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Recipe For Investment

 

We have attached annualized returns from world’s 10 largest economies for equity, fixed income and currency for 2015. The equity and fixed income returns are in local currency whereas currency is in dollar terms. As far as the bad news is concerned, we seem to be headed towards a low return world with worldwide momentum in equities failing and fixed income moderating. The good news is that most of the misguided central banks are maintaining an overly aggressive accommodative monetary stance to fuel the credit side of growth. As soon as the world stocks were down 10%, Draghi sounded his bullhorn regarding lowering European interest rates to an ever deeper negative territory. Seeing the stock market rebound 3%, Kuroda did one better and dug himself a negative interest rate hole with promise of keeping digging. China is clearly behaving like a deer caught in a headlight changing rules faster than my children’s diapers. Yellen and company has gone into hiding emerging with gobbledygook whenever they surface. Economics is simply a statement of rules which keep on changing over time – they are not like laws of physics – observed and proved beyond doubt, a fact Central Banks seems to be ignoring purposely. Unfortunately, the unhealthy trifecta of central bank, government and corporation’s preference for growth based on cheap money and 100% consumption leads to gain in short term but a lot of pain in the long term.

 

Dollar investors counting on extremely bullish equity market predictions for this year will do well to temper their expectations. As has been evident over the course of last few months, broad based equity indexes are facing strong headwinds in the short term. This is a stock pickers market at best and choosing the appropriate strategy with a long term view is advisable.

 

Investors looking for overseas investment should look towards Europe despite its flaws. The QE environment in Europe provides a floor and it helps that the European equity momentum is on the rising side.

 

Investment in fixed income should be maintained, though credit portfolios should be carefully analyzed. The value in fixed income exists irrespective of any central bank action.

 

Our favorite recipe for investment in 2016 is a well-diversified portfolio of fixed income, equities and commodities. Clearly commodities are hated today and for a good reason. But the reason is behind us for the most part or will be soon and it is time to invest in this class. The investor should start off with a focus on precious metals and increase base metals and agricultural exposure with time. We believe that the old adage of keeping a “Diversified Portfolio” is the perfect recipe to counter the volatile times we will be in this year.

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