership void left by the US departure.

The US president was elected on a populist ticket. The result is, disappointingly, anything other than populist; the actions suggested so far are those that will exclusively benefit the American elite. The next big question is how the midterm elections will affect support for or pressure against this president and whether US politicians will take the chance and insist on a change at the top before then.

Within the presidential medieval court in Washington, there seems to be chaos with policies being announced off the cuff by the president using Twitter, even if this directly contradicts the statements and efforts of his ministers. Many of the administration’s more senior positions remain unfilled and stories about fits of rage and tantrums in the corridors of power abound. Policy is not being made in the White House; it is up to individual members of the Senate to guess the right moment to present their measures to the president or his coterie of close advisors. In the end however, little or nothing is being accomplished.

President Trump has yet to have a single success story in his tenure so far. His aim seems to lie principally in trying to remove the measures passed by his predecessor, President Obama. In order to do so however, there has to be a willingness on the part if the entire Republican Party to support him, but this is simply not there. Overseas, the high point seems to have been the awarding of a big shiny gold medallion from the Saudi King to Donald Trump upon his arrival in Saudi Arabia. This was followed by the signing of an agreement in principle for a 110 Billion Dollar 10 year arms deal, which is at present being held up by the Senate Foreign Relations Committee’s refusal to give permission.

At the end of the day what actually matters to investors is the fact that the US economy is performing well and that US companies are profitable. It has taken about 10 years for industry and the banking sector to recover from the market panic of 2007 to 2009.

The defeat of so-called Islamic State or Da’ish in Syria and Iraq has little economic consequence, but is more emotive. A caliphate, or territory under an Islamic steward, was declared in Mosul by Abu Bakr al-Baghdadi, the nom de guerre of Ibrahim Awad Ibrahim al-Badri, with himself as caliph in 2013.  Before its final defeat, Al-Baghdadi ordered members of Da’ish to form their own one, two or three person caliphates wherever they happened to be in the world. These have been ordered to destroy society wherever they find themselves. The weapons to be used are anything that comes to hand, with vehicles, bombs and knives being specifically mentioned. Very few young men and women will finally heed the call, but some have and still will and there will be enough for the security forces to worry about particular targets; otherwise the main aim is to destabilize western society.

The myth of Arab brotherhood in the Gulf Area is becoming apparent in Qatar, where the country is being isolated and pressured by its conservative Sunni neighbours led by Saudi Arabia. The aim is to force Qatar to cut communication with Shi’ite Iran and to curtail the freedom of the more or less independent press. The Saudis have been emboldened by the support they believe has been promised them from the US president supported by his son-in-law Jared Kushner, however short lasting this may be.

In Europe the economic picture is also looking positive. Despite Brexit, many European and British companies are showing increased profitability are expanding and are paying dividends, all the better to meet the investors’ demand for risk assets offering a positive yield. Economic growth has returned, albeit in parts in Germany and is expected to appear in France under the new President Macron. Corporate efficiency is improving with costs being kept under control. At the opposite extreme, in Italy and Greece, the upward pressure on wage costs reinforces their uncompetitive position. The Italian and Spanish banking systems are also in a very weak state. This conundrum can only be solved by a two tier European Economy with two separate currencies. Uncertainty also arises from the forthcoming Italian election where a populist and anti-European party is gaining strength and must be reckoned with.

In the United Kingdom, a needless and incredibly badly handled snap general election has left the present ruling conservative party with a minority government, supported at present by a small Northern Irish party. The present prime minister Mrs. May has run out of her own feet to shoot into and is unlikely to last much beyond the autumn party conference where she will be expected to ‘do the right thing’.  Not only that, the present government is filled with characters more often found in a kindergarten. On the other hand, to allow the left wing Labour Party leader to run the country with populous messages that make absolutely no economic sense and seem to be dependent on spending money which does not exist would be a disaster. Mrs. May with an astonishing lack of skill has plunged the country into chaos just at a time when it needs to focus on negotiating even a halfhearted exit from the EU.

The conservative British government must now be seen to be supporting British Industry and the financial sector, something it had ignored in its political machinations. The British economy is still surprisingly strong, though there is cause for concern with a government that is woefully weak.

China is seeing subtle but important changes. The Chinese central bank is clamping down on the export of capital for foreign investment, while also putting pressure on the domestic secondary finance markets. The Chinese expected growth in GDP is expected to be between 6.5 and 6.7% in the present year.

There are two important developments in Chinese policy; the first is the Belt and Road initiative, a development strategy proposed in 2013 by the Chinese president Xi Jinping. The Silk Road Economic Belt and the Maritime Silk Road focus on the economic links between Europe and Asia as well the ocean-going supply routes which will provide China with a source of necessary imports. ‘Belt and Road’ is a long term project and is made possible by the Chinese tradition of long-term leadership.

The infrastructure initiative covers mainly Asia and Europe, but also includes Australasia and East Africa; it will include investments of up to 8 Trillion US Dollars and will ensure that China has the necessary import of raw materials for its industry and the necessary transport means to export its industrial production. Politics aside, there will be a significant future for Chinese industries.

The economic crisis of 2007 – 2009 has passed, the global economy has recovered and companies are thriving for the right reasons. At the same time there is no sense at all in investing in Government Bonds or putting money in the banks, which pay negative or very low interest rates, are themselves not customer friendly and are in need of reform. The only real alternative for private investors is to invest in very carefully chosen equities, using fund managers with a proven track record of managing risk and diversifying markets as widely as makes sense.

 

Past performance is no guarantee of future profitability.

John Townsend’s Investment Opinions February 2017

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Circus Ringmaster :-“Ladies and gentlemen! We will now present for your entertainment the most stupendous, magnificent, super-colossal spectacle! On this tiny, little, insignificant ball, we will construct for you a pyramid! Not of wood, not of stone… a pyramid, of ponderous, pulsating, pulchritudinous pachyderms! I give you the elephants.”

President Trump enjoyed the campaign trail leading to the Presidential Election and now has the appearance of a circus ringmaster with top hat and bright jacket and tie, still wishing to play to the crowds. It is unusual to have a western democracy governed by decree, more unusual still to have a country where policy is partly controlled by two unelected individuals, in this case Stephen Bannon and Stephen Miller, both of whom have a capacity for promoting ‘alternative facts’.  A thin skinned and paranoid president with the reputation of having a dislike of detail, a short attention span and only wanting to accept good and indeed fake news being filtered to him by his aides, Mr. Trump’s advisers will carry an unusual amount of power when he acts as a mouthpiece for their views. President Trump’s rhetoric is full of bellicosity but contains very little actual detail. His actions will for the most part have to be sanctioned by the two US elected chambers of Congress. The project costs suggested so far are reminiscent of a spendthrift suddenly having access to someone else’s money; Mr. Trump’s track record in this regard with his projects in Atlantic City using borrowed money is not exemplary.

