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Will the Market Crash Again?

The debate about whether we are heading for the second dip in a W-shaped economic recovery, and more importantly accompanied by a second market collapse, has never been conclusively answered.

Eamonn Ryan

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Anxiety is growing among investors that equity markets may be headed for another plunge as governments grapple with how to reduce budget deficits and repay government debt.

The US Federal Reserve’s so-called quantitative easing (QE) stimulus programme was meant to stimulate consumer demand, but instead much of it may have gone into risk assets such as commodities and global equity markets. The Fed’s $600 billion programme to buy Treasury debt has helped investors divert funds to commodities and equities, creating a bubble in those assets, which is now starting to burst.

The most positive view is that the ending of the Fed’s QE2 programme will prompt a modest 10% decline in US equities — which is what happened at the end of the first round of Fed buying.

However, the chief protagonist of the W-shaped recovery has all along been Dr Nouriel Roubini who warned more than 18 months ago of the “high probability“ of a second leg of the recession, an “outside chance” of a U-shaped recovery and only a “20% chance” of a V-shaped recovery.

He argues that actions such as QE by the US government and bailouts in Europe are only delaying the inevitable. His words are not taken lightly, because Roubini is most famous for having predicted the 2007/8 recession.

Recently, the US bears have been interpreting several economic indicators as the start. Commodities have been at the forefront of the selling so far, as May saw an end to the big rallies in hard assets. Gold has dropped slightly, while silver crashed 30% in its worst fall since 1980. Oil, which was until recently worrying investors with its sharp ascent, fell around 15%. Copper, known as the ‘metal with a PhD‘ for its ability to act as a predictor for the economy given its wide-scale industrial applications, hit a five-month low. The growing concern is that stocks have priced in an overly optimistic economic path.

PIGS hog the debt trough

Dominated by global debt levels, primarily in the PIGS countries (Portugal, Ireland, Greece and Spain), but also the US budget deficit, David Gracie, of Investec Bank, says, “there is a lot of tension because the market does not see how these debts are going to be paid off.”

A year and a half ago Roubini said that one of the most crucial questions to be faced will be the timing of the exit strategy from various stimulus measures. “Those policies were necessary to avoid an actual depression, but if kept too long raise the danger that large budget deficits will lead to renewed inflation and recession,” he said.

These policies are still in place. The challenge for governments is to create a self-sustaining recovery, says Gracie, but until then they are committed to stimulating global demand. This also limits their ability to reduce budget deficits.

Rob Porter, Standard Bank director and head of Foreign Exchange Sales, says:  “Renewed concerns about the lingering sovereign debt crises in Europe best explain the pullback in the euro, and as the dollar recovered, the speculative element in the commodity market started to reverse. At this stage it is difficult to determine whether early May’s sudden correction will be sustained. However, if the Fed starts adopting a more hawkish tone over the coming months, then we would also expect the dollar recovery to continue and for commodity prices to correct further.”

Nothing here to scare investors off

Craig Pheiffer, general manager: Absa Investments, rejects the idea that stocks are pricing in an overly optimistic economic path — in South Africa at least.

“Absa’s view is that there will not be a double dip. Granted, one cannot discount the many risks, especially the European debt crisis, but with a global average of 4,1% GDP growth expected this year, followed by 4,5% next, the future valuations of global exchanges don’t seem as expensive as they were. The JSE still has some upward momentum left in it as average earnings of about 25% are expected to come through.

“For instance, the increased valuations of commodity companies come off a very low base and though they doubled last year there is still some substantial growth left in them as good earnings come through,” explains Pheiffer.

What is causing investors in the US to jump out of risk investments is “the huge speculative element lying on top of their markets, which is pushing prices up and down. Absa expects the average annual prices of the top six commodities to be higher this year than last, and higher next year than this.

“So any collapse of stock markets may be a combination of the withdrawal of stimulus measures and the withdrawal of that speculative element — but there will still be other support measures in place and governments will ensure the withdrawal is done at a measured pace.

