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L ONGER  T ERM  T HEMES   A SSET  A PPRECIATION  F OR   2009 Sound Advice   James Vinall – Senior Investment Officer  16 t...
PROACTIVE ASSET SWITCHING  Premise This is a guide to the emerging themes EquityBell is pursuing.  This report does not at...
Currencies GBP and US$ continue to slide US$, GBP, EUR, CHF and JPY central bank interest rates are all converging towards...
EUR to stay above US$ and GBP France and Germany are the dominant EUR economies and largely did not participate in the rec...
Advancing other Asian Currencies – CNY, INR, SGD, MYR and KRW Follow the money.  China has the reserves to buy the entire ...
Fixed Income The US Treasury and the Bank of England are deeply in debt and still need to raise even more money.  As Centr...
Risk Warning Notice : Equity Bell Securities is a trading name of Equity Bell Limited (registered office: Talbot House, 8 ...
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WHERE TO INVEST IN 2009

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This is a guide to the investment themes EquityBell Securities are pursuing. This is an income crisis, not a credit crisis which requires an urgent, proactive review of asset allocation.

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Transcript of "WHERE TO INVEST IN 2009"

  1. 1. L ONGER T ERM T HEMES A SSET A PPRECIATION F OR 2009 Sound Advice James Vinall – Senior Investment Officer 16 th December 2008
  2. 2. PROACTIVE ASSET SWITCHING Premise This is a guide to the emerging themes EquityBell is pursuing. This report does not attempt to define the exact timing for entry into or exit from an investment, but explores the basis for considering proactive longer term asset switching. Dominant Theme This is an income crisis, not a credit crisis; trust in institutions and paper money will be sorely tested over the next few years. Economies will not recover until debt service is sustainable. Lax regulation allowed credit default insurance to increase money supply by 30% over the past 5 years without demanding greater debt provisioning, which is now being deleveraged. Cheap money and globalisation allowed Asia to act like a department store credit card where they lend you money to buy their goods and Western economies have now reached their credit limits. This has changed the World forever and requires an urgent, proactive review of asset allocation. L ONGER T ERM T HEMES A G UIDE F OR A SSET A PPRECIATION Sound Advice EquityBell Securities was set up in October 2008 to provide outstanding investment advice to non-discretionary, active trading clients using direct market access brokers and wealth managers. The credo is absolute returns by giving sound advice in asset classes that are individually appropriate to the risk appetite of each particular client.
  3. 3. Currencies GBP and US$ continue to slide US$, GBP, EUR, CHF and JPY central bank interest rates are all converging towards zero. The interbank lending market is not functioning as the guaranteed or insured lending that fuelled the borrowing explosion of this decade is deleveraged and removed from money supply. This means real interest rates (if someone will actually lend you money) are extremely punitive. The US and UK are also suffering from the double edged sword of imported goods inflation and asset price deflation. Previous recessions in the US and the UK have never had individuals, corporations and governments all heavily indebted at the same time. Debt has to be serviced from earnings. Both the USA and the UK will have to print money and devalue the US$ and GBP over the long term. L ONGER T ERM T HEMES A G UIDE F OR A SSET A PPRECIATION Sound Advice Data source: International Commodities Exchange The chart on the right is the USD Index which shows the strength of the US$ against a weighted basket of EUR, JPY, GBP, CAD SEK and CHF since 1999. The US$ has rallied strongly since April 2008. EquityBell Securities was set up in October 2008 to provide outstanding investment advice to non-discretionary, active trading clients using direct market access brokers and wealth managers. The credo is absolute returns by giving sound advice in asset classes that are individually appropriate to the risk appetite of each particular client.    Now that economics are catching up with the Fed, this rally may revert to 71,000, which would be a 14% decline from here.