Despite the above, this is an interesting time to invest in US Equities, not because of President Trump and his policies, often called the Trump surge, but because the economy and the companies themselves are doing well. Indeed after a difficult and at times confusing 2015 and 2016, the US economy is very positive. The Trump election has brought with it a rally in the US equity markets, which rally would probably fizzle out if it were not for the underlying economic strength.

President Trump has promised tax reforms including sharp reductions in the corporate tax rate as well as economic stimulation including greater (and sorely needed) investment in infrastructure of up to $1 TRILLION. (For the sake of clarity, a Million Million dollars). This is in addition to the additional $54 Billion he wishes to spend on the US armed forces. This latter sum sounds impressive, until it is remembered that President Obama had already requested an additional $38 Billion in defence spending. The larger sum seems to be an uncalculated figure, chosen because it was larger than the plan of his predecessor. President Trump is also insisting on building a wall along the border with Mexico, which is over 3000 kilometers long. By comparison, the Berlin Wall was a mere 160 kilometers long. Recent estimates suggest President Trump’s wall will cost over $21 Billion. It is unclear whether these election promises will or can be met; but if they are, the big engineering companies especially will benefit.

On a different level, The Federal Reserve, the US central bank, has already signaled that it proposes up to three interest rate increases in 2017. The Fed is by design independent of the US Government and it is likely that these increases will occur. Such moves will bring back a measure of inflation and begin to bring an end to the financial repression which has existed in the US and in Europe.

Low global interest rates producing zero or negative yields have allowed a heavy issuance of debt by companies.  Demand is now available to buy this debt in large amounts. The issuing companies have of course to pay a risk margin on top of the base rate for their new debt, but this is relatively small. International institutions have a problem with the fact that government debt has a largely negative yield; the insurance company trustees do not allow them to invest in large amounts of equity; they therefore have instead to find bonds to fill their investment requirements.  Interestingly, the gap between the margins between AA and BBB debt has shrunk to very low levels, reflecting the reality that the default levels in the investment sector are universally very low.

The price of oil has risen, albeit slowly. The increase from a very low level has clearly had an impact on reported inflation, but it is important to recognize that the inflation surge will pass by the end of 2017. If one wishes to wait that long, the economists from Flossbach von Storch suggest that price of oil per barrel could reach $80 in about 5 years.  This is of course unhelpful to those countries reliant on oil exports, but is manageable to those oil importers.

In Europe, the markets for Pan European equities have performed relatively weakly. There are indeed good and profitable companies in Europe, but the economic and political uncertainties give investors cause for concern.  A presidential election in France, with the possibility of a president who is hostile to the European dream, a general election in the Netherlands with an equally populist potential winner who is also hostile to Europe and the (almost) certainty that the United Kingdom will initiate a withdrawal from the European Unioin  under Article 50 of the Lisbon Treaty,(A Brexit) all give cause for concern. Greece is still a major problem, but the willingness amongst European leaders and bureaucrats to cut Greece loose from economic strangulation and the crippling debt means that more money will be poured into that particular drain.

The British Economy is performing well and has a higher growth than the average for Europe as a whole. Germany and the northern European countries are flourishing economically, as much due to a Euro currency which is too weak for their economies, as much as it is too strong for the southern countries. There is no willingness on the part of the European powers that be (not leadership, there is none) to discuss such problems. Now is therefore a good moment in history to invest in German and related equities.

Japan has suffered for more than two decades under the economic shocks resulting from a burst asset price bubble and poor lending quality based on a corporate and social system which was followed blindly. This collapse also caused a great loss of self-confidence in companies, banks and their employees. Despite high national debt, low global interest rates have allowed investment to resume. The three arrows of Abenomics, aimed at reducing Japan’s chronically low inflation, battling low worker productivity when compared with developed countries and the expenses of an aging population, have slowly taken hold in a country where change is regarded with deep suspicion. Now seems to be a good time once again to renew investments in Japanese equities.

In China, economic growth has slowed to some 6.8% a year, better than had been expected. Although Chinese national debt is high, most has been taken up by the private sector. This could bring problems to a very large secondary finance sector, but Chinese industry seems strong and has many opportunities.

A relatively new sector for investors lies in the Frontier Markets. These are countries which are smaller than even the emerging markets but have economic potential. The risks, both political and economic are higher and it takes a great deal of careful analysis in order to understand and manage the resulting risks. Potential rewards are however high for skilled analysts. It won’t be long before unskilled analysts from the big fund managers find their way to this sector and take unacceptable risks. Therefore investors should watch the original skilled analysts and not allow themselves to be seduced by unproven new competition.

To conclude, equity markets are becoming stronger, especially in the United States of America and Northern Europe, with a stronger economic support for the business of large US corporations that are already showing profitability. German companies too are in a strong position. The Equity markets will always fluctuate, nature has no straight lines, nor does investor sentiment, but the trend is important. The fixed income markets should be avoided as much as is possible outside the needs of a diversified balanced investment portfolio, until they show a much greater yield.

 

John Townsend’s Market Opinions Autumn 2016

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Against stupidity the very gods themselves contend in vain – Friedrich Schiller, German Dramatist 1759 – 1805

There is a great deal happening in the global economic market, much is important but little has an immediate impact on the way that institutional traders think and act.

In China, the economy is moving from an infrastructure investment base to a consumer driven one. The economic growth rate is slowing and lending from mainstream and secondary banks is at very high levels. That economic growth is declining from incredibly high figures is not news. The data is widely held to be unbelievable with numbers dictated by the government. However, even with real growth of 3% instead of the official 6%, there are still many non-government sector domestic investment opportunities with good corporate governance. A good fund manager will find these and avoid the banks, many of which seem to be headed for disaster through their unskilled lending, having wrongly believed that the state would bail them out. China’s imports are also changing, with consumer demand driving imports rather than engineering or raw materials. It is not that demand for steel, energy and engineered goods will cease, far rather demand for them is declining in favour of other imports.

