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The stream team | News | Money Marketing

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Market Musings from MDM February 2010

A frosty start to the year in odd places

Returns for January

But the sweet spot was in sugar

The May contract for sugar was up nearly 13%. Not that relevant to most investors but perhaps a sign of things to come

What else did we see in January?

With January giving up some of the recent gains and the safe havens of 2008 – gilts and foreign currencies - back at the fore, we are now seeing investors taking a reality check, to see if last year’s exuberance that the world was not going to end had not been overdone.

There do, however, appear to be one or two emerging themes which may be gaining momentum. One such example was men-tioned above – sugar. Sugar prices have been forced up substantially by a poor crop in India, following a poor monsoon season. The next crop is due in June, so prices will start to fall as this starts to feed through.

It’s not all a one way street, though, as the recent shortage of soybeans, brought about by a drought in Argentina, was countered by the Chinese authorities stockpiling against such a problem, so prices have, if anything, slipped back. Global agriculture indices were up by nearly 40% over the past year, though.

Looking forward from here

This seasonality will always persist but the world is getting fuller and hungrier and the land available for food production is limited; it takes seven kilos of grain to produce one kilo of meat – and more of the world’s population are beginning to be able to afford to eat meat, especially in China and emerging markets, generally. Food prices look set for steady, inexorable rises over the coming decade. This theme is just starting to seep into investment fund portfolios.

As stated over the past few months, there is a lot of indecision in equity and fixed interest markets and we expect to see the recent increase in volatility continue for a while yet.

Most recently there has been increasing concern over whether or not some of Europe’s weaker economies (Greece, Spain, Portugal) can afford their recent promises and whether or not anybody will be buying their government loan stocks (equivalent to our gilts in the UK) to pay for these promises, or at what price they will be bought.

Philip Gibbs – one of the model portfolios’ fund managers, and extremely well respected in the City – is very cautious about this particular issue.

Investment houses’ market views

On a 12 month +/-5% consensus view, apart from US smaller companies and Japanese equities, on which they are neutral - they are positive on all equities. They are positive on UK corporate bonds but negative on gilts and neutral on international bonds. They are also neutral on all property and currencies.

..although, as we said last month, just watch out if things go wrong.

Model Portfolios

Model portfolio returns ranged from just over +1% at the cautious end to a little over 4% down at the aggressive end for the month, and around 9% to 20%+ for the past seven months, since they were initiated, broadly correlated with their risk profiles, with the strongest returns (and larger recent slippages) coming from the aggressive end – but you must remember these were exceptional times.

The above is not intended to imply any advice.

MDM Associates Ltd, MDM House, High Street,
Ripley, Woking, Surrey, GU23 6AN.
(All data: source: Sharescope: to 31/1/10)

Market Musings from MDM

Market Musings from MDM

December 2009

We wish you a Merry Christmas and a Prosperous New Year

A mixed month in November

November was a very stock-specific month

Apart from Inmarsat, a mobile telecoms company, at no 9 the top 11 FTSE100 shares over the month were commodity-related, with gains of between 13% and 30%. Meanwhile, many financials had a poor month, led by a fall of nearly 21% by RBS. If you strip out THE 2% net contribution these mining stocks and RBS made to the FTSE100 it only nudges ahead less than one percent over the month

Investors in Japan were rewarded by a strong performance from the Yen, only to have the currency gains more than wiped out by a nearly 7% fall in the Japanese stock market (Nikkei 225), leaving the strongest winner being the US, with both market and currency gains for the month. The prize for top volatility for the month went to undated gilts!

So what can we deduce from this?

Firstly, that the bulls are not having it all their own way.

Secondly, that there is a lot of indecision - high gilt volatility being a big clue; daily price moves of +/- 8% are symptomatic of this

Thirdly, commodities are gaining momentum.

With such a high level of nervousness this is probably not a good time to be making "spur of the moment" investment decisions; it is, however, a good time to review any recent gains and carefully consider any income or capital requirements you may have over the coming months - not forgetting, however, to be mindful of the current volatility and to try not to lose out badly on any switches undertaken. As suggested last month, we would expect to see some increase in volatility in the short term but this looks like continuing to be a good time to accumulate equities for the longer term.

Model Portfolios

Along with markets, most fund returns were positive but fairly flat, although overseas funds, generally, were up around 1.5% to 4%. Looking forward, we heard an interesting comment from Graham French of M&G, one of the portfolios' fund managers, "If China makes it, the price will fall; if Chine needs it, the price will rise." This probably sums up the coming decade in nice, simple terms and is worth taking on board.

By the time you read this, we will have had the Pre-Budget Report, which is likely to include a variety of tax increases in one way or another. As mentioned last month, one of the things we are doing to help clients has been to explore new types of tax-efficient wrappers, to help mitigate this

Investment houses' market views

On a 12 month +/-5% consensus view, apart from US smaller companies and Japanese equities - where they are neutral - they are positive on all equities. They are positive on UK corporate bonds but negative on gilts and neutral on international bonds. They are also neutral on all property and currencies.

The above is not intended to imply any advice.

MDM Associates Ltd, MDM House, High Street,
Ripley, Woking, Surrey, GU23 6AN.
(All data: source: Sharescope: to 30/11/09)

How Capital Gains Tax (CGT) reforms have changed the face of Onshore Investment.

