Richard G. Watson - Global Portfolios Co., Ltd.

by Richard G Watson

Richard G. Watson — 2010-05-08T00:00:00-04:00

Many people are questioning how the Thai Baht seems to effortlessly maintain and even strengthen in the face of all the current political uncertainty.

To answer that question requires a look at the fundamentals of the currency. The economy has moved out of recession (Thailand only moved into recession as a result of the global financial crisis) and is poised to show good economic growth in 2010. Thailand’s foreign exchange reserves are in the region of US Dollars 140 Billion and rising. Thailand’s current account is in surplus, meaning that this country has a surplus in its dealing with the outside world. Thailand’s Government Debt is well within the 60% of GDP (Gross Domestic Product) recommended to countries by the IMF (International Monetary Fund).

The private sector banking industry in Thailand is in a healthy state; Thailand’s banks did not participate in the abusive lending practices of many countries in the West. Thailand, in conjunction with the rest of South East Asia, learned some valuable lessons in the Asian financial crisis of 1997 – 1998.

Thailand is in a very different position to, say, Greece. Thailand is similar to a company making a profit; its trajectory, excluding any unforeseeable political outcomes to the negative, is excellent.

Greece has been living beyond its means for years; it should never have been allowed into the Euro currency bloc. It seems now that, with deeper examination by the IMF, the real financial position of Greece is worse than previously believed.

Greece is in a very nasty position; their problems are caused by successive national governments spending more than they earned in taxation. This gap has now reached a level approximately at 120% of GDP –twice the IMF’s recommended maximum.

They are effectively up to their necks in debt, with a Euro currency there is no easy escape route.

European politicians, led by Germany, are starting to look at the costs of a Greek bailout – early estimates of over two hundred billion Euros by 2015. At that level it may be cheaper to give Greece some cash and ask them to revert to their original currency. How Greece is supposed to escape a debt trap by adding even more debt does not make sense.

Whilst mulling this over, one must add the possibilities of Portugal or Spain joining the problems.

Looking at other currencies common among the expat community in Thailand must include the Pound Sterling and US Dollar.

The former is running massive deficits and is moving over the 60% Government debt to GDP ratio. The economy in out of recession, just, certainly not at the speed of Thailand’s recovery or even close.

The UK’s political outlook is clouded until after election results and even then it all depends on the figures.

Britain will no doubt recover and probably at a quicker pace than often anticipated. The economy is burdened by high consumer and government debt and large parts of the banking system are still in Government hands.

It will be some time before the Bank of England can raise interest rates from their historic low of 0.5%. One factor that is of concern to the Bank of England is inflation but most of that is caused by Sterling depreciation over the past two to three years. Many British residents are feeling the pain of dealing with a weak Pound and strong Baht – a very unpleasant combination.

The US Dollar is different to every other currency as it serves as the world’s Reserve currency and is the base currency for almost everything in the greater commodity world.

Hopes that the Euro would replace the Dollar in many minds as the Reserve currency have been dealt a severe blow with the Greek crisis.

Naturally, the US Dollar has problems, too much debt, budget deficits too high, etc. It has shown its mettle even in the depths of the global crisis. In late 2008 the dollar was the refuge of last resort. Most of the latest US economic data points to a recovery in the US economy.

Many Pound Sterling thinkers have noted the disappearance of the days when the Pound/Baht exchange was over 70. The Pound is now trading at around US$ 1.50 which is the exchange rate that for decades has been judged as being fair value. When the Pound Sterling reaches two US Dollars then the former is overvalued.

The Bank of Thailand – central bank – has a declared policy of keeping the Baht broadly in line with other regional currencies. Any references to Malaysia and Singapore will reflect the success of this policy.

Unless the political situation deteriorates sharply or the impasse continues for a long time, the Thai Baht will remain strong.

Thailand has a broad economy, and benefits greatly from such areas as automobile manufacturing and substantial exports, to a large agricultural industry. Tourism is important to Thailand but in reality it is less than 7% of Thailand’s Gross Domestic Product.

Thailand’s main stockmarket index, the SET (Stock Exchange of Thailand) composite, has been the victim of the recent political turmoil, although losses or gains have not been significant.

There is, however, an old stock market adage: “The best time to buy is when there is blood in the streets”.

West leans on Asia for recovery - by Richard G Watson

Richard G. Watson — 2010-05-01T00:00:00-04:00

There is an old adage in stockmarkets: “Sell in May, go away, buy again on Michaelmas Day” (end of September).

Very often, it is a good strategy although for the past three years it would have been inappropriate.

In general, global stockmarkets have enjoyed excellent growth since early March 2009.

Obviously, stockmarkets are unlikely to continue on a pure upward trend but there are reasons for continued optimism.

Ben Bernanke, Chairman of the US Federal Reserve, Central Bank, gave testimony to Congress in mid April 2010. In his testimony he painted a picture of the US economy continuing to show signs of economic expansion combined with very low inflationary pressures. These economic conditions are perfect for a stockmarket rally and it is hardly surprising that stockmarkets have posted such significant gains.

It is still very likely that this trend will continue. Low inflationary pressures mean there is no haste to raise interest rates. Ben Bernanke has made it adequately clear that the “Fed” has no intention of derailing the economic recovery. He is more than aware that economic policy must have as its overriding objective the recovery of the US economy. Therefore, the Fed will keep interest rates at lows not seen in over half a century. There is a very real fear that higher interest rates could derail the recovery as happened in 1937.

It is an indication of how serious the recession has been and, for millions of people in the US and other countries, still is.

Stockmarket behavior is one of the more minor concerns of the “Fed”. Stockmarkets tend to be discounting mechanisms and with interest rates at near zero there is little to stop the current “bull market”.

In Asia the situation is somewhat different. The recession did affect all countries but there is growing evidence that economies are starting to grow strongly. A number of factors are involved; Asia’s banks did not participate in any of the irresponsible lending of the West and are naturally in much better shape to meet the recovery. The personal savings rate in Asia tends to be very high, Asians are less likely to be heavily indebted.

Part of the reason is that in most Asian countries, social welfare nets offered by governments are not nearly as generous as is the norm in the West.

In Asia welfare has traditionally been dealt with by families. However, this is rapidly changing. One of the main factors is birthrate; most Asian countries have seen their birthrate slow dramatically and this is combined with longer life expectancies.

The continuation of the economic miracle in Asia also helps the West. The last economic downturn of this severity was felt in the 1930’s, this time around the West has a resilient Asia as a market for goods and services.

China surprised most analysts by announcing that economic growth in the first quarter of 2010 reached 11.9% annualized. This was higher than expected although many economists believe these figures are still being inflated by the Chinese Governments stimulus package. China also announce that its latest trade figures actually reflect a deficit with imports being higher than exports.

This, naturally, means that the Chinese Government has a good reason not to allow their currency to appreciate against the US Dollar, at least in the short term.

Thailand is a beneficiary of all that is happening and economic growth was expected to reach at least 6% this years. Naturally, the inclusion of Thailand’s civil unrest in Bangkok has had a dampening effect and it is expected to trim 1% - 2% off growth.

Recently, I have made two trips to Malaysia and was surprised at the number of Malaysians who simply could not understand why the people of Thailand did not seem to be concerned about the damage to their economy. Another point frequently raised is how important foreign investment is to their economy.

For investors, the current global economic situation has much to commend it; the This is a good time to invest – to paraphrase Warren Buffet: “Be brave when others are fearful and fearful when other are brave combination of growth together with low inflation is probably as good as it gets. This is certainly a scenario that will allow further gains to be made. Naturally, these gains may end up with very expensive stockmarkets; already very few stockmarkets could b e viewed as “cheap”.

This is a good time to invst – to paraphrase Warren Buffest: “Be brave when others are fearful and fearful when others are brave.”

Unbreakable bonds part 11 - by Richard G Watson

Richard G. Watson — 2010-04-24T00:00:00-04:00

This week’s article continues on the subject matter of bonds.

Most bonds have a fixed interest component that pays out the same amount, usually every six months, for the life of the bond.

This, naturally, means that bonds, especially longer dated bonds i.e. five years, ten years and upwards are poor stores of value in an inflationary environment.

To counter the eroding effects on inflation a number of governments and related issues of bonds i.e. municipalities issuers inflation indexed bonds. This type of bond may, for example, have its coupon rate i.e. interest rate adjusted every year to compensate investors for the current inflation rate plus, say, two percent. Therefore if inflation rates were at 3% investors would be paid a total of five percent.

These inflation indexed bonds are very popular with investors although there is usually the old grumble about governments understating the real inflation rate.

The coupon rate i.e. interest rate on a bond varies greatly and there are a whole range of bonds that are termed high yield. High yield bonds are to be found among countries that issue bonds where the history of the country is one of more than average inflation rates. The other type of high yield bonds are those issued by companies and other entities i.e. electricity utilities with less than stellar credit ratings.

