Gold Price Tumbles!

Gold, along with many other commodities have been hit very hard today. As I'm writing this gold has broken through the $1,500oz to stand at $1,498oz, which equates to over 4% loss for the day - a huge downward movement.

There's been a couple of big announcements this week that have contributed to this fall. Today, Goldman Sachs downgraded their long term price view, and we all know the weight with which Goldman can influence markets!

Cyprus has also announced plans to sell gold bullion in order to help them meet their debt burden. This means there is a lot of supply hitting the market, lowering price. Quite why Cyprus announced their intentions to sell before actually selling is a strange one to me, rather than sell and then let the market know! Maybe they have short positions on gold!!

By breaking through resistance lines such as $1,500 it could encourage further selling and the price continue to fall.

Long term holders will of course still be up in their investment in gold, but over the past 2 or so years the gold price has fallen significantly and maybe losing its shine with investors!

With the selling that is currently occuring in the market place it will be interesting to see who the buyers are? Many Central Banks have large gold reserves already and may be deterred from adding to this. Jewellery demand, particularly from China and India can be seasonal so this may not produce the immediate demand required to help stabilize the price.

Mixed Markets - The Importance of Sector Allocation

Global equity markets have been fairly mixed today as Cyprus concerns still remain, however the U.S offers yet again a brief reprise from this doom and gloom as durable goods orders beat expectations of 3.9% to rise 5.7%. Gains filtering through from home purchases and the auto industry have filtered down the economy.  This lagging indicator provides great insight into the structure of the economy and at present it seems to be doing quite well.  Let’s hope the FED does not withdraw the support of monetary stimulus before this ball is well and truly moving.

The markets opened cautiously as investors were unsure how to feel about the current issues in Cyprus, some uncertainty had been cleared up, however the bad taste left in European’s mouths may lead to a run on the banks.  As such, banks are to remain closed until Thursday and strict controls on capital withdrawals are expected to be implemented.  This comes after a bailout agreement that will take a substantial amount of all deposits over €100,000.  Now many people are questioning whether this policy may be used elsewhere as Slovenia is teetering on the brink of a bailout.  A further worry is that future elections within European countries will favour the anti-austerity party much more now as people do not wish to suffer the same treatment.

The divergence in equity markets merely highlights the important of market and sector selection.  Most notably, as mentioned above, housing and the auto industry have been benefiting of late in the U.S. whereas you would not want to be holding banking stocks in Europe.  Stock Picking is a hard thing to master, however there are a number of funds that manage to get this right.  Fundsmith’s equity fund has returned just under 24% over the past year investing in a concentrated portfolio of 20 global companies, one to consider for the long term.

So what now for Cyprus?

As mentioned in a previous article (Cyprus bailout) an 11th hour agreement was made late on Sunday - but what does it actually mean in the long run? Has this €10bn solved all Cypriot problems? Or will we be back here again in 6, 12 or 24 months time? 

Well for me this €10bn has simply helped a symptom, not provided a cure. It does not seem to have changed anything structurally that will lead to Cyprus kicking on as an economy, instead it has weakened their financial sector and probably deterred foreign investment. 

Historically when nations have gone bust they have defaulted on their payments and suffered short term pain. From here, they have been able to repair; they have no debt burdens to now pay and also have suffered a devaluation in currency thus supporting exports from the country. Of course it has not been this straightforward and the population have faced tough times, but eventually they have managed to recover. What we are seeing in Europe seems to be providing further emergency loans, imposing strict austerity measures and keeping the nation in the Euro, thus not allowing them to devalue their currency and start again. Cyprus is a very small Eurozone nation, but what will happen if Italy needs bailing out, or worse still France? They will require huge bailouts which just may not be feasible. 

There is no easy fix, but at some point something has to give. We either need full fiscal and monetary union, or countries need to leave the Euro and return to their own currency. The key to countries leaving the Euro would be a managed, orderly break up, although this is likely to still lead to market turmoil and banking crisis. 

The Eurozone problem is probably the greatest world economic challenge currently, and although I don't have the answers, throwing good money after bad doesn't seem the way forward. We need to provide stability in the banking system and find a way for the weaker nations to become more competitive, an edge they have lost since having a single Euro currency. 

For now let's just hope the U.S, and the rest of world can help pull Europe out of this mess, and consider a global portfolio of equities! Euro stocks may be cheap, but it could be for a good reason!

