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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?

Sipp Investor: torn between equities and cash

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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23 comments so far. Why not have your say?


Jun 11, 2012 at 08:24

You are trying too hard to step one step ahead of the markets. The only guarantee in the long run is that you will fail.

Forget about the markets, you should not invest in 'markets', you don't know what you are buying. Noone knows the answers to the questions you are asking.

Invest in some sound companies and bank the dividends, in the expectation that over time those dividends will grow faster than inflation. Ask for more and you are asking for trouble.

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t scott

Jun 11, 2012 at 11:13

If you find a SIPP provider that pays good interest on cash let us know!! Otherwise I agree with buying some good companies (worldwide) and not funds you will get a 5% real return over time

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William Phillips

Jun 11, 2012 at 11:42

"co-ordinated and decisive leadership is required to take far-reaching and fundamental action just when political and policy leadership across Europe is fragmenting"

There you go again: the Greek relation of a potless people demanding the destruction of ancient sovereignties and the trampling of the democratic rights of 200m people for the sake of a banking bailout.

'Fundamental action' and 'co-ordinated leadership' across a diverse continent are euphemisms for a EUSSR run in the interests of banksters and power-crazed politicians. Those leaders no longer have the right to decide anything on our behalf. They refused to consult us, they ignored the message of referenda, they lied about the direction of EU travel and now their unaccountable institutions have screwed up. They're not even efficient, let alone legitimate! So don't have another summit and stagger on, just kill them.

What we are seeing is the latest iteration of 'creative destruction' in capitalism: the dissolution of a grotesque, corrupt, reactionary and crippling political 'project' which is getting in the way of individual and national animal spirits. Yes, the EMS breakdown will be a messy, No, it won't be nearly as nasty as the violence that would follow the attempted financial enslavement of Europeans. At least Britain was only half in the club and can walk away more easily.

Let us have our referendum at long last. Let us regain our freedom of action and be as poor and isolated as Norway or Switzerland.

As for your pension plan: instead of tiddling around at the margin with a bit more bonds here one week, a bit more cash the next like Dumb Investor-- why don't you admit you have no more clue how the inevitable dissolution of the eurozone will impact a British investor than the rest of us? Stick your fund in a Harry Browne Permanent Portfolio and let the newsflow wash over you.

Ah, but then you wouldn't have much to write about, would you? Are you going to sacrifice your future to Citywire' s editorial needs and transaction costs?

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Geoff Downs

Jun 11, 2012 at 14:31

Firstly the politicians are not solving the problems.Secondly are equities cheap and in any case in a bear market they go much cheaper. Government Bonds are not in a bubble. I have barely seen or heard any Fund Manager recommend them. Also a bubble is when people buy a product with the belief they will make loads of money, that is not why investors are buying treasuries.

Finally I cannot see how inflation is coming but the prospect of deflation is now looming large. My view is you have to look at Japan to see where we are heading in the next decade.

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Jun 11, 2012 at 15:10

I have no idea where markets are headed, but the present relief rally, which started on the hope of a rescue for Spanish banks, grew on the rumour of one, and peaked on the announcement without reassuring details of a scheme which may make Spain's credit problems worse, is the least convincing one I've seen. But it seems investors are so desperate for good news that they wager n the flimsiest of hopes. Is this a good sign or a bad one? As this rally is dashed, will we plunge into new depths of despair, or will irrepressible optimism triumph? I haven't a clue, so am doing nothing!

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Secret CEO

Jun 11, 2012 at 15:22

RL - good point. There are times when markets are in such a rosy condition (been a while now, I admit) that it doesn't matter what stocks you own, just pick the markets that will do better. And there are times when markets are so difficult that it is very important what stocks you own. Unfortuanely for me, my skills are not in stock picking - I don't have the time or access to information and companies that is required. This I have to leave to professionals who spend all day picking stocks. I just chose which markets in which they ply their trade and for how much of my money.