  4. 4. EUR to stay above US$ and GBP France and Germany are the dominant EUR economies and largely did not participate in the recent debt financed expansion. Spain, Ireland, Greece, Portugal and Italy did embrace debt and are now paying the price. Relative economic strength in France and Germany and the lesser need of the ECB to print money should keep the EUR from declining alongside the US$ and GBP. CHF to stay above EUR. Switzerland’s “safe haven” status is likely to grow over the next few years. Debt is low, economic policy is conservative, reserves are high which all adds up to boring stability, which is good. Although the Swiss National Bank have interest rates close to zero as demand for money remains low because no one is expanding, the CHF should stay ahead of the EUR over the next few years. JPY to stay above US$ and GBP Japan has had a troubled, low growth, heavily indebted economy for the past 18 years. Japan remains an export orientated economy and is already selling to Asian consumers. Japan will eventually benefit from programs across the Orient to stimulate domestic demand. In the meantime, it is difficult for Tokyo central bankers to do anything more than they have already done over the past 18 years to stimulate domestic demand, especially with a rapidly ageing population. Even though Japan is an economic basket case, the JPY will probably appreciate against the weaker US$ and GBP. L ONGER T ERM T HEMES A G UIDE F OR A SSET A PPRECIATION Sound Advice Tokyo is said to be overdue for the “Great Kanto Earthquake”. Since 1595, Tokyo has suffered 37 earthquakes registering more than 6.0 on the Richter scale, 6 of which have been greater than the catastrophic 7.0 on the Richter scale (1615 – 7.0, 1649 – 7.1, 1703 – 8.3, 1855 – 7.1, 1894 – 7.0 and 1923 – 7.9 with other very destructive quakes in 1782 and 1812). Tokyo Bay sits in one of the most dangerous geological places in the World, at the junction of four tectonic plates (see diagram right). Tokyo has been fortunate not to have had a bad earthquake for 85 years and the longest gap since 1595 is 79 years. Seismic prediction is almost a lottery and The Great Kanto Earthquake may not happen for many more years, but this is a when, not if event. We have sought to highlight the overdue Tokyo earthquake not because we think it may happen anytime soon, but more because it is never mentioned and the impact on human life alone will be immense. When this terrible event happens, Japan will need to bring foreign currency home quickly which will strengthen the JPY, but Japanese assets (like equity and debt) will be compromised.
  5. 5. Advancing other Asian Currencies – CNY, INR, SGD, MYR and KRW Follow the money. China has the reserves to buy the entire US financial system for cash. In absence of Western consumers buying their products, they will eventually adjust to using the cash they have earned from the West over the past two decades to stimulate and grow their own domestic economies. During the 1970’s and early 1980’s Japan kept their currency low to make exports affordable. At the G5 meeting in September 1985 at the Plaza Hotel New York, the USA forced Japan and West Germany to revalue the artificial low Yen and DM resulting in a 50% appreciation over the following two years. The US may try to force the Chinese to do the same with the CNY, which will be a disaster for US Treasuries as Asian central banks would sell and repatriate the US$ to expand their domestic economies. This is Asia’s century and Asian currencies in China, Korea, India, Singapore and Malaysia should advance over the next few years. Equities USA and UK – Switch to Asia The UK and USA economies are in the worst position since the Great Depression. Globalisation and lax regulation has allowed individuals, corporations and governments to spend cheap money borrowed from Asia. History shows us that overburdening debt may push equity indices down 80% within three years of their euphoric peak. US and UK equity indices have declined 45% from the 2007 peaks, but are still above the index lows made in 2003. There is significant room for US and UK equity valuations to fall before the bottom is found at the point of maximum bearishness. The first principal of investing is “follow the money”. This is Asia’s century and long term investors should consider switching at least some of their European and US equity asset allocation to Asia, to benefit from domestic demand stimulation and economic growth. For those wishing to continue holding UK equities, boring is good. Select established, cash rich companies with no pension shortfalls and/or that are based on sound business principles. These would be the unexciting, low or steady growth, high dividend, with little or no debt. Other sectors that may outperform in the longer term are exporters, export manufacturers, technology companies with strong IP royalties, energy, soft commodities, precious metals and agriculture. L ONGER T ERM T HEMES A G UIDE F OR A SSET A PPRECIATION Sound Advice
