PORTFOLIO TRACKER : Prepare for change

3 mins read


The global economy and financial markets are being transformed, a result of the huge growth in easy credit over recent years slamming into the credit crunch buffers and meeting head-on with the greatest government-driven fiscal and monetary ‘stimulus’ in history. This will have numerous implications, many intended and some not, for investors (actually, the human race) in the near future. Political administrations are desperate to get the Banks lending again, on the questionable assumption that confused and worried consumers will blindly start another spending spree if only they could borrow big bucks again! Problem is, the Banks want the bailouts, but given their systemic capitalisation problems they will not, and cannot, lend. I read recently that in the last three months of 2008 the value of deposits placed by US Banks with the Federal Reserve rose from $2 billion to over $770 bn – bailout money paid to them from the Fed itself! The creation of so-called ‘Toxic Banks’, which will take bad assets off the Banks’ books, seems pretty much inevitable now, and that means increased nationalisation of the banking system. Government printing presses are running at full speed 24/7, with the stated objective of turning deflation into inflation. Paper money is as a result debased.
The structural changes that are coming at us will, I believe, see the current credit famine substantially increase the vulnerability of small and medium companies, handing advantage to Large Caps with sizeable cash holdings. Selective acquisitions will be made, on the purchaser’s terms, and those not snapped up will most probably to go to the wall. Investment returns are likely to depend more on dividends and less on capital gains, heralding a return to a more ‘traditional’ approach. It will make sense to invest in ‘Value’ rather than ‘Growth’ funds and companies. Some sectors will inevitably do better than others, and selection needs to be carefully considered.
What I am looking at these days include dominating companies (with good dividend history) in sectors less likely to suffer under recession conditions, such as Consumer Staples, or industries that are undervalued, such as BioTech and Pharmaceuticals.
If Governments are going to spend billions on infrastructure, then this is an obvious investment area. A third sector is one we’ve been in for a long time, commodities. We need to be selective, however, as some are better bets just now than others – the financial crisis and rampant money printing favours Agriculture (farmers cannot get loans to buy seed, fertilizer and equipment, which will lead to lower output, and in turn higher prices) and Precious Metals, particularly Gold (increased money supply creates inflation which boosts its value). A number of people I know would add Crude Oil to the list, but I’m not sure – it seems to me the price got to where it is now (low) without too much help from OPEC posturing about cutting supply, and with a few countries, in and out of OPEC (Venezuela, CRS), pretty much totally dependent on pumping and shipping Crude I’m sure the usual ‘cheating’ on quotas is playing out again.
And so to our portfolios … starting with the Medium-risk one, firstly the changes, which relate to preceding comments: the Baring Global Resources fund, which while diversified is 60% invested in Energy, and was sold last week at a loss of $2,800 after nearly 3 years, 0.6% of portfolio. My confidence in a short term rise in Crude prices is low. Addressing Infrastructure, we have the ‘First Trust ISE Global Engineering & Construction Index ETF’ joining the portfolio. A long name and an addition to our Asian Infrastructure holding. This one is globally diversified and reacts to dramatic changes in the global situation, and has done very well this week: +8%.
Sticking with comments above, we already have most of the pertinent points covered, with dominant companies held in Consumer Staples and BioTech (both twice, including the Index ETFs); Software and 3G Networking though Microsoft and Soapstone; and a sizeable holding in Commodities of 31%, of which 17% is in Gold Bullion in a London Vault. Briefly, as space is short, the allocation is, I think, pretty good for the current turbulence. Please let me know if you disagree and want to discuss. Good Luck!

John O’Donoghue is a Consultant Adviser with Caratfin Insurance Advisers Ltd. Tel: 22 464190, e-mail: [email protected] and [email protected], www.caratfin.com. Member of CIFSA, Caratfin Ltd. is regulated by the Superintendent of Insurance under License no. F.O.S.7