HOLD ON TO CASH IN THE NEW YEAR
Peter Cooper sets out his investing do’s and don’ts for 2017,
Labelled a gloomand-doom merchant by some readers, I thought a more balanced approach might be my early New Year’s resolution for 2017.
Frankly like most investors I’m rather confused by 2016 and still trying to come to terms with what Brexit and president Donald Trump mean for the year ahead – the result of nationalist swings in major economies and bad for global trade, business efficiency and therefore profits.
Even though senior executives from Goldman Sachs figure prominently in the US president-elect’s government, its house view is that his protectionism will be more damaging to the US economy than the benefits of proactive infrastructure spending and tax cuts.
I could tell you that financial markets don’t like uncertainty. But then they seem to have managed just fine with it over the past few weeks. Is this a short honeymoon romance for a new president and premature optimism? We will find out next year. In the meantime, common sense and experience suggest the following do’s and don’ts for 2017:
Do
With the US dollar at a 14year high, do look at buying foreign assets. Dubai billionaire Khalaf Al Habtoor recommends the UK sterling and Hungarian assets. Remember this advantage will not persist forever. It’s a great bonus currently available from the dollar-linked Gulf currencies.
Do stock up on precious metals as I recommended in this column in December last year. Then the gold price was also in the dumps. But it surged 30 per cent in the first half of 2016 while the S&P 500 Index slumped 13 per cent. Shares in gold companies will again do far better than the metal itself.
Do take this opportunity to exit hedge funds and pensions fuelled up by frothy financial markets. You will probably kick yourself later for not selling high right now. Pension pots in particular are still highly valued at the moment because of a period of super-low interest rates, being slow to adjust to the underlying reality of higher rates.
Do hold a lot of cash. The world’s greatest investor, Warren Buffett, may currently be the biggest beneficiary of the Trump rally in US stocks. But he also has his largest cash holding in history, US$85 billion and rising, ready for the next crash.
Do buy commodities again. The bear market is over. Silver would be my tip for the most undervalued of all with the greatest upside potential in 2017. Buy shares in silver producers to maximise gains, though do remember that silver prices are always volatile because speculation is the main market driver.
Do show kindness to those who need your help in 2017, even if they’ve said you care too much about money in the past. In the end people do matter more than money.
Don’t
Don’t be fooled by the strength of the late-cycle US stock market rally. Its inflation-adjusted price-to-earnings valuation of around 30 times is double historic fair value and was only topped in 2000 and 1929 before major crashes. President-elect Donald Trump’s tax cuts and spending plans will not affect company profits until 2018.
Don’t worry too much about bond prices. US 10-year treasury yields are up from 1.7 per cent to 2.6 per cent since Mr Trump’s election, a staggering rise. But the higher you go the harder you fall. Standard Chartered thinks bond yields will fall from here and that will be good for bond prices, which generally also rally when stock markets fall.
Don’t worry about oil prices any longer. They have doubled in the past year and recent production cuts have set the market up for further recovery in 2017. Indeed, buying local UAE assets now makes good sense. That’s why BP paid $2.2bn for 10 per cent of the Abu Dhabi Company for Onshore Petroleum Operations (Adco) last week, albeit in BP shares and not cash.
Don’t ignore UAE stocks and property. For real estate there is now a battle between the downward pressure of rising local mortgage rates and the upward pressure of rising oil prices. In the context of the UAE, oil prices are far more important and promised interest rate increases from the Fed in 2017 may be as elusive as they were in 2016: of the four promised we only got one.
And finally, don’t forget to enjoy life in 2017 as well as invest wisely. If you don’t spend your money it may have no value apart from creating fortunes for future generations who perhaps ought to be encouraged to create their own.