Monday, 13 March 2017

Gold Still Plays an Important Role in Investor's Portfolio

Despite the fact that gold no longer backs the U.S. dollar, or other currencies for that matter, it still plays an important place in an investor's portfolio.

Historically gold has influenced several powerful empires, such as those of the Greeks and Romans for example. Eventually, there came a time when gold symbolized wealth throughout Europe, Asia, Africa, and the Americas. Nowadays however, there is a school of thought that argues gold is simply a barbaric relic that no longer holds the monitory qualities it once did. In a modern economic environment, where paper currency is the money of choice, some say gold's only benefit is that it's a material commonly used in jewelry.

Gold As a Hedge Against Uncertainty.

Despite the fact that gold no longer backs the U.S. dollar, or other worldwide currencies for that matter, it still plays an important place in an investor's portfolio. The reason for this is that gold has successfully preserved wealth for thousands of years. This is particularly important in an economic environment where investors are faced with a powerful U.S. dollar, a risk of rising inflation, austerity measures, and/or slowing developed market growth. In the past, gold has successfully served as a hedge against all of these pressures.

Buying gold bullion is not a proactive method of obtaining wealth as much as it acts as a safety net against inflation. - Jim Armiento, Financial Adviser

Gold's Relationship With Interest Rates

It is widely accepted that the price of gold has a close relationship with interest rates. As interest rates rise the general tendency is for the gold price to fall. Conversely, as interest rates dip, gold prices will rise. Because of this, gold price can be closely correlated to central banks via the monetary policy decisions made by them; particularly related to interest rates.

Many investors and market analysts believe that as interest rates rise they make bonds and other fixed income investments more attractive. When this happens, money will flow into higher-yielding investments, such as bonds and money market funds, and out of gold; which offers no yield at all. Therefore, before buying or selling gold, investors should look to the reason for the interest rate hike first, to determine if it occurred to contain inflation or if it is a genuine normalisation of monetary policy.

A Final Thought on Gold.

Whether it is the tensions in the Middle East, Brexit or the policies of President Trump, it is becoming increasingly obvious that political and economic uncertainty is prevalent our global economic environment. For this reason, investors typically turn to gold as a safe haven during times of political and economic upheaval. Looking back to the 2008-2009 recession, and in 2016 after the stunning Brexit victory, you might remember that gold became increasingly appealing because of uncertainty in the political and economic future.

Wednesday, 22 February 2017

Fine Wine One of The Best Performing Assets in Last 20 Years

From what I've seen during my research, fine wine boasts one of the best performing asset classes of the last 20 years. This is partly thanks to the rise in demand from Asia; more specifically China. In fact, the interest in fine wine is go great that China's consumption has moved France into second place as the world's market leader.

Given fine wines’ traditional insulation from risky stock and bond markets, investing in wine has the benefit of being a hedge from traditional investments. Since 1998, fine wine investments have outperformed Global equities 98% of the time and have produced a positive absolute return in every single 5-year holding period.

The best investment-grade wines are produced in small quantities - up to a maximum of 20,000 cases - and it is the demand-supply imbalance brought about through their consumption that drives prices higher over time. As the wines mature and improve, they also become rarer and more desirable. This drives prices ever higher. As a word of caution from the articles I've read, a smaller quantity of the finest wines will serve you better than cheaper cases. This is because you could see annual insurance costs and storage charges eat through your profit.

Most experts agree that in order to encourage the best results from your fine wine investment you will need to set aside upwards of £10,000, and purchase the very best bottles that you can afford. That said, provenance and quality will determine and prove the value of your investment, so do your homework and ask questions before investing.

Keeping your wine in optimal salable and flavor condition for long time periods requires careful storage. To ensure the future value of your wine when you are ready to sell, it is of paramount importance to ensure your bottles are stored professionally and correctly. Typically, you can expect to pay a minimum of £15 per case, per annum for storage and insurance. That totals £75 over a 5-year investment.

Another characteristic of wine investing that appeals to investors is the tax benefits. Due to it being exempt from capital gains tax in the UK, because it is deemed a wasting asset ‘whose predictable life does not exceed more than 50 years’ (Section 44[1] Taxation of Chargeable Gains Act 1992), fine wine can be considered more tax-efficient than other alternative investments.

Friday, 27 January 2017

The Trade Trouble With Trump's Protectionist Views

Albeit Trump shares the protectionist economic view of some of America's Founding Fathers, the trouble is that his trade proposals are much more extreme.

Trump wants to protect American manufacturers by taxing products that are made overseas and then sold in the United States. Many economists fear that this antagonistic approach will start trade wars that would ultimately harm the American economy. Withdrawing from NAFTA and the TPP, or imposing a 35 percent tariff as Trump has threatened, would have a negative effect on the USA.