Brexit, having caused two days of uncertainty in the investment markets then became less of an issue and calm promptly returned. The messages from the leaders of the weaker countries and the bureaucrats nominally at the helm of the European Union, that Britain should leave quickly and quietly – in other words, to fall on its own sword – have been ignored. Europe now has the opportunity to make changes within the Union, though bearing in mind the unlikelihood of reaching any decision; it is unlikely this will happen. At the recent meeting in Bratislava where the future of Europe was discussed, a number of suggestions were made. One glares out as an example of startlingly opportunistic but depressingly unrealistic thought. France suggests there should be a united European military headquarters, (presumably in France) controlling a European military force which would act in support of the European government. This is of course an interesting suggestion from the only European country capable of fielding a modern fighting force and one of only three remaining countries, after the United Kingdom’s departure (the others being Greece and Poland), to have adhered to the 2% of GDP minimum spending on defence. The major problem with this idea is that any pan-European decision, including military action, will take so long to achieve that any war would be lost long before agreement was reached to fight one. Such a force becomes meaningless because its political leaders, each with their own policies, would never willingly agree on a coherent decision. So it is with the reform proposals put forward in outline terms in Bratislava. They are unlikely to be agreed by all the states at any time in the future and so are in practice meaningless.

There is still a marked imbalance between the economic strength of the European States. The Northern Sates led by Germany for whom the Euro as a currency is too weak and the Southern States led by France, whose internal domestic issues and ensuing economic weakness make their current value of the Euro against world currencies too strong. This cannot be muddled through over the long term and a two speed Europe with different currencies and different economic strategies has to be the outcome. If one wants swift action, rather than just a swift Brexit, there should be a clear and rapid North South split in the structure and policies of the economic union. A removal of the bureaucratic overlay could be an additional advantage.

Bureaucracy makes itself felt in Germany too. The former German health minister Andrea Fischer recognized that she had a problem with the four permanent secretaries of her ministry when she took over in 1998. She swiftly removed three of them, but in a recent speech, she reflected that the fourth one undermined her just as effectively as the other 3 would have. She left office in 2001. It is clear that the whims of an unelected bureaucracy, without reference to their elected Political masters, make the execution of German policy. This is true through the length and breadth of German society and it is then left to the German courts to decide what policy was intended and what the laws actually mean.

In the USA there is a presidential election looming. What makes this one special and interesting is that the choice is between two deeply unpopular candidates. The least disliked candidate will probably win. The suggestion is that there is so much hostility towards both candidates that many more undecided voters than normal will actually get out and vote.

Under the democratic candidate, there will probably be very few changes to current policies. The Republican candidate has promised far reaching changes, not all of which are honest, logical or feasible. It must be remembered that the US Bureaucracy as much as in Germany, can dampen or alter the reality of policies.

The US economy is gaining ground and US corporations are growing in their profitability. Now seems a very good time to switch from European equities into the US Markets. However until the result of the US election is known, there is much to be said for holding back for the time being.

Risk and its management is now all-important. Where the traditional fixed income markets are showing negative returns, there is a temptation to diversify into hitherto unknown areas such as the Emerging Markets and corporate debt with much lower risk ratings than most investors had previously experienced or understood. Indeed many companies are capable of issuing debt at effectively no cost and are steadfastly doing so. Investors in such bonds are not being rewarded for the risks they are taking. Yet there is a danger of believing that these conditions will last forever and therefore acting, or not acting, accordingly. They won’t; the ancient dictum “These times will change” will inevitably make itself felt. Fund managers with analysts who are capable of assessing lower quality risk and taking coherent decisions will be able to avoid the inevitable future problems with debt from companies that fall by the wayside.

There is however now much to be said for investing in the Equities of the same high quality companies, where the yields, made up by equity market price increases and dividends, at least provide a passable return. Once again the skill of a management team and a wide distribution of risk will play key roles.

Looking into the future, there are industries that are once again flourishing after a longer term global economic downturn. Examples here are efficient oil and raw material producers. Increased consumer confidence also means an increased demand for the so-called next generation resources, such as lithium, battery storage production, renewable energy and coatings and packaging companies. These are detailed operations and need thorough competent analysis. They do however have a very strong future.

The major victims of the economic changes and zero or negative interest rates are the banks, which cannot make a profit with their lending when competition from other lenders is driving interest rates to effectively zero. Many funds from the major fund management companies had and still have a cushion of bank equities. These are now suffering badly and the entire sector is in urgent need of a substantial review. There is already a rescue scheme being organized for at least one Italian bank, even if this goes against European regulations. In Italy, regulations which would normally be adhered to rigidly in the Northern States are adjusted – almost with impunity- to meet specific political and economic needs.

Japanese and Western central banks have kept their interest rates – the rate at which the Central bank lends to commercial banks, at zero for a considerable length of time. The policy began in Japan in 1992 and was then taken up by the US Federal Reserve in 2008 to stave off economic collapse. In Europe, the ECB followed suit in March 2016. A zero interest Rate Policy was originally intended as an emergency measure to provide liquidity to the banks. As happens so often with emergency measures, they are clasped very tightly even when the need for them has disappeared. At the same time, the Fed, the ECB, Switzerland, Sweden and the Bank of England have Quantitative Easing Programs by which they buy high quality debt from the commercial banks to inject more money into their respective economies. Such cash injections were intended to increase investment demand and lift inflation rates from near to zero at present to a more normal two percent. This has not happened and has left the central banks with inflated balance sheets and often questionable assets, but without ammunition, other than the fear of uncertainty amongst investors, to steer their economies. The emergency measures have continued and will continue unabated until someone, somewhere, comes up with a better idea.

The outcome is that fixed income investments, needed by so many institutions to secure their obligations in the future, now have a zero and sometimes negative yield. Insurance companies have to incur costs to manage and meet their obligations and cannot now do so with the present low and indeed negative yields in their investments, The result is that investors, both institutional and retail have to increase the risk of their investments in order to achieve a higher yield. The concern once again is that many investors really do not understand what it means to take higher risks. Their nervous reactions to bad market news means that suddenly bonds and to a lesser extent equities will be dumped wholescale into the markets, almost at any price when the computers, who are not programmed to understand risk, signal a sell order.

Where does this leave the private investor? The safe investment havens of the past have disappeared. Not only will some life insurance companies no longer be able to meet their guaranteed payments and may be threatened with having to avoid making payments under their policies with guaranteed interest rates, but the wholesale stampede into previously unknown investment markets, such as the Emerging Markets in an attempt to improve returns, has dropped many bond prices in this sector. Some well managed funds, such as those from Nordea have seen a massive influx of institutional and other fund of fund money and have had to close their doors to further new investment. The fact that this is hot money and can just as quickly disappear as happened with the property funds in Germany in 2011, should be clear.