However, this is not always the case; electrical utility such as South Africa’s Escom, has a good credit rating. The risk is not primarily in the issuer but in the currency i.e. the South African Rand. Risk is a difficult concept; it often relates to the level of volatility rather than outright risk of default. Where investors buy bonds in other currencies there is always the risk of losses when converted to the investors “home” currency.

Individual investors often make the mistake of chasing yield, meaning that bonds with high yields are vastly preferred to those with low yields. This is often due to greed and lack of care in examining why the difference exists.

Many investors in bonds avoid actually buying individual bonds and simply invest in a bond fund.

Naturally, a bond fund has extra costs compared to simply buying a bond. This cost is hopefully more than compensated by the added value a fund manager can bring to the portfolio. There are many different types of bond funds ranging from those which only invest in bonds of a very high credit rating to those who specialize in junk bonds. The latter is a term for bonds that are below investment grade credit rating.

In addition, investments in emerging market debt are also popular. This then means that the bond fund manager is responsible for multiple tasks such as selection of individual holdings, political, economic, currency and market factors. In large bond portfolios the managers may also, where deemed prudent, purchase credit default swaps. This is basically purchasing insurance against a default by a bond issuer.

Bonds are often the sole or major component on an investment fund which is labeled “cautious” and is almost always present in a fund which is labeled “balanced”.

Almost everybody had heard of stockmarket crashes, property market crashes, etc. but who has ever heard of a bond market crash? Well, they do exist but they are relatively rare and any newspaper carrying a headline “Bond Market Crash” is unlikely to find that many of their readers even understand anything about the subject matter.

The last significant bond market crash started on the 24 February 1994. This was caused by a global bond market rally that had simply carried on far too long. Worries about higher economic growth and rising inflationary pressures suddenly infected world bond markets and a stampede for the exit doors caused bond prices to collapse. This was not just a single day of falling prices, the 24^th February was the start of what was referred to as a rolling market crash which extended until December 1994.

During March of this year it appeared that some sort of resolution had been reached to tackle Greece’s debt problems. The Euro zone countries reached a loosely worded accord that would see them in some sort of combination with the IMF (International Monetary Fund) came to rescue Greece if necessary.

Reports from Bloomberg and other sources now reveals that Greece is about to try and raise billions of dollars in American bond markets. It also is reported that Greece is trying to avoid any involvement with the IMF as it fears the stringent rules and conditions that will apply.

Rather, Greece wants to have the Euro zone countries involved as it knows with them that it can virtually set its own terms.

Until this matter is settled it is going to undermine the value of the Euro.

Unbreakable Bonds - The lowdown on your investment portfolio - by Richard G Watson

Richard G. Watson — 2010-04-10T00:00:00-04:00

Many investors, when constructing a portfolio, avoid incorporating bonds as an asset class.

This is a pity because bonds can often play an important role. Bonds give diversity and, in most cases, the risk involved is low.

Whilst bonds are to be found in almost every country in the world, many nationalities are completely unaware of what they are and how they work.

North American and continental European investors usually have at least a basic working knowledge of how the bond market operates but very few investors of other nationalities are well informed.

Bonds come in various forms but a “standard” bond is basically a fixed income investment that can be issued by a government, municipality or private company. In all cases bonds have credit ratings which are issued by credit rating agencies such as Moodys, Standard & Poor’s and Fitch. The credit rating is of vital assistance to investors as it indicates the level of risk that is involved with the bond.

An example of this would be the highest credit rating of triple A if a bond had been awarded this level by standard & Poor’s. Moodys have a different system and their equivalent is A1. In both cases this means the highest credit rating possible.

The credit rating agencies have two different categories of risk, the highest is termed “investment grade” which covers not only triple A credit ratings but much further down the rating scale. At a predetermined point investment grade bonds reach a floor and anything below that is called “speculative”. That is a polite term used by credit rating agencies; the rest of the world simply calls “speculative” credit ratings “junk”.

Bonds can be issued for various periods of time i.e. two years, five years, ten years and even fifty years. The shorter time periods up to ten years are commonly used by both individual and institutional investors, very long dated bonds are usually only found in institutional investors such as pension funds.

In its basic form a bond is similar to a fixed deposit with a bank. The investor simply buys a bond knowing in advance the interest rate that is applicable and the maturity date of the bond. This type of certainty helps individuals to be able to plan their personal finances. Many retirees favour bonds as they give a secure and regular income flow.

A traditional bond usually pays interest every six months. Investors often buy different bond issues and by choosing bonds with different interest periods it is possible to have a quarterly or even monthly income at a fixed level.

Whilst there are some similarities between bonds and fixed deposits there are also differences. One of the most noteworthy differences is the ability to encash the investment. Banks issuing fixed deposits will sometimes allow early encashment but if they do they will usually levy an extra charge.

Bonds have a vibrant “second hand” market which allows investors the ability to buy and sell at will.

Any large bond offering with a good credit rating is a very liquid instrument meaning that they can be sold instantly. In fact, global bond markets have a much higher turnover than stockmarkets.

The “second hand” value of any bond is not guaranteed in advance, it all comes down to the market price.

Many variables impact on the “second hand” price of a bond in most cases the most important usually being the current level of interest rates pertaining to the period to the maturity of the bond. An example may be of assistance. An investor buys a bond of high investment grade with a period of ten years to maturity. After five years the investor needs access to the capital of the bond therefore the bond has five years to maturity. What the investor is actually selling is a five year bond. If we assume that the investor originally was promised 6% a year interest on the bond and the current rate of interest on a five year bond is only 4% then the investor is in the very fortunate position of not only being able to sell the bond but to do so at a profit. Bonds are usually issued at “par” that being 100% of the issue price and on maturity the investor receives a return of 100% of capital. The example, however, has a bond being sold with a higher yield than the market expects. To balance this, the value of the bond rises therefore the investor should be able to sell the bond for around 110% of its face value. This is referred to as “over par”.

Where interest rates rise the opposite occurs and bond values would result in a loss to investors; however, if the original investor can hold the bond to maturity, then 100% of the capital will be returned.

There are many different types of bonds, one common variant is the “zero coupon bond”. This term “coupon” is simply bond terminology for interest payments. A “zero coupon bond” therefore does not pay out interest. This type of bond appeals to investors who want to add certainty to a portfolio in the form of a capital gain.

A “zero coupon bond” with a seven year term may be issued at, say, 65% of the maturity value. It then matures, seven years later, at 100% , that is, it is bought for 65% of its value and pays out 100%.

In a similar manner to traditional bonds, zero coupon bonds can be traded at any time.

Holding onto gold - by Richard G Watson

Richard G. Watson — 2010-03-27T00:00:00-04:00

The current “Global Financial Crisis” is making investors interested in alternatives and opportunities.

One of the choices is Gold but, having put the yellow metal on a potential shopping list, the next question is: How does one hold Gold?

Gold can be held in a bank safety deposit box but many international investors are going to find it difficult to arrange this not so simple transaction.

An alternative is an ETF (Exchange Traded Fund) which is simply a unit trust/mutual fund which holds physical gold, takes care of the security, etc, and gives units/shares to represent the holding of the individual investor. Again, this sounds straightforward but anti-money laundering problems are bound to arise and the average expat investor (non American) is probably going to find the process onerous. However, international ETF’s are available and there are much easier and legal ways of accessing same.

The problem still is that Gold, in its physical form, does not yield an income; the investor is reliant on a rise in the price of gold, to make a profit. That said, if an investor believes that the outcome of all these stimulus and bailout packages is going to lead to a weaker US Dollar, then Gold will very likely return to its traditional role as a counterbalance to the US unit.

What also could eventually occur, also due to massive stimulation, both monetary and fiscal around the world, is the return of a higher than expected level of inflation. Central Banks and Governments around the world may well succeed in their mission to create economic growth but it will be necessary to “mop up” excess liquidity or risk inflation or the creation of yet another asset bubble.

For Gold “bulls” other ways of participating include gold shares which offer significantly higher returns than by just holding the physical metal. Most gold shares are in the mines themselves, normally when the gold price increases gold shares rise at a much faster pace. Mines have a fixed cost for producing gold, the following is an example: total cost of extraction – US$ 500 per ounce; current price - US$ 800; profit – US$ 300. Should the price rise to US$ 1,100 per ounce, the profit margin has increased by 100%.

The real profit to an investor in gold shares is unlikely to be as simplistic as the example. One of the main reasons for this is emotions in broader stockmarkets. Gold shares are subject to overall emotions; should a rise in the price of gold coincide with a rising stockmarket, often gold shares will probably outperform average shares. However, if the rest of the stockmarket is still in a “bear” phase, returns are likely to be lower. Stockmarkets vary between over optimistic to over pessimistic. When they are the latter stage “paper assets” i.e. shares tend to underperform.

Gold peaked at US$840 an ounce in the early 1980’s; it bottomed around US$ 250 an ounce in the late 1990’s. It has taken it until early 2008 to reach its previous peak. Gold reached a new all time record high some weeks ago at over US$1,200 an ounce.

