Stuart Yeomans

The coming year will likely see a very similar set of results as the previous year. While the Federal Reserve has announced the tapering of its bond buying program, it has not yet announced the end of the program and the uncertainty is likely to continue to plague the bond and commodity markets as well as emerging market stocks. Main Market equities are likely to still be the best place to have funds in the coming year, however returns are not likely to be as high as in 2013. However, we do still expect to see returns over 9% in the coming year.

Gold and commodities are likely to continue to see price falls and Gold could eventually stabilize around the $800 mark.

One key driver that may emerge in 2014 is substantial drops in world oil prices. As the US shale revolution continues to strengthen we are also likely to see many key producers come back on line. New pipelines in Iraq as well as a return to production in Libya and the dropping of Iranian sanctions could see a substantial increase in oil production. A move to a consumption based economy in China as well as increasing fuel efficiency in Europe and North America mean that demand is unlikely to rise at the same rate as supply. Many experts predict a drop in the price of oil in the USA to nearly $80 a barrel.

This drop in oil prices will result in two key investment trends. Firstly, a drop in oil prices will allow central banks to keep monetary policy looser for longer. This is likely to have a positive impact on equity and property prices. However, areas flirting with deflation in the Eurozone and Japan may experience further problems with deflation if they are unable or unwilling to reflate their economies fast enough. These deflationary pressures may be further exacerbated by the vast increase in Chinese production over the past few years.

The second trend that is likely to emerge is a rise in the importance of western consumers. Oil prices have risen substantially since the end of the 1990s and western consumers have borne the full brunt of this. Since the late 1990s median incomes have not risen in most western economies when adjusted for inflation. This is one of the longest periods of the past century when average incomes have not increased. Falling oil prices are likely to see an increase in consumption in key economies from the USA to Europe.

The best strategies to take advantage of this trend are likely to be the following:

1. Buying Transport Stocks especially airlines and mid-range cars manufacturers.
2. Buying retail stocks especially clothing and middle market retail.
3. Selling or shorting energy stocks especially smaller companies and those reliant on exploration.
4. Shorting oil prices and gold.
5. Non luxury residential property is also likely to do well in this environment although it may take some time for this to filter down to the property market.

In the coming year the Malaysian ringgit is likely to weaken considerably. The Australian dollar is also likely to continue to fall. GBP and USD are likely to be the two best performers of next year.

Main Market Equity

We expect to see gains of around 9% in 2014

Corporate and Government Bonds

We expect continuing drops until at least the middle of 2014

Commodities

Most hard commodities will continue to fall in 2014. Oil may do particularly badly.

Gold

Gold prices will continue to fall for the next year and will likely drop below $1000 in 2014.

Property

Property in the UK and the USA will continue to rise. Most Asian markets will perform poorly in 2014.

Emerging Market Equity

Emerging markets are likely to drop further in the first half of 2014

Emerging Market Bonds

Emerging market bonds will continue to drop for the first half of 2014 but may experience growth in the second half.

I hope that you have enjoyed reading this post.

Stuart Yeomans 

CEO

Farringdon Group

Kuala Lumpur : Malaysia

The past year has seen a mixed performance across asset classes. While US Equity in particular achieved one of its best ever annual returns, most asset classes have experienced drops. The looming threat of the end of the Federal Reserve’s Quantatitve Easing program has seen drops in bond, commodity and gold prices. In addition, fears of a slowing of credit have hit emerging markets from Brazil to China hard.

In addition, the year 2013 may well have seen the beginning of a rebalancing of the world economy back from emerging markets and Asia to the USA and other developed economies. The drops in bond markets over the past year may also make 2013 one of the worst years in recent history for mixed asset managers from hedge funds to asset allocation funds.

Main Market Equity

Main market equity has been perhaps the best performing investment of the past 12 months. Markets in the USA and parts of Europe have surged to all-time highs; in addition Abenomics in Japan has caused a surge on the Nikki 225 of almost 50%.

