Archive | July, 2012

Is It Possible to Forecast The Investment Markets?

31 Jul

I think it is unrealistic to try to forecast market trends in the current financial environment – I think it is clear that the potential to both good and bad scenarios are well matched – sentiment still is the driving force – and this will and has led to wild market swings.

In my opinion if there is a definite forecast and prediction given – I would call it a “guess” – unless enough assumptions  are made – but that will make it useless in the “real world” and becomes an academic article rather than a reflection of what could happen.

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What a difference a day can make. Coming on the heels of one of its stronger performances this year, stock markets ended in the red yesterday. The market’s so-called “fear gauge,” or the VIX, spiked sharply but within the current trading range. Markets temporarily paused from their intent focus on potential stimulus, although some weak economic data did surface during the day. Several data surveys plummeted in July indicating a weakening manufacturing environment.

Around the markets
A 2% drop in JPMorgan Chase, on the back of a downgrade from banking counterpart Deutsche Bank. This erased gains stemming from positive news from the likes of Coca-Cola and AT&T. Coke announced today a reorganization of its business around three core units: Coca-Cola Americas, Coca-Cola International, and its bottling division. AT&T announced an extension of its current buyback program that would allow it to purchase back nearly 5% of its shares outstanding.

In other news, shares of Latin America e-commerce site Mercado Libre cratered 7.54% today on no news. The company, with significant exposure to potentially slowing economies like Brazil, finds itself down nearly 14.5% since the beginning of the year. Touted as the eBay of Latin America, the company has an already-proven business model, and despite its pricy valuation of nearly 37 times earnings, its predicted annual growth rate of 28.15% over the next five years makes for a pretty compelling bull thesis.


“Only mad dogs and Englishmen” would try to predict what the markets will do next. Personally, I believe in asset combining with different correlation to smooth out the returns generated with a bias to dividends, yields and including both collectives, structured products and, where needed, fixed term deposit bonds – to hopefully achieve goals and returns in the short, medium and longer term.

I believe you must follow a defined strategy, assess – review and know when to change the strategy. The art is to measure and own suitable assets based on the potential risk-reward relationship – include assets which behave differently and target specified dates.

You will see from the table above the success and failure of different asset classes from year to year – to make positive returns takes effort, focus and expertise – and then there are no guarantees.

Always review and consider your assumptions, make sure they are realistic and achievable, own assets for the right reason, do not panic buy or sell.

Remember this must be a factual exercise – always try to have full information to make these decisions and learn from your mistakes.

Emerging Market Debt Warning

30 Jul

Mike Riddell, fixed interest fund manager and heads up the Emerging Market (EM) Debt Fund had to say – he thinks emerging market debt may once again provide a good buying opportunity; however, at current levels, he thinks investors would be wise to look elsewhere. 

Investors will be well aware of the Emerging Market narrative – the asset class will surely outperform because of low debt levels, high growth and strong demographics.

The flaw in this argument in relation to EM debt:-

  • the performance of EM Debt has very little to do with GDP growth rates or demographics
  • it has been driven more by global risk appetite, US Treasury yields and the US dollar
  • instability of the Eurozone

Mike Riddel has highlighted concerns that emerging markets will face further country – and region-specific risks. 

He has sited the potential of an economic rebalancing in China could pose a particularly big risk to the asset class. China has had the biggest credit bubble in the world in the last three years, and rebalancing may result in GDP growth falling to as little as 5 to 6% per annum.

His opinion is, the risks facing EM debt appear to be rising, and while some exchange rates have begun to move, the asset class does not appear to be pricing in these risks.

My Conclusion

I believe that the risk reward ratio does not support holding this asset class and the downside risk dramatically out-weighs the upside potential.

This is not an asset class I currently hold in client’s portfolios, so personally I agree with Mike Riddell’s opinion.

There is no such thing as a bad asset class rather bad valuations – I do not expect this asset class to provide good valuations in the near future. (A price correction could easily reverse my opinion as the valuation and potential of positive returns change an asset class from being out of favour into an asset class which is in favour.)

