Investment Strategy

asset allocation

di Walter Snyder, Swiss Financial Consulting

This Newsletter has outlined a consistent investment strategy, which has insisted on avoiding bonds. Under normal circumstances, although one may well wonder what that means in as much as interest rates in the US, Europe and Japan have been historically low for years now, bonds should make up a sizeable portion of one`s portfolio. Presently bonds are to be avoided for mainly two reasons. The first is that the returns are extremely low. The second is that interest rates in the US are set to rise sooner or later, probably later. It is possible to argue that high-yield corporate bonds are reasonable investments, but in that case they too will suffer when interest rates rise. Bond markets will see turbulent years ahead.

It was earlier suggested that investment in Chinese equities was advisable, and that was good advice since the gains in the last year were over 100%. One can now expect consolidation and some profit taking. European equities were also favored, and the Dax in fact performed well though the euro fell considerably against the dollar. BRICS equities can offer diversification although geopolitical concerns have wrought havoc in Russia, where equities are still a good buy.

The strong dollar and slow growth have brought about a fall in commodity prices, which has influenced the price of equities in emerging markets. The problem with the dollar is that it is clearly overvalued and is likely to lose out against other currencies, given the US trade balance deficit. Of course, if the Fed raises interest rates, this would favour the dollar considerably and could result in the greenback being even more overpriced. The conclusion is that imbalances in the global economy make it difficult for investors to see clearly where and how capital should be allocated. The ECB started QE when the Fed terminated tapering. That shows how much coordination there is between central banks.

Real estate has an important role to play in an environment where financial instruments have a low ROI. Commercial real estate can provide a steady stream of income, and if strategically located, will not lose value over time. In Switzerland the cost of residential housing that produces income has risen so much that the margins for good returns have been drastically reduced. Institutional investors are very keen on bricks. Despite the strong Swiss franc, which does not help export-oriented companies, there are good reasons for investing in Swiss blue chips, which regularly pay dividends.

As usual gold should make up 5% to 10% of a portfolio.