There is no realistic alternative to investing in Equities, either through equity funds or as part of mixed strategy strategies. The aim has to be to build up a carefully diversified portfolio of well-managed funds and be prepared for the many changes that will inevitably happen in the near and medium future.

John Townsend advises clients on their investment portfolios for Matz-Townsend Finanzplanung.

He is a Fellow of the Chartered Institute for Securities and Investment in London.

(Townsend@insure-invest.de)

Economic and Investment Opinions September 2016

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Against stupidity the very gods themselves contend in vain – Friedrich Schiller, German Dramatist 1759 – 1805

There is a great deal happening in the global economic market, much is important but little has an immediate impact on the way that institutional traders think and act.

In China, the economy is moving from an infrastructure investment base to a consumer driven one. The economic growth rate is slowing and lending from mainstream and secondary banks is at very high levels. That economic growth is declining from incredibly high figures is not news. The data is widely held to be unbelievable with numbers dictated by the government. However, even with real growth of 3% instead of the official 6%, there are still many non-government sector domestic investment opportunities with good corporate governance. A good fund manager will find these and avoid the banks, many of which seem to be headed for disaster through their unskilled lending, having wrongly believed that the state would bail them out. China’s imports are also changing, with consumer demand driving imports rather than engineering or raw materials. It is not that demand for steel, energy and engineered goods will cease, far rather demand for them is declining in favour of other imports.

Brexit, having caused two days of uncertainty in the investment markets then became less of an issue and calm promptly returned. The messages from the leaders of the weaker countries and the bureaucrats nominally at the helm of the European Union, that Britain should leave quickly and quietly – in other words, to fall on its own sword – have been ignored. Europe now has the opportunity to make changes within the Union, though bearing in mind the unlikelihood of reaching any decision; it is unlikely this will happen. At the recent meeting in Bratislava where the future of Europe was discussed, a number of suggestions were made. One glares out as an example of startlingly opportunistic but depressingly unrealistic thought. France suggests there should be a united European military headquarters, (presumably in France) controlling a European military force which would act in support of the European government. This is of course an interesting suggestion from the only European country capable of fielding a modern fighting force and one of only three remaining countries, after the United Kingdom’s departure (the others being Greece and Poland), to have adhered to the 2% of GDP minimum spending on defence. The major problem with this idea is that any pan-European decision, including military action, will take so long to achieve that any war would be lost long before agreement was reached to fight one. Such a force becomes meaningless because its political leaders, each with their own policies, would never willingly agree on a coherent decision. So it is with the reform proposals put forward in outline terms in Bratislava. They are unlikely to be agreed by all the states at any time in the future and so are in practice meaningless.

There is still a marked imbalance between the economic strength of the European States. The Northern Sates led by Germany for whom the Euro as a currency is too weak and the Southern States led by France, whose internal domestic issues and ensuing economic weakness make their current value of the Euro against world currencies too strong. This cannot be muddled through over the long term and a two speed Europe with different currencies and different economic strategies has to be the outcome. If one wants swift action, rather than just a swift Brexit, there should be a clear and rapid North South split in the structure and policies of the economic union. A removal of the bureaucratic overlay could be an additional advantage.

Bureaucracy makes itself felt in Germany too. The former German health minister Andrea Fischer recognized that she had a problem with the four permanent secretaries of her ministry when she took over in 1998. She swiftly removed three of them, but in a recent speech, she reflected that the fourth one undermined her just as effectively as the other 3 would have. She left office in 2001. It is clear that the whims of an unelected bureaucracy, without reference to their elected Political masters, make the execution of German policy. This is true through the length and breadth of German society and it is then left to the German courts to decide what policy was intended and what the laws actually mean.

In the USA there is a presidential election looming. What makes this one special and interesting is that the choice is between two deeply unpopular candidates. The least disliked candidate will probably win. The suggestion is that there is so much hostility towards both candidates that many more undecided voters than normal will actually get out and vote.

Under the democratic candidate, there will probably be very few changes to current policies. The Republican candidate has promised far reaching changes, not all of which are honest, logical or feasible. It must be remembered that the US Bureaucracy as much as in Germany, can dampen or alter the reality of policies.

The US economy is gaining ground and US corporations are growing in their profitability. Now seems a very good time to switch from European equities into the US Markets. However until the result of the US election is known, there is much to be said for holding back for the time being.

Risk and its management is now all-important. Where the traditional fixed income markets are showing negative returns, there is a temptation to diversify into hitherto unknown areas such as the Emerging Markets and corporate debt with much lower risk ratings than most investors had previously experienced or understood. Indeed many companies are capable of issuing debt at effectively no cost and are steadfastly doing so. Investors in such bonds are not being rewarded for the risks they are taking. Yet there is a danger of believing that these conditions will last forever and therefore acting, or not acting, accordingly. They won’t; the ancient dictum “These times will change” will inevitably make itself felt. Fund managers with analysts who are capable of assessing lower quality risk and taking coherent decisions will be able to avoid the inevitable future problems with debt from companies that fall by the wayside.

There is however now much to be said for investing in the Equities of the same high quality companies, where the yields, made up by equity market price increases and dividends, at least provide a passable return. Once again the skill of a management team and a wide distribution of risk will play key roles.

Looking into the future, there are industries that are once again flourishing after a longer term global economic downturn. Examples here are efficient oil and raw material producers. Increased consumer confidence also means an increased demand for the so-called next generation resources, such as lithium, battery storage production, renewable energy and coatings and packaging companies. These are detailed operations and need thorough competent analysis. They do however have a very strong future.

The major victims of the economic changes and zero or negative interest rates are the banks, which cannot make a profit with their lending when competition from other lenders is driving interest rates to effectively zero. Many funds from the major fund management companies had and still have a cushion of bank equities. These are now suffering badly and the entire sector is in urgent need of a substantial review. There is already a rescue scheme being organized for at least one Italian bank, even if this goes against European regulations. In Italy, regulations which would normally be adhered to rigidly in the Northern States are adjusted – almost with impunity- to meet specific political and economic needs.

Japanese and Western central banks have kept their interest rates – the rate at which the Central bank lends to commercial banks, at zero for a considerable length of time. The policy began in Japan in 1992 and was then taken up by the US Federal Reserve in 2008 to stave off economic collapse. In Europe, the ECB followed suit in March 2016. A zero interest Rate Policy was originally intended as an emergency measure to provide liquidity to the banks. As happens so often with emergency measures, they are clasped very tightly even when the need for them has disappeared. At the same time, the Fed, the ECB, Switzerland, Sweden and the Bank of England have Quantitative Easing Programs by which they buy high quality debt from the commercial banks to inject more money into their respective economies. Such cash injections were intended to increase investment demand and lift inflation rates from near to zero at present to a more normal two percent. This has not happened and has left the central banks with inflated balance sheets and often questionable assets, but without ammunition, other than the fear of uncertainty amongst investors, to steer their economies. The emergency measures have continued and will continue unabated until someone, somewhere, comes up with a better idea.

