Pension

How To Keep Your Head When Those Around You Are Losing Theirs

Learn the secret of how to make money while those around you are fearful, in under 2 minutes. Explanation in the text below, as well as advice on how to react to recent stock market moves.

How to keep your head when those around you are losing theirs.

  • Firstly get better informed by asking 3 simple questions: What’s really going on? Why is it happening? What could happen next?
  • Then work out how it could affect you with another 3 simple questions.

The recent turmoil in the financial markets is a great example. Investors seemed to be losing their heads. (more…)

From A Dog To A Darling: 5 Ways To Profit From Japan That Most Have Missed

From a dog to a darling, Japanese stocks have finally found favour. After returning 52% for investors last year, there are still 5 reasons this market has further to go, with opportunities most have missed. There is the potential for a catch up within the stock market, mispricing, earning growth, restructuring and increased buying. Sectors to benefit from reflation and growing domestic demand within a still unloved part of the market may profit.

[Click image below or this LINK to watch this as a TV Clip]Screen Shot 2014-01-10 at 14.33.03

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EU Differentiation… The Key Points you should know…

“United we stand; divided we fall” Aesop (Ancient Greek Fabulist and Author of a collection of Greek fables. 620 BC-560 BC)

The problem with the “EU” banner is that it links together economies that are quite different from each other. Much press has been dedicated to the fate of the PIIGS – Portugal, Italy, Ireland, Greece and Spain but it is interesting to compare journalistic exposure with economic impact. Greece Ireland and Portugal account for less than 5% of EU GDP. To save you shifting through pages of research – here are the key pertinent points for each economy… The structure follows that of my earlier assessment of the futility of EU bailout mechanisms–

  1. FLAWED LOGIC – what are the real issues?
  2. NOT SOLVING THE PROBLEM – will the economy in question be able to grow enough / will the debt burden be manageable enough so that it will fall as a % of GDP?
  3. UNCERTAINTY – what are the political issues?

Source: "Belgium Joins The PIIGS: And Then They Were Six" - Gavan Nolan, Econotwist The Swapper - learning and understanding the increasingly complex financial world.

Portugal – A Disappointing Deficit, Dipping Back Into Recession

  1. DISAPPOINTING DEFICIT and FOREIGN PRESSURE – Disappointed the market with its deficit reduction plan for this year, amounting to a value for the first 10 months of 2010 which was than for the whole of 2009 and forecasted to exceed the EU limit until at least 2012. Exposed to more foreign pressure with around 70% of its debt is held abroad
  2. LOW GROWTH – estimated to only amount to 1.3% for 2010 for an economy expected to fall into recession next yr
  3. POTENTIAL SOCIAL UNREST – planning to reduce its public workforce

Italy – Saved by its Savings, Economic Exposure but Debt Isolation

  1. TOO BIG TO BAIL OUT – second largest debt burden after Greece (public debt equates to 120% of GDP)
  2. LOW GROWTH

  • HOWEVER: High savings rate, exposure to German and Emerging Market economies, less dependant on foreign creditors and therefore more flexible

Ireland – The Public Prefers a Default

  1. HUGE BAILOUT – amounting to 60% of GDP vs. “only” 47% for Greece
  2. POTENTIAL FOR DEFAULT – 57% of the public believe the country will not be able to support the annual interest payments involved with this debt burden (€5bn over 9 years) and would prefer the government to DEFAULT on its commitments
  3. PROTEST and INTERNATIONAL IMPACT – 50,000 took to streets to protest against the Government’s plan to cut the budget deficit. The UK has £140bn exposure to Irish banks

Greece – Flirting with Insolvency

  1. STRUCTURAL LIMITATIONS“overblown state sector”, “uncompetitive and relatively closed economy”
  2. SOLVENCY – It has been argued that the bailout package will only prevent Greece from insolvency for ~a year
  3. CIVIL UNREST – has been seen in response to social program cutbacks

