Safety first for your personal finances in 2016



It is just about possible that the world will manage to drift through 2016 without any major accidents in financial markets, although the sidewards movement in most global stock markets this year is probably another indicator of the calm before the storm.

Individual investors need to think about their risk position. Does hanging on in stock and bond markets at multiyear highs make much sense when the upside is now limited and the downside could be very large?

The latest red flag is the credit seizure in emerging markets. Net issuance of debt fell by 98 per cent between the second and third quarters of this year, according to the Bank of International Settlements.

That’s part of the fallout from the Chinese equity market crash over the summer. But then that was a follow-on from the slowdown and failure of the Chinese stimulus package of 2009 that was equivalent to half a year of GDP, the largest such stimulus in economic history.

Indeed, China’s hard landing from high economic growth to some kind of recession or depression looks like being the real economic story of next year, with knock-on effects for everybody else on the planet, from even lower oil prices to problems for Germany, from which China buys about 60 per cent of its manufactured imports.

This economic shock is already baked in the cake whatever the Federal Reserve does or does not do to interest rates after its meeting next week. You might almost say it does not matter.

So how do individual investors look to prepare and insulate themselves from what could well be very rocky financial markets, and very possibly a second global financial crisis?

It’s not too late to sell treasury bonds and shares if you have a modest portfolio or cash out of a pension plan if you can. In the previous global financial crisis the US dollar was the best place to hide, at least in the initial shock wave.

After that silver and gold were the best performing assets until they topped out in April and October 2011 respectively. Then you should have switched to global equities and Dubai property, but you still had a year to wait for the bottom in UAE stocks.

Will we see a similar kind of pattern this time around, assuming that 2016 does take the Armageddon path rather than tiptoeing through this minefield?

Financial markets seldom repeat but, as Mark Twain said in a rather different analogy, they do rhyme. My main issue is with seeing the US dollar as a safe haven at this time.

The greenback has just put in a 12-year high in terms of valuation against a basket of global currencies. On the charts there is a recognisable double top. Is it possible to make a case that the US dollar is overvalued and therefore due for a fall?

Well, the Fed is supposed to be set to raise interest rates, and that is dollar-positive. But if it doesn’t raise rates the dollar will fall, and it will also fall if the forward guidance after raising rates suggests that this will be a very slow process.

Everybody in the currency markets has the dollar as their darling for next year and it’s become a very crowded trade. Usually the biggest market reversals happen when everybody is convinced about an argument and then it suddenly breaks down.

So what can you do? Most readers will have dollar or dirham deposits – and with the fixed peg the dirham is a proxy for the dollar. This affects the humblest investor to the giant sovereign wealth funds.

I think you need to spread your currency risk and diversify. The euro has just bounced off a double bottom against the dollar. The rupee has been depressed. I’d be a bit more worried about the British pound with the economic suicide of the referendum on UK membership of the European Union tabled for later next year.

Let me also suggest that you treat gold and silver as another currency and add them to your portfolio if you don’t own any precious metals. I know the high dollar has driven gold and silver down this year and that is very off-putting.

But then if the dollar is now about to head in the other direction, along with stocks, bonds and real estate, which are all interest- rate sensitive, then that is precisely the reason to own gold and silver now.

And if I have to put my hand-on-my-heart for the best investment next year, it would be the massively undervalued shares of the gold and silver companies whose combined worth is little more than Facebook. Why not sell what is clearly the most overvalued asset class and buy at the other end of the spectrum?

Peter Cooper has been a senior business journalist in the Gulf for the past 20 years

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