How investors can shelter from the sterling crisis
There are some very large movements taking place in financial markets at present that remind us how important diversification in financial planning is.
Part of this is due to activity by global central banks which suggests they are increasingly worried about global economic momentum. Part of it, too, is being created by Brexit.
In global money markets it is now estimated that over $13 trillion is being held in bonds that are producing negative returns.
That means for every €100 held in these bonds the investor is paying the issuer an interest rate instead of receiving one.
This upside down version of savings reflects a view among investors that protecting capital is more important than generating a return on it. I have not seen such nervousness since 2008.
These conditions are pushing down mortgage rates in many markets including Ireland. Indeed, in Denmark they have just introduced a mortgage that pays out rather than charges interest.
While all this is encouraging for borrowers it does point to some deep rooted problems in the global economy. Much of this can be attributed to growing tensions between China and the US, resulting in slowing trade.
Brexit, too, is making its mark felt; nowhere more than in sterling which recently hit a 10-year low. For UK consumers this will push up the cost of all imported products and services including holidays and food.
Moreover, it takes the UK’s wealth in the global economy down by reducing its absolute value every day sterling sinks further.
For Ireland, sterling is now the key pressure point as it is the currency of our closest economic neighbour.
Exports of certain products will suffer if this trend, which is unlikely to improve ahead of the fourth quarter, continues.
For wealth managers these big shifts in macro-economic variables once again send a reminder of the value of diversification.
I suspect most people in Ireland have their wealth tied up in Irish property and after that have cash in euros and pension fund investments in equities and bonds close to home.
That is not a bad profile in current circumstances given the relative strength of the euro and inflating Irish property prices.
However, the best assets to be in over recent months would probably have been gold and the dollar. Both of these have been on the rise as worries about the global economic and money markets have increased.
The challenge, now, is to shape a portfolio that provides diversification in a very volatile world.
Ideal portfolios are always hard to craft but something that provides balance across bonds, cash, equities, property and commodities is the mantra usually laid out by wealth managers.
Layering over that a currency screen that provides exposure to a number of different regions helps too.
All of this, however, is occurring against a backdrop of what is called "lower for longer" interest rates. That implies so-called risk-free assets – sovereign bonds – are yielding little or no returns presently.
All other assets tend to be priced off this asset class with returns being tagged to risk appetite.
For those with an appetite for risk I suspect the UK warrants some serious study.
Not only is sterling falling materially but the valuation multiple on many UK equities and properties has contracted, too, amid Brexit worries.
For a euro or dollar investor this is making high quality UK assets trade at prices not seen for a number of years.
Although Britain will endure significant challenges with Brexit it remains a large economy with a strong pro-business ethos.
While not for the fainthearted I think Britain is producing some interesting opportunities for long-term investors but patience and detailed analysis is needed before taking the plunge.