Millions Of Pounds Lost In Pension Pots

29 Jul
As an IFA (Independent Financial Adviser) and industry professionsal, I am constantly reminded that the majority of consumers are unaware of the collective value of their pension funds. If this is true, it could potentially result in millions of pounds of unclaimed investments. 
Pensions alarm clock

Friends Life Pension Survey (information available on 23 July 2012 through Friends Life Media Services)
Friends Life is the latest of many product providers who have produced a survey detailing that 10% of those who responded had no record of their corporate pensions held with previous employers, and 32% were unsure where was the relevant paperwork.
Friends Life confirmed they believed the trend could get even worse in the coming years; their research suggests that there will be more than a seven-fold increase in the number of small pension pots in the system by 2017, with 370,000 worth less than £2,000 created each year. This could equate to an extra £74m in pension savings being lost on an annual basis. 
This astounding research shows that people are not paying enough attention to their pensions. Friends Life have suggested that, every year, individuals are losing out on significant savings held within pension funds that they are unaware they have.
The survey also indicated that more than 30% of people have pension pots with two or more employers, with a further 5% unsure of how many pots they have. 
More than 40% of people responding said they believed they were not paying any charges on their pensions, while a further 26% thought their pension didn’t cost them anything as “their company pays”. 
Women were shown to be more apathetic when it comes to pensions and are less likely to know how much their pot is worth, with 72% unaware of the collective value, compared with 64% of men. Also, the study stated women are less likely to keep track of their pension’s documentation, with over 11% having no record of their pensions, compared with 9% of men. 
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The fear and worry about these pension surveys is, if they are correct we could be facing a whole generation of people who are unprepared for their retirement. 
Personally, I believe it is imperative that people are aware of where their money is and what it is doing for them. Too often pensions are deserted and not considered properly before it’s too late.
Please make sure you are aware of the pensions you have, the amount you and your employer are paying, what charges there are and how much each pension plan is worth is essential for retirement planning.
If you want help, just ask a professional. I am an IFA (Independent Financial Adviser) and would always recommend independent advice. Always make sure that the adice you recieve is independent – sometimes companies will dress-up their advice as wealth management, exclusive or other such terms to hide the fact the the advice is NOT independent – be aware.
You should keep up-to-date on your pensions and make sure you track down all investments made via pensions either through previous employers and personal arrangements. I suggest that you maintain a list of all policy details from previous pensions, and keep providers up to date with contact details. 
I urge you to think about these factors long before approach retirement – is the quality of your retirement will be linked to your financial security – earlier the planning the better as we would have time to grow the funds and hopefully target any shortfalls

Will The Earnings Season Lead to Prosperity or Panic?

26 Jul

Looking to the major market indices it isn’t clear what market action to expect over the remainder of the year but could this be another year of two halves? The pattern of the market does look like it’s forming a bearish rising wedge.

Remember, technical analysis is always part art and part science – so you can never be completely certain on outcome based on a market pattern. Using historical analysis – a rising wedge pattern – roughly two-thirds of the time they will break to the downside. (Conversely, one-third of the time they break to the upside.)

Market Timing Indicator for July 23 2012

In accomplishing our goal of capital growth we must do a number of things. We must make returns on our investments, we must protect our investments, and we must limit our losses.  While all three aspects work in tandem with each other, we must bias our allocation towards one specific goal.

Regarding the current portfolio positioning, I’m not so focused on the chance that these wedges will break to the downside – more the impact of each scenario on my client’s portfolios.  Markets are currently heading towards long-term resistance lines that have been around for decades.  If we do break to the downside, although at some point I think we will, there could be a very significant sell off with consequences that no one can predict at this point.  Alternatively, there is the potential to an upside break and if there was I expect it will be quite muted.

The only scenario I believe has a true chance to inflate equity values is a series of positive earnings announcements.  A lot of expectations, earnings numbers, guidance, etc… have been revised downwards over the last couple of quarters, so there is the opportunity for some positive surprises that could lead to some bullish price action.  In absence of such a scenario, I really can’t think of much else that would prompt a run up.

Further, I expect trading in the near future to get very volatile. When reviewing the shape and trend of the last quarter the typical following quarters would show high volatility with little overall change then a correction followed by a recovery phase from over-panic. The question is will this trend repeat this time? 

Screen Shot 2012-07-24 at 20.15.52

Historically, and looking forward as August and September have been very costly for the average investor. 

My focus will be in taking the highest probability client appropriate risk-rated strategy that offer hopefully the best risk to reward scenarios.  There will be times when we miss our opportunities, and times when they’re not timed perfectly.  But, patience pays off in the long run…there goes my crystal ball – still doesn’t work…

Pension Pots Crippled by Falling Gilt Yields ?