“A 10% pullback in equity prices is possible under these conditions but a dramatic collapse in the market is not the base case scenario,” he adds.

Before becoming a financial writer and freelance journalist in 1997, Eamonn Ryan was a legal adviser, company secretary and alternate director at listed company Cashbuild Limited from 1988 to 1997. Since becoming a financial writer, he has focused on the business and financial sectors, as well as personal finance, writing for Finweek, The Star Business Report, Sunday Times Business Times, Business Day, Mail & Guardian, Entrepreneur, Corporate Research Foundation (which brings out a series of books each year ranking SA’s best employers and best managers), as well as a host of once-off and annual publications such as ‘Enterprising Women’ and ‘Portfolio of Black Business’. He also writes media releases, inhouse magazines and sustainability or annual financial reports for various South African corporates and financial services groups, including the Ernst & Young annual M&A book.

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5 Insider Tips Every Trader Needs to Know

Here are five insider tips that every trader needs to know.

Ethan Featherly

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Like in every profession, there are a lot of figures circulating regarding how many forex traders actually make money, and how many traders lose more money than they earn. We are not going to launch into speculations that we can’t prove with accurate statistics. However, there is one thing we can say without citing any official sources: there are more people losing money than those earning.

Why? The answer can be found in the annals of human psychology. Some go into forex expecting to get rich overnight, while others do not (understandably) have the time to dedicate themselves fully to this activity. So what can you do, concretely, to join the group of people earning money? Here are five insider tips that every trader needs to know.

1. Choose a Methodology and Stick With It

Even before executing your first trade, you need to have a rough idea on what you will base your decisions on. In this sense, you must know what intel you will need to make the appropriate decision, like when to enter and exit a trade, which timeframes are the best (more on that later) and so on and so forth.

Some people are partial toward fundamental factors (foreign investments, inflation, unemployment rates, and other economic indicators), coupled with a chart, for executing a trade. Others prefer the raw numbers and stats of technical analysis.

But, whichever methodology you choose, make sure to be consistent and that it is adaptive, as there is no objective way to tell if one is truly better than the other. The most important thing to consider is whether or not your methodology and the strategies built around it are adaptive enough to keep up with the changing dynamics of the forex market.

Related: How Founder Of 27four Investment Managers Drove Transformation In The Industry

2. Always Calculate Your Expectancy

Expectancy is a formula that traders use to determine how reliable their trading system is. It involves going back in time to your previous trades (a journal will come in handy here), measuring how many traders were winners versus losers, and then finding out how profitable your winning trades were as opposed to how much money was lost after bad trades. The formula is as follows:

E=[1+(W/L) x P – 1, wherein W is the average winning trade, L represents Average Losing Trade, while P is Percentage Win Ratio.

3. Define Your Trading Goals and Build a Strategy Fitting of Your Personality

forex-tradingMost forex beginners come into the market thinking that they know everything that one could possibly know, without any sort of long term plan or concrete goals. This is the one mistake that eventually leads most traders to quit forex, because the reality of the market – and the trade itself – will hit them straight on sooner rather than later.

Therefore, the first thing you need to do is set a couple of goals. Start small and realistic at first – do not set yourself for winning a ridiculous amount of money in the first months because you will be sorely disappointed.

After setting the goals, you can start looking at various trading strategies and see which ones will help you achieve these goals and, most importantly, whether or not they are a good fit for your personality.

Some helpful questions to ask in this case are in the lines of ‘’Do I feel comfortable holding positions overnight?’’ or ‘’How much risk am I willing to assume for a given trade?’’, ‘’Am I more comfortable following a trend or betting against it?’’, ‘’Will I trade to gain some additional income, or full time?’’. Another equally viable method which will help you asses your strengths and weaknesses is doing a personal SWOT analysis.

4. Make use of Multi Time Frame Analysis

Regardless of whether you are a swing, day or long term position trader, it is highly recommended you always approach trading in a top-down fashion. This technique involves starting with a higher time frame chart and gradually zooming down to your current trading time frame chart. By doing this, you can get a ‘’big picture’’ view of the price action.