Spain – Pulling a “Sickie”

  1. UNEMPLOYMENT and a potential for DEFAULT – the highest in the EU at around 20% of the population. A third of private sector debt (€0.6tn) was generated from the housing boom and liable to default.
  2. INTEREST PAYMENTS HAVE JUMPED – Since Oct, yields have jumped from 4% to 5% leading to a larger debt burden as a percentage of GDP
  3. SOCIAL UNREST – Just the other week we saw one of the largest “sickies” thrown by their air traffic workers

Hungary – The Government Can’t Win

Although not within the PIIGS acronym – it is important nonetheless to mention this economy at this point and a great example of the potential impacts to investment. It’s a case that highlights the Government can’t win – if it decides that instead of implementing austerity programs eliciting social unrest, it will instead employ more crowd-pleasing reforms, it will get punished nonetheless….

  • DOWNGRADED – Moody’s has downgraded its debt to the lowest investment grade status. One more downgrade and it changes classification and those restricted to investing in Investment Grade debt only will be forced to sell, regardless of any other factors. Great opportunity to pick up dent at a discount (whilst watching the quality of the issuer!)
  • REASON – Short term (less antagonistic) measures are not sustainable – special taxes and utilising private pension schemes to fill holes! The Government is relying on future growth to afford its pension liability in the future and anyone not transferring to a state pension by end Jan may lose 70% of their pension value.

Contrast with the Core

Just to contast these economies with the one seeming to be driving force behind the union – Germany’s deficit could potentially fall to the 3% EU limit next year

INVESTMENT INSIGHT: When investing in the EU – differentiate between countries!

European “Financial Mechanisms” – Can they solve the EU’s problems? And how can I make money from the concern?

World unity is the wish of the hopeful, the goal of the idealist and the dream of the romantic. Yet it is folly to the realist and a lie to the innocent – Don Williams, Jr  (American , b.1968)

There has been much in the news lately on the outlook for the European Union. In May, Greece was offered €120bn in EU government and IMF loans over 3 years to replace the need for new borrowing at exorbitant market rates – the “first bailout of a Eurozone country and the biggest bailout of any country”.  Just last month Ireland joined the queue and received a €85bn injection plan. The flame of contagion was burning bright as investors worried Spain, Portugal and Italy were to follow suit quickly (The other members of the PIIGS acronym – and we’ve been advised what risks lie in an acronym!). Then just as markets calmed after the ECB staged their largest intervention and purchased mainly Portuguese and Irish bonds on Friday, the rating agency Moody’s announced it was downgrading Hungary’s debt by not one but two notches!  This country isn’t even in the periphery of the EU, it’s outside of it entirely… and so the contagion spreads….

Source: Bloomberg. The premium investors demand for investing in Irish government bonds over German bunds remains elevated (indicating a perceived heightened risk)

Why won’t the EU bailouts solve everything?

1. FLAWED LOGIC: attempting to solve the problem of debt with more debt

2. NOT SOLVING PROBLEM: without growth, the debt burden as a share of GDP will continue to rise. The latest European Financial Mechanism only covers maters until 2013,  if Debt/GDP has not reduced significantly then bond holders start sharing the pain

3. UNCERTAINTY: ministers keep changing their minds! (“no bail out” to “bailout”, “no pain for creditors” to “sharing the burden”) – markets don’t like uncertainty!

The key discrepancy –

What the ECB wants EU countries to do: Be prepared to increase the size of emergency bailouts, consolidate budgets and reform (implement austerity measures and assume national responsibility so the ECB can avoid being a bailout tool)

What EU country economies need: COMPETITIVENESS AND GROWTH

Market Impacts

  • YIELDS may have fallen sharply for some periphery debt but as the chart before shows, they remain at elevated levels.
  • FORCED SELLING – Pension funds, insurance cos and ETFs which are focused on matching the liabilities to their assets may have to sell certain debt when its credit rating is cut

How can you exploit this?