Raising tariffs on imported goods, such as shoes and clothing made in China, will drastically increase prices for American consumers. Moreover, the countries that Trump's administration singles out will be more than likely to retaliate with higher tariffs on American imports. These protectionist actions by the U.S. would trigger a trade war, which would drive up prices and hurt American consumers by reducing their purchasing power. Demand would fall, and companies would need fewer workers. It's "a lose-lose scenario."

Early moves by President Trump highlighting a protectionist stance on world trade have given investors reason to rethink their asset allocations. Many are worried that Trump’s anti-globalisation mantra will spread protectionism around the world, erect trade barriers, and curb global economic growth.

Trump has said his protectionist policies will keep "jobs and wealth inside the United States" . He has promised to increase employment, saying his plans for lower taxes, trade barriers and tighter immigration rules would lead to stronger economic growth. As with the deficit, many economists warn his plans could make things worse not better. Much of what he is suggesting would hinder economic growth and in turn employers’ ability to create new jobs.

It’s clear that Trump hopes to return the United States to its protectionist past. The trouble is that in those days - 200 years ago, the American economy was still small enough that it could grow by focusing inward. Today, the United States' economy is a global one. U.S. companies have had to expand production, as well as their consumer base, across the world to keep growing. Albeit Trump shares the protectionist economic view of some of America's Founding Fathers, his proposals are much more extreme.

Tuesday, 17 January 2017

What Does A Hard Brexit Mean For UK Citizens And Investors?

Britain plans to make a clean break from the European Union. PM May does not want an Brexit agreement that leaves the United Kingdom "half-in, half-out."

Prime Minister May has recently come out with a much tougher position on EU withdrawal than she had previously taken; now supporting plans for a "hard" Brexit. PM May recently said that Britain plans to make a clean break from the European Union, and not opt for "anything that leaves us half-in, half-out."

We seek a new and equal partnership, between an independent, self-governing, global Britain and our friends and allies in the EU … Not partial membership of the European Union, associate membership of the European Union, or anything that leaves us half-in, half-out. We do not seek to adopt a model already enjoyed by other countries. We do not seek to hold on to bits of membership as we leave. - British Prime Minister Theresa May

This creates a great deal of uncertainty over what kind of economic relationship the United Kingdom will have with Europe after Britain exits the European Union. One thing is certain though, I think we need to accept that a hard Brexit is likely to bring about a period of economic disruption in the UK. This has lead many citizens and investors to grow concerned that a hard Brexit will be bad for the pound.

A hard Brexit arrangement would prioritise giving Britain full control over its borders, making new trade deals and applying laws within the country. This would benefit the UK by making it a global trading nation. After all, don't forget that the UK is a full and founding member of the World Trade Organization.

The obvious downside to this arrangement is that Britain will have to give up full access to the EU single market. In doing so, it will subject itself to tariffs when trading with European neighbours. As well, experts have warned that London’s position as an international financial hub will be dealt a severe blow if the UK leaves the EU single market. Time will tell.

Since Prime Minister May's announcement there has been a positive reaction to the news of a hard Brexit. At the moment the pound is trading at $1.22 against a strong U.S. dollar, its highest since the June vote to leave the European Union.

Membership in the EU does not define the United Kingdom's future as a global player. In fact, quite the opposite. There are already plans to trade freely beyond Europe, in countries like Australia, Canada and the United States, where officials have already said they are eager to negotiate trade agreements with Britain.

Tuesday, 10 January 2017

Alliances Play Important Role in Container Shipping Recovery

Several weeks ago I asked for help finding information on Davenport Laroche and shipping container investments. My call for assistance got very little response; in fact, none at all. This prompted me to do my own research into the container shipping industry and educate myself.

This is what I discovered:

2016 was a very challenging year for container shipping lines. Most companies reported consecutive losses and struggled from quarter to quarter. These adverse conditions even resulted in the surprise bankruptcy of Hanjin Shipping Company - a Top 10 container shipping line and one of South Korea's largest transport companies. It seems that container shipping was not alone, many of the world's leading ports shared in the struggles, as well.

After hearing this, most investors would turn-tail and run in the opposite direction. Rightfully so I suppose. But, what about century-old companies like Maersk (1904) and APL (1848)? They are not giving up; they must have a plan to survive the downturn. Certainly international trade is not going to grind to a standstill!

It would seem that the answer they've come up with is partnerships and alliances. These coalitions are becoming increasingly popular among both container lines and shipping ports. Starting from the top of the industry, Maersk Line, the world's leading container line, has partnered with the Mediterranean Shipping Line - who is ranked number two in the industry - to form the 2M alliance. APL joined the world's largest shipping partnership - the OCEAN alliance, with number three ranked CMA CGM, as well as China Cosco Shipping, Evergreen Line, OOCL and Neptune Orient Lines.