India now seems to be at the centre of the gold universe. There were widespread reports that when gold moved to over US$ 1,000 an ounce many Indian ladies decided to cash in their traditional gold bracelets. However, India has joined most of the rest of the world in an economic downturn and its inflation levels are still relatively high whilst growth rates are falling quite rapidly.

On a global basis, around 75% of gold is used for jewelry fabrication, demand which at present is muted. The balance is mainly used for investment or industrial purposes.

It is difficult for private investors to select individual gold shares; much more efficient is an investment into a gold fund i.e. offshore. It is important, as always, to select a fund manager with an above average track record.

The final way that the private investor can access gold as an investment is via the futures markets and, again, it is important to use a fund for this approach. Futures Funds are seldom boring but they have one great advantage over any other approach: they can make a profit on both a rising or falling gold price.

We live in very uncertain times and efficient crystal balls are in extremely short supply. However, an investor in gold over the past five years would have seen a gain of around 100% and a gain over the last ten years of around 300%.

There are efficient ways of holding all these assets and being able to switch at any stage without causing a paperwork nightmare.

The global gold market appears robust. The IMF (International Monetary Fund) sold several hundred tons last year which was immediately purchased by the Indian Central Bank, the Reserve Bank of India. The reason for the purchase was to diversify India’s foreign currency reserves which have risen substantially in recent years.

A further large amount was put on the market again by the IMF and caused little disruption to the price. The IMF is making these sales to give it liquidity to assist countries with financial problems.

It is an indication of a strong global markets for gold that it can absorb large unexpected sales.

Protecting your investments after death - by Richard G Watson

Richard G. Watson — 2010-04-03T00:00:00-04:00

Many expatriates living in Phuket have lived in quite a few countries before coming here. Often, these expats have acquired assets in several of these countries and have retained them as investments. Looking after such a geographically spread-out estate may be manageable during a man's lifetime, but what happens when the owner of such assets dies?

Without proper planning serious problems can arise for a widow, who may not have any understanding of business, or for offspring who are still minors. In many cases expatriates would be better off using an offshore trust to avoid complications.

But what is an offshore trust; indeed, what is a trust?

A trust is a legal entity that can hold and manage assets including: companies, property, bank accounts, stocks and shares and anything an individual may own. The trust is governed by trustees who may be individuals, banks. Accounting firms, legal firms, insurance companies, trust companies or any of a variety of other entities.

If a trustee is a professional corporate body, it has a legal obligation to manage assets professionally. If it does not, then it is liable for any costs or losses due to its negligence.

The advantage of a trust is that it is simple, because all the assets of the Settlor, (the person who sets up the trust) are already held in the trust's name and are not dispersed around the world.

Nearly all offshore trusts are situated in tax havens, for example the Channel Islands or the Isle of Man. For non-residents these are true tax havens and no death duties or tax is paid.

Choosing the right trustee is important. I recently heard a good tale that illustrates this point. A Thai lady with two young children lost her husband. The deceased husband was originally resident in Hong Kong, where he owned property and a business, although he also owned properties in Britain.

The husband left a will that put all his assets into a trust after his death. He had wanted all but one of this properties sold by his trustees and the capital invested in a trust that would provide sufficient income for his widow and children.

Although he was an attorney, he had made a terrible mistake. He gave absolute power over his estate to friends whom he had appointed as trustees. The dead man owned a nice house in Phuket, but with a large mortgage. The trustees decided his widow must rent out this house in Thailand and move to one of the houses in Britain. The trustees were deaf to her pleas the she had never been to Britain in her life, couldn't speak very good English, and that neither she nor her late husband had ever intended that she should stay in the UK.

The lesson here is that appointing individuals as trustees is dangerous - apart from anything else, there is a good possibility of fraud. If our attorney had appointed a corporate body as trustees his wishes would have been carried out faithfully.

Apart from any other consideration where individuals have been appointed as trustees, there is always the potential problem of death or severe illness interruption their ability to serve as trustees.

Some security may be found in the use of a Protector. The Protector has veto rights over the trustees who must obtain the Protector's signed confirmation of their every action.

The drawback is that this can add unnecessary delays. I dealt with one case where the trustees were unable to act for six weeks because the Protector was traveling in the US and nobody knew his itinerary!

One of the cheapest ways to form an offshore trust is by using the services of a trust company that is owned by an offshore insurance company. This reduces the cost of establishing and maintaining a trust by a very substantial amount. It also allows for smaller amounts to be placed into a trust. Most corporate trustees will otherwise refuse to accept assets worth less than about GBP 250,000 (about Baht 17 million). I recently came across a well known international bank who will not manage a trust unless the underlying assets exceed US $ 3 million (about 100 million Baht).

Apart from the advantages, trusts can be very useful instruments to protect assets in the case of divorce. With an offshore trust, you retain control of the assets, including the right to withdraw all the funds from the trust.

There are many different types of trusts. In most cases expats will select an offshore discretionary trust as it is the most flexible. However, as with all aspects of personal financial planning, it all depends on the individual situation. One of the advantages of an offshore discretionary trust is that the Trustees are guided by a letter of wishes. During the lifetime of the Settlor, this document can be changed at anytime, to include or exclude beneficiaries or the terms in which they can benefit. It is not necessary to have this document drafted in legal terminology. Trustees simply want clear instructions that are not ambiguous.

Small print can hide big secrets by Richard G Watson

Richard G. Watson — 2010-01-23T00:00:00-05:00

Last week this column covered the Euro, Yen and US Dollar and, as promised, this week is about the Pound Sterling.

However, it would not be doing justice to the global situation without referring to the Chinese currency, the Yuan. China has built up the world’s largest foreign currency reserves at around US$ 2.4 Trillion. In 2009 alone this increased by almost half a Trillion Dollars.

China’s currency is not convertible and recently has been effectively “pegged” to the US Dollar at a rate that most analysts believe undervalues the Chinese currency. This certainly makes exports highly competitive and China became the world’s largest exporter in 2009, dislodging Germany from the top position.

The lack of convertibility in the Chinese Yuan limits its participation in the current world of floating rates.

The Pound Sterling is, naturally, fully convertible. The Pound appreciated strongly especially against the US Dollar before the current global financial crisis. It was then trading at around two US Dollars to the Pound. This was an exchange rate that was last seen in 1992 and in both cases the Pound was greatly overvalued against its US counterpart.

Most currency analysts agree that the Pound is worth between US$ 1.50 to US$ 1.60. Recently, the Pound has traded in a range of US$ 1.59 – US$ 1.66.

The problems faced by the US economy are also strongly evident in the UK economy. In fact, the UK economy is strongly linked to the US not only in terms of trade flows and investment but also in style.

The boom in real estate, consumer indebtedness and banks lending money without much credit information were equally common on both sides of the “Pond”.

Britain has found itself in something of a “holy mess” and the situation was greatly aggravated by its own Labour Party government. Before the crisis the government had gone on a spending spree which left little in the coffers when the economy encountered problems. In addition, the government had, during this decade, increased the hiring of public service workers known in the UK as the civil service. The previous prime minister, Tony Blair, had encouraged a flow of talent from the private sector to the public sector by offering high salaries to the ridiculous extent that government salaries, on average, were higher than private sector incomes. That was certainly not a mistake make by the Americans.

In last week’s article, some of the focus was on the Greek economy and the difficulty it faced with huge budget deficits and an inability to devalue as it is part of the Euro currency bloc.

Britain has very similar problems; most analysts believe that the budget deficit this year will be in the region of 13% which is similar to Greece. The UK budget deficit will almost certainly be the highest of any major industrialized economy.

The UK had one great advantage over any member state in the Euro zone; its own currency. This allowed the UK to devalue the currency which, in turn, made exports more competitive and imports more expensive. This created something of a safety value for the Pound Sterling.

Huge challenges remain; budget deficits at 13% are simply not sustainable. A general election is due within the next few months with May as the most favoured month. The shadow finance minister has said that if his party is elected, within three months (the traditional “honeymoon” period) his party will be the most unpopular government since World War 2.

The central bank – the Bank of England – embarked, during this crisis, on a quantitative easing experiment. This involved the Central Bank buying GBP 200 billion (around US$ 320 billion) of government bonds. The idea if this strategy was to keep longer term interest rates at low levels. However, this is a totally artificial strategy and the money having been spent poses some hard questions.

Should the Bank of England choose not to extend this quantitative program it would soon be accused of taking sides so close to a general election. This is something that central banks avoid like the plague. Another important question lies with the future direction of longer term interest rates once the central bank has exited the market, there are fears that they could rise significantly.

The devaluation of the Pound had led to another problem: inflation, this is rising and the Bank of England must also start to look after the election at containing this looming problem.

Unfortunately, with the UK economy still, effectively, some way from recovery, this is not exactly an attractive time for the central bank to raise interest rates. Central Banks normally rely on higher interest rates to cool demand which has a knock on effect on inflationary pressures. The Bank of England finds itself somewhere between “a rock and a hard place”.

The “International Monetary Fund” predicted, in 2008, that the UK would be the last major industrialized economy to emerge from its economic problems. That prediction looks uncannily accurate.