25 Jul
It seems that on a regular basis there are articles and information provided suggesting how awful our pension income system is – I am an investment IFA specialising in tax planning. My opinion is different.
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My opinion – changes in legislation and regulations have made the arrange more flexible. (This is to an extent never seen before). Yes, Gilt Yields are low and this is a major factor in determining annuity rates and yes, compared to the past the returns achieved are low – but so are the factors creating the environment for higher rates.
A key factor is inflation – we recently saw rates hit 3.6% only a few months ago but they have fallen back in more recent times. On a historical basis these rates are very low. Annuity rates were much higher, at a time when inflation was also much higher. So we have been a victim of the success of monetary policy controlling the rate of inflation. The figures around annuities and inflation have moved maybe no quite in tandem but there has been a very strong correlation.
There again part of what determines the value of Gilts is inflation, especially level Gilts where inflation (and future expected inflation) is clearly an important factor affecting the pricing i.e. if everything is going up in price and the rate of this increase both known and expected has an effect on the value of assets with known returns.
So let’s have a look at the actuals:-
Gender Age Escalation Guarantee Purchase Price Expected Annual Payment
Male 55 Level None £100,000 £4,750
Male 60 Level None £100,000 £5,250
Male 65 Level None £100,000 £5,950
Male 70 Level None £100,000 £6,700
Male 75 Level None £100,000 £7,900
Gender Age Escalation Guarantee Purchase Price Expected Annual Payment
Female 55 Level None £100,000 £4,650
Female 60 Level None £100,000 £5,050
Female 65 Level None £100,000 £5,700
Female 70 Level None £100,000 £6,300
Female 75 Level None £100,000 £7,350
The above figures were provided through and have been rounded down to provide a guide estimated price rather than actual terms. The basis was a simple level lifetime annuity with no additional benefits.

So the question is – in an environment where interest rates offered, say a 5 year fixed rate bond typically pays arround 4.0% AER and the rate of inflation for June 2012, according to the Office of National Statistics, was 2.4% (Consumer Price Index) or 2.8% (Retail Price Index). Are these rates so unrealistic?

For investments, where I advise – my opinion for the future – if I could consistently achieve net returns of 5% per annum plus a bit to neutralise inflation – I would feel job well done.

The concern with pensions are twofold – rates available once at retirement but also the returns achieved during the term getting to your retirement date.

So the investment environment and your success is paramount – effective management is essential and this is where my expertise can help. The current speculation about the Eurozone, amongst other international and national issues, and focus on Spain will have an effect. If you think, circa £29 Billion was wiped off the value of the FTSE 100 yesterday – while Spanish government borrowing costs soared to a new euro-era high of 7.5%. 

As a result, gilt yields have approached all-time lows. This could be disastrous for many pension pots as the vast majority of all pensions and savings are linked, at least in part, to shares. The crisis in Europe is and has driven many investors into gilts (seen as a “safe haven”. The downside effect is this has pushed up the price of gilts, so reducing their effective yield and forcing annuity providers to cut rates to historic lows.
This means those on the cusp of retirement are destined to have a permanently lower level of retirement income. Remember, there are choices as to how to draw your retirement income and some of those facilities are flexible and can change. For example there are temporary annuities, income drawdown, and some halfway products available. With pension planning and retirement income – every situation is unique, so I can only comment on options available on a case by case scenario.
Issues to be aware of – personally I am uncomfortable as a general with the following – buying an annuity when you do not have a need for the income (I have heard of sales people presenting that you might as well take it – income you could have and why not….beware of sales approaches); moving pensions offshore to circumvent UK legislation (tax planning is all about using the rules as they exist any time you try something else, you run the risk of future legislative changes and the wrath of HMRC).

How Do We Communicate?

23 Jul

Many people have asked “How Do We Communicate?”

My email address is & my office number is 029 2020 1241

Let me know if I can help.

Are Equities Mispriced?

23 Jul

Looking at a chart of the VIX index, we have seen a floor to the index generally being around 15 for the last 5 years but with the range 15 – 18 being the sell-trigger or the spark where the index typically sees a rise. VIX is currently at 16.27. Risk pricing in US equities is once again showing a lack of caution.

Is this a trigger to sell?   

To put it another way let’s compare VIX to IG CDX (investment grade CDS index).

Unlike VIX, which is measuring implied volatilities of options, CDX is an indicator of CDS protection premium (spreads) on the bonds of many of the same US companies. I am suggesting that this, in general, compares the risk pricing for equities with that of credit.

The scatter plot below shows VIX vs. IG CDX levels since 2009. Based on this dislocation, equity implied volatility looks relatively cheap.


The market outlook is not clear and we are sure that market volatility is here to stay.

The issue being the cost of institutional debt, especially debt in the form of Gilts, Treasury Notes and Blue Chip Corporate Bond especially – are expensive

In comparison, on a relative basis, equities seem to be cheap – financial instruments seem expensive – so a suitable market exposure approach may well be to take a classical view and own defensive equities with strong cash flows mixed with some niche markets which are less vulnerable to the current market weaknesses and/or have already seen serious market corrections.

The question is what type of investor are you? Are you investing for months, or years or a fixed point in time in the future?

I would suggest that a combination of strategies is required, combining deposit-based strategies for the short-term, structured products for, the say, 2 – 6 year focus and investment portfolio for the over 5 year investment duration.

I accept and expect every personal circumstance and focus is different.

Good luck investing.