Government and Corporate bonds

High demand for credit worthy government and corporate bonds after 2008 pushed prices up substantially. These prices were further exacerbated by the printing of more than $ 3 trillion worth of extra money by global central banks, most of which went into purchasing government and corporate debt. With the anticipation of the end of this money printing exercise, bond prices had become unsustainable by the end of 2012 and the past year saw a substantial drop in most bond prices from the UK to Japan.

High Yield Bonds

High yield bonds had also risen to unsustainable levels after the credit crunch and an improvement in company credit worthiness was insufficient to offset drops caused by the speculation of the end of the QE program.

Commodities

Large amounts of money have flown into the commodities market as a result of the QE program. The anticipation of the end of this is coupled with the dramatic slowdown in demand from emerging markets. Meanwhile there has been an increase in supply with large new mines coming on stream as well as increased oil and gas production in the USA as a result of the shale revolution.

Gold

Gold has seen substantial drops across 2013. While the threat of NATO action in Libya was enough to temporarily halt this fall, gold prices have now fallen by around 60% off of their all-time highs.

Property

Property has experienced a mixed bag in 2013 and has had a similar experience to the equity markets. While cracks have appeared in Asian property markets and price falls have begun, western property markets have fared better. Although US house prices have begun to recover, there continues to be vast over-supply in key markets such as California and Florida.

The UK has seen large increases in residential and commercial property in central London, however property markets outside the South East region continue to be depressed and most have not yet surpassed their 2007 peak

Emerging Markets Equity

Virtually all emerging markets performed badly in 2013. The MSCI Emerging Market Index dropped by 12% across the year. Concerns over the new policy direction of the Chinese government and the end of QE in the USA have combined to continue the declines that started in 2012. Emerging markets remain substantially off of their 2008 peak levels and it may take many years for these markets to return to these previous levels.

Emerging Market Bonds

The same forces that have served to lower prices on western bonds have also affected emerging market bonds. In addition, fiscal concerns over several main emerging markets have also caused depression across much of the emerging market debt market.

I hope that you have enjoyed reading this post.

Stuart Yeomans 

CEO

Farringdon Group

Kuala Lumpur : Malaysia

UK Real Estate has been the latest sought after long term investment by investors from the Emerging Markets. As the market grows crowded, however, they are taking a more granular approach to it, seeking low-leverage opportunities in supply constrained sectors. The residential sector in particular is garnering investor attention, as demographic trends and government policies point to strong fundamentals in the short and long term. Of the many facets of the residential sector, the provision of consented land to the house-building industry, offers perhaps the best opportunity.

After the fallout of 2008 – 2009, UK real estate quickly became a target for emerging market investors, especially from Asia, and in recent years the market has solidified its standing as a top destination for global investors in general. According to the recent Global Investor Appetite Survey, published by Nabarro, a global real estate law firm based in the UK, 73% of the 600 investors interviewed were likely to increase their allocations into UK real estate in the next two years.

Investment is coming from all parts of the globe, but Asian investors have taken the lead since the last financial crisis. A recent feature in the Financial Times highlighted the emergence of these investors, and the surprising role of Malaysia in particular. “Malaysia has emerged as the second largest investor into UK real estate in recent months. The size of Malaysia’s pension funds, relative to their domestic stock and bond markets, has encouraged them to look overseas and the UK has been a primary beneficiary.”

They are being joined by Brazilian pension funds which are looking increasingly at alternative asset classes abroad in response to low domestic fixed-income rates. Offshore orientated Chinese insurance funds bolstered by government policy changes, abundant liquidity and local currency appreciation are also increasingly looking offshore.

These investors are attracted to transparent re-emerging or developed markets such as the UK . In today’s global market place, wherever an investor is based, a sound investment proposition, wherever it is in the world, is something that will be considered.

