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Expat Investor : August 2009
EXPAT INVESTING Stategic investment planning Graham Barnes, International Director with The Fry Group, explains why expat investments need new strategies for success. we are investing for short-term capital protection or long-term growth. The UK and US governments are resolved to increase spending and government debt levels in the hope the old economic drivers, consumption and house price growth, return. The doubt is simply that personal indebtedness remains too high to soak up more. The US economy, being that much more robust, might pull it off. The UK might not. Some 30% of UK GDP was contributed by its finance industry, which is now on its knees. The danger is that the high level of UK government borrowing feeds inflation or, worse, that the government loses credibility and fails to attract sufficient purchases of its debt. More conservative European countries see no need for massive injections, as their economic growth was not based on mortgages and debt. Even so, the levels of unemployment will present real problems. In Asia and other developing markets, the problem is different. These markets have fallen because of a cut in the flow of capital from the West and as investors fear a reduction in imports to the US. However, the domestic economies did not share US and UK mortgage problems and their banks have not experienced problems. Overall, the financial problems appear in Western banks or in some countries, and the levels of government debt stifle economies. That is the negative side. We must balance that gloom with the sense of recovery which equity markets are prone to discerning – even if some way off. Capitalism is not broke yet, it has given massive benefit across the globe and, after this latest upset, the process will continue. In a word limited article, the generalisations must be short, but against this background here is my view – for short term investors there are few real alternatives to: Cash Rates on most major currencies have fallen, but it is still worth looking for a competitive rate. Although some UK banks are famously paying as little as 0.5% for deposits, there are still sensible institutions offering up to 3%. Beware of the jurisdiction and strength of the institution. Indeed, I am not sure you can rely on the apparent safety suggested where an institution has the backing of its government. Investors will remember 2008 as a year when assets crashed in value. Theory says that what is bad for equities will not be bad for bonds or commodities so, if you diversify assets, something will do well. That theory failed in 2008. It was also a year when returns on cash fell 6 EXPAT INVESTOR ? too, and, for those Britons living overseas, the value of sterling fell sharply. I doubt there are many lessons yet to be drawn – not until all bank debts are truly quantified. A judgement on events of this magnitude is often best left for a few July/August 2009 years. But I do feel the way our politicians are responding to the black holes created in 2008 gives us the basis of assessing how we should invest. Should we favour pundits who fear the worst or those who see the green shoots of recovery? Then we must consider whether expatinvestor.com Bonds For as long as governments, especially UK and US, need to raise so much I am wary about investing – the supply will inevitably affect the price, but at some point fears of returning inflation will cause investors to buy again. Meantime, corporate bonds can be attractive simply because the 2008 sell off has seen prices fall to levels which assume higher than likely levels of corporate default. So, as demand returns the theory is that prices will strengthen. Most other assets either have high costs or lack liquidity – rendering them unsuitable in the short term. For longer term investors (those looking beyond three years) the solutions vary depending on whether income or growth is sought. There are opportunities in either category, as it is always better to buy when assets are cheap or yields are high. Income investors are likely to be gloomy about low cash yields, but yields on bonds, UK property and quality equities should compensate. Whilst we cannot pinpoint how long recovery will take, it’s likely that the fall in prices of those assets is now over. Equities Growth investors, more naturally drawn to equities, must steel themselves against the possibility that the March 2009 recovery is just a bear market rally. That might well be so, and ‘sell in May’ could yet prove right, but I doubt that we will see stocks back below the levels seen in March 2009 (when, for example, the FTSE 100 fell to 3512) simply because the politicians have started to put out the fire. All equities will not perform alike. To me, we stand visibly at a point where the old economies have a heavier burden now whilst younger ones have more economic potential to exploit without debt burdens. Although developing markets have proved more volatile in the past, I see them doing well. Commodities, including gold, offer possibilities as China’s growth continues and the government seeks alternatives to US Treasury Bonds. Gold has found the US$1,000 barrier to be a real hurdle, but, as the spectre of inflation returns, so that will crumble. At Fry’s, we recognise that all investors have individual needs, so it is difficult to give specific model portfolios. What is important is to agree a spread of assets that suits you and then find ways of achieving your aim. If you can, either use a manager who has added value in the past and charges a fee, or use a tracker or ETF with a much lower fee.We are happy to combine both in our client portfolios. Lastly, whatever you do decide to invest in, do consider the tax structuring of the investments for, as it’s not always easy to make a return on your money, you must reduce the tax take. www.thefrygroup.co.uk
May June 2009
September October 2009