The global economy had barely recovered from the recession that begun in 2008 before the recent round of economic turmoil began. As a result many countries in the world are facing a double dip recession due to overwhelming economic uncertainty, political polarization and simultaneous de-levering. These factors are posing a serious risk to businesses and consumers and as a result they lack the confidence needed to revive the global economy. Investors are entering a new era of volatile markets and seeking yield. They must invest in a world with low growth, very low interest rates, and a de-levering economy. As a result it is of prime importance to position portfolios based on macroeconomic events that will serve to produce yield while investors wait for economic issues to be resolved and normal growth to be restored. Understanding current economic conditions and making bets on probable direction of various economies will be vital to protecting investors’ capital and getting reasonable returns.
Europe
- Because of political gridlock, and polarized differences in cultures in Europe, politicians will fail to come to a speedy conclusion that tackles the issues of fiscal integration. Until they manage to resolve this issue which will take over a year in my opinion, I expect the ECB to step in with monetary policy to provide stability to a quickly dwindling economy.
- An exit for some of the more troubled states in the Eurozone such as Greece, Portugal, Finland and a probable fracture of the Euro area to North and South Euro within a year will draw them closer to creating a fiscal union.
- This will cause the Stronger Euro for the stronger economies such as Germany and to an extent France (North Euro).
- There will be inflationary pressures in the weaker parts of Europe (South Euro) as devaluing currencies will allow the countries to pay their debt and restructure their trade balance.
Continued uncertainty regarding the future of the Eurozone and the ability for the remaining countries to agree to a fiscal accord that will create a United States of Europe is going to continue producing volatility in markets. These uncertainties will affect consumer and business spending thus, affecting emerging economies that depend on the eurozone such as China
China
- As long as the Eurozone remains a problem China is likely to continue to experience slower growth than investors are accustomed to.
- The Chinese economy is heavily dependent on foreign investment from Europe and the United States; as a result, until they successfully transition to a consumer economy, their growth will heavily depend on the economic conditions in Europe and North America.
- In efforts to combat a slowing economy in china, I expect the PBOC to partake in a simultaneous injection of monetary policy with the rest of the G20 nations. I expect some form of monetary stimulus to assist unemployment and various industries that have been suffering due to uncertainty.
US
The United States of America also faces major hurdles to overcome in the next year or so. First and foremost is the “fiscal cliff” which threatens to slow the American economy by up to 4.5%; thereby, throwing the economy back into a recession. It is evident that policy makers are at a standstill on the matters until after the elections on November 4th to decide on the next president of the United States and the members of the senate. This risk causes businesses to be uncertain of the future of the economy and reduce spending thereby causing more tightening in the economy. Over the next year I expect to see measures to combat this issue in the United States
- To begin with the Federal reserve bank of the USA will enact monetary stimulus to reduce unemployment and avoid a complete economic catastrophic event if the US went over the “fiscal cliff”
- Printing and distributing more money will devalue the US dollar relative to competitors which will drive US exports
- The US will continue to keep interest rates unusually low until the economy begins to recover.
Investors need to be aware of other emerging countries that are growing based on domestic activity and have been through a de-levering process thus have low debt; countries in South East Asia such as Indonesia and the Philippines fit this description.
Countries such as Australia and Canada are viewed as safe havens from economic uncertainty in the global economy. Investors will look favorably at the economies in these nations and be attracted to their assets. Canadian bonds produce a comparable yield to the US and Strong European Countries such as Germany.
Portfolio Construction
Balance Mandate
- 40% Fixed income
- 40% Equities
- 20% Precious Metals and Hard Assets
Technology (Equity) / Natural Gas (companies)
I will look to add dividend paying strong technology stocks to my clients’ portfolio. I believe this is an area which will be beneficial to a portfolio because the one of the two primary ways to grow an economy is by increasing efficiencies by developing technology. Companies that are positioned to increase efficiencies and have good management and are trading at a value to investors will benefit a portfolio
Dividend yield
REITS (Equity)
It is important to find yield in an environment with slow growth. Rental real estate in the United States provides such opportunity. Companies operating in Non-judicial states that seek to purchase homes and rent them out while waiting on the value of the houses to appreciate will add value to portfolios. In addition, home building and real estate add value to the economy and the politicians may see this as a place to begin when seeking to improve the economy.
Housing (Equity)
Builders/ Steel manufacturers. Companies in these sections with attractive yields and good price valuations.
Gold/ Precious metals (PM/FA)
With the co-ordinated efforts by central banks to print money and devalue currencies, investors will look for a flight to safety. Investors will flock into gold as they perceive the dollars and euros devalue. This is because Gold and silver have always acted as inflation hedges and as a back-up currency.
Real Return Bonds (Fixed Income)
Real Return bonds will serve as a low risk opportunity to protect investors from inflation and currency devaluation.
MBS (Fixed Income)
These are a low risk way to invest in one of the tools to creating job growth in America; in addition, speculation shows that further monetary easing by the Federal Reserve may be in purchases of Mortgage backed securities.
Emerging Market ETF’s (Equity)
Emerging markets will have higher yields than domestic markets, I would seek low risk emerging market situations such as those in South East Asia where there is a young large growing population, growth based on domestic consumption and low debt structure.
Buy a house (Hard assets)
For investors looking to purchase houses out right, there are pockets in the US that have shown signs of improvements and look poised to produce good returns through rental income or increased house prices.
CNN lists 10 cheapest and best cities to buy rental properties:
- Las Vegas has a Median price of $122,000 after prices reduced 65% from its peak in 2007, there is projected annual rent of $12,898 in the region by 2015.
- Detroit has a median price of $78,000 down 50% from its highs in 2004 and a projected rental income of $9,016.
- Daytona Beach has a median price of $114,000; Orlando Florida’s median price is $115,000.
Investors will want to stay away from states where foreclosure rates are increasing and there stands to be an increase in “shadow inventory”. The problems are most severe states such as Arkansas, Hawaii, Washington, Oklahoma, New Mexico, Mississippi, and almost all states in the Northeast.
This is my trading book!1