The shrinking giants of global currency by Richard G Watson

Richard G. Watson — 2010-01-30T00:00:00-05:00

Last week this column covered the Euro, Yen and US Dollar and, as promised, this week is about the Pound Sterling.

The lack of convertibility in the Chinese Yuan limits its participation in the current world of floating rates.

Most currency analysts agree that the Pound is worth between US$ 1.50 to US$ 1.60. Recently, the Pound has traded in a range of US$ 1.59 – US$ 1.66.

The boom in real estate, consumer indebtedness and banks lending money without much credit information were equally common on both sides of the “Pond”.

In last week’s article, some of the focus was on the Greek economy and the difficulty it faced with huge budget deficits and an inability to devalue as it is part of the Euro currency bloc.

The devaluation of the Pound had led to another problem: inflation, this is rising and the Bank of England must also start to look after the election at containing this looming problem.

The “International Monetary Fund” predicted, in 2008, that the UK would be the last major industrialized economy to emerge from its economic problems. That prediction looks uncannily accurate.

The pound loses its sterling worth by Richard G Watson

Richard G. Watson — 2010-02-06T00:00:00-05:00

Last week this column covered the Euro, Yen and US Dollar and, as promised, this week is about the Pound Sterling.

The lack of convertibility in the Chinese Yuan limits its participation in the current world of floating rates.

Most currency analysts agree that the Pound is worth between US$ 1.50 to US$ 1.60. Recently, the Pound has traded in a range of US$ 1.59 – US$ 1.66.

The boom in real estate, consumer indebtedness and banks lending money without much credit information were equally common on both sides of the “Pond”.

In last week’s article, some of the focus was on the Greek economy and the difficulty it faced with huge budget deficits and an inability to devalue as it is part of the Euro currency bloc.

The devaluation of the Pound had led to another problem: inflation, this is rising and the Bank of England must also start to look after the election at containing this looming problem.

The “International Monetary Fund” predicted, in 2008, that the UK would be the last major industrialized economy to emerge from its economic problems. That prediction looks uncannily accurate.

by Richard G Watson

Richard G. Watson — 2010-02-13T00:00:00-05:00

Investors are looking at 2010 in general as a difficult year in which to choose asset classes.

Most are finding that cash in the bank either yields nothing or close to it. Government Bonds have low yields and any future signs of inflation will lead to capital losses.

In the bond category, the most attractive areas are in carefully selected emerging markets debt and corporate bonds.

Sovereign bonds in the Euro zone have to be approached with a level of caution for example German Bunds are extremely low risk whilst Greek and Spanish bonds are probably to be avoided.

The concerns about the Greek economy continue and for good reason. The current Greek government is probably making all the right noises about finding the right way out of their problems. It must be borne in mind that they were recently elected after the previous government tried to introduce an austerity program and became distinctly unpopular.

The new Greek government has already vowed to freeze the salaries of the public sector who, in turn, have vowed to strike.

The economic contagion has reached Spain and the Spanish government have been outspoken about the differences between Spain and Greece. Certainly, Spanish governments debt at 54% of Gross Domestic Product (GDP) compares very favorably with Greece’s debt of 113% of GDP. The recommended maximum used by the International Monetary Fund (IMF) of 60% of GDP is a well established yardstick.

However, Spanish unemployment has soared due to the financial crisis and by the end of 2009 had officially reached 18.8%, a truly worrying statistic. Among under 25’s the unemployment figure is much higher.

Spain is facing an acute real estate crisis, the boom has long turned into a nasty bust with almost one million new properties remaining empty.

During the current crisis countries with their own currency, the UK being a perfect example, were able to let their currencies devalue and found this to be a useful escape route. Naturally, it does not make for a total economic solution but it does remove some of the pressure.

Spain, as a member of the Euro zone, does not have the luxury of devaluation and has instead to rely on a strict austerity program. This would be difficult enough to impose in normal times but with unemployment heading towards 20% it is going to be very difficult. It is possible that Spain could make the transition from deep recession to outright depression.

Simon Derrick, the head of currency strategy for Bank of New York Mellon, in a recent interview on television business channel CNBC, described the problems facing the Euro zone. Should countries i.e. Greece, Portugal, Spain, etc. require a “bailout” then that will mean that the German taxpayer is effectively underwriting these countries. Alternatively, if any or all of these countries default then either way it cannot be positive for the Euro.

The global attitude to the Euro has certainly shifted to a negative bias is a matter of weeks. Readers may wonder why Ireland has not been included in the list of Euro zone countries in trouble. The answer is simple: Ireland’s government adopted an austerity program some months ago which not only froze public sector wages but reduced them by 10%. The total program showed that Ireland was deadly serious about sorting out their economy that it enhanced Ireland’s reputation. Even Germany, the lynchpin of the Euro zone, publicly complimented Ireland on its strategy.

Commercial rentals in Ireland have fallen some 30% to 40% in the aftermath of the financial crisis. Increased foreign investment is coming to Ireland and, naturally, this is a very welcome development.

Investors have often noted that this crisis has resulted in a major shift in the global economic centre of gravity from North America and Europe to the Middle East and Asia and Latin America.

It is not likely that North America and Europe will be able to change this much in the future it appears to be something of a permanent change.

This is not to say that North America and Europe will not enjoy an economic recovery in the future but with Asia & Co growing at faster rates the focus appears to favour this part of the world.

Investors are likely to find emerging markets the most financially rewarding places to be, but it is how to invest that is of prime importance.

There are a number of alternatives; these include investing in an emerging markets fund. This certainly gives the fund manager a wide variety of choice which is important as economic, political and market factors can change rapidly in the emerging world.

This is an area of greater than normal volatility although late 2008 and the first quarter of 2009 showed that nowhere is immune to large losses.

However, assuming that all emerging markets do not suddenly join the ranks of submerging markets, en masse, then diversity is a great advantage. When investing it is wise to consider the options open to your selected fund manager and you certainly want to give fund managers the ability to avoid or escape serious problems. This is why single country funds in emerging markets, whilst potentially very profitable in good times, can be a nightmare in bad times. Most emerging markets do not have the liquidity of older more established markets.

Exploring averages by Richard G Watson

Richard G. Watson — 2010-02-20T00:00:00-05:00

The global financial crisis has left in its wake two different economic scenarios: firstly in the west, debt laden countries and, secondly, in emerging markets including Asian countries in general with strong economic fundamentals.

There are exceptions; Japan having more in common with the west with enormous debt being a prime example.

Investors in stockmarkets will naturally be attracted to the areas of growth, however many companies who are benefitting from emerging world growth have their roots in the US, Europe and Japan.

The use of a truly “international” or “global” fund may well have a place in the current environment. This type of fund has the ability to “cherry pick” the best of global opportunities. The biggest risk to this type of fund is the reality that the fund managers performance is benchmarked against a global index which is weighted heavily in favour of the US, Europe and Japan. This would virtually cancel out the advantages of going the global route.

Fortunately, all funds that invest worldwide are not managed with a view to replicating indexes, there are a number who truly just invest in the best of the best.

Investors who believe that newer world markets offer the best potential returns have a wide range of choices available. One category is emerging markets; this tends to be highly profitable but suffers from high levels of volatility. It is a route that is best reserved for investors who are prepared for these major bumps in the road and is also attractive for investors who intend to “dollar cost average” their entry rather than relying on simply placing one lump sum into an investment. Dollar cost averaging is a technique that is easier to use in theory than in practice. Simply, if an investment goes down in value it is human nature not to want to put good money after bad or in military terminology “never reinforce failure”.

In the investment world, adding capital to a market or group of markets that have fallen in value lowers the average cost of entry. For those of a positive disposition it means that falling markets have advantages, although in the longer term the investor still wants markets to rise.

Another area of investment that is particularly of interest in the current environment is BRICS. This term, originally coined by the US investment bank Goldman Sachs, stands for Brazil, Russia, India and China. There are certainly four countries who are enjoying strong economic growth and in the case of Brazil and Russia have huge natural resources. The latter two, India and China, have huge human resources.

The combination of all four gives an investor access to completely different economies with enormous growth potential.

Goldman Sachs may have coined the term BRICS but a number of other groups have adopted this approach as it is so attractive. Another feature of this method of investment is that it gives an investor access to companies that probably would not appear in any usual portfolio.

Russia is a prime example, most notable for its emerging companies, Russia has other attractions which usually remain unheralded i.e. the retail sector. Since the fall of communism a number of Russian retailers have emerged. In a short space of time they, in some cases, have become highly sophisticated and profitable but have had to go to the stockmarket to fund expansion.

The use of four countries in a group is also a defensive approach, in that the fund manager can divert funds from, say, Russia to India if political circumstances of market conditions warrant this strategy. In the investment world it is always useful to have alternatives.

Investors naturally can also invest in just one country and in the larger, long established markets there is often sufficient depth, choice and liquidity available to make this feasible. In emerging markets a single country approach is often combined with extremely high risk as these markets often end in a frenzy of investment only to be followed by a long lasting crash.