The outcome is that fixed income investments, needed by so many institutions to secure their obligations in the future, now have a zero and sometimes negative yield. Insurance companies have to incur costs to manage and meet their obligations and cannot now do so with the present low and indeed negative yields in their investments, The result is that investors, both institutional and retail have to increase the risk of their investments in order to achieve a higher yield. The concern once again is that many investors really do not understand what it means to take higher risks. Their nervous reactions to bad market news means that suddenly bonds and to a lesser extent equities will be dumped wholescale into the markets, almost at any price when the computers, who are not programmed to understand risk, signal a sell order.

Where does this leave the private investor? The safe investment havens of the past have disappeared. Not only will some life insurance companies no longer be able to meet their guaranteed payments and may be threatened with having to avoid making payments under their policies with guaranteed interest rates, but the wholesale stampede into previously unknown investment markets, such as the Emerging Markets in an attempt to improve returns, has dropped many bond prices in this sector. Some well managed funds, such as those from Nordea have seen a massive influx of institutional and other fund of fund money and have had to close their doors to further new investment. The fact that this is hot money and can just as quickly disappear as happened with the property funds in Germany in 2011, should be clear.

There is no realistic alternative to investing in Equities, either through equity funds or as part of mixed strategy strategies. The aim has to be to build up a carefully diversified portfolio of well-managed funds and be prepared for the many changes that will inevitably happen in the near and medium future.

John Townsend advises clients on their investment portfolios for Matz-Townsend Finanzplanung.

He is a Fellow of the Chartered Institute for Securities and Investment in London.

(Townsend@insure-invest.de)

 

Unsettled Markets

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John Townsend’s Investment Opinions – Mid June 2016

There ain’t no answer. There ain’t gonna be any answer. There never has been an answer. That’s the answer.
Gertrude Stein American writer 1874-1946

The panic that gripped the equity markets at the end of 2015, reached its low point on 11th February 2016. No-one noticed, because the fear affecting the markets was still so clear that it took a while for the memory of the pain to subside. There was no logic to the panic, just a number of seemingly dislocated events, such as the low oil price (which should have been seen as positive), China’s slowing economic data, terrorist acts, the EU refugee crisis, the unrest in the Ukraine, the fact that the Syrian war has de facto turned into Sunni versus Shia, and the weaker employment figures in the US all played their part. The MSCI in Euros dropped 12%, the DAX some 16%. The doom mongers who perhaps once guessed the markets decline, are now deemed to be expert prophets. I don’t believe the markets are in decline, but are instead vulnerable to volatility, especially as the downward movements in prices had no intrinsic logic, based as they were almost entirely on emotion and fear. It is also important not to confuse the national economies with the equity markets and well managed Funds. A good fund manager will find opportunities even in poor economies.

China floated its currency, the Renminbi Yuan (RMBY) last year. At the same time the Chinese central committee’s decision to turn the Chinese economy from an investment in infrastructure driven economy to a consumer demand driven one has inevitably caused a change in the rate of economic growth, but as the Chinese growth figures were largely artificial anyway, the effect should have been minimal and an encouragement of the view that the world outside China would one day see real figures. The fact remains that the Chinese economy is still very large and is showing growth; the demand for consumer products from domestic as well as foreign sources is growing. A weaker RMBY also makes imports more expensive which encourages domestic suppliers to grow.

In Europe the crises bumble on unabated. The possibility of Britain leaving the European Union (known as Brexit) has caused and is causing turmoil. Once again experts and pollsters are having a wonderful time making predictions, some for a British exit, some against. The British government has not helped their cause with the ruling conservative party being deeply split. The opposition Labour party, under its new and ineffectual leader, is effectively rudderless, though theoretically in favour of remaining within the European Economic Community, but unable to provide any consistent lead. Bookmakers and betting shops still suggest (just) that Britain will remain within the fold, but the 23rd June is the deciding date and the expert opinions will then have to be tempered by reality. It is the older generations from the comfort of their armchairs who are demanding a Brexit; the younger generation is much more pro-European and will benefit most from Britain remaining within the EU, but many either do not yet have the vote or won’t vote for whatever reason. In the meantime, the investment markets will continue to be volatile but post-election markets will show investment opportunities both in the UK and in a more stable Europe.

The ECB’s policies have caused interest rates and bond yields to drop to never before seen depths. 10 year German government bonds are now much sought after, despite the fact that yields are now firmly in negative territory. The argument is that the institutions do not expect to hold the paper to maturity anyway, but need a safe haven until the ever present uncertainty prevails. Bond fund managers have taken to increasing their returns by taking more risk, though still within the BBB investment grade boundary. By investing in corporate bonds, many of which are in any event more highly rated than some European governments, as well as selecting different maturities within their portfolios, the fund managers can protect the stability of their yields.

In the US, the Federal Reserve has begun to raise interest rates. It was at first only a token gesture but a signaled intention and more is certain to come. Europe is inevitably some way behind the US with the ECB continuing to expand the purchasing program of investment grade bonds from European banks. It seems that the major beneficiaries of the ECB’s liquidity measures are the banks (and therefore the governments) of the weaker southern European states. The Banks within northern Europe, with the occasional hiccup, do not need this stimulus, nor indeed do the northern European governments.

Rock bottom interest rates have encouraged some investors to consider investing in houses, not for their own residential needs, but rather to rent out as an investment. This needs to be treated with caution. Even houses in reasonable condition outside the biggest cities cannot, with the best will in the world, make a comparable return even to the negative yields in the 10 year Government bond markets. One has to take into account the costs of purchase (some 10% of the purchase price) the fact that prices are unlikely to rise appreciably over 10 years, the fact that all buildings will need to be repaired at the owners’ cost and also that there will inevitably be times when a property is unlet. These factors will reduce the returns of rental property to a point where a well balanced fund portfolio will provide a much better return.

Gold has once again become a topic for serious discussion. The market collapse of the past few years has caused discipline to be re-imposed, with unprofitable mines and mining companies being shut and less ill-thought out investment in new mines taking place. A certain, but small amount of physical gold – in sellable form – might be worth considering as a defence against disaster as long as it is kept somewhere safe from theft , where investors can access to it in the event of a true crisis. Banks are not ideal depositories as they are likely to remain firmly closed when disaster strikes.

