Important portfolio issues

We have tried to mitigate our exposure to continued weak growth in advanced economies by:-

Buying being very sensitive to price, i.e. not paying for growth

Buying high quality companies whose business is not cyclical and who have strong balance sheets

Diversifying in currencies and not just holding the currency of where we are (which is the EURO)

Buying companies that have revenues that are geographically diversified

As prices become cheaper gaining exposure to cheap physical real assets (often cyclical companies). This strategy helps mitigate risks from excessive money printing by the authorities

We have been keen to gain exposure to emerging economies but are concerned on how to achieve this without increasing the risk/reward ratio. We have attempted to do this via:-

Buying advanced economy companies that have a repectable and growing revenue base in emerging economies

Buying companies that are involved in businesses that deal with real assets. We favour oil and timber. We note the latter commodity is not as easily transportable as the former, hence prices are more locally determined

We have stayed clear of buying foreign currencies such as the AUD, SGD etc as we are not currently comfortable with how to value such variables.

We have also stayed clear from buying industrial or precious metals. Our foray into agriculture ended poorly as we bought an EM company whose corporate governance proved to be most untransparent and anti shareholders.

As a result we are advancing our macro approach to consider new avenues to implement exposure to EM when the prices are more attractive. Our decision to maintain a low exposure has proven to be good so far. We feel it is better to be earning a wage and seeing that increase in those regions, then being a foreign investor in their stock market.

Fears on interest rates, inflation and depreciating currencies

We hold cash versus equities, having little room for bonds at the moment

We hold cash with the aim of deploying in equities when the price is attractive for us

We hold more equities than cash due to the opportunity cost (negative real rate) and fears of continuous money printing eventually increasing inflation in EM and this will be exported to DM, reducing the purchasing power of cash

We fear increasing inflation in EM will lead rates to increase there reducing global growth. We think this will be positive for the USD and lead risk assets to decline. We therefore still hold a substantial holding in cash ready to be deployed when we see more interesting price levels

If the USD does increase, we would be looking to short the currency. Hence LONG US equities and SHORT USD would be a long term trade we would like to continue for a number of years

There are always at least two parties recipient to change. Since I cannot go long EM currencies I can go SHORT the USD. The question is relative to what? We can do a basket of currencies

Whilst alternative currencies are not available to the USD in the transition into a multi polar world, gold is likely to coninue to receive positive capital flows

Balance sheet issues?

Consumers in DM are de leveraging and consumers in EM still can't leverage up to take up the slack. Hence WEAKER GLOBAL AGGREGATE DEMAND IN CONSUMER SPENDING. This is bad for global growth

Currencies increasing in EM will help give consumers in EM a stronger purchasing power. It is also less politically damaging to help reduce inflation then increasing interest rates

Governments in DM are leveraged. De leverage via money printing to reduce the burden of their debt, reduce spending to reduce the deficit (but this reduces future debt but doesn't reolve the problem of past debt - that is often solved by growth which comes from receiving new capital to invest!)

New capital can be attracted by initiatives whilst there is confidence in an economy or debt restructuring when that confidence is gone, or bankruptcies to reduce the number of competitors and hence increase margins

Capital is attracted when their is an opportunity to make a profit!

A global initiative would help develop a plan on how each makor economy should play a certain role to help dilute the large global imbalances that have been developed over the last decade

A single country cannot resove this problem. Whilst capital has become global, labour has not, and neither has politics. This has created a tension on who does what

Corporates are the economic participant that can best maneovre in a globalised world. They are flexible to deploy capital where they want, not fixed like governments or stubborn like households. hence they can optimise their return and better adapt to a changing environment. We see this as corporate profits are increasing as a share of GDP whilst wages and tax returns are decreasing

Growth differential between EM and DM implies that cyclicals should be a better investment in EM and high quality in DM

Commodities have been driven up highly in recent years. Focus on supply constrained commodities such as OIL, PLATINUM and other commodities that are taken from only a few sources that are being restricted or where demand is increasing (but not a cyclical demand)

US needs to change the balance sheet and structure of its economy and be more competitive (via wages and currency and benefits)

Europe needs to have debt sustainability either via writedowns, fiscal transfers or money printing (not a long term solution)

EM need to help the consumer either via increasing currency valuation or easier access to credit or more support so save less