Re ections & Projections

by Andrew Wood Happy New Year! Welcome to 2012. Its that time of year when many of us say out with the old and in with the new but is it really that practical or even possible to achieve this with nancial matters? The European debt did not vanish overnight because we turned into a new year; markets did not rebound to their earlier highs; global currencies did not equalise back to desired levels; commodities did not bounce back to their previous records. But most of us will try to take stock of what has happened in the last year and try to see where we can make a dierence by steering in a dierent direction in the coming year. So, where actually are we as far as our nances and the markets are concerned? What happened in the last twelve months that in uenced our going concern as individuals in our personal business of living life? Looking at the overall picture there were many world events which shaped the directions in which we headed, starting with the Arab spring. The events which unfolded in the Middle East sent shock waves through the global markets and oil prices soared. The devastating earthquake and resulting tsunami in Japan simply made matters worse in the east. This had a serious adverse eect on the Japanese economy and markets, from which recovery has not really seen the light of day. Gold attained several new highs in the year, peaking at $1,911 per ounce in August and then crashing back down in quick succession. The commodity has shown much volatility since then and has closed around 16% below its high for the year. Most other commodities have been rather volatile with many declining in value over the year. Currencies have also been impacted with the Swiss Franc being one of the surprises. It was becoming so strong against other global currencies that the government pegged it to the Euro. This has made a considerable dierence to one of the worlds safest havens. The Thai Baht has declined somewhat against other major currencies but is this enough to ensure the continuation of competitive exports? Of course many expats would prefer to see the THB at levels of 2008/09 because they have incomes and reserves xed in these. In the latter half of the year the situation in Europe has been a major concern. The Merkozy plan to introduce stricter scal compliance by EU members seemed to steady the nerves of the markets. However, the problem has not gone away and this was only a temporary paint over the crack or a kicking of the can further down the road. At the end of the day the sovereign debt issues in aected countries still exist and it certainly looks like many parts of Europe will be in recession sometime early in 2012, if they are not already. These types of crisis have occurred before and they will probably happen again. They were navigated before and the current diculties will be overcome. The question really is when and how will it aect us all as individuals?

All these and many more factors touched our lives as people at some stage in the past year. One thing of particular note is that the fundamentals of historical market forces appear to have changed. Historically we have seen that when one thing happens another is aected in a speci c way. This has traditionally given analysts guidance in predicting the future. For now at least, the fundamentals are out the window and we seem to have entered a period where we really cannot predict the future with as much accuracy as previously. Once upon a time government bonds were a safe haven. That was probably because governments were generally considered to hold safe debts. This has changed and now a government bond will give a paltry return which will hardly keep up with in ation. Additionally there is now little if any capital growth on the base value of a bond and so they are considered depreciating instruments. On the other hand many investors are well aware that equities in the right choice of companies are good investments in that they return dividends which are superior to those

returns produced by government bonds. In addition many believe that the long term oers solid possibilities for capital growth on underlying share holdings. What is good growth and what is long term I hear you ask. Well, if government bonds produce say 2.1% per annum and share dividends exceed 5% the case is easily evaluated. If shares appreciate over two years or more, this would be considered longer term. With the tilt of these factors we are seeing that risk analysis is moving from government bonds as the preferred longer term safe strategy, to equities. Now I also hear you say you can get say 18% on Portugese bonds and even up to 7% on Italian bonds. Will they appreciate? Probably not. Will they be redeemed at maturity? The answer is likely yes but therein lays the question which is tilting the risk factor from one area to another. The underlying investment is now not considered as safe as it once was. Let us also not turn our backs completely on the USA, which appears to be sitting in the recovery position. It certainly has shown signs of improvement. The big question here is how much aect will the presidential election campaigns in 2012 have on the running of the economy and what will happen to the markets as a result. We have already seen how internal politics seems to take precedence over economic sense in the past year. If this is any type of indicator then there could be several repeats of this in election year. As an important growing economy China has substantial in uence on the rest of the world, never to be underestimated. There have been problems with some facets of Chinas economic growth but it remains relatively stable. Whilst we are on the BRIC countries, Brazil is a continuing success story whilst India appears to be stalling a little. So, will the emerging markets prove as robust as we have seen in the past? Opportunities abound for the investor with the courage to be contrarian. If you feel you would prefer to let your cash languish in a bank vault it will certainly depreciate through this year. However, pray that the bank itself is safe. Some agree that a depreciating deposit is better than a market shrinking investment. It is quite feasible that oil will appreciate; gold will again steadily rise; markets may bounce back if the Eurozone is seen to be resolving the overall crisis, but will then rise only marginally throughout the year; commodities could rise well, given that they are usually rst out of the recovery curve. These are not predictions; I would not dare to assume I know what is going to happen! It would be very interesting to hear what you all think as readers and what factors you feel may have an important impact on the year ahead. Whatever it is we are all bound to deal with our personal business of living life. Some just ignore it and hope or assume it will go away and others take an interest trying to get their lives in order in the best way possible. In whatever capacity you read this column I wish you well this year.
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