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Justin Urquhart-Stewart: The only way is up? A Fool’s Paradise

At the end of the first quarter, it is always useful to look back and see if you can discern a pattern of what has been catching the investors’ eyes. Well, a quick glance at the list of asset classes shows one very clear picture: This is though both an encouraging picture as well as a somewhat worrying one.

The good news is that there seem to be very little red or negative numbers but the bad news is that there seem to be very little red or negative numbers! My apologies if I seem to be somewhat perverse, but the good news of gains can – and is – masking some underlying risks that are waiting to catch out unwary investors at a later stage.

There is, of course, a key variable when looking at asset prices and their performances: currency. This past few months have been especially misleading as the Green Back strength have been seriously distorting the investment values when you put them back into Sterling. For example, the Dow Jones in $ terms would have been down 0.26% and the broader S&P500 looked a little better at +0.44%. Hardly a dynamic return for investors, but when translated back into home values in £ then the figures change to +4.7% and +5.43% which looks quite respectable for indices that went nowhere! This just underlines the threat as well as opportunity of foreign currency risks.

So what were the themes for the first three months? Well, primarily it was the fading value in the USA economy as reflected in its indices and the strengthening returns, despite all the media hype to the contrary, within the Eurozone markets – and that was despite the Greeks! However, here again we see the effect of the currency movements as the German Dax rose by 22% in Euro terms but that translates back to us in £ as 12.88%, which is still not bad.

Then if we follow the equity markets around the world, again we see still a positive pattern with most things going up. China and India both rose and with the benefit of a weaker £ gave a return for the first quarter of over 8% and 9% respectively. Other emerging markets – and especially the wilder Frontier markets – were less appealing. However, even Russia provided a positive return… even in Roubles. The dog of the quarter though for the equity markets was Brazil, which although it was positive in local terms, it was negative by over 11% for any UK investors.

Next if we now look at the fixed interest markets, they too have generally done quite well. In Sterling terms all the main categories returned positive numbers. This was all the more surprising as the fret about potential rising yields has as yet not been translated into lower capital values – but to me the key word is ‘yet’.

As for the other asset classes, the pattern has been the same. Global property and private equity seemed to have had a good quarter – although this depends on which index you want to follow.

Private equity especially has been a strong performer as many of the funds have had the opportunity of selling in their investment assets into a rising market so an 8% return for the quarter was very respectable. It was thus only the commodities that were the let-down with a loss in either £ or $ terms and Gold only turning positive once put into Sterling terms.

This is all generally good news. So what’s the problem? And the answer is that not everything (or nearly everything) should be going up together. This will change and to an extent we are living in a “fool’s paradise” and being dazzled by the lustre of rising values. Something will change, and this could be caused by some geo-political crisis or – I suspect – by some economic change and potentially around those yields which will be affected by the much anticipated, and much delayed, rate rise in the US. That will cause a ripple at least around the fixed interest prices and whether that becomes a “taper tantrum” in the markets or something worse we just can’t judge.

So for the moment, we can enjoy a good quarter, but let’s not be fooled; such perfect conditions never last forever. Like the British weather; enjoy the sun, but keep the brolly handy!


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