  6. 6. Fixed Income The US Treasury and the Bank of England are deeply in debt and still need to raise even more money. As Central Bank interest rates head towards zero to stimulate economies and add liquidity while the banks deleverage the extra money created by credit insurance, longer term rates are set to rise as bonds are sold because the money is better served elsewhere. This means a steep yield curve. Long term bond holders who are enjoying higher coupons should hold to maturity (if they can). Investors who want to put money into bonds may like to keep durations around 3 to 5 years in high quality paper, to be in a better position at redemption to put the money to better use. As we expect the EUR to appreciate against the US$ and GBP, it may be better to buy 3 to 10 year high quality EUR denominated bonds where the yields are similar to get the expected FX gain. L ONGER T ERM T HEMES A G UIDE F OR A SSET A PPRECIATION Sound Advice Commodities Gold, Silver and Platinum are traditional inflation hedges. We expect imported inflation in the USA and UK as the US$ and GBP decline, but also expect asset price deflation as insured credit is deleveraged out of the money supply. However, a greater driver for precious metal prices in times of economic strife is a lack of trust in paper money and the safety of banks. Central banks printing money coupled with fraud and mismanagement at leading financial institutions may cause a flight to safety. Gold futures are trading at a premium to spot gold as funds are selling Gold Exchange Traded Funds (ETF’s) as they do not pay a dividend and they are a liquid asset they can easily sell. This is depressing the spot gold price. Gold coins are now selling at a US$80 premium to spot gold as individuals buy for safe keeping. Gold is currently trading at US$833 per ounce having made a high of US$1,023 on the 17th March 2008 before dropping sharply to US$692 on the 24th October 2008. Gold and other precious metals are likely to appreciate considerably until economies show signs of recovering, which may be years away. Data source: London Metal Exchange
  7. 7. Risk Warning Notice : Equity Bell Securities is a trading name of Equity Bell Limited (registered office: Talbot House, 8 – 9 Talbot Court, London EC3V 0BP. Registered in England and Wales No. 6725781) is an Appointed Representative of London Islamic Investment Bank Limited, which is authorized and regulated by the Financial Services Authority. Whilst every attempt is made to ensure the accuracy of the information provided, no responsibility can be accepted for any inaccuracy. The information provided cannot be relied upon as constituting a recommendation, nor construed as any offer to sell, or any solicitation of any offer to buy investments. No liability is accepted for any loss whether direct or indirect, incidental or consequential, arising out of any of the information being untrue and / or inaccurate, except caused by the wilful default or gross negligence of EquityBell Securities, its employees, or which arises under the Financial Services and Markets Act 2000. L ONGER T ERM T HEMES A G UIDE F OR A SSET A PPRECIATION Sound Advice Conclusion FX Investors should consider switching a portion of a US$ or GBP asset base into EUR, CHF or better still a basket of Asian currencies. Equities If you have to hold UK equities, switch to defensive, cash rich companies with steady income and little or no debt. Other sectors to consider are exporters, export manufacturers, technology companies with strong overseas IP royalties, energy, soft commodities, precious metals and agriculture. Otherwise switch a risk assessed portion of equity exposure from the USA, UK and Europe into Asia (ex Japan) companies. Fixed Income Stay safe and collect coupons. If you are a US$ or GBP investor with money to invest, consider high quality 3 to 10 year EUR bonds that should also deliver a currency appreciation. Commodities Western economies are likely to get much worse over the next 18 months before debt can become sustainable and fuel a recovery. Gold, Silver and Platinum are likely to advance substantially (particularly in US$) as the recession begins to bite and fear grips investors. It is prudent to consider switching a risk weighted portion of core assets from equities into Gold, Silver and Platinum. Equity Bell Securities Quay House, 2 Admirals Way, Canary Wharf, London E14 9XG Tel: +44 (0) 20 3189 2105 www.equitybell.com
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