Charles MacKinnon: Don't look too far ahead in 2011

Sitting watching snow drive across the landscape in December was in many ways a great metaphor for the strange new world we are living in. The financial landscape has become obscured; what used to be obvious has become buried.

This is pretty much where we are in investment terms; the relentless flow of liquidity from central banks is changing and distorting what used to be pretty robust relationships in the investment world. In general, if a central bank is printing money at a great pace, there are two almost immediate consequences; the currency devalues and interest rates start to rise.

But now we have the reverse; interest rates are at historic lows, and global currencies are relatively stable. How do we, as investors, try to make sense of this, and more importantly position ourselves to profit from this bizarre “weather” that we have been experiencing?

Not all companies are in debt

The first point to remember is that this time will pass, and things will get better. Consumers on both sides of the Atlantic are not all in debt, and many more of them are in employment than not, and for those individuals and families falling prices and low borrowing costs are a bonus, and in their spending lies the seed of recovery. The new consumers in Latin America and Asia have insignificant levels of debt, and a rapidly rising disposable income.

The second point is to not think too hard or too far forward when making investment choices. We do not fully know what will be the long term effect of the quantitative easing and austerity packages that were put in place in 2010, and the law of unintended consequences is the only thing we can be sure of.

Keep focused on growth markets

So what’s to be done? At its simplest, cheap money and rising living standards will make people buy more things, and things are made of stuff, so invest in commodities, both hard (such as copper) and soft (such as grains). Glum economic conditions will make individuals cautious, so hold on to your bonds as the income they produce will be a vital part of your total return. Continue to invest globally, as this will give you protection from any one country, currency or region getting things wildly wrong, and focus on regions where the demographics are on your side. Wherever you invest, it is the big, well capitalised companies that have the best access to the cheapest credit.

Last but not least, don’t try too hard. Things will not get better in a straight line, and so this is a time for simple, robust portfolios not sophisticated clever ones. Among our biggest positions are: iShares MSCI world fund (IWRD LN), Emerging Markets fund (IEEM LN), Investec Commodities fund (IENRIAN LN), Pimco Diversified Income fund (PIMDINC ID) and the Troy Trojan fund (CFTROJI LN).