HASSIUM ASSET MANAGEMENT
WE have seen a volatile start ot the new year, but whatever is happening in the markets, some things never change. When choosing what to do with your cash, the first thing to remember is always to focus on long-term wealth preservation. Growth comes a definite second.
When managing your money you need to make decisions based on sound fundamental analysis and valuation over the long term, rather then getting caught up in day-to-day trading or stock picking. Even the best investment and hedge fund managers in the world struggle to get trading and stock picking consistently right so what makes you think you can do better?
Make sure you are making financial decisions in the context of your total net wealth and long term financial requirements. Just because a bank focuses on shareholder value and profitability every quarter does not mean you should be thinking so short-term.
Your three big decisions investment for the next 12 months and beyond should focus on:
• Strategic asset allocation: what is your equity exposure relative to your cash and bond exposure.
• US dollar exposure: what is your US dollar exposure relative to your base currency, sterling or the euro.
• Emerging market and or commodities: what is your exposure relative to your cash, bond and equity holdings.
Getting these three key decisions right will account for 80-90 per cent of your performance. It’s not about stock picking, fund selection, or which structured product or hedge fund you invest in.
Looking specifically at the next 12 months and beyond there are some key considerations:
1. Remain cautious. Expectations of a strong recovery in our view look over done. While recent events in Greece seem overstated, tightening measures in China pose a major threat to global growth and so to the pace of recovery. It’s important to remember that economic recovery does not necessarily equate to financial markets trading higher. Also, good economic news will become bad market news as inflation rises and the financial markets focus on government deficit levels and the impact of stimulus withdrawal. Failure by central banks to remove stimulus programs will lead to asset price bubbles and premature removal could lead to deflation. The recovery and broader financial markets remain fragile.
2. Banks also remain fragile and bank credit has traditionally been the driver of growth. In Europe there will be further write-downs on the back of exposure to Greece, Spain, Ireland and Portugal. In the US there will be renewed pressure, with Obama’s plans to limit bank activities, and more importantly the upcoming wave of mortgage resets. This will impact on the availability of bank credit and therefore the pace of recovery.
3. Longer term, we believe the US dollar will strengthen. We have seen recent dollar strength against both the euro and sterling on the back of investors unwinding short speculative positions, caution over the economic outlook given concerns about Greece and other countries within Europe, and an expectation that the US will lead the world out of recession. Dollar denominated assets should continue to perform well in a sterling or euro-denominated investment portfolio.
4. Government bonds remain expensive but are a hedge against downside risks and offer higher rates than cash. Government and corporate bonds have broadly traded down, given concerns over the Greek budget deficit and debt funding concerns. We continue to like selective corporate bonds and inflation-protected government bonds. With interest rates expected to increase in the second half of 2010, investors should stay short dated in the bond markets for the moment.
5. Equities look overpriced at current levels given the strong performance seen in 2009 and current underlying fundamentals. Equity markets are forward-looking and focus more on the prospects for 2011 and beyond, which in our view remain very uncertain. Any significant pullback from current levels would be a good opportunity to increase equity exposure. For equity exposure we prefer the US. We are negative Europe, neutral the UK and Japan and cautious about emerging markets, which appear to be in bubble territory.
6. Gold at $1,100 makes no sense. Prices have been inflated by investor risk aversion, speculative investments, a weak US dollar, and various hedging (insurance) strategies. Avoid investing in gold. Broader commodities will remain volatile in 2010. In the longer term both oil and agriculture would be good additions in a portfolio as they are likely to trade higher.
7. Emerging markets are in bubble territory. Investors have become too carried away with their impact on global growth and have not focused on fundamentals and valuation. This is a clear short-term underweight position for us. Longer term we anticipate emerging markets playing a larger role in world affairs and would look to increase exposure. We believe China, India, Russia and Brazil are still the most compelling long term plays.
8. Property has suffered in numerous countries since the onset of the credit crunch and has limited upside from current levels. Spain and Ireland continue to be beset with problems from a strong euro, an over-extended domestic banking sector and an oversupply of housing. The UK has supply side constraints and so a floor on valuation. With limited bank credit and poor liquidity we see limited upside to investing in real-estate.