Fully invested bears – Gregor Logan

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I published an article today on Medium about fund managers’ growing acceptance of the deteriorating state of the fundamental of the global economy, and yet their seeming inability to change conclusion about where and how to invest because of the lack of acceptable investment alternatives.

Read the full article by Gregor Logan on Medium >

Do it yourself multi-asset global portfolio – Gregor Logan

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I am often asked by friends how they should invest their spare capital. Typically I seek to avoid giving a specific answer on which share, fund or country is the best place to be invested. Instead, I recommend they find a good adviser, such as an IFA .

The adviser would then do a pretty lengthy fact find to determine the appropriate investments based on time frame, volatility and expected returns. Tax planning would also be considered, primarily whether a pension or ISA might be used.

The end result will typically be a cautious, balanced or adventurous portfolio, characterised by the percentage exposure to equities (volatile) , bonds (presumed to be less volatile) and commercial property. A smallish percentage might also be recommended in alternative assets, such as hedge funds.

Or, if they are willing to do a bit of work themselves it is possible to save a lot of fees by building a multi-asset, global portfolio with reasonable risk/return characteristics themselves. It is now pretty easy, inexpensive and not very time consuming.

Over the last 20 years there has been significant growth in the number of investment platforms, or online shops for shares or funds, which give even modest investors access to a wide range of funds with online research functions to help identify which funds to buy.

Barclays, Bestinvest, Charles Stanley, Fidelity and Hargreaves Lansdown all score well in investor surveys for cost, service, range of features and breadth of investment choice

At the same time there has been a proliferation in the number of passive products that simply seek to replicate the returns of an index or benchmark, but at a much cheaper fee.

So simply open an account with a platform and buy a few index tracking funds to give you the appropriate multi-asset/global exposure. As an unsophisticated investor how do you determine what is the optimum asset allocation, you might reasonably ask?

The easiest way is to mimic the professionals. The average asset allocation of cautious, balanced and adventurous portfolios managed by most UK wealth managers is now published and freely available every month.

For the adventurous, it is 55% equities (25 UK; 30 rest of world), 13% government bonds, 7% corporate bonds, 10% property, 15% absolute return.

Vote of confidence in central bankers – Gregor Logan

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Equity markets have rallied over the last week as central bankers in Europe and the US have opined on interest rates. Firstly Mario Draghi at the ECB kept rates on hold but more encouragingly said more QE was a possibility after the current programme concluded. Markets might have been concerned at this admission of potential economic frailty but instead chose to be grateful for the possible extra boost to liquidity. Similarly Janet Yellen at the Fed kept rates on hold and this time left open the possibility of a rate rise in December this year, in contrast to last month’s concerns about ‘international headwinds’ suggested no move till into next year.

This is similar to the stance suggested by Mark Carney to the annual meetings of the IMF and World Bank that it remains a possibility that UK rates may rise this year.
Meanwhile the economic news has continued to confirm a modest slowdown in growth and pretty much a complete absence of any inflationary pressures.

Clearly the central bankers continue to think it better to allow the unfortunate consequences of low interest rates to prevail over the risk that tightening too soon will choke off the still modest economic growth.

Most commentators are agreed that low interest rates and QE have been a major contributor to growing wealth inequality as asset prices, both tangible and intangible, have been boosted. The decline in bond yields has hurt pensioners both directly through lower annuity rates and together with other low risk savers indirectly through lower deposit rates.

This has led to greater risks being assumed by both savers and borrowers. For example, the amount of debt required to purchase property with vastly inflated prices by new owners has risen and only been affordable because of low rates. This leaves them vulnerable should either rates rise or prices fall or both.

When asset prices have been rising for a while it is easy to forget the devastating impact on the residual of two big numbers when one or both of them move in the wrong direction.

It leaves a delicate balance for the central bankers to maintain. Possible of course, but past history suggests not one they often get right.

It’s all about interest rates – Gregor Logan

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Global equity markets have traded sideways over the last week consolidating the rally at the start of October. There has not been a huge amount of economic data to the influence the direction of the equity markets, and what data there has been has continued the modestly positive but slowing trend of the last several months.