What next for Markets?

Market optimism faded after a bailout for €10bn was hashed together on Sunday evening.   The second largest bank in Cyprus takes the fall and as expected the Eurozone remains intact (for now).   Whilst depositors first €100,000 will remain, those holding bank debt and deposits over this amount will likely loose all of their money.  With a huge chunck of the banking system taken out, questions will be asked to whether sufficient available credit to Cypriot people will be made?  The largest bank, the Bank of Cyprus will be restructured and absorb the safe deposits from Popular Bank and whilst this is a relief for many Cypriot nationals, this will almost certainly ostracise both foreign banks and overseas investors for the foreseeable future and presents a cautionary tale for other European countries teetering on the edge of economic turmoil.

Markets reacted positively this morning, bucking the biggest weekly decline in 2013 as risk on appetite crept back into view.  However with uncertainty still in front for Cyprus investors remain uneasy. 

Correlation between global equity markets has quite noticably been diverging as economic recovery shows in certain countries more than others.  This global correlation has been inherent as economic crisis has struck so often in the past 5 years following the credit crisis and last week was a prime example. 

Emerging markets have lagged significantly behind developed equities and whilst risk/reward suggests emerging market equities should outperform, it is not the case.  This is down to a number of reasons; as economic recovery gains momentum, people tend to invest in equities that they know about, from here, smaller cap equities will follow.  Emerging markets have faced some different problems as Russia lost a lot of ground over the past week with large exposure to Cyprus. 

It presents an opportunity for those who wish to increase their equity exposure, in the long run these markets offer significant upside potential and it is where I would invest.  There are a number a excellent emerging maket funds, performance of which had been superb.  First State Global Emerging Market Leaders provides exposure to top companies across these markets however, a more leveraged play would be investing in Russian equities, with historically low PE ratios and a maturing consumer base, this could be a top performer over the next few years.

Check out our Top 10 Funds of the Month for some more investment ideas.

To Bailout or not to Bailout

Yet another post about Cyprus, well lets hope it’s the last!  With policy makers manically trying to put a bailout agreement together, many will be asking what is the likely outcome?  

This week saw volatility flash back into view, and it was unsurprising the Eurozone was to blame.  It was made clear Cyprus was in need of a bailout at least two weeks ago, and for many who had ventured deeper into this would have realized the extent of the bailout.

So why all the panic? This was purely down to the execution and terms of the bailout agreement.  As the banking system has such large debts they are liable to take some of the pain.  A further €5.8bn needs to be raised. However Cypriot’s and foreign investors alike reacted in outrage as up to 10% levy on depositors was announced.  After being shot down 36-0 by MPs, an alternative agreement is now being drafted ahead of Monday’s deadline.

So what is the likely path?  Unfortunately, it will be the depositors that will have to take some of the burden.  There just isn’t enough money elsewhere that would result in a manageable bailout.  As such, it may be that a larger levy will be made on those above the current €100,000 deposit guarantee (£85,000 UK).  This will cause less outrage for those living in Cyprus, however those wealthy foreign investors will have a significant haircut.

If this is the route agreed upon, markets will soon calm down and we can expect a rise back up to new highs.  Economic data continues to improve out of the U.S and people will be waiting to increase positions once volatility has reduced.  As such, one can take advantage of this by adding a European equity fund.  Yes this may be counter intuitive right now, however, over the last week smaller companies have lost a lot of ground, and as such oversold.   Funds such as Barings European Select will be a great addition to portfolios and will capture some of this upside potential investing in value companies.  Fundamentally, Europe still offers access to a number of quality companies benefiting from global operations.  Whilst they are listed in Europe, this is not where primary earnings come from.

If you think Cyprus will fail to come up with a bailout agreement by Monday, there are ways to manage your risk, check out Portfolio Hedging – it’s not for the faint hearted.

Eurozone - the uncertainty is back

Europe continued to be the main focus around global markets today as the ECB gave a March 25^th deadline for Cyprus to come up with a plan to raise a further €5.8bn.

The mood was further dampened by poor manufacturing data out of Germany and France, the bears gained momentum as similarities to last year show.

Whilst last year did not have the momentum of money moving into equity markets, and an improvement in the U.S, we did see equity markets rise at the start of the year over optimism that the worse was over for the Eurozone.  Then... equity markets fell off a cliff as worries Greece would vote in an anti-austerity government causing the possible break-up of the Eurozone.  This did not happen, however with its neighbour Cyprus banging on the door, we could see a similar situation.

