Archive | April, 2012

Imminent Market Downturn – Or Pessimistic Banter?

18 Apr
Many well-respected fund managers, investment strategists and economists have viewed their opinion over the market, so it’s clear – the market is about to see the best bull run of the 21st century or suffer a 20% correction in equities.
 
So who to believe?
 
Do we go with pundits, such as, BlackRock’s Bob Doll (Chief Equity Strategist)
who feels that the cautious sentiment already priced into the markets will prevent a 2011-style collapse and says the pessimistic argument is overblown?
 
Or, should we look to economists and strategists, such as, Marc Faber who predicted the stock market crash of October 1987 – he’s expecting a 2011-style collapse.
 
Okay, I accept the argument that the situation in 2011 was different :- 
  • optimism was higher with stocks coming off an impressive first quarter
  • oil prices were rising
  • the earthquake in Japan
  • the politically infused US debt ceiling fiasco

These all help fuel a sharp turnaround in risk assets as investors panicked and sold in volume.

 
2012 so far :-
  • stocks have been following a similar pattern in the first quarter of the year
  • oil, fuel and general commodity prices are a concern

 

6 Month FTSE 100 Chart

 

The question is – has the markets priced for relatively modest levels of growth, leaving less room for downside disappointments? If this is the case then the downside risk will be lower.

Looking at the recent levels of volatility it is clear that fundamentals only make up part of the argument – sentiment could well be a major influence.

Personally, I think either scenario is plausible so how best to build a portfolio?
 
1. We could use the gung-ho approach of everything in and it’ll work itself out and anyway stocks always rise over time! Simple answer – no. The highest most stock markets reached was in 1999 and the cycle has led up and down since then but don’t forget the benefit of dividends, assuming they’re re-invested.
 
2. We could hold only cash – no market risk to capital but what happens to the spending power of your money if you receive interest net of tax lower than inflation – another effective way to erode real capital let alone if you spend the interest.
 
3. Combine assets – I have taken a balanced structure between equities, fixed interest, absolute return funds, appropriate investment trusts and alternative investments.
 
The third strategy is the one I choose. I think it is fair to say it is very unclear what the markets hold for 2012 – for example in March the FTSE 100 reached 5,965 and in April fell below 5,595, a fall of 6.2%.
 
The idea being in the downturn the portfolio remains stable and in positive markets we make profits. This is achieved through careful portfolio construction blending assets with differing correlations to help neutralise the market confusion. Let’s just say I sleep soundly at night and so do my clients.
 
Contact me on my contact details above – email welshmoneywiz@virginmedia.com, twitter welshmoneywiz, linkedin Darren Nathan

It’s Official, S&P Confirm UK’s Soverign Debt Rating – AAA

16 Apr

The wealth status of the UK have been confirmed as AAA by rating agency Standard & Poors. This confirms their opinion on the UK as being wealthy, diversified, open with suitable debt management and controls in place.

They have confirmed they see the UK’s economic policy will continue to focus on closing the fiscal gap, with the potential of controlling the problems, with the likelihood of resolving the issues while providing a suitable infastructure where prosperity is plausible. The UK is seen to benefit from a large liquid market for  government debt issuance, entirely funded in domestic currency at long  maturities.

The agency believes the UK government will implement the bulk of its consolidation program and economic growth isn’t expected to fall below current projections.

The Good News – Standard & Poor’s have highlighted strong demand for long-dated gilts from both domestic and non-resident institutional investors.

 

The Bad News – the steep correction in the fiscal accounts is expected to cause a drag on economic growth; household spending is likely to be weak; and the UK will post modest real GDP growth (est. 1.6%  between 2012 and 2015).

These are only estimates and will be reviewed regularly as there are many factors, which could significantly affect these figures, assumptions and estimates but for now the general view is GOOD NEWS.

My contact details are detailed in the header – email welshmoneywiz@virginmedia.com, twitter welshmoneywiz, linkedin Darren Nathan

Earnings Season Gets Underway – And The Return of Market Volatility

16 Apr

OK so it was unexpected how stable the markets were in Q1 2012, I expect it is hello again to volatility going forward.

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On the reporting side, almost a fifth of the S&P 500 report next week and these include some big blue chip companies and banks (IBM, Microsoft, Coca-Cola, McDonald’s, Citigroup and Bank of America). On the economic front, March retail sales, industrial production, existing home sales and weekly jobless claims.

