They say that if you ask two economists for an opinion you
will get three different answers. This sometimes applies to
analysts of the financial markets. Some will see boom times
ahead, some will see nothing but gloom and doom. Some will
invariably be influenced by their own field of interest. A
mutual fund manager is more likely to be bullish about his
fund’s prospects, even if there are indications that
the asset class in which his fund invests is falling out of
favour. And when did you ever hear someone in the real estate
business say they expected prices to fall? Consequently, trying
to establish a consensus on where the markets are going requires
a fair bit of ‘reading between the lines’. Having
said that, I have reviewed a wide range of expert opinions
and there does seem to be a fair amount of consistency as
to prospects for this year. Let’s look at the various
asset classes.
Stock markets
Most stock markets enjoyed double digit growth in 2006, despite
more conservative projections at the beginning of the year.
Most analysts are predicting another positive year but with
lower gains than last year. Further gains in profitability
are expected in corporate America and companies’ earnings
and exports could be helped if interest rates start to come
down and the dollar falls as a result. A rise in the value
of the Euro however is likely to make it harder for European
companies and we are unlikely to see a repetition of the spectacular
gains of 2006. Analysts remain bullish in respect of Asia
and other emerging markets.
Bonds
These are the fixed interest instruments that form a major
core of conservative portfolios and pension schemes. They
consist primarily of government bonds and corporate bonds
which are very safe, albeit unexciting, investment instruments.
With interest rates rising and other assets producing very
attractive returns they generally made less than cash for
investors in 2006. The reason is that although they produce
a secure income stream the capital values fall as interest
rates rise. With no sign yet of interest rates coming down
and the possibility of further increases in Europe, this year
is likely to be another poor one for bonds. Long term investors
should not abandon them however; when interest rates start
to fall or if there is turbulence in global stock markets
bonds will become a valuable asset again.
Commodities
2006 saw flows into commodity investments surpass US$100 billion
as more and more investors recognised the importance of the
asset class and the fact that with a rising world population
the long term demand for commodities is bound to be strong.
2007 is expected to be another positive year for the asset
class but expect volatility. Oil has come down sharply from
its peak but it doesn’t take a lot of intelligence to
work out where it is going to go in the long term. Even soft
commodities like corn are being driven by energy-related demand.
Property
The much predicted crash in global residential property prices
has not yet happened, although prices are certainly edging
downwards in many parts of the world. In the UK, prices resumed
their upward movement last year resulting in a surprise hike
in interest rates in January by the central bank to curb further
inflation. At some point, the higher interest rates are going
to bite and this will create downward pressure on prices.
Commercial property on the other hand enjoyed a boom year
in 2006 and much of the same is expected this year although
not quite at the same level. Commercial property funds, which
have been regularly making double digit returns, are now easily
accessible by the smaller investor.
So what could upset the predictions?
In the world of investing one must always be prepared for
the unexpected. Unforeseen events can play havoc with the
markets, particularly in the short term. Examples from the
past would be 9/11, the Enron collapse etc.. Calamities will
always send shock waves through the markets but less calamitous
events can also upset predictions and turn what is expected
to be a positive year into a negative one. Examples right
now would be a steeper than expected fall in US house prices
that creates a consumer confidence domino effect on global
markets, severe weather incidents resulting from global warming,
a worsening of the political situation in the Middle East
and so on. If we let these fears play too much on our minds
we will go nowhere so we must put them into perspective, but
a wise investor will always keep in mind that things can go
wrong and have strategies in place that can cope with any
setbacks.
Any particular implications for Bali expats?
The world is now a global village so it doesn’t make
a lot of difference where you live if you are an international
investor. Where you plan to live in the future does have a
bearing on such issues as taxation, estate planning etc. so
these are aspects of financial planning that should be addressed.
When we discuss stock, bond, currency and property markets
we are looking at the global picture, not the local one which
is a much more complex market and while there are great opportunities
the risk factor must also be considered. In a developing country
laws may be changed at any time and if you are a foreigner
you could be quickly disadvantaged. The implications of new
laws on property ownership in Thailand for example are now
being digested by foreigners. There is no gain without pain
of course and the most successful people in the world are
often great risk takers but wisdom dictates a calculated approach
to all investments and the avoidance of putting too many eggs
in one basket.
Colin Bloodworth is a senior financial adviser with Financial
Partners International. The views expressed are his own. If
you have any questions you may contact him at 021 520 8099
or colin.bloodworth@financial-partners.biz
