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Blythe Financial Leaders in Wealth Management

       

Blythe Financial Investment Update

For those of you who are not of a mathematical persuasion the above equation is a very neat and simple statement about how to generate returns.

FV stands for Future Value and the 3 key elements to Future Value are:-

1. Your present value (PV);
2. The rate of return (r); and
3. The amount of time the PV has at the rate of return (n).

Simple! Or so it seems….

The hard part usually is knowing how to generate “r” and, not only how to generate it, but how to generate it in a way that does not expose the investor to a higher level of risk than they are willing to tolerate.

There is however an occasionally more pertinent consideration and that is that sometimes it pays to focus on preserving PV rather than generating “r”.

There is also a much rarer situation and indeed that is where we find ourselves right now – caught between the two.

In a torrid start to 2016 we have, on the one hand, much of the macro-economic data pointing to growth, albeit weak, around the globe and a number of positive indicators suggesting that whilst 2016 will be difficult it ought, on balance, to be positive.

On the other hand we have the behaviour of equity, bond and commodity markets showing the kind of reactions associated with poor economic data and indicators.

The pertinent question therefore is are the markets correct or is the data correct?

There is an often adopted view that “the market” is the very definition of a perfect market, which from an economist’s point of view, is that the price for any given stock, product or service is set by supply and demand and that all information pertinent to that stock, product or service is available to all parties at exactly the same time. This view tends to then lead to an expectation that “the market” is rational and completely accurately priced.

This however is not a view that we share and as such we think that the market can at times be completely irrational and its movements hard to fathom and we think that this is the case today…but… we are less sure of that than we were this time last month.

For now we prefer to rely on the data and, of late, we have had some reasonable data ranging from the positive GDP numbers in UK & USA, to record low levels of unemployment in USA, avowed central bank support in Europe, Japan & China and cautiously optimistic results from a number of key companies.

There is however a paradox in that avowed central bank support and that is that negative interest rates make the banking sector especially significantly more vulnerable as it restricts their ability make a turn on interest rates – banks are unlikely to pass on negative rates to depositors yet are charged negative rates on their deposits with the central banks and thus the negative rate works almost like an additional tax on bank profits. If this concern really takes hold then the banks may be become much weaker and the last time that happened was in 2007.

But what about China?

Certainly we have seen China’s growth figures reduce and concerns about the level of debt both at State and corporate levels.

China is undergoing one of the largest urbanisation movements ever seen and the notion that somehow the demand from China is going to dry up is I think unlikely.

Also, the fact remains that China’s GDP figures are significantly better than most of the rest of the world and couple this to the fact that the slowdown in GDP was actually planned as long ago as 2008 (with the planned shift towards a consumer based economy) and I am sceptical about the weight of importance being placed on this issue. There is however a degree of imbalance in the Chinese economy.

Coming back to where we stand right now however we are of the view that the volatility of the past few weeks is overblown and out of proportion. We do not however discount the possibilities of either the data showing weaker signs or the market becoming even more irrational than it already has. Central bank responses will hold a large clue as to how things will shape up and managing the paradox highlighted above will be key.

We are therefore minded to maintain our position and rely upon our diversified portfolios to protect against the downside and take advantage of any opportunities on the upside. In the meantime we will be monitoring data and markets closely and in the event that we believe that preserving PV becomes our goal we will take action to do so.

If you have any questions or would like some advice from one of our Chartered Financial Planners then please feel free to call us on 01624 619180 or email at enquiries@blythefinancial.com

 

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