Q4 Global Issues and Asset Allocation

Global issues cloud Q4

Q4 2014 starts with geopolitical concerns, a slide in commodity prices and China.

2014 has been pregnant with themes:-

*Thankfully the Scots saw sense in avoiding another financial crisis. However will the Coalition deliver “Devo-Max” ahead of next May’s General Election? The episode left a bad taste in that 45% of the Scottish vote feels disenfranchised. The 2015 General Election is likely to be another hung parliament. It is possible the next UK government is another 1970s Lib-Lab pact?

*2/9 MPC members want to lift Base rates and the Bank also wants more powers to control mortgage lending. The Bank is likely to lift bank capital ratio requirements to 4% another credit negative factor. Overall credit is tightening across the UK and is likely to be more expensive in 2015. This could impact the property bright spot.

*Russia’s Cold War re-start despite a sinking economy (GDP sub 1%, 8% inflation) is an initiative instigated at the top. Vladimir Putin has embarked on Soviet style bullying, coercion and invasion of neighbouring countries. For those who recall the 1989 collapse of communism, its speed and breath and the 1991 Soviet collapse, who had assumed the end of the Cold War, what has happened is a partial reversal. In 1983 President Reagan called the USSR “an evil empire” – has it changed?

*The EU is in the midst of a GDP slowdown. The monetary stimulus has been applied but has yet to help EU consumers hence sluggishness. This EU slowdown involves the larger EU economies more than the smaller ones that featured in 2011.

*BRIC countries, the high growth large economies during the Noughties have decoupled and are experiencing significant currency weakness v the USD. This portent is unwelcome and could destabilise multinational earnings.

Asset allocation is a key factor- how can this be determined?

A number of major blue chip stocks have fallen out of bed during 2014 and stayed out. Basically Anglo American, Antofagasta, ARM, Barclays, BG, BHP, BP, CocaCola HBC, Experian, Fresnillo, Intu, M&S, W Morrison, Petrofac, Rio Tinto, Royal Mail, Sainsbury, Tesco have experienced steep share price falls in 2014.

Investors, be they institutional, sovereign wealth funds, retail, professionals, hedge funds are acutely sensitive to any bad news with the response to “sell first ask questions later”. The reaction to bad news has been more acute than at any time since 2008.

The high level of stock specific risk means asset allocation and diversification is very important. Portfolios can be impacted by the a) wrong assets b) bad timing and c) over leverage or some combination of these.

When reviewing portfolios it is easy to lose sight of the BIG PICTURE- but what is that? The big picture depends on your financial objectives/ life style/ age etc but is broadly the individual’s ability to sustain a current modus operandi – the ability to absorb losses and the capacity to fund new assets or new obligations.

The starting point must be the balance sheet. We have set out balance sheets for a “hypothetical” “Clapham Omnibus” individual in age brackets 30-40, 40-50 and over 50.

Age Group	30-40	40-50	50+
Long term assets
Property	200	300	400
Intangible assets / i.e. State pension / SIPP/ life policies	10	20	50
Personal effects/ Furniture	10	10	10
Realisable commodities gold coins / alt assets	–	–	–
Bonds/ NS certificates	10	20	60
Equities	30	40	50
Short term assets
Cash	10	10	10
CFD other cash positive Derivative assets	–	–	–
Total Assets	270	400	580
Short term liabilities
Credit card payables	5	5	5
Other payables / overdraft	5	5	5
CFD other Derivative liabilities	–	–	–
Long term liabilities
Mortgage (s)	120	80	40
Personal Loans	10	–	–
Total Liabilities	140	90	50
Net Assets	130	310	530

Source: CSS Investments Ltd

For simplicity we are ignoring possible off balance sheet “liability” type items, such as alimony payments, child care, school fees, long term tenancy agreements and potential off balance sheet assets like inheritances and lottery wins! These may be relevant.

The natural progression is for a rise in net assets during the 30s/40s due to higher property values and declining mortgages. It is worth filling this out to get a sense of the big picture, the asset / liability mix etc.

Asset Allocation in this environment

A balance sheet review clarifies; a) debt/ equity b) liquidity and c) balance sheet size. It identifies the relative importance of different areas relative to net assets.

Decelerating global growth and increased uncertainty increases focus on liquid assets/ liabilities protection/ management. We have put in blue the shorter term/ more liquid areas where clients should focus and how these areas are likely to perform in the applicable circumstances.

 

ECONOMY	RECESSION	NORMAL	BOOM
Long term assets
Property	LOWER	HIGHER	HIGHER
Intangible assets / i.e. State pension / SIPP/ life policies	LOWER	HIGHER	HIGHER
Personal effects/ Furniture	LOWER	LOWER	LOWER
Realisable commodities gold coins / alt assets	VARIABLE	VARIABLE	VARIABLE
Bonds/ NS certificates	HIGHER	HIGHER	LOWER
Equities	LOWER	VARIABLE	HIGHER
Short term assets
Cash	LOWER	AVERAGE	HIGHER
CFD other cash positive   Derivative assets	VARIABLE	VARIABLE	VARIABLE
Total Assets	LOWER	HIGHER	HIGHER
Short term liabilities
Credit card payables	LOWER	AVERAGE	HIGHER
Other payables / overdraft	UNKNOWN	UNKNOWN	UNKNOWN
CFD other Derivative liabilities	VARIABLE	VARIABLE	VARIABLE
Long term liabilities
Mortgage (s)	LOWER	LOWER	LOWER
Personal Loans	LOWER	LOWER	LOWER
Total Liabilities	LOWER	LOWER	LOWER
Net Assets	LOWER	HIGHER	HIGHER

Source: CSS Investments Ltd

*Ask our Advisory Services*

Everyone is different with different risk tolerances, our services will determine:-

*The optimal level of portfolio assets for your account given your risk tolerances.

*How to diversify your portfolio given the asset liability mix in your balance sheet.

*Timing issues related to changes in global asset prices.

*Portfolio leverage via the use of derivatives if required (subject to a suitability review).

*Call our team now on + 44 (0)207 264 2360