The interest rate hawks at the Bank of England and the Fed have both given speeches this week outlining why they think rates should rise sooner rather than later. Ian McCafferty of the BoE told an audience at Bloomberg that to achieve their ambition of a gradual and non disruptive normalisation of policy after a long period in which rates have been at historic lows, they must not get behind the curve. As he has been a lone voice at the last three meetings in calling for a rate hike, presumably he thinks they are already behind the curve. John Williams at the Fed told Bloomberg something similar.

This leaves us still trying to determine whether the recent correction in equity markets will be just that, or turn into a more prolonged and deeper bear market. The bulls argue we are in a mid-cycle pause in economic growth and that the developed economies can continue to prosper despite the now fairly entrenched slowdowns in the emerging economies, China in particular. Europe, they suggest, is in the early stages of benefiting from QE. Also, that high equity valuations relative to their own history are no impediment to further gains, as was seen in the last several bull market peaks which topped out at valuations higher than most thought plausible. The apparent technical deterioration with a trend break and more new lows that highs can be dismissed as a temporary phenomenon should markets rally from here.

The bear’s response is that we have enjoyed the second longest equity bull market in history, driven mostly by rising valuations on the back of extremely loose monetary policy and which is about to become less loose. As short interest rates rise so will bond yields, undermining the flattering comparison equities currently enjoy. Corporate profits will be squeezed and the valuations put on them will shrink.

With markets driven at the margin, or by the ‘what have you done for me today’ principle, I am inclined to side with the bears.

Global growth, TPP, and corporate tax reporting – Gregor Logan

Global equity markets have rallied at the start of October, following their poor third quarter returns. The gains were led by the oversold mining sector, as lower commodity prices have finally prompted significant capacity shutdowns. The economic backdrop has remained positive but at a modest and on balance slowing pace. The UK and US monetary authorities continue their will they/won’t they tease. Initially fearing the potential contractionary impact of higher rates, equity markets now seem minded to fear the negative implications behind a postponement of rate rises. The ‘what do they know that we don’t know’ conundrum.

The jury is still out on whether the third quarter correction will turn into something worse. What is clear is that global economic growth and global earnings momentum have slowed, but not yet stalled. Should it stall the monetary rather than fiscal levers will probably be used yet again. It will be interesting to see if markets interpret such stimulus as a positive or negative this time around.

The TPP (Trans-Pacific Partnership) trade deal was also agreed in principle last week between US, Japan, Canada, Australia and several other smaller Pacific Rim nations. It is now pending individual country’s legislative ratification. This has the potential to set many of the rules of how business is conducted and to lower trade barriers between these counties. It should in time be expansionary, but is potentially yet another disinflationary/deflationary force in the meantime.

There was another significant, but much less publicised, deal signed last week between the G20/OECD countries obliging multinationals to report lines of business on a country by country basis to help tax authorities get a handle on where profits arise so they can seek to tax them. The aim is to stop profits being shifted to a lower or no tax regime. This has potentially significant consequences for a lot of the ‘Steady Eddie’ companies that have performed so well since 2009, in part because of their bond proxy status. Potentially higher taxes and higher bond yields may hold back their relative performance.

Was the ending of QE equivalent to the first rate hike? – Gregor Logan

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Last week I wrote an article for The Market Mogul about the impact that any Federal Reserve interest rate rise might have on the global economy, and when it might happen. Some people have said that the decision to hold rates in September indicated that the Fed were worried about growth prospects.

But see it another way: I think the ending of quantitative easing should be seen as the equivalent of a first rate rise, and I think in time this will also be recognised in the market. It is from this date that we should start to calculate the impact on the economy and asset prices, not when the Fed finally do raise rates. I think this has already been reflected in the weakness in emerging market economic growth, stock markets and commodity prices.

Read more on The Market Mogul by Gregor Logan >

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Welcome to my website. I'm Gregor Logan, an independent management professional with over 35 years of experience in all asset classes, including equities, bonds, property, private equity, alternative assets and bonds. I previously held senior-level roles at MGM Assurance, Pavilion Asset Management and New Star Asset Management.

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