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Despite the global pandemic and its catastrophic effects on economies worldwide, there seems to be no waning of appetite for stocks and risk-based assets globally. The major markets have delivered mainly positive returns in the year to date, in particular, the Japanese NIKKEI 225 Index has outshone its developed market counterparts as COVID-19 has been relatively well contained.
In other financial sectors, we have seen cryptocurrencies go through the roof with some citing it as the 'new gold', and institutions taking up big positions in the asset class. We have also seen significant investment inflows into ESG (environmental, social, governance) either via the stocks of companies who adopt the philosophy or directly into ESG-related funds.
US Tech stocks seem very frothy in their valuations, none more so than Tesla but investors keep buying into the company’s direction. Technology is here to stay and will forever evolve so for the long-term investor, this sector remains an attractive one despite some incredibly high valuations.
But surely we are soon due a big market correction?
Not necessarily. Interest rates are at historic lows and are likely to remain that way for the foreseeable future, despite the potential looming threat of inflation. Fiscal stimulus throughout the pandemic has been on unprecedented scales, with the US recently announcing another massive bout of support and investment in infrastructure. Corporate earnings are bouncing back strongly with greater optimism on the back of the vaccine that the pandemic is over, and individuals have greatly boosted their personal savings through lack of spending opportunities.
Reasons to be cheerful? Perhaps cautious optimism is more the phrase at this time. There are still headwinds out there and markets inevitably recalibrate from time to time but the long-term investor should probably not be too concerned.
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Interest rates in the developed world have remained very low or even negative, ever since the global financial crisis of 2008/2009 and investors have struggled to extract any kind of meaningful yield from the asset class known as cash.
This is particularly challenging for retired individuals who need income but understandably do not wish to take risks with their capital. The biggest problem is that cash interest rates are below inflation and in real terms, this means one’s capital is eroding in value. For example in the UK, interest rates have averaged under 0.5% p.a during the last 10 years, whereas inflation has averaged over 2% p.a. Nowhere near enough to preserve the real value of your capital.
Interest rates will only rise if economic growth accelerates on a sustained basis or inflation increases to such an extent that if left unchecked, it could threaten financial stability. Neither scenario is evident in many developed economies at this time.
So what are the alternatives?
If one seeks a yield greater than cash, some element of risk will need to be accepted. It’s the old risk v reward conundrum. Of course, cash is essential within a portfolio for short-term and emergency needs but once that nest egg is established, what can an individual invest in for greater returns?
Fixed Interest Securities:
Government bonds were traditionally an option for a potentially higher return than cash but within a ‘low-risk’ framework. However the current yield from developed country government debt has also fallen to the point that even these assets do not protect against inflation. Corporate and emerging market debt may offer higher yields but go hand in hand with a higher risk profile which may be too much for some.
Once cannot compare cash with stocks from a risk perspective but they offer the potential of a yield greater than cash over the long-term and history has proven that. However one must accept that stocks fall as well as rise in value, and dividends from them are not guaranteed.
Equities are one of the few asset classes which currently offer a yield above inflation. While many companies have cut or suspended dividends during the COVID-19 crisis, there is still potential for the share price to rise as well as the future prospect of healthy dividend payouts resuming. When the yield on cash and bonds falls when interest rates are low, the capital value of equities tend to out-perform. Looking ahead, we should see corporate profits and dividends recover more quickly than rising interest rates as we ease out of the COVID-19 pandemic.
If you are concerned that inflation is eating into the purchasing power of your cash reserve, then accepting some risk and investing excess cash in a sensibly diversified mix of equity-based investments like mutual funds, index funds and Exchange Traded Funds may solve your dilemma over the long-term.
If you are looking to earn an income from your investments, you might want to consider equities for at least part of your excess cash for the foreseeable future.
Contact us to find out how we can help you protect your capital against inflation.
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Even the most seasoned of investors become uneasy when the markets fall and September 2020 has seen quite a deep sell-off after the extended recovery from the bottom of the markets in March. Tech stocks overheated and have now returned to more reasonable valuation levels but should this September correction concern you and what lies ahead?
Many investors have short memories and are often influenced one way or the other by recent events as opposed to focusing on the longer term picture which every investor knows deep down, is the pragmatic approach and the key to successful returns. Market sentiment is often infectious and the sheep will follow the bears or they will cling to the tails of the bulls. Not something Warren Buffet would subscribe to! Successful investment strategies are achieved by looking at the long-term of multiple years, not what has happened in the last 12 months or what they are anticipating might happen in the next few months like the effects of a US election.
History tells us that for the vast majority of the time, US elections do not have any great effects on stock market returns in those respective years. Therefore do not allow the timing of the election to have a big sway on your decisions to invest in your long-term goals because you don’t stand to gain much by waiting for the election to conclude.