The Good News – valuations seem to be supportive of the market

The Bad News – stocks fell for a second week, in the most volatile week of the year, punctuated by big swings in both directions.

I think this is the first time since possibly October last year, where we have seen been effected by the reality that stocks are typically volatile, despite low volatility in the first quarter. It’s possible we could see further losses with trend data indicating a growing potential of this being double what we’ve recently seen. This could become reality off of the weaker U.S. data; a slowdown in China, and the European debt saga becoming more threatening again.

The biggest uncertainty is the Eurozone. Europe has recently returned as a significant market worry with yields in Italy and Spain rising dramatically, amid expectations of weak economic data and growth and growing fiscal concerns. I think there are going to be more reported over the European scenario, as Spain issues bills on Tuesday and longer-dated securities Thursday; ECB (European Central Bank) President Mario Draghi speaks at the ECB statistics conference on Tuesday.

This is a challenging time but could also be very profitable as volatility creates opportunities.

Any questions – my email address is welshmoneywiz@virginmedia.com; or follow me on – twitter welshmoneywiz, linkedin Darren Nathan

Markets Weekly Round Up – And What A Week

14 Apr

The markets have ended the week down, marking the largest weekly decline so far this year. What a crazy week in the markets! The markets have felt more like a roller coaster than the financial valuations of shares in companies, with prices swinging wildly on an almost daily basis and that’s in a week where there was virtually no significant economic and other driving news.

Investor sentiment has really shown how quickly investors views have and can change from optimist to pessimist. This change was expected as we have seen a lack of market volatility and investment realism based on actual underlying fundamentals so the likelihood of the “king’s new clothes” scenario I had expected. The question is – is this just a bit of profit-taking before the rally continues or the end of an overzealous spike – the calm before the storm and panic?

I am expecting a short-term pull back based on fundamentals, Eurozone fears, US & China economic story and reality that the markets have priced in an overly optimistic view of the near future. In spite of this I believe the general trend and data show a positive story over a long time horizon but the short-term will be volatile and is currently over-priced with a further drop expected.

The Markets

The recent market drop and increased volatility reflects, in my opinion, investor sentiment regarding the health of the UK and global economies, which saw some of the most impressive gains of the year going into earnings season and were then wiped out over the last two weeks.

I can confirm that prior to the recent declines, I had already restructured client’s portfolios to be significantly more defensive and the outcome is during this negative period we have made a profit and are well placed to take advantage of the opportunities created by the situation. Client’s investment risk exposure is carefully controlled to reflect their personal risk profile as a maximum if potential profits warrant the exposure.

When we have weeks like the ones that have just been, help to explain why investing for the long-term is the only way to play the markets today but with the bias to maximise potential risk adjusted profits and minimise any potential to losses. The plan is to structure and manage clients’ portfolios to reflect potential risk/return opportunities with a limitation on the exposure as defined by your individual risk profile. To be sure, I believe you should stay well-informed about the recent happenings and this is part of the reason for the existence of this blog.

However, wild swings like this week’s often hurt investors’ psyche more than they help unless you receive suitable support, guidance and investment advice. The risk being that investors can be largely distracted from the most central aim of saving and when you receive quality advice market volatility, panic and confusion can lead to enhanced profits.

Questions, please contact me at welshmoneywiz@virginmedia.com, twitter welshmoneywiz, linkedin Darren Nathan

Pensions, Annuities and Drawdown

13 Apr

Capped drawdown was introduced as part of Government reforms to abolish compulsory annuitisation at age 75.

Following the changes, which came into force in April 2011, the maximum amount a person in capped drawdown can withdraw from their pension pot each year is equivalent to 100% of the GAD annuity rate. So the initial income generated by a level single life annuity and the drawings through capped drawdown are the same. The future drawings through capped drawdown is set tri-annually depending on gilt rates and the value of the pension fund (so investment performance is a key factor).

Last week the Association of British Insurers debated the issue as many have raised concerns about the potential of falling annual drawdown income.

Mark Hoban, Financial Secretary to the Treasury gave his opinion on this  subject: “Whilst the Government reforms to extend and improve capped drawdown gives greater freedom, they do interact with the effectiveness of a fund manager’s strategy and gilt rates to determine the maximum drawdown. The Government appreciates that in the short-term, some of the other factors affecting drawdown rates may be combining with the change in the annual withdrawal limit to reduce individuals’ total drawdown income. However, the Government’s reforms are based on longer term considerations; we are confident that the reforms will improve flexibility and income sustainability for savers for the future.”