This tip is important because many traders commit the grave error of building their trading decisions around the time frame in which they are currently trading. For instance, when a trader sees a hammer candlestick pattern on a five-hour chart, they push forward with the trade without considering what might happen in the following time frame. What you are doing here is similar to a game of chess – you have to think a few steps ahead and choose your forex trading products and tools wisely in order to land a successful trade.

5. Do Not Use More Indicators Than Necessary

Indicators are simply visual representations of market realities that show things such as price movements, patterns and the like. As useful as they are, after trading for a while, you will soon realise that at some point they become quite counterproductive.

Many traders will tell you that the only indicator that you need is price, and everything else is there just to make one understand how the market got to that point. And since succeeding in the forex market is mostly about getting in on a trend before anyone else spots it, you can probably guess why over-crowding your monitor with indicators is not such a good idea.

Conclusion

Whatever some might tell you, forex is not a walk in the park. Like everything in life, it takes hard work and dedication to reach the point where you can state without doubt that you have achieved excellence. However, even the most dedicated and hard-working traders need a push in the right direction in the form of some lesser known insider tips that only traders will know. Hopefully, the tips in this article will provide you with the insight necessary to take your trading efforts to the next level.

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Time For An Alternative Investment Approach

The age of high-risk, high-reward thinking may be all but done, for now.

Fedgroup

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For years the investment formula applied by investors has been to craft a diversified portfolio of assets weighted more towards equities. It made sense to build a foundation on safe, low-risk, low-return capital preservation investments and, depending on your age, allocate a relatively larger portion of your investable income into higher risk, higher return equities.

But is this justified in the local context? While global equity markets have enjoyed a decade-long bull run following the 2008-2009 financial crisis, consistently delivering 10% to 15% annual returns, the JSE has been a perennial under-performer over the last four to five years.

Volatility

Despite this fact, significant investor capital has continued to flow into local equities, either directly into stocks or via unit trusts, ETFs and endowments.  And now amid more volatile global economic conditions, where global indexes have come off record highs in early 2018, local equities are still projected to underperform in the medium-term as the market correction that many predicted gathers momentum.

Related: Investing In Wealth-Generating Assets

This shift is symptomatic of the volatility that currently characterises global markets as Brexit plays out, trade wars intensify, and widespread socio-political instability creates systemic economic risks. Yet, investors are still being advised to put their money into higher-risk vehicles.

Further compounding the issue is the fact that the country’s exchanges are dominated by a few large entities, which are all negatively impacted by the country’s dire economic situation. This means local investors must also contend with concentrated risk.

Outdated thinking

Despite these threats, many financial advisors have stuck to the traditional investment playbook by telling clients to “stay calm and remain invested in equities.” But given the prevailing market conditions, investors can realise better returns from investment opportunities that break from this conventional approach.

Returns from various fixed-rate investments, for example, have and continue to outperform equity investments, and do so without the associated risks.

While reducing risk is not necessarily a key concern for naturally risk-included entrepreneurs, when it comes to investing our hard-earned money we have the power to manage that risk. So, forget the old, pervasive attitude of “no risk, no reward.” It’s dated and, quite frankly, unwarranted.

The new reality is that fixed-term, low-risk investments have become among the best-performing asset classes — a fact that is tearing at the foundations of conventional investment advice. Entrenched beliefs must therefore be challenged, especially when investments that offer security can match or outperform high-risk options such as equities.

So, what are our options, given that fixed-rate investment options currently abound? Well, before diving into a vanilla offering from a bank, consider what your capital is secured against.

Forward-looking investments

forward-looking-investments

Banks generate their returns by lending out pooled deposits in the form of loans and credit. Some of this lending is secured, much of it is not. This can introduce risk into your investment, because the ability of debtors to repay debt is often compromised in a struggling economy, and bad debts will impact the returns that a bank can offer depositors.

