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Expat Investor : January February 2008
INVESTMENTS January/February 2008 EXPAT INVESTOR 7 to invest in 2008 EQUITIES STAND OUT PAUL COOPER, ASSET ALLOCATION, THE FRY GROUP Choosing where to invest in 2008 will depend on your objectives and attitude to risk. Modern investment funds offer greater flexibility, enabling you to build an individual portfolio which can move between assets to ensure that your investments are in the right place at the right time. 2007 was certainly a rollercoaster of a year. The credit crunch has negatively impacted equity markets, but the impact on earnings has so far been confined to the banking sector and, while the loss of money is real, the pain is being spread across the world. Losses to date have been small compared to the destruction of value caused by the weak market. In the US, for example, $30bn of losses have been announced, but more than $600bn has been wiped off the value of the financial sector. Currently, losses are regarded as temporary, with growth in 2008 rising as estimates for 2007 are reduced. Nevertheless the credit crunch will cause the economic slowdown to steepen, and growth in the US will slow more sharply than most. However, with further cuts in US interest rates likely, a recession is not expected. Indeed, the International Monetary Fund expects the global economy to grow by 4.8% in 2008 (vs. 1.9% for the US). Although this is less than the 5.2% expected this year, it is healthy by historical standards. Growth is being driven by the emerging markets, which are less dependent on the US than they have been in the past. Continued on page 8 THE NECESSITY TO DIVERSIFY CHRIS HILLS, CHIEF INVESTMENT OFFICER, RENSBURG SHEPPARDS INVESTMENT MANAGEMENT It is never the easiest of tasks to look forward a year and recommend an investment strategy to make money. This year in particular, in the aftermath of the US sub-prime mortgage crisis, will prove a testing time for the crystal ball. Undoubtedly the likelihood has risen that the credit crunch will be transmitted to the real economy from what has, in the months since the phrase 'sub-prime' became recognised, been a problem confined to the financial sector. The speed and extent of this transmission will depend on a Of the major financial assets available to investors, equities stand out as the asset of choice. Although the economic downturn will negatively impact earnings growth, the fundamental picture remains intact -- balance sheets and cash flow are strong and profitability has never been as high. Equities are facing the uncertainty from a position of strength. We would be cautious on bonds because prices have been boosted by portfolio de-risking. Yields are not attractive, especially as there is a risk that measures to boost growth in the US in the short-term cause inflationary problems in the medium-term. The revaluation of emerging market currencies also raises the "UK property looks less attractive, but with global growth remaining robust and interest rates on their way down, the opportunities for growth in some parts of the world, such as Asia, remain excellent. " competitiveness is likely to be quickly reversed by the region's high productivity growth. In terms of strategy we do not feel that a US recession is an imminent threat. The deflating property bubbles in the US and elsewhere will continue to provide a negative drag on growth, but there are sufficient counterbalancing forces (particularly Asia) to keep growth ticking along. The outlook for equities, therefore, remains positive, although the recent correction may have a bit further to run in the short term. In terms of the bond markets, the current rally looks to have virtually run its course. Currency-wise, the recent interest rate cut has further damaged sentiment towards the US dollar. The weak US dollar trend against the pound and euro is in its last stages, at least for the time being. Not only is the US dollar technically oversold, but it's cheap and very much out of favour. inflationary risks in the west. Commercial real estate is mixed. UK property looks less attractive, but with global growth remaining robust and interest rates on their way down, the opportunities for growth in some parts of the world, such as Asia, remain excellent. Commodities will continue to be supported by emerging market growth, though the slowdown in the US will have a negative impact overall. Areas with tight supply remain attractive, though returns are unlikely to be as strong as they were in 2006/7. Sterling is overvalued and with interest rates likely to fall in the coming months there may be significant value in being outside the pound. With a constantly changing situation, it is important to keep regularly updated.