When considering the most appropriate route for your pension income, you need to consider current and future factors. Annuities have the benefit of a defined and known income, possibly for life or a fixed term; although in most cases may cease on the death of the annuity holder. Whereas capped drawdown provides an income directly from the pension fund and so future values can be volatile and could lead to either, an increasing or decreasing income; but on the death of the pension account holder the benefits can be received by the surviving spouse and possibly their dependants. 

There are pros and cons to both and the intricacies need to be considered before making a decision, take professional advice to consider your options.

My contact details are :- email welshmoneywiz@virginmedia.com, twitter welshmoneywiz, linkedin Darren Nathan

China’s Economy is Heading for a Soft Landing, Slowdown or Hard Landing?

13 Apr

The big worry about China, is our reliance that their growth will help drive economies around the world out of the global recessionary cycle. So, if the assumption on this is wrong, how dire will the fallout and effect be on the Chinese and global economies? 

The Chinese economy grew at a more muted rate in Q1 2012, with growth of 8.1%, down from 8.9% in Q4 2011 and lower than amalgamated economists forecasts of 8.3%. The figure where a soft landing is expected to transfer into a hard landing and potentially market crash is 7.5%

So, China’s economy is not heading for a major crash based on these indicators and many suggest will manage to engineer a soft landing. The concern being that the downward trend if not stemmed could fall below 7.5% before year-end and markets are more vulnerable to “what they fear” rather than “what is”.

There are many leading economists forecasting opposite scenarios – the optimists believe an engineered soft-landing will be achieved while – the pessimists  believe the Chinese economy is heading for a crash. 

The problem being if you research boom bust cycle, you’ll get thousands of articles and research documents on its history and if you research soft landing there are very few entries and no historic events. There’s never been a boom and a soft landing ever.

I believe the Chinese economy does not seem to have a problem with growth. I think there is a problem with credit underneath the growth. For international markets, in general, to regain confidence in the Chinese market which will lead to a sustainable rally, we will need to know what are these issues and how they are being dealt with. I think this will be dealt with on a piecemeal approach and once this is the case I believe we can move on. This coupled with issues in the banking sector (as credit is uncertain) make a compelling argument that a soft landing is unlikely. I also don’t believe a crash is expected, markets will pullback on a realisation if a soft-landing is not compelling but I believe the available funding and the wish of China’s officials will soften the hard-landing.

My contact details are :- email welshmoneywiz@virginmedia.com, twitter welshmoneywiz, linkedin Darren Nathan

Rising Stars – One Idea – Look To Luxury Brands

11 Apr
Okay, we are well aware that the markets are in a phase of possibly a market correction but at least a drop. You will be aware that I have previously amended clients’ portfolios in expectation of the current pull back and I personally believe that the markets will drop further, at least in the short-term.
 
Now could be a good time to review decisions to take advantage of buying opportunities, for those who have followed a similar strategy and have avoided the declines – I expect you will be well placed to take advantage of the market opportunities as they unfold.
 
Last year was a good year for the luxury goods industry, with sales rising by over 15%. The market growth has primarily been driven by wealth in emerging markets; and consumers from Asia ex Japan, the Middle East, Eastern Europe and South America buy about half of all luxury goods.
 
Many luxury consumers buy luxury products while travelling overseas, as they may find better prices due to lower taxes and possibly better choice. According to Global Blue (a specialist in processing tax refunds), the most important luxury buyers while travelling are the Chinese, Russians, Japanese and Brazilians. Also, high-end consumption in the US is doing better than expected, adding to the industry’s growth. I believe this has been driven by the financial recovery and lower unemployment rates lifting sentiment among these upper-income consumers.
 
Luxury goods’ is a profitable business and companies have strong balance sheets. I see the outlook for luxury goods remains favorable.

The key to investing is including elements, which add the potential of profit on a risk adjusted return basis but a careful eye needs to be kept to fundamentals, market failings, diversity and asset allocation to help ensure the best potential outcome is achieved.
 
If you need my assistance or have any questions, contact me on the details above – my email address is welshmoneywiz@virginmedia.com