April – 2015

April 2015

Of all religions, the Christian should of course inspire the most tolerance, but until now Christians have been the most intolerant of all men. – Voltaire

2015 has so far seen a number of important events. The main Equity markets have seen an increase in value in the first three months of 2015 which could in the past have been seen as good for the whole of a year. There are a number of real or imagined reasons for this.

Firstly, the fact that the equity markets were weaker than expected or necessary in 2014 meant there was much catching up to do. The pendulum had gone too far and has now swung back. The question is how far it will go before the present swing ends and the pendulum returns?

Secondly, the policy of the main central banks has been to reduce official interest rates to or near zero. The USA, with the Federal Reserve Bank now under new management, feels the support has gone far enough and has signaled the end of their low interest rate policies. Europe perhaps unsurprisingly, has only now started their market purchases of investment bonds, the decision having been delayed, in the best European tradition, by arguments over detail. The sharp but continuing increase in the value of the US Dollar against the Euro has suddenly come to an end. This is a very good reason not to gamble on currency values within a portfolio. ‘Worldfirst’ printed an interesting statistic that the amount lost by Apple Corporation in currency valuations in the last quarter of 2014 was more than the entire worth of Google.

Thirdly, the risk of inflation had, for a while at least been removed; this brought an air of complacency to investors, but the risk is now returning, as it becomes obvious that there is too much liquidity which is not being absorbed.

Fourthly, the price of crude oil has halved since the beginning of the year, which has helped energy consuming countries, but has proved painful for the smaller energy producers.

What is also interesting, (as shown by figures published by M&G) is that when the European inflation figures are analyzed, consumers are rational in estimating that inflation over the past 10 years, as felt by them, has been higher than the official figures suggest. Prices of purchases that are needed, such as food, electricity, transport and water have increased strongly over the time period, while non-essentials such as mobile telephones, household appliances and televisions have fallen in price. The implication is that the official reduction in the inflation rates and energy costs may not be the boost to growth that the press is expecting.

Russia, or the new soviet style power block centered on Moscow, is less vulnerable to low oil prices than the press suggest, even though the cash flowing into the country from oil and gas prices is now sharply reduced. That said, Russia has very few independent companies and the risks of the Russian markets are, in my view, unacceptably high. The low energy prices are unlikely to last much longer, though where the balance will be found is uncertain. It is a relief perhaps that Britain is reaching the end of its North Sea oil reserves.

Even today, the Russian fleet, such as it is, in the Bay of Sevastopol in Crimea shows signs of decay. The ships date back to the Soviet-era and many should, in any other navy, be destined for the scrap heap. But appearances can be deceptive. The fleet, its base, and the sprawling military infrastructure that go with it, are vital to Russian President Vladimir Putin’s military and geopolitical ambitions and one of the main reasons the Kremlin has grabbed complete control of Crimea.

Also, the fleet will soon be restocked with billions of dollars’ worth of hardware. Jane’s Navy International, reports that six new submarines and six new frigates are scheduled for delivery in the near future. Russia, it seems, wants to be able to afford them.

Finally, the Greek elections have brought in a leftist party which ran on the promise of renegotiating the rescue package which had been causing strong domestic discomfort for the past two years. Election promises are all too often forgotten once a party gains power. I expect the Greek demands to be watered down, before the rest of Europe sends the Country back to the Drachma and economic isolation.

In fact such isolation may not be so bad, except that there is a fear that Italy and Spain will also discover a need to renegotiate their economic position within the Euro Area. Besides which Greece is an economic pygmy and the press excitement gives it more weight than it actually deserves.

Where does this leave investors? Low or negative interest rates and inflation mean that investing in bonds or indeed keeping money on deposit will produce negative returns. There is no sensible alternative to investing in equities, though only with fund managers who have proved their worth over several years. The glut of money going into the investment markets has inevitably led to a number of dubious schemes. Investors should beware of advertisements featuring celebrities whose only ability is, seemingly, to receive fees from PR Agencies.

For those whose stomachs are not strong enough for pure equities, there are a number of mixed funds (Mischfonds) that can be subdivided into defensive, balanced and dynamic. Again some of these funds have been managed by the same capable managers for many years and are well worth considering in a well-diversified and balanced portfolio.

Don’t be afraid of the markets. They offer opportunities now that have not been available for over 10 years. These opportunities should be grasped firmly.


1. The rise in Equity market prices is probably not yet over and there are, for those willing to consider these markets, still profitable opportunities.

2. Currency movements, whether against the US Dollar or any other major (or minor) currency makes such plays dangerous. Unless an investor
absolutely wants to gamble in the currency markets, such investments are to be avoided.

3. Always invest with a diverse group of fund managers each with their own proven strategies. Investors should ensure that their advisers are aware of the risks they are suggesting and that they seek to reduce them as far as possible.

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)