The entrepreneurial investor
AIDAN BAILEY analyses today’s unpredictable market and shares his insights, moving forward.
The world’s financial experts have almost given up trying to predict what’s going to happen next. But here’s my rundown of a few situations I never thought I’d see – and where I think the future lies.
Base rates at 1% The Bank of England has cut rates to one percent – the lowest level in its 314-year history. Currently, unemployment is rising, interest rates are falling so people are holding onto savings, banks are unwilling to lend due to bad debts and potential property investors are waiting for house prices to drop – with the UK residential market indicated to potentially fall a further 15 to 20 percent.
But think ahead. The general consensus is the economy will return to normality in 2010. So now is the time to take advantage of low mortgage rates as low as just three and-a-half percent, rental yields of six percent and attractive dividend yields on shares, compared to interest rates on savings.
10% dividend yields Banks aside, there are plenty of shares trading at ridiculously low valuations, yet currently returning high dividends. Aviva is paying a dividend of 13 percent, but has capital concerns and general exposure to a falling stock market. BT’s dividend yield is almost 10 percent – although profits are falling due to a growing pension deficit. Shell is paying a dividend of almost eight percent, but is at the mercy of lowering oil prices.At face value, these yields are appealing, but the future of dividend income and share prices is unknown. Warren Buffett once said, “A simple rule dictates my buying: be fearful when others are greedy and be greedy when others are fearful." The market is definitely fearful. But don’t worry, greed will return. Once the fear subsides, greed will reassert itself and the prices of assets across the board will rise substantially.
Oil below US$40 It wasn’t long ago oil traded at US$147 a barrel. In 2008 it was thought the world was running out of oil. Today, oil is trading around US$40 a barrel. It has regained its momentum, but could oil fall further? Given “black gold” is a depleting asset, a barrel of oil should return to around US$75 to US$80 a barrel, in a rational market. Although it may take some time, the consequence of higher commodity prices is higher inflation. Given global authorities have embarked upon a deliberate policy of monetary inflation the next challenge will be protecting your portfolio from the effects of inflation. Consider investing in “real” assets, such as property, commodities and equities.
It may be strange times indeed, but there are always opportunities for investors – as Warren Buffet well knows.
Aidan Bailey BA (Hons) CertPFS AWPCM
General Manager Singapore, International Division
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