Many have a fairly heavy weighting to equities within their portfolios, and this would have turned out nicely over the past 6 months.  But questions may be rolling through the minds of many investors as doubts whether the Eurozone can keep funding bailouts spread.  With Germany’s elections coming up in December, Merkel is somewhat on the back foot about using tax payer’s money to bailout countries which have been reckless with their economic policy.  Anti-austerity political parties in many countries are gathering momentum as seen in the most recent election in Italy and it is a concern this may happen in Germany, resulting in a Eurozone without a leading economy.  A lot can happen until then, but it will play a fundamental role in the future of the Eurozone.

This year will certainly be a bumpy ride for the Eurozone, and with Cyprus issues to be resolved, uncertainty over an Italian government and economic issues in France (read more on this soon) let’s hope the end result is positive.

I still maintain a positive outlook for equity markets over 2013, and as long as these issues are resolved quickly, it will draw focus away from the negatives and look forward to the possibilities the future holds!

Check out our Top 10 Funds of the Month to see which funds we rate highly.

What's next for Cyprus?

It was a shaky start to the markets today as uncertainty remained over whether the banking levies in Cyprus were going to be implemented.  Politicians finally voted on the issue and revealed what I had expected, “no thank you!”  Outcry from both foreign investors and Cypriots made it painfully clear; this was a poor choice of tactic when formulating a bailout agreement. 

It is all very well when it’s not your money on the line, however the game changes entirely when it is.  The 36-0 vote against the levy is a relief to many, however what next? There is the sudden realization that without a bailout agreement, Cyprus is in big trouble.  With very little bargaining power, this small country is backed into a corner and may have to rethink the offer made by the IMF and European Commission. 

It is remarkable how such a small country (representing 0.5% of the Eurozone) can cause such a problem.  This stems from possible contagion risks surrounding this country, if the deal continues to be rejected and no further offer is made, the country will most certainly leave the Eurozone, taking its banks down with it.  Fear will then spread to whether other countries, such as Greece will follow suit as the people give up on harsh austerity measures.  With fragile political states of Spain and Italy still in the fray, will they then follow? It can be a slippery slope in these situations and will weigh on many investors’ minds for the next few weeks.   

The Euro weakened on the back of this news as the future of the Eurozone was questioned, it at least provides a slight relief for exporters as the currency falls from recent highs.

On a positive note, U.S housing starts increased to the most in two years providing a glimmer of hope in the global recovery.  

An uncertain time again, seems somewhat familiar to last year...

Cyprus Bailout - Haircuts for Depositors!

We've seen other Eurozone nations bailed out since the Credit Crunch but the Cyprus bailout is different - this is the first time that depositors in banks are being hit and there could be severe implications..

Firstly let me try and explain what is actually going on with this 'bailout'. As things currently stand Cyprus is to receive a €10bn rescue loan, however in return for this there is a one off tax pillage on savers, which should raise €5.8bn. Depositors of more than €100,000 will face a 9.9% levy whilst depositors below  €100,000 will be hit with a 6.75% levy. 

Now it seems strange that an economy that contributes only 0.2% of Eurozone GDP can impact the news and global markets so much. However the key word here is 'contagion' and there is a fear that the levy on savers applied here, could be rolled out to other Eurozone nations requiring bailouts. We have already seen markets reacting today, with global equities tumbling, and yields on peripheral European debt rising and safe haven government bond yields falling (Germany, UK, USA).

So what should investors be mindful of? Well if you hold bank stocks, stock selection in this sector will become even more important. If we see cracks appearing in other nations, savers may begin to withdraw savings on mass as expectations may arise that they may face levies. This run on banks will cause bank stocks to tank, particularly the banks who are facing liquidity constraints from withdrawals. Over the short term I think it reminds investors that we are by no means in the clear yet regarding the Eurozone, and there are still many obstacles. It may lead to some profit taking and equities may fall over the coming week, and yields in riskier debt increase. Some may see this blip as an opportunity to buy in and this could lead to cash being rotated into some of the stocks and bonds that may have been oversold (Buying on the dips)

For me I'm just grateful that the UK is able to print money and that my savings are based in UK banks, which seem safe.... For now!