A few thoughts on the ongoing turmoil in the markets – risks & opportunities

Posted on 8th June 2010 by Trevor Reynolds in Blog

Disappointing US private sector jobs data, untimely remarks out of Hungary about a possible sovereign default, etc. etc. – the bad news just doesn’t seem to end, unnerves investors and leaves most of us unsure on what we should be doing right now with our finances. 

I don’t want to minimise the depths of the difficulties our financial markets and economies have to deal with, far from it, but I believe it to be wise to take a step back and try to look at the whole picture in general and your situation and financial planning in particular. 

Whilst British economists in a survey (Daily Telegraph, 5th June) predict the collapse of the Euro, ask yourself the motivation behind this published view. Could it be that they want to distract from problems at home? In terms of debt and deficit the UK doesn’t look any better than the Euro zone nor is the Pound a more attractive currency. The same is true for the US with its record deficit and ballooning debt. The US Dollar just seems to be the lesser evil at this point, relatively. And that the Yen is overvalued in view of Japan’s own severe problems – e.g. 200% debt of GDP – should be clear to everyone.

Remember, at inauguration the Euro stood at US$1.18, its low was US$0.85 at the end of 2000, its high US$1.50 at the end of 2009, and fair value is seen to be around US$1.20 by many analysts. I believe there is no need for panic. The Euro was overvalued during most of the economic crisis (especially against the UK Pound, Norwegian and Swedish Krona). At the moment, the weaker the Euro, most likely the better, as it helps the exports of the Euro zone countries (e.g. Aerospace group EADS that builds the Airbus gains €100 million for every one cent that the Euro falls), helps promote overall growth and supports fiscal tightening and austerity programs. Unless its fall is too rapid or unorderly (this is the only scenario I think the ECB may step in), a weaker Euro might actually be what the doctor ordered. And this is a clear opportunity, i.e. a chance to buy the Euro at cheap levels and invest in line with your overall planning rather than remain sitting on Yen in the bank that don’t give you any returns.

Granted, in 2009 people were too optimistic in terms of an overall recovery being around the corner. Hence we saw astoundingly rising stock markets, and many people realised that they had missed the boat or threw in the towel just when markets started to pick up. This year the focus has turned from toxic bank debt to unsustainable sovereign debt levels, the need for more stimulus measures and at the same time austerity programs to reign in the spending as much as possible. Are we headed for inflation or deflation? The list of problems and question marks is pretty much endless – something that rarely changes as our world is getting ever more complex.

Stock markets have been on a negative trend this year across the board, and we have seen violent swings, which mostly gets interpreted as unfavourable but indeed is very favourable for regular longer term investors. Commodities prices have fallen and with these the values of the commodities currencies like the Australian Dollar and Canadian Dollar. But for how long will they remain relatively weak and the Yen and US Dollar relatively strong? Not all currencies can fall at the same time and at some point the tide will turn. 

And what does this all mean for us, for everyone, who needs to provide for a family, plan for the future, for education cost, for retirement?

Basically, again, it’s back to basics: focus on your own situation, your goals and plans and calmly discuss the risks and opportunities with your financial planner. There is no need for panic, hectic decisions or inactivity – all these very human emotions just make things worse and increase the risk of not achieving your financial goals.

Some questions might be: does it make sense to buy the Australian Dollar and add to this position in your overall portfolio? Should you exchange some of your Yen savings and buy the Euro, would this make sense longer term? Is your portfolio well diversified? Should you diversify into a gold investment? Should you make changes to your savings plans in terms of fund choice? Should you endeavor to save more if you are worried about inflation? Does it make sense to buy property now? And so on. You might also want to read

http://www.bannerjapan.com/loans/seven-steps-toward-common-sense-financial-planning/

Whatever the economic climate, doing nothing isn’t your best option, staying informed but not being confused by all the news out there will increase your chances of minimising the risks and identifying the opportunities that are always there.

Don’t hesitate to get in touch if you wish to discuss your questions and concerns. 

Kind regards

Stefanie Richert
Senior Adviser

June 7th 2010

Leave a comment