Investors should, above all, seek a broad diversification within their portfolio. There are many fund managers who skillfully find sound equity investments, but these investments should be balanced with well managed bond funds. Investors should also consider mixed strategy funds, covering the equity and the bond markets as well as absolute return funds, where performance is not necessarily correlated with movements in the markets.

Many new funds and new strategies have sprung up since the markets became volatile. Not all are managed with the skill that makes them worth considering and many will not survive. Therefore, when selecting funds for a well-diversified portfolio, only fund managers who can show at least a three year track record of managing risk, including in adverse markets, should be considered.

Much is made of the costs contained within a fund (the Total Expense Ratio or TER) and the fact that fund managers might have the gall to pay themselves too much, including sometimes with performance fees. This is nonsense. Funds should be selected purely on the basis of net returns to investors over a longer period when compared to their peer group and the ability of the manager to manage risk. A successful fund manager deserves to be well rewarded as long as the investor gains the benefit. Funds that in yield and risk terms fall below the top quintile of their peer-group should not be selected for investment anyway and if they are already in the portfolio should be considered for replacement.

John Townsend advises clients on their investment portfolios for Matz-Townsend Finanzplanung.
He is a Fellow of the Chartered Institute for Securities and Investment in London.
(Townsend@insure-invest.de)

The Chinese influenza can be catching

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Stop blaming China; we taught them how to do what they are doing. – Tom Galey, Professor of Business and Economics and China expert

The Chinese influenza can be catching

The Equity markets often trade as much according to sentiment as to Logic. These markets have seen a mood of near, if not actual, panic in the last few days. This has little or nothing to do with Greece, or indeed with the Federal Reserve’s impending interest rate increase, far rather the Chinese government triggered emotions that were wholly unexpected and unintended.

The Chinese central bank, with the encouragement of the International Monetary Fund and by extension the US government, has begun a free float of the Chinese currency – the Renmimbi Yuan, or RMBY. Inevitably this has meant an initial reduction in the value of the RMBY compared to other world currencies, something which has caused much anxiety. The Chinese want the RMBY to be a reserve currency, akin to the US Dollar, the Swiss Franc and (in part) the Euro. This desire has, in my opinion, more to do with prestige than logic.

At the same time, the shares traded in the Chinese domestic stock exchanges, based in Shanghai and Shenzhen, (the ‘A ’shares) have suffered large falls. Domestic Chinese investors, the only ones allowed to invest in these shares, had often bought shares on margins with the remainder of the price taken up as loans. In a rising market this can be good news, when markets fall however it is disastrous. The Chinese central bank has moved to reduce the extravagant lending by Chinese Banks to their domestic clients, but has now been forced to lower interest rates as a sign that it will support the domestic economy. This move is also designed to offset the news that the Chinese economy is expected ‘only’ to grow by about 6% in 2015.

Even such reduced growth would under any other circumstances be regarded as good; but a jittery market, lacking even a minimal appreciation of the changes happening within China decided to get cold feet.

The International Chinese Equity market (the ‘H’ shares) traded in Hong Kong, has suffered losses by extension, all too often from panicked overseas investors not understanding the difference between the two markets.

China is deliberately moving from an investment driven economy to a consumer driven footing. This is understandable and correct, but the change will in itself result in a different economic growth pattern before it is over.

The stresses coming from China have affected the international equity markets too. There is a fear that those exporters from the west and from the emerging markets who have built up large sales in China will suffer, as indeed will their suppliers. The reality is however likely to be the opposite in the medium and long term, as Chinese consumers will gain even more opportunity to make purchases of international or domestic goods of their own choice. Much the same is true of energy, industrial and soft commodities. Let’s be clear, Chinese industry will continue to need to import.

To add to the tale of woe, interest rates in most of the western world have reached levels of nearly zero. This is wonderful for borrowers who will try to borrow as much cheap money as they can, not realizing that such high levels of debt will prove hard to service when interest rates rise.

The United States Federal Reserve has signaled its intention to raise interest rates by a small amount in September 2015. The caveat being that there are no disasters which might cause them to delay. The attention was initially on the US employment markets, but these seem stable enough. The question is whether turmoil in the international equity markets could cause a delay. Past experience suggests not, but there is a new hand at the helm.

Attention has drifted away from Greece, which is a shame, because nothing there has been settled and much could still go wrong. The Tsipras government has resigned and called an election in an attempt to gain more support in the Greek parliament. 30 left wing party members of parliament promptly left the party to form their own break away movement. The end result is anyone’s guess. I still believe that Greece will attempt to gain a reduction in its disastrously high levels of debt by leaving the Euro and demanding a debt reduction (by way of a ‘haircut’ of 50% or more). This is speculation, but another way out is difficult to envisage.

Now is the time to invest in the major Equity markets while levels are so artificially low. It is perhaps a counterintuitive step, but not necessarily an unduly risky one.

Past performance is no guarantee of future profitability.

John Townsend advises clients on their investment portfolios for Matz-Townsend Finanzplanung. He is a fellow of the Chartered Institute for securities and investment in London (Townsend@insure-invest.de)

Investment opinions- October 2013

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John Townsend’ Investment Opinions – October 2013

The reason we are so pleased to find out other people’s secrets is that it distracts public attention from our own. ¬- Oscar Wilde 1854-1900 British dramatist and Poet

The last month has seen much excitement over the American NSA’s collection of electronic communication between everyone else, including those who regarded themselves as friends of the Americans.

Looking back over time, it becomes clear that these complaints are hypocritical. Every country needs to know what the leaders and decision makers of other countries are thinking. Traditionally, such information has been garnered from conversations that diplomats held with individuals within government and industry or their counterparties within the foreign departments. The budget cuts that affected the CIA during the Clinton presidency resulted in an increased dependence on electronic information gathering and a reduced reliance on human intelligence (Humint) with a consequent reduction in the ability to interpret the information gathered. The electronic data collection, once started, has grown in ability and scope, to the point where every senior politician and industry leader has to be circumspect about how they communicate. A major issue is whether the scientists developing and using these electronic eavesdropping systems are in fact controlled by anyone at all.

One might be careful about being overheard by the Russians or Chinese, but few people will admit to being concerned about the American collection of military, political, economic or industrial information, especially when the British and French have been so adept at doing the same thing. The eleventh commandment ‘thou shalt not get caught’ springs to mind. Most European countries and indeed those outside Europe gather information about their allies and competitors and very often share it with each other, their own industry and even possibly with the Americans.

