Happy New Year T&T! I sincerely hope that you resolve to make 2011 the year that you put things in place to make all your investment aspirations come true. As we begin the year appreciate that the world does not suddenly become a different place because the clock has ticked over and a new calendar is hung up on the wall. The year 2011 will be different to 2010 only if we make it different by doing things differently. Very often we spend an inordinate amount of time seeking some magic solution when much of what is required is already within our sphere of knowledge, all that is lacking is the will to execute effectively.
There was a financial crisis in 2008 and just about everyone lost money on their investments. Then, after the global event there was the CL Financial debacle in T&T that came to light in January 2009. These events created a sense of fear, anxiety and confusion in the minds of investors, so much so that the next move was to park whatever wealth that remained into the safety of bank deposits, treasury bills and bonds and generally seeking to take as little risk as possible. I am reasonably certain that most, if not all the persons, who adopted this course of action in the era post the financial meltdown would still be counting losses on their portfolio.
The bottom line is that little risk also meant very low returns and while there are some who are justified in taking no risk because they could not afford to do so for the majority this stance has resulted in a huge missed opportunity to rebuild their financial wellbeing. In 2009, the US stock market as measured by the S&P 500 was up 23 per cent. In 2010 the market was up around 13 per cent. Cumulatively $100 invested in the market at the beginning of January 2009 would be worth close to $140 today. Compare that to the 0 to 5.0 per cent returns that most investors have sought out during this period. It comes down to managing risk as opposed to being afraid to take risk. It is about getting information in order to overcome anxiety not allowing anxiety to turn into fear that then leads to inaction.
Seizing Opportunity
On November 12, 2009 I wrote an article headlined "Going for Gold." This is how that article ended: "At the end of the day one asset has done extremely well over the past nine years through all the market highs and the market crashes. That asset is gold. It just crossed $1,100 an ounce last week, a new high. "It is my view that gold has come to the fore because of suspect monetary policy. Recently the Central Banks of India and China have been buying gold even at these elevated levels. One of the largest gold producers have sought to unwind hedges to protect against falling gold prices. Even accounting for short term pull backs it is a useful asset class to own if only to protect against uncertainty across the broader market. At the end of the day look for the opportunities and once you find it go for gold."
The record will show that for 2010 gold was up 29.3 per cent for the year, outperforming the S&P 500 and certainly outperforming the 2.0 percent 12-month fixed income rate that investors have craved during the course of the year gone by. Even in the middle of the financial crisis you would recall my urging to invest in commodities in general and gold and oil in particular and both have done extremely well over the past couple years with oil up 14 per cent in 2010. Some other big movers in the commodity space in 2010 were cotton (91 per cent), silver (83 per cent), corn (51 per cent), wheat (47 per cent), soybeans (33 per cent) and copper (32 per cent). Note that the rise in cotton along with the minimum wage increase in China is likely to result higher clothing costs in 2011 and the increases in corn, wheat and soybeans, also sugar will impact food price inflation in the coming year.
Method to the Madness
So was this all a lucky guess on my part that makes for a good boast after the fact? There is a method to the madness and as we enter 2011 it is worthwhile to recap the advice offered back in November 2009 for with the markets up nicely over the past couple months it is as relevant now as it was then. Keep this extract in mind during the course of the year: "I had the privilege of being a guest on one of the morning talk shows on radio and television last week. The discussion was on the US coming out of recession and the implications for us in T&T. During the call in segment a caller made the point that things in the US will be "bad" for the next ten years and that "we should tell the people like it is" and not give any false hope in terms of the recession being over." This conversation occurred in November 2009. Continuing to quote from what was written then:
"The caller's perspective on the US economy is not too different from mine. The US in my view is unlikely to return to the fore as the global engine of growth as they were during the last century. Right now we are in the middle of a global transition of economic power but these things play out over years, even decades. "Where we probably differ is my view that a "bad" economy does not mean the absence of opportunity. In a nutshell the world is not flat. Nothing happens in a straight line and so while the road ahead may be tough, some may even say bleak, there are always opportunities to take advantage of and always a market in which to make money. The last thing you should do as an investor is become paralysed by fear and use the gloom and doom as an excuse to do nothing; especially over a ten year horizon.
"Such inaction will more often than not leave your poorer and for that matter you will be denying yourself one of the basic truths in investing, that is, the trend is your friend. It may be much more appropriate from an investing perspective to understand the trend of the market at a point in time and to seek ways to take advantage of it. That is essentially the job of your investment advisor and very often it requires actions that are counter intuitive to what you might think or feel at a particular point in time since by the time everyone figures out the trend there is little money to be made, it's too late." Those who took that advice offered towards the end of 2009 would have been properly positioned to reap the benefits of some of the returns available during 2010. As we enter 2011 the same applies. The majority of Wall Street analysts are predicting that the US market will be up on average 11 to 13 per cent, that US GDP will be above 3.5 per cent per annum and that 2011 will prove to be the pivotal point on the way towards a sustainable economic recovery.
I have my doubts that things will pan out as expected. In fact, they rarely do. If you recall at the beginning of last year interest rates were thought to be as low as they could go and the only way was up. Yet, during the year, it went lower. During 2010 just about every analyst was predicting that the Euro would fall to parity against the US and some had predicted that by now the Euro would have fallen entirely as a currency. Today the Euro is very much in tact and trading at a 1.30 handle to the US dollar. Yes there are still problems with the US economy, a number of States are in deficit and will have to cut jobs and raise taxes. Housing is likely to continue its decline and problems in commercial real estate should come more to the fore in 2011.
Beyond that is a highly levered Federal Reserve balance sheet and a buergeoning budget deficit. There are lots of challenges but if the markets want to go higher then it will. In 2011 the trend is your friend.
Ian Narine is a broker
registered with the SEC.