Forward-looking secured investments, on the other hand, offer a set rate for five years and are secured against a variety of assets, like Fedgroup’s Secured Investment in participation bonds, which removes significant risk from the equation. These types of collective investment schemes are also regulated to protect investors.

Related: Balancing Business And Investment Risks

While it may not be prudent to completely disinvest from the local stock market, there is a case to be made to be more circumspect with future investments, matured investments, or that portion of your portfolio that is earmarked for reallocation. With this money, an investment that delivers both capital security and a high, fixed rate of return might well prove more attractive than the traditional wisdom of local equities.

The guaranteed, low-risk returns currently offered by fixed-rate investments have transformed these products from fringe options into mainstream investment vehicles that can no longer be ignored. With the chance to outperform the average equity investor, isn’t it time to rethink your conventional investment approach and consider the lucrative and, more importantly in such volatile times, secure opportunities offered by these alternative investment options?

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Are You Keeping All Your Eggs In One Basket? Here’s Why You Need To Diversify Your Offshore Investments NOW

Most South Africans have 83% of their wealth concentrated in South Africa. Entrepreneur spoke to three investment experts about offshore investing and how diversifying one’s risk can boost long-term returns.

Nicole Crampton

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What should investors be using offshore investments for?

Clinton Sprong: One of the main reasons is for diversification. That means not having all one’s assets in South Africa. Furthermore, there are many global companies that provide access to international themes that are going to reshape the future like robotics, artificial intelligence, driverless cars and so on. One just can’t get access to these companies on the JSE.

Philip Smith: South Africa is a small, open economy that comprises approximately 0,4% of global GDP. By limiting your investments to South Africa your potential capital growth is entirely constrained by the vagaries of the local economy. It also means your investment is not able to benefit from the economic growth in more than 99% of the global economy. Similarly, the total market capitalisation of the JSE (approximately $1,11 trillion as of March 2018) is just over 1% of the total stock market capitalisation of all listed markets worldwide (approximately $100 trillion). So, by limiting your investments to the local market you miss out on the equity market performance of approximately 99% of the world. You are also not able to expose your investments to the truly rapidly growing tech stocks like Apple, Amazon or Samsung, as well as flagship global companies like Honda or Toyota. Of course, investing offshore does have a currency component to it, and by investing in offshore markets you are able to hedge against some of the volatility of the local currency. However, the main rationale for investing offshore should be about diversifying your portfolio rather than the rand alone.

David Nathanson: While all countries are subject to their own specific set of risks, emerging market countries are generally faced with greater political and currency uncertainty than developed countries, and South Africa is no exception. The biggest risk facing South Africa is its debt burden, which has doubled since the last global recession in 2008/09.

Excessive debt is the main culprit in any household, company or country that finds itself in financial trouble. In 2008/09, when the last global recession struck, South Africa was in a fairly strong financial position and managed to weather the storm. There was volatility, but no permanent destruction of wealth. Countries like Iceland and Greece were less fortunate: Their domestic stock exchanges have lost 70% and 80% respectively in USD over the last decade. More recently, Turkey and Brazil — countries in a similar position to South Africa — have found themselves in difficulty. Their domestic stock markets have lost 30% and 40% respectively in USD over the last decade. Over the same time period, the MSCI World Index has doubled in USD — global diversification would have served investors in these countries very well.

The point of these decade-long examples is to demonstrate the difference between temporary volatility and long-term wealth destruction. It is the latter that investors should be most concerned about, and this is the risk faced by anyone overexposed to one country, particularly an emerging market country with a heavy debt burden, capital controls and significant political risks.

From an investor perspective, the major risk is actually overexposure to South Africa, and the solution is to invest globally. According to the latest AfrAsia report, wealthy South Africans have 83% of their wealth concentrated in South Africa. Ask yourself, as a global investor, how much of your capital would you risk in any one country, specifically an emerging market that represents less than 1% of the world? No amount of optimism can justify 83%, or even half for that matter.