In the Eurozone the economic recovery, especially in the southern countries, is agonizingly slow und unstable. In Germany, the economy marches on from strength to strength and it is clear that the polarization within Europe is becoming harder to disguise. Low interest rates and a weak Euro helps German exports outside the Eurozone, even if exports to the Mediterranean countries with weak economies are reducing.

The European Commission is forecasting growth in Europe in 2014 after two years of contraction. But the numbers are feeble. Remember this is for Europe as a whole and while German economic growth will be stronger it means that other countries will fall below the average figure.

There are some dismal projections for the labour market too, with the average unemployment rate for 2014 being about the same as it is now at around 12%. These jobless forecasts – if they turn out to be right and that is a big assumption – show some improvement in some of the crisis countries, notably Greece, Ireland and Spain. Unemployment levels however, will remain high and there is little or no improvement forecast for Italy or France.

In China, the communist party will hold the third plenum of the 18th Central Committee in the middle of November. Past third plenums have produced major policy changes. In this case, it is likely that the Chinese leaders will suggest major reforms based on the ‘383 plan’ circulated by the government some time ago and which proposed a reform of the Chinese economy by 2020. In a recent ‘Data Flash’, Deutsche Bank suggested that China will reduce investment restrictions for private investors in key industries. China will also increase its openness by allowing foreign investors access to most service industries. Additionally the state owned enterprises and municipalities will have direct access to the stock and bond markets. The economy has already begun the swing from an infrastructure investment led growth model to a consumer demand pushed economy. This has a much better future, even with some near term weakness and the central committee is likely to encourage this move. On the other hand, it is likely that many more opportunist private banks will spring up. Corporate governance in China has not reached the levels one might hope for or expect in other countries and these banks could easily be a major source of losses. They are well worth avoiding.

In the United States of America, the profit announcements of many major companies are serving to generate positive surprises to investors. As a result, the prices of equities in the market as a whole have risen strongly. Not every company is producing increased profits; indeed some companies are showing no profits at all. So it is a wise choice to select experienced fund managers who have the benefit of competent research departments to select the most potentially profitable companies in which to invest.

The US equity market has seen interesting growth over the past 4 years and some commentators suggest the end of the rally must therefore be close. In reality, there is still room for growth in the market as corporate profitability and growth, combined with sharply reduced leverage and inventory lead to higher equity prices.

Many conservative investors, both institutional and private, believe they are safe by keeping their money on deposit with their banks. In reality they are burning their investments as the yields on government debt fall below the rate of inflation. The question is what should replace government bonds? On the fixed income market corporate debt from companies with high credit ratings have become popular to the point where their yields are very close to the levels of their own governments. Highly rated emerging market bonds, though not debt in local currency, carry a higher yield though there is an inherent credit and indeed market risk, where investors might find it hard to sell the paper in adverse market conditions. The best yields are still to be found in good quality corporate equities, while gold, fine art and real estate are too speculative and presently very expensive and potentially illiquid.

Changing markets require changes in traditional thinking and investment philosophy. The investment decisions taken when investing in corporate equities are much the same as investing in corporate debt from the same company. The yields are however higher and a competent fund manager should be able to maximize the returns while minimizing the risk.

Changing times require changing approaches. The strategies that worked in the past are now potentially loss-making and will remain so for many years to come.

Past performance is no guarantee of future profitability.

John Townsend advises clients on their investment portfolios for Matz-Townsend Finanzplanung. He is a Fellow of the Chartered Institute for Securities and Investment in London.
Townsend@insure-invest.de
www.insure-invest.de

Now is the time to invest in top-quality Equities

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Cyprus is in the headlines; it has been for more than a week with the Cypriot government twisting and turning at every suggestion of any disciplined measure except free money.

The committee of lenders (misunderstanding their position as committees so often do) initially suggested that a surcharge on all bank deposits, both small and large, should be imposed. This nonsense was then swept away as it became clear that all bank deposits under 100,000 Euros with European banks were effectively guaranteed anyway and the mere suggestion to raid these was a disaster for a whole market.

That there are some Russian depositors, with deposits in their tens or hundreds of millions of Euros, has enraged the European authorities, with the German Finance Minister asking (with some justification) why the German taxpayer should subsidize and protect Russian money launderers. Interestingly, there is anecdotal evidence that some of the most influential depositors were forewarned of the impending crisis and managed to extract their own money to somewhere slightly safer, or at least out of Cyprus.

All very interesting and important to Cypriots and residents of Cyprus. In the rest of Southern Europe there is a feeling of ‘there but for the grace of God go I’ but what are the implications for investors?

1. Just as it was felt to be safe for investors to add financial company risk to their portfolio, it is suddenly abundantly clear that bank depositors and shareholders, especially in the south of Europe can no longer be secure that their interests will be taken into account. Placing money with these banks is once again under the Economics so forcefully put forward by Mrs. Thatcher a question of ‘Caveat Emptor’ or buyer beware. If one is offered higher than normal returns, one should expect higher risks, sometimes much higher risks. Therefore don’t invest with banks that seem superficially attractive.

2. The problems of Southern Europe – The Olive Oil States- are far from gone, they have merely been swept under various carpets waiting for the next German cleaning lady (Die Putzfrau’) with a degree of self-righteous pomposity, to unearth them again and hang them out for the world to see and wonder at. Government bonds issued by southern European states will suffer again and this will include French Government Debt.

3. The implications of this new reality have not been lost on the European equity markets which have suffered somewhat under the uncertainty. The larger markets in Northern Europe will soon stabilize especially Germany and the United Kingdom. The southern states will continue to be unstable, this despite the fact that there are so many excellent companies there.

4. Now is the time to invest in top quality equities; the brave and those who believe they know the markets can consider investing directly. The rest of us should make the effort to find the most capable fund managers, those able to manage risk and to use their services. This will result in lower losses in bad times, while still giving up only minimal profits for the skills of the fund manager.

5. The rest of Europe still expects the European Central Bank to foster growth by reducing interest rates still further. This will encourage the profitability of the best companies as well as downstream investment by their suppliers.

Investment Opinions February 2013

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The United States have developed a new weapon that destroys people but it leaves buildings standing. It’s called the stock market.” – Jay Leno.

2012 became a profitable year for investors in equities. Pushed by their banks however, investors were and are still being encouraged to stick to the same strategies as in the past. This is useful for the banks but not helpful for the investor portfolios which suffer as a result.