Global investors’ taste for UK real estate can be attributed to such factors as the reliable legal system, strong education institutions, the convenient time zone, and low prices in the wake of 2008-2009, which is precisely when they began to enter the market more strongly. In addition, the UK real estate market boasts important fundamentals that distinguish it from other developed markets.

The recovery in the UK residential sector has differed from that occurring in either the EU or the US because of the unique political and demographic circumstances that are driving the market in England, particularly to long-term demographic trends. The UK’s population is expected to grow from 61.4 million in 2008 to 71.6 million in 2033, an increase of nearly 17%. At the same time, household density is set to fall from 2.3 to 2.15 persons per household between 2013 and 2033.

To meet this projected household growth, figures from the UK Government’s Department of Communities and Local Government suggest that 5.8 million housing completions are needed in England in the 25-year period between 2008 and 2033. An increase of 61% over the current level of housing completions will be needed every year in that 25 year period in order to meet that additional demand. To meet this demand, several stimulus measures were introduced in the budget of April 2013, including the “Help To Buy Mortgage Guarantee” scheme, the Help To Buy Equity Loans scheme and the Build To Let scheme. The results are already apparent, with home mortgage approvals up 25% since January.

Asset prices are also up, with house prices rising 5.4% in the year to August 2013, and the consensus is that this trend is gaining momentum, particularly for newly built homes. According to the Construction Register, newly built homes in the UK are more popular than ever before, while a recent survey by Halifax on house prices shows that new builds are outperforming the rest of the UK housing market, with an average value 9% above the norm.

But even as these policy measures stimulate demand, supply is nowhere close to meeting it. There is no way anytime soon that the sector will be overburdened by an oversupply of housing. The housing shortage in the UK is so acute that there is absolute cross-party political support for the need to increase housing supply and this is unlikely to change before the end of the next Parliament in 2020.

With demand outstripping supply by such a large amount, one of the major problems facing the sector is a shortage of consented land for the development of new homes. This will eventually drive house prices in the UK further.

I hope that you have enjoyed reading this post.

Stuart Yeomans 

CEO

Farringdon Group

Kuala Lumpur : Malaysia

The Great British Pension Problem, have you heard of it? Do you really know if it will affect you? Surprisingly it is not in the news as much as I think it should be and well to be honest it’s not just a problem, it is more of a disaster.

Due to the magnitude of this problem, some of Britain’s biggest companies are actually thinking about going bust over it. The amount they owe their former and current employees through the pension schemes is in some cases worth more than 20% of the company’s market value.  The knock-on effect has therefore been for much of the growth going into boosting these funds and not developing the business or investor returns.

Despite £35 billion being ploughed into the pension funds of these FTSE350-listed companies over the past 3 years, just £4 billion has been wiped off the deficits.

Defined Benefit Schemes pay a guaranteed amount for life. But the nature of these pension schemes has made it impossible for the firms to know exactly how much they will have to end up paying out. Calculating a pension deficit involves considering several factors, like pension benefit guarantees made to past and present employees, how long they live to draw the benefits and the investment returns. Regardless of performance of investments and contributions to top up the fund by current workers, any deficit has to be made by the employer.

This problem has led to many companies deciding to no longer offer Defined Benefit Schemes to new employees. However, the companies still need to continue to fund the scheme until the youngest member dies. New employees can instead expect a pension based on income from an annuity they buy with their accumulated retirement savings (Money Purchase Pension).

Average contributions for Money Purchase Schemes are around 9% of a worker’s salary, compared with 19% under a Defined Benefits Scheme. The money that employers are still contributing to Defined Benefit Schemes is limiting the amount that employers are contributing to Money Purchase Schemes, which reduces the investment potential and leaves the employee with a smaller pot to fund an annuity when they retire.

Are you in a defined benefit scheme and don’t know where you currently stand? Please contact me for a free pension consultation and we can make sure your future is safe.

I hope that you have enjoyed reading this post.

Stuart Yeomans 

CEO

Farringdon Group

Kuala Lumpur : Malaysia