Focus: Cash continues to gain strategic importance as
an investment asset class in the current deflationary stage of the long term
economic cycle which has persisted, in indebted developed western markets, since
the turn of the millennium. As one of only three asset classes expected to
outperform during this 15 to 25 year phase, it has become increasingly important
not only to allocate an adequate proportion of investment portfolios to cash but
also to actively manage that money in order to achieve optimal returns in a low
or zero interest rate environment against a backdrop of ongoing fears of a
global depression.
Implications: During such a deflationary period, two key
issues come to the fore:
* Strategically managing asset allocation with due regard to
the risks and rewards of each asset class - recognising the three most suitable
asset classes for this long term phase (namely gold, bonds and cash), whilst
exploiting tactical allocation to other assets, notably risk assets such as
equities and property, so as to capture counter trend reversals.
* Maximising the potential returns of each of these three
strategically appropriate asset classes.
These issues need to be considered from a wide range of
currency perspectives and all investment criteria, in terms of the global asset
and currency opportunity set, noting that the most favourable long term returns
and investment opportunities are likely to be found within un-indebted, higher
growth economies, such as those in South East Asia. Although a short term US
Dollar rally seems likely, international assets will become consequently less
attractive. Depositors need to be aware of this from a currency perspective and
choose the optimal exit point from any international currencies.
Outlook: A sharp retrenchment is expected in the value of
risk assets throughout 2012 and 2013. Currency volatility is also expected to
increase, leading to both elevated levels of risk and greater opportunities.
Executive summary
Zero interest policy causes problems for investors: all
that’s gold, does not glitter - The consequence of uninhibited lust for
credit, which has defined economic and capital market activity for the last
thirty years, is slowly, inch by agonising inch, reaching its inevitable
conclusion as both people and nations are starting to learn the hard way about
the need to live within their means. Yet the UK, the US and Europe continue
pumping billions more Dollars into their economies in a bid to stimulate a
recovery, while many other countries have started to follow suit. Most notable
and most alarming of these is China, in view of both the sheer scale of its
capital base and the worrying inadequacy of Chinese regulatory oversight or
transparency.
Capital flows have caused unintended consequences increasing
the daily cost of many consumer staples beyond the ability of many societies to
cope, constrained as they are by their increasingly unequal income and wealth
dispersion characteristics. Evidence of this has spread from Athens, through the
still continuing Arab Spring, via the streets of many UK cities to the Jasmine
riots in China.
An intellectual debate continues to rage about what actions
the Fed, IMF, ECB and all central banks or supra-national bodies can or should
take; whether Federal Reserve Chairman Ben Bernanke’s handling of the Global
Financial Crisis (GFC) - based on the narrow and seemingly incorrect historical
perspective of monetarist economic theory - can win the day. Investors could
learn a great deal about the current situation and future outlook by studying
long term market cycles - especially MBMG’s Kondratieff Seasons (see
graph above).
The policies that have been adopted are justified with
reference to economic theory but the justifications provided are spurious and,
therefore, investors should not expect better or different outcomes to the
previous instances of the global ‘Winter’ phase of the economic cycle.
Accepting that cash, gold and bonds are the three
strategically appropriate assets for this phase, investors need to understand
the challenges associated with each of these. For bonds and gold that challenge
is not to get caught holding the time bomb when these asset values fall off a
steep cliff, although that may not be imminent. For cash, the test ahead is to
get any kind of returns in a zero interest environment.
This is a very challenging investment environment but
awareness of the larger context will help investors to find the most appropriate
solutions.
To be continued…
|
The above data and research was
compiled from sources believed to be reliable. However, neither MBMG
International Ltd nor its officers can accept any liability for any
errors or omissions in the above article nor bear any responsibility for
any losses achieved as a result of any actions taken or not taken as a
consequence of reading the above article. For more information please
contact Graham Macdonald on [email protected] |