Thailand is a perfect example; the main SET index reached its peak in early 1994 at over 1,700 before the onset of the Asian Financial Crisis in 1997 the index had already fallen to the 1400 level. In the months that followed the index collapsed to just over 200. Even now the index is only at around the 700 level.

The investment world is fraught with hazards, few would have thought that when Japan’s stockmarket reached its peak in late 1989 that twenty years later it would only be worth around 25% of its highs.

Risky business in global currency markets by Richard G Watson

Richard G. Watson — 2010-02-27T00:00:00-05:00

The speed that currencies can change direction in value often takes people by surprise.

The Global Financial crisis which peaked in late 2008 saw the US Dollar as the most popular haven of last resort.

Last year saw the dollar fall as perceptions favoured other currencies such as the Yen and the Euro. The latter currency became the favourite of many people for a number of sound reasons or at least they appeared to many as sound reasons at the time. These reasons included the “perception” that continental European banks were not so exposed in general to the “credit meltdown” which was more of a US and UK problem.

We move then into the philosophy of “risk”; one of the areas we now know to contain some risk is among the sixteen member states of the Euro Currency Zone.

Greece, although only accounting in Gross Domestic Product (GDP) for less that 2% of the Euro Currency Zone, has budget deficits and debt at dangerously high levels. Unfortunately, details of “ swaps” conducted in partnership with at least two major US investment banks were entered into in the 1991 – 1992 period were now emerging. This was solely designed to “window dress” Greece’s national economy into appearing stronger than it actually was, to meet the requirements of Euro currency membership. Unfortunately, when Italy showed its own statistical economic data to gain Euro admittance one analyst compared Italy’s accounting to that of Enron.

This is what is really worrying central bankers, investors and all other interested parties. How bad can this become with Portugal, Spain and everybody shudders when the Italy word is used. Using Italy and default in the same sentence is considered in poor taste.

However, Euro zone politicians are ever more happy to announce that recent falls of the Euro against the US Dollar is good news. They are right; Euro Zone exports have suddenly become cheaper and more competitive in key global markets i.e. North America, Latin America, Asia. This will assist many European (Euro Zone) countries who are in need of all the help they can receive.

All this commotion and uncertainty over component countries in the Euro will have lasting effects on the currency unless the future holds even worse news for the US Dollar. Markets hate uncertainty and doubts about the Euro will probably persist.

When countries such as Greece come on to credit rating agency screens with downgrades to sovereign credit ratings this is no simple event.

That means that the Greek Government has been selling Greek National Bonds denominated in Euros to many investors. These investors are naturally alarmed and yields on Greek Government debt are much higher than on, say, German Government debt known as Bunds. The debt of Spain and Portugal has also shown losses as worries mount.

The European Union is very upset about the Greek situation. For once they seem prepared to take an erring country to task. There has been a conference of Financial Ministers referred to as the ECOFIN group and they have set Greece a timetable to enact more economic policies to rectify their problems. The deadline is 16 March.

Already Greece is facing internal opposition with strikes in both the private and public sectors pretesting against measures that the government is already trying to implement. The public reaction in Greece to even more stringent economic discipline is obviously going to be even more extreme.

It is simply impossible to introduce a full range of economic measures to rectify the situation by March 16 but, on the other hand, the present situation is out of control.

Analysts believe that 30% of the adult population are actually paying no tax at all. Tax evasion is a national sport and it is going to be a lengthy period before this can be solved especially as the Revenue Department have joined the strikers. The March 16 deadline imposed on Greece is to be backed up by sanctions and fines if the Greek Government does not meet its commitments in full. Greece also needs to issue bonds by April and in the current circumstances this may well prove impossible, a failed bond auction will simply add further to Greece’s woes.

The Euro Zone may have escaped most of the credit crisis but with some member states having dubious “balance sheets” they have not escaped sovereign debt traps. The Euro Zone investors in national “sub prime” bonds include many private investors, pension funds, banks and other parties. One suggestion of how to quickly help rectify the situation, at least temporarily, comes from an American source. Boston University Economics Professor Kojlikoff has been described by Bloomberg as the guru to Britain’s central bank governor, Mervyn King. Kojlikoff recommends that all Greek wagesand prices be reduced by 10%.

It may work if implemented but it does sound very similar to the prices and incomes policy that was tried over 40 years ago in Britain and that was not a success.

One thing is certain, the Greek and other weak members of the Euro Zone have a story that is going to continue to make headlines. Anyone for a Euro?

Taking your pension overseas - by Richard G Watson

Richard G. Watson — 2010-03-13T00:00:00-05:00

Occasionally, the European Union (EU) comes up with a set of rules that actually benefit the population.

This was true in respect of pension mobility by residents of the EU member states. This, naturally, was only allowed where the holder of private pensions actually moved to another country.

Britain, as a member of the EU, had no choice but to comply with the directive. This was despite UK politicians often protesting against the mobility of pensions. One example was a Liberal Democrat Treasury spokesman, Lord Oakeshott, who demanded that the UK Treasury “stamp out” this concession. “When you have pumped up your pension pot with top-rate tax relief you can’t then cheat the taxpayer by sailing off into a tax haven sunset to draw your pension”.

Lord Oakeshott had not taken into account that the British government would be saving money on National Health, Social Security and other benefits which are considerable. The average person leaving the UK on retirement is not a member of the ultra rich.

The mobility of private pensions became known as QROPS – Qualifying Recognized Offshore Pension Schemes. When a UK pension is moved out of the UK there must be an acceptable structure in the new country to accept this pension. This also requires that a trustee, acceptable to HMRC, is part of this transfer.

Some companies in Singapore abused this spirit of the pension legislation by allowing withdrawals and other irregularities. This resulted in HMRC refusing to recognize any pension transfer to Singapore.

It is not actually necessary for the pension to be domiciled in the country where the pensioner is living. For example, a pension holder could be resident in Thailand and have the new pension trustees located in Guernsey of Hong Kong.

QROPS do not offer any route for changing a pension to cash as was tried in Singapore. QROPS do, however, allow income to be taken tax free and the normal 25% withdrawal is allowed.

With a QROPS, more freedom of choice for underlying investments is allowed and, importantly, at the age of 75 the individual is not compelled to buy an annuity. This can be very important as this leaves a lump sum on death that can be passed on to beneficiaries.

Naturally, there is a substantial amount of red tape and form filling to be completed, However, this is the responsibility of a financial advisor and trustee.

At Global Portfolios we use trustees who update us on a weekly basis on the status of the transfer whilst this is in progress. This enables the client to know exactly what is happening.

QROPS are not some magical tool but simply a way of moving a pension from a high tax country to a tax free one. I have used both Hong Kong and Guernsey as bases but the latter offer cheaper trustee fees.

When a pension moves offshore there are strict controls over governance of the pension. The trustees are controlled by the relevant financial services authority in which ever jurisdiction is chosen. The examples of Guernsey, Channel Islands and Hong Kong are indicative of very advanced regulatory systems which are acceptable to the UK’s HMRC.

Initially, it may seem complex but the process of transferring pensions offshore from the UK is virtually mass production.

There is no alternative when using a QROPS to the involvement of a trustee even in the UK there is always a trustee in place. Each trustee, in turn, has a list of acceptable “platform providers”

Initially, it may seem complex but the process of transferring pensions offshore from the UK is virtually mass production.

The main decision is the style of investment, within limits, which are only composed to protect pension holders.

Everyone involved realizes that eventually each pension holder has individual requirements and these must be tailored to suit and flexible enough to change if and when necessary.

People who are contemplating using a QROPS scheme should be very aware that where anyone is offering extras that they are stepping on to very dangerous ground. What happened in Singapore can happen to any jurisdiction who incurs the wrath of HMRC.

QROPS are worthwhile but it all depends on the amount involved. One major QROPS trustee in Guernsey stated that the minimum amount that would normally be considered is Seventy Five Thousand Pounds. This is not a hard and fast amount if an individual had strong opinions on the matter and the amount involved was less it could still be considered. However, these guidelines are to establish where the pension transfer would bestow benefits over costs.

During the first five years of the QROPS the new trustees are required to report back to HMRC. Should there have been unreasonable transfers to the pensioner then HMRC reserves the right to claw back tax relief. It is for this reason that people should only expect reasonable withdrawals.

The trustees can also intervene in the choice of investments but the intervention should only occur to protect the client. Trustees will not otherwise intervene and I have always found them to be reasonable.

Economic stumble may sanction stimulus by Richard G Watson

Richard G. Watson — 2010-03-06T00:00:00-05:00

America’s central bank, the US Federal Reserve , decided, in late February, to raise its discount rate to 0.75%.

This may not appear as a significant move at first glance but it is the first change in interest rates. Naturally, the discount rate is not of great importance as it simply reflects the rate that banks requiring central bank assistance can borrow money.

It is the trend that is of importance; it is the first indication that the Federal Reserve are seeing the elusive first shoots of recovery. Most analysts believe an increase in the key “Fed Funds Rate” is still months away.

