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Sipp Investor: why I'm holding onto cash
Challenged by his wife, Rob Kyprianou considers why he is hanging onto the cash holding that has held back his portfolio's performance.
My Sipp (self invested personal pension) portfolio rose by 1.3% in the month of November. A nice return for one month given the economic backdrop and the fiscal cliff gridlock in the US following the election there.
However, my portfolio’s upbeat response to these headwinds could not match that of markets generally as demonstrated by my benchmark (50% UK equities, 25% Eurozone equities, 25% UK gilts) which rose by 2.0% in the month.
For the year my portfolio has returned 11.9% compared to 8.7% for my benchmark. Again my cash holdings and my large underweight in Eurozone equities were responsible for lagging the benchmark despite the decent performance of my emerging equity and high yield and emerging debt holdings.
Buying into US & China
Last month I wrote that, following the US election, I was in a wait-and-see mood and would, in the meantime, only act if some market move created an opportunity. In the absence of a substantial market correction or exuberant rally to exploit, I topped up in a couple of markets which I already owned but which were exhibiting some market weakness. The fact that this weakness was in the equity markets of the world’s two largest economies was in itself a reason not to get too carried away.
I added to my holdings of the Threadneedle American and the First State Greater China Growth funds. These purchases took my US equity exposure to 13.6% and my emerging market equity exposure to 25%, reducing my cash to 9.4%.
What's holding me back?
But, given the decent performance of most capital markets and the leakage in my performance versus my benchmark in the past few months, what is holding me back from putting the rest of my cash to work? Challenged by my wife’s reproach on this question, namely that all men suffer from commitment problems, I felt I had to be clear in my own mind as to what was holding me back.
In the popular jargon of today, for my portfolio to be fully ‘risk-on’ would require the US fiscal cliff to be resolved, confidence that China’s growth slowdown will be short-lived, the Eurozone to embark on a growth-inducing crisis resolution programme, and for the UK economy to be able to break out of its growth malaise. Of course there are other factors that could impact sentiment, including events in the Middle East, but right now these are the considerations uppermost in my mind.
My own score card on these drivers is somewhat mixed. The discussions by policy makers on the US fiscal cliff have not appeared to have gone well. As I write it is not clear to me what type of deal – if any – will be in place by the end of the year. Anything from going over the cliff to extending the deadline well into next year seems an option. Even if a deal is put in place, the outcomes are so wide open that the impact on the economy in 2013 and beyond is difficult to predict in advance. The reasons for this policy gridlock were described in my article last month – the political and ideological divide is not so great that talks can be described as intractable, but they highly complicate negotiations. At least we will know something by the end of the month, good or bad.
In China the more recent signs are encouraging. The new political rulers have spoken about the need to support growth, to encourage the restructuring of the economy away from its dependence on investment and export led growth to consumer expenditure, and to crackdown on corruption. At the same time data on factory output, retails sales and inflation have been better, although export growth is finding it hard given global conditions. Sentiment towards Chinese growth and equities has room to recover.
UK is best house in a bad neighbourhood
If any problem seems intractable it remains the Eurozone crisis. A Greek budget deal and some progress on a Eurozone banking union, albeit at a very early stage, have propped up sentiment.
However, although there are indications that policymakers are becoming more sensitive to the possibility that pure austerity as a solution to the crisis has passed its sell-by date, there is still no credible sign that Eurozone politicians know how to deal with the financial and debt crises and grow their economies at the same time.
As a result, the zone drifts into recession with contagion reaching deeper into the core of the Euro countries. Instead of a united political front, politicians and public opinion continues to drift towards greater political fragmentation. Italian prime minister Mario Monti’s threat to seek early elections in Italy in which he will stand will only serve to bring these fragmenting forces to the forefront in one of the key eurozone indebted countries.
As for the UK, its prospects seem to be set. The chancellor’s Autumn Statement made 3 things clear: there is no Plan B to mitigate the path of fiscal rectitude that the government has embarked on; as yet there is no change to the fiscal policy mix of being tough on macro fiscal levers such as state spending while trying to encourage growth through supply side measures such as corporate tax rates, investment allowances and funding for lending; and the government’s chosen path has no credible alternative to contend with.
This fiscal backdrop, plus the position of the UK as the best house in a bad (European) neighbourhood, will keep the medium term growth environment in the anaemic to modest range.
Clarity to invest
Thanks to my wife I have at least cleared my thoughts to the point that I have clarity in what I am looking out for when deciding my next investment policy moves. Feeling better I can now focus on Christmas. Next month I will review my portfolio’s performance in 2012, warts and all, and will look forward to 2013. In the meantime I wish you all happy holidays and a prosperous end to what has been an exhilarating and, it would seem with only a few days to go, rewarding 2012.
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