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Sipp Investor: I'm moving into eurozone equities

Robert Kyprianou looks back on a tough third quarter and explains why he's moving into equities in emerging markets and the eurozone.

Sipp Investor: I'm moving into eurozone equities

Robert Kyprianou looks back on a punishing third quarter and explains why he's moving into equities in emerging markets and, perhaps surprisingly, the eurozone.

Good riddance to a bad quarter

When I review the recently ended third quarter I am reminded of a quote from the musical The Music Man: 'Where is the good in goodbye?'

I doubt that I am alone in saying good riddance to the third quarter of 2011. Not only was it the worst quarter for global equity markets since the 2008 post-Lehman collapse, but there were few other asset classes where investors could hide.

Former safe havens such as gold and the Swiss franc proved to be anything but safe during the quarter, seeing sharp pull-backs from elevated levels. Previously rewarding alternative investments such as commodities and corporate bonds showed us that they were not immune to the spreading global economic slowdown.

Only investors in government bonds in a few Western markets – especially 30-year US treasuries – will look fondly back on the quarter.

As a result of all this my Sipp (self-invested personal pension) portfolio lost 9.8% of its value over the quarter – ouch!

Reasons to be cheerful

In absolute terms this was the worst quarter for my Sipp on record – far worse than the fourth quarter of 2008. So, am I angry or depressed, or maybe both? Actually no. I am (perhaps surprisingly) quite calm. How can this be? On self examination I have come up with three reasons:

One: beating the benchmark

First off, my portfolio might be down by nearly 10%, but the benchmark I use to measure my added value was down by more: 12.5% to be precise. It may be difficult to appreciate this, but unless my benchmark has been mis-specified as a fair reflection of my long-term liabilities then – in the long run – this is what really counts when judging performance.

Put another way, it's no good if your assets have risen by, say, 10% if your future liabilities, which your assets will eventually have to meet, have risen by 20% at the same time.

Two: opportunities abound

My second reason to be cheerful is that, as the best investors will attest, times of severe and broad market dislocation are rich in opportunity. I do not believe in the long-term deflation implied by long-term government bond yields in the US, the UK and the core eurozone markets.

Global slowdown and policy paralysis are certainly negative factors, but when looking at the relative value of government bonds and domestic equities in major Western developed countries, it is important to recognise that the new and maybe only triple-A institutions are blue-chips companies. So why are so many of their shares yielding more than their respective, acutely indebted, government’s bonds?

And let’s not forget the new global locomotives – the large, lowly indebted, highly competitive and voraciously consuming emerging economies in Asia and Latin America. Why have their equity markets fallen even further this year than many of those troubled, leveraged, busted developed economies?

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10 comments so far. Why not have your say?


Oct 17, 2011 at 16:57

Bonne chance, mon brave. Hang a picture of Berlusconi by your bed and have a good pray every night.

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Oct 17, 2011 at 19:15

On the bright-side Rob, your portfolio is only down 10% while Citywire's Dumb Investor is down over 11% !

Don't get me wrong I know who I'd rather trust with my money but doesn't this say something about the market? There's very little diversification, it's all the one trade, unless you're brave enough to hold Gilts, Bunds or Treasuries.

Also, it's worth remembering it was the developed countries that were "voraciously consuming" up until 2007 and look how that turned out!

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Oct 17, 2011 at 20:16

Good point from the Badger

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Secret CEO

Oct 18, 2011 at 17:29

Thanks Drake for your best wishes . Just to be clear - I am very short Euro equities. My intention to buy some would only to be to remove some of this short position. I am a long way from being a fan of Merkozy, Berlusconi or Papandreou.

TrustyBadger - dont look back, look forward. The point is that it is a relative game - the western consumer will be constrained by its need to repair its balance sheet, and by weak labour and housing markets. Contrast this with the situation in a number of key developing markets where savings rates are high, incomes are risinng, personal balance sheets are not constrained by past debt, where there is actually growth in employment, and where rising urbanisation and industrialisation will fuel demand for a wide range of consumer durables as well as even some luxury goods.

Footnote - the best investment decision dumb investor made was to get his inheritance in the spring this year and not before otherwise he would not have had so much cash during much of the decline in markets.

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Oct 18, 2011 at 23:16

@Robert - I am looking forward and it looks pretty grim out there; unless you're asking me to look forward 5-10 years, in which case fine, but there is such a thing as being too early!

Though the prospects for Asia may appear better than US & Europe; investing in that region is clearly not without it's risks E.g. inflation, over-heated property market, state-controlled imperial empire building as opposed to sustainable wealth creation, tensions with the US over dollar peg, ability to decouple from the problems of west, etc.

The magnitude and pace at which the emerging markets sold off shows that they still remain very closely correlated with US and European markets.

Looking at Europe you have to consider whether these champagne socialists will be able to get their house in order without inflicting prolonged misery on the wider economy; it seems whatever they do the outlook is bleak so I wouldn't be rushing into European equities though I guess it's fair game to start looking for wheat amongst the chaff.

Personally I'm content to stick with a portfolio of high-dividend paying defensive shares (UK mainly, but not averse to European companies of the same ilk) with continued exposure to index linked bonds. The continual downward growth revisions suggest that there's no reason to alter course in a hurry.

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Secret CEO

Oct 19, 2011 at 15:46

Hi TrustyBadger

You certainly make the case for cautiousness which is understandable given the quarter we have been through and the general environment we are in. I still hold to the view that investment strategy at current market levels should be linked to whether you buy into the long term (not cyclical) deflation scenario priced into indexed linked and govt bond yields in the core west markets. If you do, then indexed linked priced at zero real yields and high yield defensive equities in western markets may still have value. If you do not - which is my view - then indexed linked are very expensive and there are far better opportunites in more growth orientated stocks and regions. It is a view and there certainly is room for difference of opinions.

As for Euro equities, note my response to Drake. I am very short Euro equities. All I am doing is covering some of my short after a sharp setback (especially in sterling terms) - this is very different from going outright long.

Good luck out there and update us on your views, maybe in one of the forums.

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Cape Town

Oct 19, 2011 at 19:27

The zone will soon be the zapped alas

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Oct 19, 2011 at 20:22

Hi Robert - thanks, I do very much appreciate your replies. You have at the very least caused me to question whether I'm perhaps a bit too cautious ! Thanks again.

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Oct 20, 2011 at 16:15

Trusty, you can't be too cautious at the moment. Trust me. Sarkozy has f***ed Carla Bruni and I'm afraid he's about to do the same to you, Robert and the eurozone.

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John Bourke

Oct 22, 2011 at 11:03

I am with Robert on this one. Money has been printed on a big scale and that will have to find an outlet through inflation once confidence in the major economies returns.

There are a lot of high class Eurozone equities with low debt, high yields and big exposures to emerging markets. Doubts about Eurozone Governments seem to have depressed sentiment too far on Eurozone blue chip equities.

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