Financial Planning In a Very Scary World

If you are reading this, you are most certainly the holder of one or more financial products and want to better understand how to manage your wealth in today's world, where we have never (in 80 years) seemed so close to international wars.

The role and importance of a financial planner/wealth manager - having someone to talk to - has never been so relevant.

Always remember the golden rules of financial planning:

If your adviser operates under the Just Service Global Network you will, most likely, already have your investment portfolio's well positioned. If, for any reason, you have not reviewed your savings/investment products (containing investment portfolios) make sure they are well diversified and structured to handle ongoing market volatility.

Source: Leo Wealth, 8th July

The high inflation causes more and more social unrest and fear, which in turn increases the odds of a global recession. The moment everyone becomes very negative about the economy, the risk is that it becomes a self-fulling prophecy.

The good news, in this sea of negativity, is that labour markets around the world are still very strong. At the same time, both household and corporate balance sheets are in much better shape than they have been in decades. Other than in China, there are also no major imbalances in property markets like we had in 2007.

While the U.S. may manage to avoid a recession, it is more likely that Europe will experience one as it is much more impacted by the Ukraine war through sharply rising natural gas prices. While oil can be moved around the world easily, we do not yet have the infrastructure to move large quantities of Liquefied Natural Gas (LNG) around. There are not enough LNG tankers and more importantly the specialized terminals to receive LNG. Most natural gas is transported by pipelines, with the biggest ones between Russia and Europe.

Longer-term the picture is more positive for Europe. Europe has committed to invest 210 billion euros over the next five years to achieve energy independence from Russia. Combined with increased defense expenditures, the IMF expects the structural primary budget balance to swing from a surplus of 1.2% of GDP in 2014-19 to a deficit of 1.2% of GDP in 2022-27.

The Chinese economy continues to suffer Covid lockdowns, lower demand for manufactured goods, and a soft property market. Further downturns in the property sector represent the biggest long-term threat. Chinese real estate prices are amongst the highest anywhere. The Chinese economy is very much a managed economy, but eventually the Chinese property market could face the same fate that befell Japan 30 years ago. As was the case in Japan starting in the 1990s, China’s working-age population is now shrinking, which will erode the demand for housing over the coming years.

We have actually turned positive on Chinese growth stocks last month and not only did they outperform, they delivered positive returns in June. We think they can continue to outperform. The Chinese economy is not going to collapse, more fiscal stimulus is likely on its way and Chinese stocks have discounted a lot of bad news. Given current valuations, we recently increased the allocation to Chinese tech companies in our global and Asian portfolios.

Whether we experience a soft-landing or a recession, it is likely that global earnings estimates will come down, but not as rapidly as most investors expect. And this is key as valuations have come down a lot this year, already discounting a lot of bad news, including the increased odds of a recession. The S&P 500 is currently down 21% from its peak in early January. International stocks have fallen by a similar amount.

While global bond yields still have scope to rise over the long term, they are unlikely to rise much over the next 12 months as inflation declines. We now think that the 10-year Treasury yield will finish the year close to the current 3% level, with risks tilted to the downside in the event of a recession. In other words, we don’t expect to see a large movement in bond yields over the next 12 months, which justifies a neutral stance in fixed-income portfolios as yield income is now a lot higher than a year ago.

The U.S. dollar, which is now almost as overvalued as it was 1985, is set to weaken eventually. The trade weighted dollar index (DXY) has strengthened 9.6% since the start of the year and is now up 17.5% since May 2021. Relative to its Purchasing Power Parity (PPP) fair value, the dollar is 29% overvalued. This level of overvaluation now exceeds that reached in 2000 and is close to what was observed in 1985. Over long-term horizon of 5-to-10 years, valuation is an important driver of currency returns. The deviation from PPP has been a reliable indicator of long-term movements in the EUR/USD exchange rate.

The Japanese yen could be the surprise winner during the remainder of the year. The yen is cheap. Very cheap. It is trading at the biggest discount to PPP in its history. Sentiment towards the yen is extremely bearish. The Japanese economy is recovering from the pandemic disruption, while inflation is rising. The reason for the Yen weakness is the dovishness and domestic market intervention of the Bank of Japan, but that could change.

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Regards

The Just Service Client Service Team