Welcome back William Phillips - you certainly brighten these pages. Just don't know how to use your insights. Where should I invest my pension - after all I own no Euro stocks and hold a lot of cash which I presume is consistent with your views. Now what?

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Jun 11, 2012 at 15:52

Rob, I would be/am wary about being in cash.

Spain is wobbling badly, and will tip quite soon, the string provided will not hold for long before it snaps, then Italy etc.

Germany too will be sucked into the vortex, and then we will have shades of Weimar Republic and Zimbabwe, and then the printing presses will be white hot. and your cash pile, instead being in solid companies, growing according to the inflation brought on by QE, where ever (and paying dividends), will not be able to buy much at all, a cup of coffee perhaps?

OK, OK, I am exaggerating, but now there is talk about having print to be able to buy up the debt, I am sure you will have read this.

I suspect, if you are waiting on the sidelines, it is going to be a longish wait, we have Greece next week, and that is going to be a seismic shift, 8 or 9 on the Richter scale, and until the German elections are done (suspect no more Merkel, but a lefty (and they love spending/devaluating currencies-Mugabe, finished his education in Russia) will replace her), and then eventually the States, and by February, their presses are going need frequent servicing because of all the use they will be put to. They were not able to do that in the States in the 30s, but now it is the very first thing they do, and all that is going to do is stave off the real solution, and then that too will be broken.

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Geoff Downs

Jun 11, 2012 at 16:07

At times of economic contraction and reduced credit I doubt company dividends will grow, more likely to be cut as companies try to save cash. Why do you believe QE will cause inflation?

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Jun 11, 2012 at 18:09

I might be wrong, but printing money (QE) causes inflation because there is more cash around, so it is worth less than before. Therefore, if you print more money, it buys you less, ie inflation.

I may be wrong though.

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an elder one

Jun 11, 2012 at 18:47

Decline and fall of the German empire?

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Daye Tucker

Jun 11, 2012 at 19:47

European Empire?

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Cautious Investor

Jun 11, 2012 at 21:10

Thank you, Rob, another well-written item explaining your thinking.

It might be too early yet, but when fear is at its peak, and despair is all around, that's the time to buy. My take on it is that the Greek election will give a fairly clear signal; whereas Spain will take the rest of this year to unfold/unravel. I'm still mostly in cash at the moment, but it could be that 2012 is the year to start drip-feeding funds back into equities.

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Geoff Downs

Jun 11, 2012 at 21:42

Again as with the original article your comments are vague. You say the best time to invest is when fear is at it's peak which you feel isn't the case now. Firstly in terms of Fund Managers you be hard pushed to find any that are negative about the market, all saying equities are cheap. In that sense there is virtually no fear at present.

Bear markets can run for many years which is what has happened in Japan. These markets could drop by 50% or more over a long period of time. Your remarks seem to suggest that that just wait a bit longer then it will all be back to normal.

I feel the days of easy money are gone and won't be back for a very long time, if ever.

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Anonymous 1 needed this 'off the record'

Jun 11, 2012 at 21:44

"you pay a high price for a cheery concensus"

also depends whether you can afford to miss out on dividend income while waiting for the signal to buy-when will that be incidentally?

ftse 3500,4000,4500,5000?please advise

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Anthony O' Grady

Jun 11, 2012 at 21:52


Firstly I speak as someone with a 25 per cent weighting in cash and ditto for equities. So, not the biggest bull in the ring.

I am however interested in Europe. Having read John Templeton's book (which I can recommend to anyone who hasn't read it) I am mindful of Templeton's first principle- buy at the point of maximum pessimism etc. Whether we are THERE yet is another question.

Russell Napier, a huge equity bear, reckons that the cyclically adjusted p/e ratio for many European stocks makes them appear genuinely cheap. Bearing in mind another Templeton principle which is to buy cheap stocks, don't try to time the absolute bottom, what are your feelings about European stocks right now. I am thinking principally about the quality end of the spectrum.

Also any comment on the Jupiter European Opportunities Investment Trust?

