GLOBAL equity markets have started the year strongly. Investors seem pleased that the US fiscal cliff has been averted, or at least deferred. Now the bigger and more important issue is the US debt ceiling, which will be reached in spring 2013. Until then, financial markets will likely remain volatile. In the longer term, we are more optimistic and see short-term volatility as an opportunity to make some good strategic investment decisions.
Large cap global equities look fairly valued, and dividend yields remain a meaningful component of returns. Global equities are also a good inflation hedge if you are optimistic about long-term prospects.
It is important to remember that it is company profitability that drives share price appreciation, not geopolitical events. Over the long term, we are encouraged by fair valuations along with better-than-expected earnings numbers.
And the US is still the engine of the world economy – as big as the economies of China, Japan and Germany combined. In Europe, equity markets look oversold, while in emerging market growth prospects continue to improve.
CHECK YOUR FEES
Total fees should be no more than 0.8 per cent of assets under management. This includes management fee charges, execution costs, custody fee charges and any rebates. Always understand clearly what the charges are, and don’t be afraid to switch advisers or negotiate them down when charges become excessive. It is not in your best interests to be in high cost “alternative” investments. So-called “structured products” only serve to make the banks wealthy.
At least 80 per cent of your portfolio should be in liquid investments you can sell immediately. This is not because the world is falling apart, but because there will be some amazing buying opportunities for investors over the next six months.
Part of this strategy should be to keep about 30 per cent of your investable assets in cash and short-dated bonds. If you want to put your money into property, hedge funds or private equity, be sure to keep your exposure low. Remember, you are taking much higher risks when putting your money into these broadly illiquid investments
Bonds remain expensive but can’t be avoided. Depending on your base currency, stick to top quality government bonds over the longer term – UK gilts, German bunds and US treasuries only. We advise most of our clients not to own government bonds more than three years in maturity. High quality short-dated corporate bonds are an alternative and can offer more return over cash or government bonds.
Investors should avoid taking significant credit and interest rate risk, and remember that chasing yield or income in the bond market is the worst thing possible. And all cash-like investments should always be in your base currency. Investments in other non-base currencies are speculative in nature and just add more risk to your portfolio.
Gold remains in bubble territory, so avoid the hype. Anyone buying at current levels is basically speculating, not investing. When market volatility is high, investors sell their gold as it seems to be viewed as a short-term provider of liquidity or cash. The big global investors have already made their long-term money allocations to gold. When markets recover, investors again sell their gold and reallocate money into riskier assets, like shares and commodities.
Global markets are very uncertain at the moment, but there are positive signs that, over the longer term, problems will get resolved and markets will improve. In the interim, do not get caught up in all the short-term noise. Above all, do not trade or speculate around uncertain geopolitical events.
Yogesh Dewan is chief executive and founding partner of Hassium Asset Management.