This economic recovery is likely to be different from others after a recession. The financial crisis spread its tentacles into many areas of the US economy and with the simulative effect of all these Federal packages still helping the economy it is still difficult to assess how the economy will react without them.

Assuming the worst, that the US economy will stumble later this year towards a “double dip”, then more stimulus will be added to the economy. Basically, it will be a matter of the economy has to be rescued regardless of cost.

Any concerns that this will lead to an even more indebted America will simply have to take a back seat.

Most economists agree that the US is not yet in a debt trap; the level of government debt is high but, assuming that government spending will fall as a percentage of GDP (Gross Domestic Product) in the future then the US position is sustainable.

However, future political will to run a sustainable economy is still of great concern as claims for social security, health care and many other issues will continue to rise.

Unemployment is the US has fallen slightly but it is likely to be a lagging indicator going forward. The previous recession of 2001 showed in its aftermath that unemployment takes time to fall. That was a very mild recession compared to the latest.

The nature of employment this time around promises to be very different; before many of the jobs created were in the real estate sector and construction. It is very unlikely that these areas will lead the way in this recovery.

The latest report from the (US) National Association for Business Economics (NABE)is optimistic stating that they see a “healthy expansion underway”.

What does come as a pleasant surprise is their positive outlook for the housing market with home prices expected to rise 1.6% in 2001 and 2.6% in 2011. These rises may be very muted but they are moving in the right direction.

The biggest surprise is their outlook for the stockmarket and they expect the key index, the S & P 500 to rise 23% by the end of 2011.

More than half of US households hold part of their savings in the stockmarket and a rise of this magnitude will make many people feel a lot happier.

The NABE report identified their greatest concern as being the size of the Federal debt.

One area that is at last achieving some attention is credit cards. President Obama has announced that a new law is to be introduced to ensure that all applicants for credit cards under the age of 21 will need to be co-signed and that credit cards may not have an interest rate increase in the first year.

This has been a serious problem in the US, as well as other countries, with young people being deluged with credit cards. It is common for young people to find themselves heavily in debt often for avoidable expenses.

Naturally, should the US economy return to a sustained growth path then interest rates will have to rise. Investors should note that stockmarkets do not like interest rate increases, especially when they become a regular event.

The opposite side to that coin is that stockmarkets would become even more concerned if there was an absence of interest rate rises in the face of economic growth as that would mean that the inflation genie was being let out of the bottle.

A recovery with rising interest rates is called, in stockmarket terms, “climbing a wall of worry” but this is a natural phenomena and very different from panic in markets.

According to the current consensus the US consumer is still going to only have a weak tone in demand.

Should that prove to be the case then the possible Fed Fund rate increases will be postponed.

Fed Chairman Bernanke is an ex economics professor at Princeton University and he is acknowledged as an “expert” on the causes of the Great Depression in the 1930’s and into the 1940’s. One of the lessons is don’t raise interest rates or drain liquidity until an economic recovery is definitely underway.

The US consumer may be weak but they are also deleveraging i.e. paying down debt and that was the ultimate cause of the crisis in the first place.

Assuming that the US recovery is on track, this is very good news for the global economy. The US may account for an ever reducing percentage of the world economy but it is still the largest individual economy by a very long way.

Give Grey Areas the Attention They Deserve by Richard G. Watson

Richard G. Watson — 2010-01-16T00:00:00-05:00

We are at a very interesting period in the history of mankind. The Americans refer to it as the “baby boomer” generation. That is the children born in the decade after World War II, broadly 1945 – 1955. Many of them are either retired or are approaching retirement. What is so interesting about this generation is that for the first time in history there are so many people in many different countries with affluence and a large number of choices available to them. In addition, there are large numbers of people, both older and younger than the baby boomers, who are financial independent.

A recent survey of the attitudes of people approaching retirement was conducted by Lloyds TSB, a major UK bank. The results were rather interesting: over 91% of respondents expressed a wish to retire outside of the UK. In reality, this will never happen for a huge variety of reasons including family ties, friendships, fear of the unknown, etc. The list is almost endless.

However, significant numbers of people will move, usually to warmer climates. In North America this will often mean relocation to the “sunshine belt” and in Europe a move to warmer areas in the south.

The world, as was are all very aware, is much “smaller” than it used to be. Modern communications and transport make the difference.

Another great change that took place in the 20^th Century was the rapid decline in the importance of the extended family unit. Many will say that this is a tragedy and, whilst books can be writer on the subject, the ultimate fact is that it is reality. Educational improvements have ultimately led in many countries to greater wealth and individual freedom. Whether people choose to exercise that freedom is entirely a personal matter.

The net result for South East Asia is that a small percentage, which equates in real terms to a substantial number of people, are making this region their new home. A significant number will spend some months every year in South East Asia and travel home for the remainder of the year. On the other hand, many will spend most, if not all, of their time in this region.

Countries such as New Zealand and Australia hare long understood the economic benefits of this “grey immigration”. One “grey” immigrant is worth, on average, more than ten tourists in economic rewards to the host nation.

However, South East Asian governments have generally been very slow to recognize the massive benefits that this type of immigration brings to their economies. They pay lip service but simply have not thought the whole situation through in its entirety.

A perfect example is the field of medical tourism; it is widely understood that this is a very profitable area. Thailand, Malaysia, Singapore and India are aggressively promoting this form of tourism with great success. Its benefits are not merely financial; it provides local entrepreneurs the opportunity to develop hospitals of a high standard and for local medical professionals career opportunities that otherwise would not exist. It also offers better health care facilities to become available to local residents.

If countries on this region are really serious about encouraging retirees, they should ask themselves: “What do retirees want?” Countries such as Indonesia Thailand and the Philippines offer retirees packages but all limit the retirees to condo ownership. However, many retirees want to have their own gardens, part of the attraction for people living in this region is the natural beauty of plants, birds and wildlife; gardening is a popular hobby.

Malaysia has “stolen a march” on its rivals. They have realized that retired people want security, so they offer ten year renewable visas and the right to own properties. With respect to property, they simply placed minimum costs for two simple reasons. Firstly, they do not want to encourage “breadline” retirees and, secondly, they do not want this category to end up competing for property with poorer Malaysians. They require certain income levels or fixed deposits to guarantee the financial stability of the applicant, in this it is similar to Thailand. The government of Malaysia has an excellent website: www.mm2h.gov.my which stands for the name of the official program: “Malaysia My Second Home”. There are other valuable incentives in this program.

Also, there is an excellent magazine “The Expat” available in hardcopy and on line at: www.expatkl.com

The most ambitious project ever devised for retirees was a creation envisaged in the mid 1980’s by major Japanese investors. The country selected was Somalia because of its all year round hot climate. The idea was to transport 300,000 Japanese retirees to a substantial coastal area in Somalia. The Japanese would have installed first world infrastructure including roads, electricity, housing, medical care, entertainment, shopping, golf courses, etc. The benefit to Somalia would have been in terms of massive capital infusion, employment opportunities, etc. However, Somalia descended into civil war, where it remains. The project was cancelled.

The Investment List by Richard G. Watson

Richard G. Watson — 2010-01-09T00:00:00-05:00

Investors are frequently baffled by the ever increasing range of choices available. The following give some indication of some categories in the collective investment world:

MONEY MARKET FUND – These are investment on cash or short term money market securities. The advantage for investors is, because of the large amounts invested in total, wholesale investment rates apply which would not normally be available to investors. There are large numbers of these “funds” available in a wide variety of currencies. Whilst in the Anglo-Saxon world customers will often ask their bank or other financial institution for rates on fixed term deposits; in countries such as France the public would be more inclined to ask what the current yield was on a Money Market Fund. Often banks will offer two types of Money Market Funds: up to six months and between six months and eighteen months. Most of these investments age on a daily call i.e. they can be withdrawn without notice and interest accrues on a daily basis.

BOND FUNDS – These come in many “shapes and sizes” and in total cover Trillions of Dollars, Euros. Etc. Bonds are often more complicated products than they may superficially appear.

Funds may invest solely in one currency for their bonds or invest in a wide range of currencies. Every fund has a “base” currency but will use the issues of other currencies to enhance returns. Currency hedging techniques may or may not be employed; investors should examine the investment strategy in advance.

HIGH YIELD BONDS – In general, this means that the manager of the fund is prepared to invest in bonds of lower grade investment rating or even in bonds that are not of investment grade to enhance returns.

One recent case involved a very large investment group that offered short dated bonds to investors giving them the same feeling of safety as would be expected in a money market fund. Unfortunately, the fund included some SIV’S (Structured Investment Vehicles). Investors only received 96% of their capital back. Fortunately, no members of the public were involved, there ware 14 institutional investors affected. The Fund was thereafter immediately closed. It was a very unusual case; the manager of these funds is one of the largest corporations in the world. The losses, as the fund was not large, only amounted to US$ 10 – 15 million. For the sake of their reputation it would have been, perhaps, wiser for them to have taken the loss on their balance sheet.