If you camp with the bears, check your portfolio risk and ensure you have some exposure to more defensive assets like cash or bonds but don’t eliminate your investment in stock-based assets like mutual funds, ETF’s and direct shares in companies. Your cash and bond exposure could be a counterweight to your retained positions in equity-based investments which should always represent a percentage of your portfolio.
The key during any periods of stock market volatility is to remain disciplined, do not panic, and constantly remind yourself of your long-term goals. Don’t lose sleep over how the stock markets might perform over the next 6-12 months and keep focused on that goal of a comfortable retirement or the best college for your kid’s education.
However if you have reasons to need access to capital in the short-term, remember that typically, bear markets tend to last about 2 years so if you need liquidity within that timeframe, your best bet is to adopt cash positions as there may not be sufficient time for risk-based assets to fully recover.
Have you checked the risk level in your portfolio recently? Does it need rebalancing? Talk to your investment adviser and check if your positioning is right for you and your long-term goals.
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Crystal clear water, skies of the deepest blue, air so fresh you want to bottle it. Places like this are usually only found in a tropical paradise but during the lockdown with the global population restricted to working from home, we have allowed the world's eco-systems to 'breathe' again. Amazing what can be done to help the environment, even if it was so tragically forced upon us.
Even before COVID-19, global warming, the environment, and the policies of ethically run companies, had become topics of hot debate among many people the world over. So much so that companies now realize they need to display a strong awareness of, and have a coherent policy for 'ESG' to attract and retain employees and stakeholders alike.
ESG means 'environmental, social and governance'. Companies with strong and clear policies surrounding these issues are set to get ahead, and many people believe, stay ahead.
But what does this mean for the individual investor? More and more clients are asking us for ways in which they can invest in the ESG sector, be that for capital growth and/or they simply believe in ESG and wish to be a part of it for moral reasons.
So which sectors could be hotspots for ESG investing in the future? One of the most obvious is water and with global warming, it is becoming an increasingly scarce commodity. Companies involved in good water management and clean water processing could be set for strong growth. Also, companies committed to clean and renewable energies and de-carbonization may attract more stakeholders in the future and alongside them, companies involved in the evolution of electric vehicles and the batteries that power them.
Of course, purchasing individual shares in companies is always a risky strategy, even more so in specific sectors. Should you wish to do so, we would recommend no more than 10-15% exposure to ESG in any investment portfolio. Alternatively, due to the rising demand for ESG-related investments, more and more collective investment schemes like mutual funds and ETF's with a specific focus on investing in stocks of companies with a strong ESG identity, are coming to the market and a number of them offered by some of the world's largest fund houses. Collective investment schemes typically invest in a basket of 30-40 stocks which diversifies your risk.
This article is not a solicitation to invest in the ESG sector, it is simply for your general information. Oh and while we are on the subject, AP Advisers Ltd is committed to the highest levels of ethical corporate governance, and its staff regularly contribute time and effort to the good of the local community whenever it is able.
Senior Investment Adviser
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The tragic death toll incurred by COVID19 has raised awareness for the need of succession planning. We have seen a rise in enquiries recently relating to making a Will and protecting assets. Many think that making a Will is the reserve of the elderly, the wealthy, or those with a complicated asset base but in truth, most of us should have one. Leaving this mortal coil without a Will can give rise to huge complications for heirs in terms of time and expense, and language barriers, and the decisions as to the distribution of your estate will likely be made by state law. Those laws may not reflect your wishes.
What is a Will?
It is a legally binding document which details your desired distribution of wealth upon your death, and if you have dependent children, who will take care of them. It is always safer to have the Will witnessed by at least one person which helps to protect your estate from challenges made by for example, estranged family members, business associates or creditors.
Why Make One?
1. You decide who gets what and how much.
2. You prevent undesirable people (maybe relatives) from making a claim on your estate.
3. You decide who is the guardian of your children. Very few parents would want a court to decide on this matter.
4. The Executor of your estate can act much faster to ensure your wealth gets to the right people as soon as possible. This is especially important if the beneficiaries are financially dependent of you.
5. A Will may help in mitigating inheritance tax liability on your heirs.
6. The bequeathing of charitable donations are often exempt from estate duties.
Many of our expatriate clients own assets in more than one country. In that case, it may be prudent to write a Will in the jurisdictions in which those assets are held.
AP Advisers Ltd is not a legal firm. The above is for general information purposes only and does not constitute legal advice. Our suggestion is to seek qualified legal advice from a professional in the respective jurisdictions in order to help you write a Will. There are Will writers in Japan who can assist with both domestic and overseas assets.