These alliances allow the participating container shipping lines to make better use of the group's resources and thus operate more efficiently. This doesn't necessarily make them more revenue, but it certainly saves them money. That still means more profit in the end! "A penny saved is a penny earned."

Looking ahead to 2017, it would seem to me that the shipping alliances formed will play an important role in the industry's recovery, and lead to profitability in the future. Left to fend for themselves, many of the industry's major players would have eventually perished in an increasingly competitive sector. Mark Shields once said "There is always strength in numbers. The more individuals or organizations that you can rally to your cause, the better."

The only real threat I see to the container shipping industry in 2017 is President Trump's economic plans. If introduced as he promised on his campaign, they could bring about an era of protectionism and possibly start a trade war with economic giants like China and India.

Thursday, 22 December 2016

An Amateur Investors Guide to Private Equity and Hard Assets

I am a cautious investor; not at all interested in the risks involved with stocks and bonds. I like to invest in the alternatives; investments that have little or no correlation to the bond and stock market.

Although there is an ever-increasing number of alternative opportunities to invest in, two of my favorite alternative investments are private equity and hard assets.

Private Equity

Private equity is money made available to private companies or investment firms.

Using private equity, investors and managed investment funds make investments directly into private companies. In some instances they conduct buyouts of public companies and make them private.

If invested directly into the company, the funds raised through private equity investment are often used to develop new products/technologies, expand working capital, make corporate acquisitions, or strengthen the company's balance sheet.

In most instances, private equity firms will work with the partner companies, typically over several years, to “turn them around” with the intention of selling them for a profit.

Private equity deals fall under a Securities and Exchange regulation that requires investors be "accredited" or "qualified." For an individual to be accredited under the SEC rules, he or she must have income of more than US$200,000 per year for the past two years (US$300,000 for a married couple) - and have a reasonable expectation of making the same or more in the current year - or have a net worth, excluding primary residence, of more than US$1 million.

Hard Assets

I was once told that "hard assets are at the center of a wise investor's portfolio". Heal assets have fundamental, intrinsic value. In the event of currency devaluation or inflation hard assets can hedge against any losses.

The hard asset I find the most interesting is cargo containers. Making an investment in shipping containers could be regarded as the ultimate hard asset.

In the last several years, Warren Buffett has purchased the Burlington Northern and Santa Fe Railroad. Why buy a railroad? A railroad, like shipping containers, is nothing but hard assets that make money by moving other hard assets; such as coal, wheat, corn, steel, etc. So, Warren Buffett is investing paper money into hard assets, so that if the dollar drops to zero it has no effect on him; he still owns a railroad.

Final Thought

If your portfolio is primarily composed of so-called paper assets, like stocks, bonds and most financial instruments, then your financial security hinges on the value of your country's currency. If the currency devalues, so does your portfolio.

Monday, 12 December 2016

A Strong USA Dollar Creates Domestic And International Risks

A strong U.S dollar creates challenges for the USA and other countries. If the U.S dollar strengthens, then goods and services in the USA become more expensive.

a strong usa dollar

The U.S. currency has strengthened 4.3% since the U.S. presidential election on November 8, 2016, approaching a 14-year high. If the U.S. dollar strengthens against another currency, then goods and services in the United States become more expensive for people using those other currencies outside the USA. Therefore, businesses in other countries may buy less American-made goods and services, which is bad for American producers.

The currency headwinds are very real. Because when the dollar is strong, our goods are more expensive overseas. - Meg Whitman, CEO of  Hewlett Packard Enterprise

A strong U.S. dollar creates headaches for countries too. The countries most at risk from a strong dollar are those with hefty dollar-denominated debts. Although the use of foreign exchange reserves can be used to prop up national currencies or pay off debt, doing so gives the appearance that money is fleeing the country. This can lead to "capital flight" as investors follow the money out.

China is one of the countries most at risk. The Chinese yuan has been devaluing against the dollar for the last year-and-a-half. This has caused the government to spend a considerable share of its foreign exchange reserves. A strengthening U.S. dollar will continue to put pressure on China to burn through its remaining reserves even faster. This significantly reduces the financial safety net the country has built up over the last two decades.

There are five other countries, India, South Africa, Indonesia, Turkey and Brazil, that have been deemed to be particularly at risk because of their large current account deficits and dollar-denominated debts. The so-called Fragile Five are not alone. Many emerging markets are saddled with significant dollar-denominated debts too, and do not have abundant foreign exchange reserves to rely upon.

In the ever-changing foreign exchange market, events anywhere in the world, at any point in time, can seriously influence performance. As the dollar's value rises, countries will find it more difficult to repay or refinance their debts, especially as the cost of swapping dollars on the open market rises. U.S. exporters should brace for tough times too. Their goods sold overseas have become more expensive in many places, and their foreign earnings are worth less when translated back into U.S. dollars.