ASSET BACKED LENDING –This is an area where investors have to be careful; what are the quality of assets? That is the primary question. In an era where securities have been listed as double “A” or even triple “A” by the credit rating agencies only to be downgraded to sub investment grade/speculative investment grade of “junk” within months must leave investors including sophisticated institutional investors wary of credit rating announcements.

Simply put, the global credit rating aware caught completely “off guard” by a wave of SIV’s (Structured Investment Vehicles), CDO’s (Collateralized Debt Obligations) and other complex “paper”.

The credit rating agencies are stating that the ultimate responsibility for assessment lies with the investor. It can only be a matter of time before many cases end up on court, especially in the US.

Credit rating agencies have taken a very serious blow to their credibility; it will take them years to recover. For example it was standard operating practice for Swiss Banks to offer their clients a selection of bonds with the credit rating included as standard information. Many other global banks find themselves in the same situation.

STRUCTURED PRODUCTS – Many strange products have been foisted on to an unsuspecting public by the private banking operations of many of the world’s banks. These are often the private banking operations that advertise in the most exclusive magazines and financial publications together with six figure watches, eight figure real estate and the finest products and services for the ultra rich. Often these private banking operations hint that they really do not serve clients with less than US$ 10 million – not for the “riff raff”!

Some of the products they sell are of the firmly “heads we win, tails you lose” variety. Just as there are screams from “sub prime” borrowers in the US housing market that they did not understand the contract. The rich victims of private banking operations also did not understand the nature of their investments. However, they are generally too embarrassed to discuss these matters.

The simple remedy is, if you do not understand a financial product – LEAVE IT ALONE. You will not be alone in your decision, many high flying or crashing investment bankers have learned that, if a financial product is opaque, it is to be avoided.

The new term in global financial circles is “transparency”. It is only common sense. However, how many million of investors keep on forgetting that point?

We only have to look back to 1999 when Warren Buffett, the world’s wealthiest investor, said he did not understand the business model of many dot.com start ups, or their valuations.

Michael Bloomberg, the founder of Bloomberg’ also stated in an interview in the late 1990’s that many dot.com companies did not have a viable business plan and had never even shown a profit.

How many people were listening then?

What's in store for investors in 2010? by Richard G. Watson

Richard G. Watson — 2010-01-02T00:00:00-05:00

Welcome to 2010 and let’s trust that it is a good year.

Before looking at what this year has to offer it is worthwhile reviewing 2009 as much of what happens in the early part of this year will be an extension of last year.

We certainly start 2010 with most areas looking brighter than was the case one year ago.

January 2009 saw markets continue a freefall of what can best be described as panic. The actual meltdown started in the Autumn of 2008 with the collapse of Lehman Brothers a U S investment bank. However, panic on this scale had not been seen since before World War II.

The real cause of this panic may have been attributed to Lehman Brothers and the fact that the US authorities allowed this to happen but there were many other factors. Banks and related financial institutions had, in countries such as the US and UK, been lending money on completely unsustainable basis; common sense had apparently disappeared completely.

The former chairman of the US Federal Reserve (central bank), the “Fed”, has been widely criticized for keeping interest rates too low for too long after the recession in the early part of the decade. Hindsight shows that this is probably true, but it really was not the cause of the problems that arose.

Many factors contributed to the mess that finally ended in what is now called the “Great Recession”.

The real cause was a failure in regulation and much of the problem can be laid at a series of events and circumstances that made this all go wrong.

The reality is that no sensible lender is going to lend money to a borrower who looks unlikely to be able to repay the loan. When banks and other lenders become eager to lend money to borrowers who are simply not creditworthy then something is terribly wrong. Naturally, the old business model of lenders states that if you lend money to those who cannot repay and you lend enough to this category of borrower you will go bankrupt.

However, the rules of the game changed. Lenders only have to worry about bad loans if they actually hold the loan when it turns sour. The introduction of “securitization” changed everything as it allowed lenders to package their loans and sell them off to an unsuspecting third party i.e. a municipality or pension fund. When this occurs, then lenders can concentrate on simply finding enough bodies to lend to, be it on credit cards, mortgages, etc.

The bonus culture that has in recent years infested banks simply meant that banks were incentivized to continue this behaviour.

The reader may well question how this came about and also why had it not happened before?

This is where another vital link in the process comes into play – credit rating agencies. It has long been a foundation of the financial system that credit rating agencies gave unbiased views on whatever entity was being examined from a bank, to a bond, to a country - they all have credit ratings; the higher the score the lower the risk.

For many years there were only two major credit rating agencies and they effectively became a cartel. The introduction of a new major credit rating agency created competition and the result of this was that any group wanting a better credit rating could go shopping for that rating.

Lenders wanting to securitize a block of loans and wanting to sell them to a third party needed to have a good credit rating to make them seem better than they really were. The credit rating agencies were paid for their rating by the lender. The system had been corrupted.

When these loans started to fail, the original lenders found that in most cases they were unable to distance themselves from their own terrible loans. Then the meltdown started.

Banks and other lenders found that they could no longer trust their counterparties i.e. other banks as they often had huge hidden problems in their balance sheets. The money markets and other markets went into freefall.

2009 started with the continuation of the rout of 2008 in a similar fashion to a virulent disease the effects were felt on a global basis.

The US, being at the centre of the problem, saw the national currency, the dollar, come under intense pressure; money flowed to apparently safer areas such as the Yen and the Euro.

Massive stimulus packages introduced into many countries around the world helped stabilize economies and markets.

In March 2009 the realization came that the world was not going to fall into an economic depression. The recovery then started, confidence returned, slowly in many cases.

The recovery was also aided by the realization that governments would simply not allow large financial institutions to collapse. Everybody has learned a lesson from Lehman Brothers.

2010 promises to be a better year than 2009, some of the global problems have been addressed. The biggest concern for 2010 is the ability of economies to remain on a growth footing without massive government support. During this year excess liquidity is going to have to be withdrawn without hurting economies. This requires a delicate touch.

Reading the real numbers by Richard G. Watson

Richard G. Watson — 2009-12-26T00:00:00-05:00

The US economy is technically out of recession having recorded growth rates of 2.8% annualized in the third quarter of 2009.

Almost everywhere there are comments about this being a “jobless” recovery. However, one only has to recall the comments earlier this decade when the US came out of a previous recession to recall that exactly the same words were used. It was not a jobless recovery then and it does not appear that this will be any different. Already the unemployment rate has fallen from 10.2% to 10.0%.

In reality, it was better jobs data that initially expected that pushed the US Dollar higher against all major currencies. The low interest rates in the US had encouraged investors to borrow funds in US Dollars to invest in higher yielding currencies such as the Australian Dollar. This was the short lived US Dollar “carry trade” which had previously been the Yen carry trade. The better US data encouraged investors to abandon the US version as they feared losses from a rising US unit.

Much of this activity has returned to Japan where hopes of an improving Japanese economy are starting to fade. Japanese economic data that initially looked optimistic for third quarter GDP growth (Gross Domestic Product) was savagely slashed on an official revision. Japan, the world’s second largest economy, is showing increasing signs of being unable to sustain an economic recovery. Deflation is re-emerging and this has Japan’s economic planners seriously worried.

Returning to the US, the real unemployment rate as opposed to official figures is often quoted at around 17%. The reasons for the difference are usually attributed to factors such as people not registering as being unemployed as they simply believe that there are currently no jobs available. These people are often married and the other spouse is still earning money or they have funds and are living on their “hump” until matters improve.

Jim Paulsen, chief strategist at Wells Capital Management, gave his opinions as guest host on television’s CNBC’s US Squawk Box. Paulsen became well known as he saw the recession and credit problems developing in the US in 2007. He took aggressive positions “shorting” US mortgage securities which was a very profitable stance for him and his investors. Now he has moved firmly into the positive camp and rightly points out that although US economic growth is still weak, the size of the change from the depths of recession are very substantial.

Historically, the public view of the US economy emerging from recession is always more negative than reality. This is understandable as conditions on the surface of an economy always take some time to improve.

Naturally, there is a strong argument that the recovery in the US economy is due to the amount of government money that has been injected. This is a very valid point but the US Treasury and the Central Bank, the US Federal Reserve, are both very aware of the danger of removing excess liquidity too early. It will also take time before there are any increases in official interest rates.

Investors in US stock markets have enjoyed excellent returns in 2009 in stark contrast to the huge losses of 2008. The market at present is now taking more of a “wait and see” mode, corporate profits are going to be all important. The days of the market rising regardless appear to be over.

Europe also appears to be recovering with Germany, the largest economy, providing encouraging data. However, some other countries are still struggling. Spain has official unemployment figures reflecting around 18% unemployment with a residential property market that is in serious disarray.

Greece, with a new government in power, is trying to extricate itself from a very deep hole: Government debt is approaching 120% of GDP which makes the country the second most indebted advanced nation next to Japan. However, Greece has an economy with little diversification and there are serious concerns about its future.

The term “default” has recently been used frequently in respect of Greece and their problems have certainly encouraged money to flow from the Euro Zone to the US.

