Last week, we looked at some topical considerations for new investments in 2013. Although 2012 was a mixed year, we noted that there were some exceptional winners and unusual losers.
We also looked at some of the pointers for equities, taking account of three major measures and influences. These are the equity risk premium (ERP) measure; the Chicago Board Options Exchange Volatility Index (VIX); and the price/earnings (P/E) ratios of individual companies. These all started 2013 in a positive way, pointing to equities being good value. Indeed, in the first three weeks of this year indices showed terrific gains, with the FTSE up 280 points, or 4.78%, more than the entire year 2012; the S&P500 rising 67 points or 4.7%; and the Hang Seng up 1,014 points or 4.48%.
Turning to property, we agreed that there are many diversified ways in which you can invest in properties, which is an essential part of any overall asset allocation of your net worth. Although property has very good long-term capital appreciation potential, be aware that the liquidity of such assets can be low even when the income potential is excellent.
There are currently opportunities to use the property markets in a variety of ways beyond traditional ownership. These allow more liquidity and greater income potential. Thus, with the possibility of owning your own home and some additional diverse methods of property ownership providing steady income, these are an excellent part of your overall plan.
With a variety of different possibilities for asset allocations and so many factors that may influence them, what else should an investor consider for 2013?
Most people take into account commodities when looking to round out a portfolio. The most popular of these is gold. Investment here can take different forms. Apart from buying bars, there are investment funds that purchase gold. Such funds are becoming popular and investors like the idea that they partake in an actual physical holding within their fund. Then there are index trackers. For the doubting Thomases, these are unacceptable because they simply track the price and have no actual assets attached to them.
Equity funds, meanwhile, buy the shares of companies involved in gold mining, processing or other related industries. This type of allocation is less concentrated on the actual gold price as the equity markets and gold prices will influence their value. Thus, although they relate to gold, the correlation is weaker than most other gold-related holdings.
What about other commodities? There is a vast variety in which you may invest through various methods. Many are very volatile indeed and while the risk factor can be very high, often the rewards are exceptional _ when you reap them.
With a growing global population, are food commodities going to be favourable this year? Beware of investing in single commodities unless you are working with a professional. Very often an approach to allocations via a food index or agricultural fund is better than buying an exchange-traded fund (ETF) in a single commodity.
Climbing food prices may well make good returns on your allocations but this means that there will be more inflation generally worldwide.
Inflation is one of the factors that will affect asset values this year and we need to ascertain whether it will have a significant influence.
With quantitative easing the preferred solution of many governments for dealing with their economic woes, the idea is to encourage growth by stimulating demand. This, in turn, creates inflation. The best assets to hold during periods of inflation are commodities and equities.
One of the other significant factors at present is that interest rates are below current inflation rates, which is going to be very bad news for pensioners, who will continue to see their incomes eroded by inflation while pension levels are held down by low interest rates. As an expat with a qualifying recognised overseas pension scheme (QROPS), you will see the rate at which you can draw down reduce, particularly if you have a revision of your drawdown income during 2013. Of course, inflation will eventually push interest rates higher but the timing of when these will overtake inflation in invariably delayed.
There will certainly be equity growth if inflation becomes more significant in the world. Some are even projecting that the cycle will return to that of the late 1970s and early 1980s. In those years inflation rates were above 20% and bank interest rates were even higher. So, if you have any debt this could be a significant factor for you.
Another fear among some economists is that because current interest rates are below inflation rates, people will find it easy and cheap to borrow while it lasts. But when interest rates exceed the inflation rate once again, the debts chalked up will become far less affordable and there will be further banking difficulties with toxic assets again.
In terms of the geographical location of your asset allocations, China is currently looking encouraging. While there have been some difficulties last year, the leadership takeover is now complete and seems to have been a success. Growth is projected to resume and markets currently look underpriced.
In Europe there are several good investments at seemingly bargain prices. These arose because of the difficulties in Europe last year. However, whether they will remain good investment allocations remains to be seen. This will largely depend on how the eurozone fares economically over the coming months.
There is a constant battle of opinion over the current state of the US economy. Although the fiscal cliff difficulty was overcome at the 11th hour, several issues were not addressed and will loom again toward the end of the first quarter.
Historically these difficulties are usually resolved just in time to avert crises but there is always a great deal of nervousness in the markets leading up to these agreements. Some soothsayers are sceptical about these looming deadlines but we have not witnessed a failure as yet.
Looking at the last three years, equities have enjoyed good growth in the first quarter and then have slid in spring corrections, leading to frustrations and disappointments. Some analysts are predicting a repeated but earlier decline this year because of the US fiscal cliff and debt ceiling requirements. These issues will surely be subject to repeated political battles and hold the world to ransom. Markets may thus disappoint as we progress and care should be taken to ensure you are on the right track.
No matter whether you are creating wealth or protecting it and making it work for you, these factors are significant to you. I urge you to seek the assistance of a professional adviser who can assist you in creating a life financial plan for your future and then assist you to manage it.
Andrew Wood has been an expat in Asia for 33 years and is executive director of PFS International. His articles, which cover the complete A-Z of financial planning, are available through the PFS library to readers on request. Questions to the author can be directed to PFS International on 02-653-1971 or emailed to email@example.com.
About the author
- Writer: Andrew Wood