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Anthony O' Grady

Jun 11, 2012 at 21:53

Sorry - it's actually a book about Templeton written by Jonathon Davies and Alistair Nairn.

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Anthony O' Grady

Jun 11, 2012 at 21:59

Double sorry - it was actually Albert Edwards from Soc Gen, not Russell Napier

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Secret CEO

Jun 12, 2012 at 07:55

Anthony O', Cautious Investor, Anonymous 1 and others whose comments relate to the risks of being out of the market/ when to get back into the market.

I sympathise with the view that timing the market is, generally, difficult. It is what we used to call a "low quality trade" - that is, the relationship between the reward on the trade and its risk is low.

That is why I do not normally "trade" the portfolio. However, in extremes there are times when the economic/ financial/ market environment is itself extreme enough to improve the risk/ reward of market timing (either selling or buying). These, by their nature, are normally rare. We are currently living in times where we are being presented with more such "opportunities" since the credit crisis began in 2007.

Unfortunately, there are no hard and fast "rules" or market levels to determine when you might get back in after having got out. It is some combination of market levels and events which can vary from situation to situation. In 2008, having got almost entirely into cash early in the year, fearing a finacial and market tsunami as a consequence of the credit crisis, I began to get back into equities in late 2008. Why then? There was a combination of events and reactions that seemed to improve the risk/ reward environment for doing so. The event was the Lehman failure, the reaction was the equity markets collapse/ bond rally that followed and, importantly, the responses of policy makers (in the US and UK) to provide liquidity and bail out funds for busted financial institutions/ corporates (remember TARP).

Sadly it is not clear what will be the events/ reactions that improve the risk/ reward trade-off for getting back in - they vary from situation to situation. It is certainly not as simple as a specific target market level. Maybe the event could be the Greek election/ Grexit; maybe the reaction could be a severe market collapse following a bank run across the Eurozone, maybe the policy reaction could be something meaningful out of Europe to shore up the Euro. Maybe it is none of these. Maybe the environment will just improve slowly and steadily without big key events/ reactions. That is the nature of uncertainty.

Right now, my thoughts have not yet turned to when to get back in. I am struggling with whether my next move is to sell more - Greek/ Spanish threats to the Euro/ Japanese style long term general deflation/ US fiscal timebomb/ Chinese structural softening - take your pick.

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an elder one

Jun 12, 2012 at 10:37

Cor! do you sleep at night at all

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William Phillips

Jun 12, 2012 at 11:59

Kyprinaou: "Where should I invest my pension?"

I told you- use a passive, automatically (annually) rebalanced mechanism such as the Browne Permanent Portfolio. Plough back the income.

Handles all conditions with low volatility, has shown steady real growth over 30 years with no serious drops. No faffing around or gazing into cracked crystal balls required. Never cheaper to run than in these days of low-cost ETFs covering all asset classes.

Much too inexpensive for the commission-vultures of the intermediary trade, though. And it gives you too little reason to act like a big, important Master of the Universe by tinkering with a few per cent of your portfolio here and there, according to what you think the news will be next week.

Do you sincerely, single-mindedly want to acccumulate wealth at the lowest possible risk and cost but over the long term? Or do you want a lot of gambling-type uncertainty, excitement and activity for activity's sake along the way?

Most churning investors fail to address their own psychological needs and flaws. Me, I'm only in it for the money. Never gambled in my life-- not so much as a Lottery ticket. Patience paid me.

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Secret CEO

Jun 12, 2012 at 14:01

William Phillips- thanks for the tip. I hope that Harry Browne's approach of investing one time and going away for a year doesn't mean that in the meantime we will lose your views and comments on the daily goings-on in markets that preoccupy so many others.

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Jun 17, 2012 at 08:37

Back to the title of the post... So if you have £100 to invest in a SIPP today, what do you do? Keep as cash or ?

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Jun 17, 2012 at 17:47

No brainer - gone into cash already - will come back when the drop occurs

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