Greece, being a member of the Euro Zone, poses many questions including how far will the European Union (EU) and the European Central Bank (ECB) go to rescue Greece if this becomes necessary. This is somewhat new territory, especially as the Euro is only ten years old.

The general belief is that the EU and the ECB will be forced to come to the aid of Greece if necessary.

The International Monetary Fund (IMF) has recently – mid December – issued a statement to the effect that other countries could well develop serious economic problems in 2010. They expect substantial sovereign volatility.

It is human nature to assume that with economies in general starting to recover that stockmarkets will follow suit. This, hopefully, will prove correct but much of the good news is probably reflected in prices. It is still probably the safest approach to stockmarkets to use the Dollar cost averaging approach. Diversification of asset classes will continue to be the safest route.

The titan often overlooked by Richard G. Watson

Richard G. Watson — 2009-12-12T00:00:00-05:00

India is one of the countries in Asia that investors commonly ignore. In the past there were good reasons for this including overwhelming bureaucracy, an unwelcoming attitude to foreign investors and massive poverty.

For over forty years after independence from Britain the government of India seemed determined to lead the country into a downward spiral. When I landed in New Delhi airport as a teenager in 1969, there were many planes on the ground but they virtually all appeared to be carrying the Aeroflot (USSR) logo. This was symptomatic of of what was happening in India: the adoption of a quasi socialist economic system.

Some of the attachment to the former USSR was purely strategic. The Americans favoured Pakistan, a country that India had waged several wars against. In addition, India/China relations were in the same situation. It then became the case of “my enemy’s enemy is my friend”. It was also fashionable to proclaim anti imperialist slogans.

This state of affairs, and the economic malaise that accompanied it, remained until the late 1980’s. The only boom industry was population growth.

However, a new generation of politicians was coming to the fore that could see that many other Asian countries were performing economic miracles and they wanted to be part of it.

The first moves to improve the economy were tentative, bureaucracy, internal subsidies and all sorts of structural problems littered the country. Despite these adversities, Indian companies were often able to make progress.

The economy started to grow in the early 1990’s and as the decade progressed so did the pace of economic growth. Much of the growth was inward looking but as the number of university graduates increased so did the level of sophistication of the services and products offered by an ever increasing number of companies.

The development of the internet also broke down international barriers. India was more fortunate than China and many other Asian countries in that a large number of people were fluent in English. This allowed the development of such areas as call centers which, by Indian standards, gave impressive numbers of well paid new jobs with little or no investment.

Many Indians are natural entrepreneurs and the development of high technology companies accompanied the development of a wide range of services and industries.

Indian business changed its focus on just looking at the domestic market to international expansion.

Another advantage that India has over China is that India has long established financial markets and a banking system. Indian business often initially viewed the Chinese as competitors but increasingly they are expanding trading links.

Over the past few years, India has started to establish itself as an international manufacturer. Many foreign investors are opening factories in India and more companies are entering all the time.

Economic growth has been excellent, with growth in the 6% to 8% range. This might be one to two percent points lower than China but it is still impressive. Growth in the third quarter of 2009 was 7.9%

The government is increasingly pro-business and recently reduced company tax. Representatives of the government are frequently guest speakers at Indian business conferences and they are vocal in their support of the business community.

India is a democracy and the main political parties, the Congress Party and the BJP, are acutely aware that if they want to have any chance of winning an election the Indian economic upswing must continue.

With a population of over a billion and about a quarter of that number being “middle class”, the Indian domestic market is becoming substantial.

How can an investor take advantage of this investment opportunity? There are several ways; the easiest is to invest in a Mutual/offshore fund. There are a number of choices managed by large well known international groups. The advantage of this route is that all the research and asset selection is undertaken for a modest fee, investors are able to use the economies of scale in this regard.

Investors are also able to compare the performance of various managers against each other and also the main Indian stockmarkets indexes. These indexes are the Bombay Sensex 30 and the S & P (Standard & Poors) Nifty 50. The indexes cover respectively the leading 30 and 50 largest companies in India. For the more adventurous there are alternatives such as Indian Small Companies Funds.

Investment amounts, for these funds, are generally low and investors can choose to hold more than one fund.

On a general recommendation, I would see India as having a case for holding 5% to 10% of a growth portfolio. However, the market is neither cheap nor expensive, trading at about 15 x earnings.

India’s emergence as a manufacturing base has yet to be the subject of heated debate in Europe and North America.

The currency is free floating although, in reality, it is closely linked to the US Dollar. Again, it has an advantage over China where tensions over trade disparities are provoking increased political ire.

Interest rates were widely expected to be raised in the first half of 2010. The strong performance of the economy which exceeded official forecasts has probably brought the first interest rate increases forward. The Central Bank – the Reserve Bank of India – is keeping a wary eye on inflationary pressures.

"Where there's muck, there's brass(Money)" by Richard G Watson

Richard G. Watson — 2009-12-19T00:00:00-05:00

Waste is probably the most unlikely and certainly most unattractive area that might appeal to investors, but as the old adage goes, “Where there’s muck, there’s brass (money)”.

In the UK alone there are more than 25 millions tonnes of waste produced every year, which roughly equates to more than 500 kilos per person; for years this has mainly ended up in landfill sites.

This isn’t just a UK problem, but something affecting nations worldwide. In Europe, the EU has started to take action, forcing member states to reduce the amount they are adding to landfills because they are not sustainable in the long-term.

In turn, the UK government is pressing local councils to adhere to lower landfill additions, with penalty fines being levied for each tonne of excess waste.

This could have led to problems for councils had new technology not allowed for alternatives, but it is now possible to process waste from household garbage and recycle much of it into compost.

This is not just some university project. Instead, it is something happening at a substantial ongoing commercial level. A number of local councils have already contracted out part of their total waste for various periods of time varying from three- plus three-year contracts to 20-year contracts.

Many more contracts are going to be awarded in this area quite simply because it helps remove the threat of national government fines and is to the benefit of all concerned.

One of the advantages of this new technology is that all councils have to do is deliver full garbage trucks to the contracted waste disposal company; they do not even have to separate different types of waste.

A company at the forefront of this technology is New Earth Solutions and they have partnered with existing fund management group Premier to form The Premier Investment Opportunities Fund – The New Earth Solutions Recycling Facilities Investment Sub-Fund.

Three plants are already processing up to 200,000 tonnes of waste per annum, with contracts already secured with local authorities from Bristol, West of England, Bournemouth, Dorset, Kent and Gloucester for up to an additional 412,000 tonnes per annum.

New Earth is currently perusing tenders with around 20 local authorities for a further 1.4 million tonnes per annum.

The whole process is highly mechanized and the sorting of waste begins immediately on arrival with the removal of items such as metals, glass and so on. Thereafter, the waste is left in long piles on what resemble large above ground tunnels.

Multiple data sensors are placed into random parts of these piles to determine temperature, humidity and other variables. The compost-making process involves surprisingly high temperatures inside the compost itself; the temperature must be over 60 degrees Celsius up to a maximum of 80 degrees.

Specialized machines process these piles, which are almost two meters high. All material passes through these machines so that it is completely mixed. What was previously on the exterior becomes part of the interior and vice versa.

This process continues until one further sifting is necessary and shortly thereafter, with some earth added, the whole remaining waste becomes pure compost.

The high temperatures in the process ensure that harmful organisms, salmonella, for example, are eradicated.

Income from various sources adds to the total returns, coming firstly from local authorities and secondly from other treatment operators involved with plastics, glass and metal.

Obviously, compost itself finds a ready market. One example is the local authority contract in Kent, England where all compost produced there is sold to London for use in its public parks.

However, compost is not the only possible byproduct of waste. The energy created in the process is substantial and this, in turn, is sold to the National Grid as electricity.

The European Union Directive has set member nations limits for the amount of biodegradable municipal solid waste to be land-filled by certain key dates: 2010, 2013 and 2020.

These dates are also mirrored by the UK government and failure to meet targets will force local authorities to pay fines of up to 150 pounds sterling per tonne.

A land-fill tax levied by the government on local authorities and private sector waste products per tonne deposited is already in place.

Landfill tax was introduced in 1996 at seven pounds sterling per tonne and by April 2007 this had reached 24 pounds per tonne.

From April 2008, the Landfill Tax was set at a higher rate and will have reached 72 pounds per tonne by 2014.

I have two DVD documentaries made by the BBC and Channel 5 in the UK which give a good insight into the whole process with New Earth Solutions.

The most interesting news for investors has been the solid returns. One month had a return of +1.04%, three months +2.83%, six months +5.34% and one year +12.57%, and since its inception in July 2008 +16.40%. All performance is net of annual management charges.

Initially, this fund was only available in sterling but US dollar and euro classes are now available. This fund is another investment that was not impacted by the global financial crisis.

The details of the Fund are as follows:

Domicile: Isle of Man

Custodian Bankers: BNP Paribas Trust Company (IOM) Ltd, France’s largest bank. Operating as fund custodian is a normal party of the bank’s functions.

Accountants: Ernst & Young LLC

Valuer: GVA Grimleys Limited