The Finance Act 2008 removed “Taper Relief” and its predecessor “Indexation” from the Capital Gains vocabulary. It also removed the prospect of Higher Rate Tax and set as standard a rate of 18% tax for gains in excess of the Capital Gains Allowance (currently £10,100 per annum).

There was much lobbying in Parliament by the insurance companies because, at a stroke, the government had virtually confined Onshore investment bonds to history. This, because such bonds are automatically subject to Basic Rate Tax on any gains within the bond, whereas Unit Trusts and OEICs only pay 18% tax on gains in excess of the annual allowance of £10,100, and then only if the encashment were to give rise to such a gain.

For Example: £200,000 invested in a Unit Trust grows in one year by 10% and is worth £220,000. £110,000 is suddenly needed and withdrawn from the Unit Trust. A gain of £10, 000 only would be registered and, because this is within the annual allowance of £10,100, the whole withdrawal would be free of tax

Such changes in legislation are, of course, not exempt from re-adjustment in the future, particularly by a new government coming to power, but I feel fundamental changes would be unlikely. A new government might, particularly given our current level of national debt, be more inclined to increase all levels of tax together, thereby maintaining the imbalance between bonds and unit trusts.

So we are left with a regime that disadvantages Onshore bonds in favour of Unit Trusts and OEICs.

Our Capital Gains Allowance is probably the most underused of our personal tax allowances and I believe it is an area worthy of “in depth” discussion with your financial adviser. Furthermore, any client who has had their money in an Onshore bond for five years or more should look upon such a discussion with some urgency.

Richard Perkins Dip PFS

Ten Top Tips for Retirement

My number one tip is live for today with an eye on tomorrow. Not as difficult as it sounds. Have your holidays, enjoy your family but make sure you budget along the way, keeping some money aside for the future. If you do a proper budget you’ll be surprised at how much money ‘slips through your fingers’ and it’s this money that will make all the difference in making savings for the future.

Everything you save has the potential to be for retirement – don’t just think of pensions as being your only route to income in retirement.

Don’t leave things to chance – you need to plan. This is different from your budget and is really the goals in life you want to aim for. Put it into a financial plan and you’ll be surprised what you can achieve.

Review your finances regularly. What may seem like a good plan or investment a few years ago may no longer be meeting targets.

Really know and understand what you are doing and don’t use ignorance as an excuse for putting your head in the sand. Understand what retirement planning is all about and interact with your adviser properly.

Your finances are your responsibility – whilst your employer may operate a pension scheme or some other type of savings arrangement, this does not mean that you don’t also have to make some allowance for the future.

It’s never too late or too early to start planning.

The best plans can still fail – you can only do what you are capable of – if need be take a break from future planning and look after the now.

Find an adviser you can trust, work & stick with them.

Generally speaking you get what you pay for – don’t always be led by costs.

Market Musings August 2009

Steady progress through the mist

Another good month!

We have had a few of these this year and it was nice to see more positive movement across the board. With the general exceptions of gilts and currencies, most investments should have made money during the month, with Western markets delivering around 8-9% and the Hang Seng leading the way with nearly 12% return.

The first week or so of the month saw a continuation of the previous month's downward drift for equities and Sterling, while gilts continued their steady climb - only to suddenly turn the opposite way and the surge in stock-markets was quite pronounced for the rest of the month; most markets rising by around 12-14% over this period, once again led by the Hang Seng, which rose by nearly 20%. Putting this into perspective, this represents around a couple of years' worth of typical returns.

This is important to note, as it has been less risky to be invested than not, and the FTSE is already up by over 30% since its March low - that's three or four years' worth of fair returns. Also, the FTSE is back up to where it was 10 months ago - so, to paraphrase the situation, it has been 10 months since investors lost money on the stock market

Model Portfolios

For quite some time now we have been running some core model portfolios - just three basic models: lower, medium and higher risk. These have been assembled along "risk allocation" lines, rather than the more common "asset allocation" lines - which means that they comprise a series of funds, each with a different risk/reward profile - on a look-through basis you will often find that the end result is similar to a portfolio derived from asset allocation construction methods but the various fund managers do the switching between asset types internally, and more cost and tax-efficiently. The intention being that this saves you from having to make ongoing "complex" investment decisions; for example, instead of having to decide whether to switch out of Japanese smaller company equities, managed by fund manager X, into a European Corporate Bond fund - or was it an American Technology fund, or….? it makes switching decisions far easier for you.

In other words, running most conventional "asset allocated" portfolios has involved a continuous series of "complex" decisions. Using our "risk allocated" models, however, simply requires you to decide if you want more or less risk, so you can then adjust the percentages held in each fund accordingly. To paraphrase Clint Eastwood, "Do you feel lucky, or not?"

We have now extended and updated these models so as to offer five risk profiles - from very cautious to very aggressive - using a broader range of funds, and also with more funds used in larger portfolios than smaller ones - more on this next month.

Investment houses' market views

On a 12 month +/-5% view they have turned negative on Europe but positive on US smaller companies and remain broadly positive on Pacific (excluding Japan), Emerging Market and BRIC equities. They remain neutral on all other equities.

Their outlook on property remains negative in the UK and neutral for global property securities. They have turned negative on Gilts but remain positive on UK corporate bonds and are neutral on currencies, with a slight bias towards the US$ and Euro over Japanese Yen.

The above is not intended to imply any advice.

MDM Associates Ltd, MDM House, High Street,
Ripley, Woking, Surrey, GU23 6AN.
(All data: source: Sharescope: to 31/7/09)