The reality is that markets almost inevitably want to see price levels rise as long as there is no logical reason for this not to happen. Left to their own devices, investors, both institutional and retail instinctively need to see growth in their investments. It is only the fears of adverse conditions that get in the way. In time however the upward trend always resumes, even if it takes a while.

In Europe, Greece has effectively been written off. Mr Draghi’s statement that ‘we will do everything it takes and believe me it will be enough’ did not include Greece and probably won’t include Cyprus. Spain is still in a difficult position with its banks, but still has many effective industrial companies but insufficient government effort to encourage growth.

Last week’s decision that the European countries did not want to devalue the Euro is logical; against which currencies would one want to devalue the currency in the first place? The southern European countries (the olive oil or club med states) need to devalue their currency against the northern European states such as Germany, the Netherlands, Finland and Poland, but no-one is (yet) suggesting that the Eurozone be split this way.

Great Britain will have a referendum on remaining in the European Union after the next general election. This was a decision taken for domestic political reasons; 2017 is so far away it could well be in another lifetime and the suggestion could well be ignored by whichever political party is in power at the time. In the meantime, the mere suggestion puts pressure on the remaining Europeans and brings the press commentators into a lather of indignation, all of which can be safely ignored. What is potentially worrisome however is that when Europe negotiates with the USA over a free trade agreement, those areas that are important to Britain such as finance and banking could be sacrificed by the European negotiators at the request of the Americans in order to achieve better positions in other areas. There won’t be much that Britain can do about it.

One should be aware that while some developing countries are growing so fast that they can no longer be truly called developing, some developed countries, such as Greece and Portugal could slip down the ladder in the opposite direction as their economies shrink and political lack of courage and incompetence make them ever weaker.

Where to invest next? The equities of efficient companies, found and analysed by competent analysts for hard-nosed fund managers has to be the next step to an effective investment portfolio.

Investment Opinions 26 October 2012

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Money won’t buy happiness, but it will pay the salaries of a large research staff to study the problem. – Bill Vaughan 1977

Europe has found another cause for concern. This time it is Spain and the Spanish banks. France’s economy is struggling and the banking union being pushed forward by the French will undoubtedly help the French banking system without adding to the already very high French national debt burden.

Western Banks are still not lending, either to companies or private individuals. The proposed banking union will not help this situation; it will simply mean that more money can be pushed to the European banks without it impacting on the local government’s overall debt position. The banks are still likely to deposit their monies directly with their own central banks until they are confident their required capital ratios have been safely met. No agreement has yet been reached on the supervision of individual banks; the need for major capital increases to protect against loan and trading losses is about the only thing that is certain and a more general supervision will almost certainly be applied at some stage.

Concerns over the Southern European political situation still have the investment markets in thrall. Greece will probably leave the Eurozone with as much dignity (and other state’s money) as it can muster. Rumour has it that Spain, with its weak economy, might seek economic aid from the rest of Europe. Does any of this really matter? In Greece’s case probably not. In Spain’s case, it will shake the foundations of the European experiment. The Government bond markets and any funds focusing on this region must be avoided.

Germany is trying to insist on the need for austerity from other European countries. There is some smugness in this, as Germany has itself now been down the austerity route. German industry is profitable, even if the banks are inefficient and the leading economic indicators are showing manager’s confidence in the future, albeit with some navel-gazing resulting from the impact from the economic weakness in the Club Med states. The reality is that the German economy is riding high and the equities of many companies are now sound investments.

There are companies in all European countries which are attractive and there are excellent fund managers with proven track records in the European Equity markets to undertake the investments. These will know when to strike.
Government bonds of all investible countries now have such high prices that their yields are below any rate of inflation. The risks associated with an investment in government bonds is simply not reflected in the returns.
In the US, the hate between the Presidential Office and Congress is akin to the final stages of a particularly nasty divorce. Who gets to keep the house and the children and who gets to pay the debts? And that’s without the animals. The fiscal cliff – a throwback to the panic measures of the Bush era, which President Obama has been blocked from doing anything about – will probably be reached and fallen off before any steps can be taken. US Treasury yields are still far too low for all this risk, and the falling value of the US Dollar, makes investing in US Treasuries for any investors other than US institutions, nonsense.

US equities, especially from first class profitable companies have fallen in price with the investment market uncertainties and make a lot of sense to invest in now. Equity prices will probably wobble when the fiscal cliff is reached and fallen over, but this should be short term.

The same credit decisions used for investing in Corporate Debt is used for investing in Corporate Equity. There are many excellent companies in which one can invest profitably. It just needs careful analysis and decision making. An experienced fund manager has the analytical tools and can decide whether they feel comfortable with the prices currently being traded. Private individuals trying to do the same are merely gambling.

Emerging Markets in both Equities and Bonds are worth looking at selectively. There is concern over China and the perceived lack of stimulus for the domestic economy. Chinese economic policy is dominated by the figures 8 and 3. A targeted annual growth rate of around 8% and a targeted inflation rate of around 3%. The People’s Bank of China has already stopped taking the heat out of the market and an annual growth rate of some 7.5 to 8% is once again on track. Anywhere else in the world, such growth would be greeted with cheers. Again there is a need for experienced analysis and fine feeling. Experienced fund managers, backed by strong credit analysis teams will know where to invest.

Elsewhere in South East Asia, especially Indonesia, Thailand and the Philippines, some equity markets are showing excellent actual growth and strong potential. Some investors are being tempted by the local currency markets where yields can be high, but this is a high risk sector for proven managers of the risk.
Corporate Equity from companies around the world which have paid regular dividends show great medium term potential. Dividends, especially when paid from earnings and not out of reserves or worse, debt, are a sign of a company’s health. Debt raised by companies at the behest of short term hedge fund investors simply to pay extraordinary dividends are a recipe for disaster.

Companies are raising money on the high yield paper markets, which bearing in mind the high quality of the debt paper on offer, will quickly lose its high yield status. The essence is to invest when the price is comfortable for the investor and not to blindly follow a trend.

Now is a time for investing with a medium term outlook and an understanding that there will be volatity. There is little point in short term trading as bad news has generally had an effect before it reaches the screens.
In short:

1. Avoid government bonds; the yields do not justify the risks of an investment..
2. Equities from companies that have a record of paying dividends from income have a strong medium term attraction
3. Corporate Debt in the form of high yield bonds have credit risks often better than many European countries and yields which are far higher.
4. Emerging markets are selectively strong; China, South Korea, Vietnam and the Philippines are bright spots.
5. NOW IS THE TIME TO SEE THE VALUE IN EQUITIES, they will show growth when all else is weak.

Past performance is no guarantee of future profitability.