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Sipp Investor: selling off shares after a good run
Rob Kyprianou reveals why he's reducing his holding in the Aberdeen Emerging Markets fund despite its solid performance over the past four years.
Following a good month for his portfolio, Rob Kyprianou is trimming his position in emerging market equities.
A solid start to the year
February continued the good start to the year for equity markets and for my self-invested pension portfolio (Sipp), which rose in value by 8.5% in the first two months of the year, compared with a 5.5% rise for my benchmark (25% UK gilts, 50% UK equities, 25% European equities).
My winners have been an overweight position in equities (87% compared with 75%), my heavy overweight in emerging equities (37% compared with 0%), and my small positions in Japanese and financial equities.
Also helping my performance compared with the benchmark was my heavy underweight in UK gilts (0% compared with 25%).
The decent five-month rally in equities has been fuelled by a number of factors, including:
- The massive injection of liquidity by central banks in developed countries, now supplemented by the beginning of monetary easing in many major emerging economies;
- Growing evidence of a steady, self-sustaining private-sector-led economic recovery in the US;
- The European Central Bank (ECB)’s LTRO programme which has removed, for the time being, the key event risk to global markets – a banking collapse in Europe;
- The general underweight position in risk assets built by global institutional and private investors in response to the banking crisis and subsequent recession, leaving large cash piles available for investment once again;
- The historically extremely low level of cash and bond yields in most developed countries.
All of these factors more or less remain in place today. However, the significant recovery in equity markets would suggest that a review is appropriate. In my case, such a review is made somewhat easier by the fact that I built up my equity stake, mainly in emerging markets, during the setback during summer last year.
Although the positive driving forces for equities are still in place, there are also risks ahead.
Fault lines in the eurozone
The most negative force is the eurozone’s approach to the sovereign debt crisis. Yes, the ECB has bought time with its LTRO, heading off banking disaster, and yes the rescheduling of private-sector-held Greek sovereign debt seems to have been completed.
But neither of these addresses the key fault line: the wrong political and institutional structures for a single currency zone. There remains no central tax, spending or borrowing authority and, in their absence, no mechanism for transfers from rich to poor regions.
Instead, a highly fragmented and fractured political system, where interests are at times in deep conflict, means that the only response to sovereign debt crises is austerity, which offers no hope for growth – the key ingredient to any resolution of heavy sovereign indebtedness.
Unwinding years of borrowing excess
Another challenge is the long-term process of paying back debt that is taking place in the rest of the developed world in response to the private sector borrowing binge.
Even though this is under way, especially in the US, it will take years to unwind, which will limit the pace of overall growth in these countries.
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