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Sipp Investor: banks have more to give after a bumper 2012
Experienced investor Rob Kyprianou explains why he's holding onto banks, still avoiding Europe and eyes a 'superhero' in the US.
2012 has closed, the final numbers are in and I can report that it was a decent year for my SIPP. The fund grew by 12.5% after all costs and fees. My benchmark (50% UK equities, 25% Euro equities, 25% UK gilts) rose by 9.8% in the year. In the five years since I took full control of my SIPP at the beginning of 2008 (I know – a baptism of fire!) my SIPP has risen 24.6% in value while my benchmark has fallen by 2.4% in the same period.
So what worked and didn’t work in 2012?
First the Good...
- The outstanding performers in the portfolio were the specialist financial funds. The two funds in the portfolio rose by an average of 22% as this badly traumatised sector finally staged a recovery – having entered this recovery situation too early, this is a welcome relief.
- The long term heavy overweight exposure to emerging equities (25%) helped performance as the global and Asian regional funds rose by 14-18% during the year. The country funds were mixed with the China fund rising by 10% and the India fund by 24%.
- The decision to allocate the full 25% gilt component of the benchmark fully to a range of high yield and emerging market bonds helped performance relative to the benchmark as the funds rose between 5-11% while the total UK gilt index rose by around 3% over the year.
Now for the Bad...
- I have avoided Euro equities completely for much of the Euro debt crisis despite comprising 25% of my benchmark. In 2011 this proved appropriate as Euro stock indices in sterling terms fell by 17%. However these markets recovered by around 14% in sterling terms in 2012 while I (stubbornly?) maintained my heavy underweight stance.
- My overweight exposure to US equities was a drag on performance as my US funds rose by around 3% in sterling terms on the year. A significant contributor to this lagging performance was the nearly 5% fall in the value of the dollar against sterling in the period.
And finally the Ugly...
- The aggressive step up in monetary easing by the Federal Reserve in the late summer raised my concern over the long term inflationary consequences of the unprecedented global monetary expansion that we have witnessed in the last 4 years. As a hedge I added a position in global commodities through an ETF and a natural resource fund. These have fallen in value since purchase by an average of 5% in a period when global equity markets have risen.
How about 2013?
The New Year is a traditional time to step back and see what themes may drive or surprise markets. Here are some thoughts:
Holding onto banks
The current economic malaise in the west was prompted by a banking crisis, aggravating public finances in a number of countries. There are only two ways of relieving a heavy public debt problem – deflate the value of debt by stimulating inflation, or stimulate private sector growth to raise tax receipts and reduce non-discretionary public spending.
Monetary policy in the west has been the main tool for stimulating inflation/ growth but it has not worked as the banks have been too crippled to play their normal transmission role. For inflation/ growth to respond to monetary stimulus, the banks must heal first.
There are encouraging signs. In those countries that responded first and fast to the banking crisis, namely the US and the UK, there are early signs that lending conditions are easing albeit four years after action was taken. Regulators too recognise that banks need help to heal so are relaxing rules on liquidity and capital, and some governments are providing support for certain types of lending as in the UK’s finance for lending initiative. Bank recovery will lead a general recovery in the developed west– I am holding on to my financials funds despite their strong performance in 2012.
A year ago I expressed the opinion that the 50 year post war trend of greater European economic and political integration was coming to an end. I believe we have now entered an era of political fragmentation in Europe where local interests come first before the interests of an ever closer Europe. There are key elections this year in Germany and Italy – representatives of the core and the periphery – where the state of public opinion will be tested.
Fragmentation cannot fail to complicate the European machinations to heal the structural fault lines that underlie the Euro and the European debt crisis. Draghi’s spectacular OMT gesture has only bought European politicians time and It is premature to call an end to the euro crisis until politicians can demonstrate that they have found a way to address the euro debt crisis and grow their economies at the same time. To do so requires someone writing a cheque and there are unlikely to be volunteers in the rising mood of ‘local for local’ that is pervading European popular thinking. I do not feel inclined to reduce my Euro equity underweight just yet.
The end of one superhero...
Equities and high yield bonds have had a good 15 months, disconnected from the real economies as Europe fell into recession, Chinese growth concerns grew, UK growth barely flat lined and the US fiscal cliff loomed. Bonds and equities have been sustained by monetary policy support – the most massive expansion of central bank balance sheets in the developed world on record by far.
But will central bankers continue to feel comfortable with pump priming capital values?
We are likely to hear more concerns coming out of central banks about the wisdom of inflating their balance sheets further – already these noises are being voiced in the Federal Reserve System. It may be hard to comprehend today, but during the course of the year expect to hear more and more talk of the end of the quantitative easing era.
The most vulnerable market to a removal of the monetary prop is government bonds in the developed world – I am a very long way from re-entering the UK gilt market that makes up 25% of my benchmark.
More about this:
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- What is OMT and how does it save the euro?
- Fiscal cliff Q&A: what does it mean for investors?
- Sipp Investor: why I'm holding onto cash
- Sipp Investor: US faces its 'Thelma & Louise moment'
- Sipp Investor: how I'm playing 'infinity QE'
- Friday Five: how the euro crisis could be re-ignited
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