“Europe is difficult to understand for markets. They work in an irrational way sometimes,” Christine Lagarde, French economy minister

  1. Companies located in an EU periphery country, with strong balance sheets and demand insulated from worries about their homeland (i.e. international exposure and demand for their products from the east etc) making it a sound investment choice, may suffer from illogical moves in the markets that punish anything connected to the country regardless. This debt can be picked up cheaply.
  2. In addition, a downgrade in a country’s government debt may trigger a wave of forced sellers (the pension funds etc. mentioned above) that are restricted in holding this level of debt. If this is just an automatic trade, these distressed sellers may be exploited with the purchasing power in your hands

“Isn’t the consumer dead..?”

 

“American households have shifted their cash flows from illiquid real estate and consumer durables to paying down mortgages and consumer debt…It is this rapid rise in aversion to illiquid risk that explains a large part of the anaemic recovery in the US.” Greenspan

 

Highlights

DRIVER OF REVIVAL: The US consumer has historically been a crucial driver of economic renewal

PRECARIOUS POSITION: Many worried about employment, have under-saved for retirement

STIFFLED STIMULUS: The propensity to spend (and boost the economy) will be limited

 

 

Answer

The importance of the consumer and the concerns surrounding the structural headwinds they face are undeniable. Consumer spending accounts for approximately 70% of US GDP (although I’ve read an interesting piece by Darren Marron arguing this figure is actually nearer 60% when spending on imports are dealt with more appropriately[1] but nevertheless, this is still a significant percentage). The magnitude of the problem has been well described by John Maudlin who pointed out that versus the last recession, we have seen “double the asset deflation, triple the job loss, coupled with a collapse in credit.” It doesn’t look likely that the consumer will be bouncing straight back!

 

Conference Board Consumer Confidence Index down 57% since 2007. Source: Bloomberg

 

On the subject of unemployment, although it is universally monitored, what has been missed by many is what the rate does not take into account. Salaries have been cut and working hours reduced. This adds to the misery of many consumers. Furthermore, it is these people who are working part-time that will be hired back into full-time employment before companies reach out to the many unemployed. This must be assessed within the context of an expanding labour force where a substantial amount of new jobs are needed every month in the US.

 

Looking forward, another key limiting factor on the consumers’ propensity to spend is the move to save instead, as they look to fund their retirement / non-wage earning years. The “Baby Boom” generation is expected to account for nearly 60% of net US wealth by 2015, according to a study by McKinsey,[2] and their turnaround from spending to focus on saving will be magnified by the fact that they have historically under-saved. The aforementioned report identified that as low as only 25% are “financially prepared for retirement”, thus the decrease in the spending habits of the vast majority will be significant.  Inside Europe the story isn’t much brighter and the UK pension gap (the difference between the income needed to live a comfortable retirement and the actual income individuals can expect from their current pensions) has been heralded as the “biggest in Europe”[3] by national papers. The OECD sets an average pension at around 59% of the earnings built during a full working career, a stark comparison with the UK’s 31%[4]. With relatively small public pension, an individual will need to make extra savings to ensure their standard of living does not drop dramatically as they move into retirement. This is not an outlook that will encourage the spending that will boost or even support the economy. (For a deeper insight into the ageing populations of the developed world see What is a \”Structural limitation to growth\”? How can I exploit it?)

 

 

Savings Rate, US. Source: McKinsey Global Institute analysis

 

ECONOMIC IMPACT: This points to a muted recovery instead of a “V” shaped bounce-back.

INVESTMENT INSIGHT: Look at companies which aren’t as heavily reliant on the Developed Consumer but with an international reach and operations within Emerging Markets. To exploit the ageing of the “Baby Boomers” within Developed Markets, see What is a \”structural limitation to growth\”? How can I exploit it? and invest in companies positioned to benefit from an increased reliance on healthcare, nursing homes etc.