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Sipp Investor: torn between equities and cash
The eurozone crisis has Rob Kyprianou worried, yet equities still look cheap and government bonds still look expensive. What to do?
Ouch! I signalled in my previous article that I was reducing my equity exposure because of global growth concerns, shifting some of my cash into corporate bonds.
In the end the market ran away from me much faster than I had expected as the anticipated growth concerns were worsened by a deepening of the Euro crisis following the May elections in Greece and France. Serious concerns about the eurozone banking system followed.
The sharp equity market sell-off brought my programme to a premature end as, like holding sand, the markets slipped through my fingers.
What I've sold
I did manage to reduce my equity exposure from 75% to 55%, reinvesting 10% of the portfolio into the corporate bond funds I identified last month. I sold equities across the board, eliminating my holding in Japan, where my exposure was small and not a strong conviction position, and reducing holdings in the UK, emerging markets and, to a lesser extent, the US.
I was hoping to reduce or eliminate my financial fund holdings as well, but they fell very sharply and very quickly as I dallied. This has left my equity holdings as follows: UK 18.5%, US 12%, financials 3%, and 21.5% in emerging markets. I still hold no eurozone equity or government bond funds.
My equity sales and my equity barbell (long US and emerging market equities, short European equities relative to my benchmark), helped cushion the damage to my portfolio. In May the value of my self-invested pension plan (Sipp) fell by 3.2%, cutting my gain for the year so far to 3.7%. My benchmark (50% UK equities, 25% eurozone equities, 25% UK Gilts) fell in value by 5.0% in the month, falling 3.2% year to date.
Although my corporate bond funds only dipped a little in value in the month, they could not keep pace with UK government bonds as yields fell sharply to post-War lows. Overall, my portfolio has outperformed its benchmark by 6.9% so far this year and by 9% over 12 months.
So what to do now?
The growth weakness I had feared seems to be materialising in the world’s two biggest economies, the US and China. Jobs data in the US are clearly showing that the rate of growth there is slowing; Chinese PMI surveys and trade and industrial production data are clearly indicating that the global slowdown is affecting Chinese growth.
As for Europe, economic and financial conditions are deteriorating at a worrying rate, with economic sentiment at a three-year low, the bailout periphery countries showing signs of implosion and even Germany feeling the pain.
For me, the fall in the oil price is a clear sign that we are experiencing a synchronised global slowdown. And if this weren’t enough, the 6 May elections in Greece have brought forward the spectre of Drachmageddon – a disorderly Greek exit from the Euro.
Consequently risk assets have all suffered and traditional flight-to-safety assets – higher rated government bonds and gold – have all benefited. This would appear to be a key moment for the global economy and financial markets.
The three big questions
Does the West have any meaningful firepower to halt the growth slide? Does the eurozone have the ability to pull back from an economic, political and financial freefall into disintegration? And can China keep growth going with its own resources while its traditional export growth engine slows?
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