Fortunately, the case for global investment doesn’t hinge solely on an optimism or pessimism towards South Africa. The upside is that there is a whole world of opportunity out there that South Africans should be taking advantage of. We believe that a portfolio of our 30 best investment ideas chosen from 7 000 stocks globally is likely to be vastly superior in terms of quality, price and diversification when compared to a portfolio chosen from 100 stocks locally.

Related: What Should I Know Before I Invest My Hard Earned Money?

If the investor never plans to leave South Africa, or start a business overseas, is it advisable that they invest offshore? Why?

Clinton: Yes. Having most of one’s life savings and investments (house, car, pension fund, business etc) in South Africa means that investing offshore allows one to diversify risk and get exposure to world-class companies that are able to expand aggressively given their size, brands and distribution.

Does investing offshore give you a better return than investing locally?

Philip: Not necessarily. For example, if you are invested only in developed markets like the US or Europe then you are likely to get lower returns — at least in percentage terms — due to the fact that economic growth and inflation rates in these mature markets are much lower than their developing counterparts. Where you benefit by investing in developed economies is that you are exposed to hard currency returns and are also able to access truly blue chip, global stocks. However, if you invest in an emerging market fund, you could potentially get higher returns than those available in South Africa as many developing nation economies, particularly those in Asia, are growing at a much faster pace than South Africa, which is currently experiencing very slow economic growth.

Clinton: All markets move in cycles. Global equity markets have certainly provided superior returns over the past three to four years. Global economies have been growing at between 3% and 4% per annum versus a 0,5% and 1% growth in the South African economy, which lends itself to better returns from international companies.

David: A wider opportunity set can be a massive advantage if it is used correctly. This depends on whether or not you have a strong investment process, and on how you apply it. If you apply indiscriminate diversification, you shouldn’t expect superior returns, though you would reduce country-specific risks. If, instead, you apply a great investment process to choose your best ideas from a wider global opportunity set, you should expect these investments to do better than your best ideas chosen from the narrow local market. This can be done without sacrificing the benefits of global diversification.

Related: Making International Investing Simple And Transparent – CybiWealth Digital Platform

For those investing offshore, what would be the benefits and risks of investing in emerging markets versus developed markets?

Philip: The advantage of investing in an emerging market fund is that you are able to gain exposure to high growth economies with significant scale like South Korea, India, China, Indonesia, Thailand and so on. These markets tend to have much faster rates of economic growth than developed markets and also tend to have fairly favourable long-term demographic underpinnings (i.e. a young population of aspirant consumers who are likely to help drive economic growth well into the future). However, the advantage that many developed markets have is that they still contain the bulk of the truly blue-chip global stocks and also offer arguably more stable, predictable currencies. Emerging markets tend to be highly reliant on exports to developed nations and anything that imperils that ability to export can immediately impact their currencies. In a global geopolitical environment where there is an increasing risk of trade wars, one only needs to look at recent developments with the Turkish lira, to see that emerging market currencies can be very vulnerable to external shocks, which can negatively impact your returns.

Clinton: Emerging markets have historically been attractive investment destinations as their economies have often grown in excess of developed markets. China for example has been growing in the high single digits for a decade. However, the risk of a South African investor investing in an emerging market is that it reduces the benefits of diversification, as in most cases if there is a crisis in one emerging market, all emerging markets, including South Africa are affected.

There are professionals advising people to invest in a global account when saving for their annual international vacation. Is this good advice? Is offshore investing for short, medium or long-term investing?

Clinton: An individual’s investment horizon is dependent on their needs, goals, and risk appetite. Depending on this there would not be a problem dividing one’s investment goals into short-, medium- and long-term ‘buckets’. One may find however that the short-term bucket has less exposure to growth assets like equities, while the long-term investments have a much higher weighting to equities to cater for better long-term growth prospects.

Philip: It’s advisable to save in the currency that you intend spending. So, if you’re planning on taking a holiday in Europe and are able to save monthly in euros then you can insure yourself against the risk of a sudden negative move in the rand rendering your holiday unaffordable. However, saving in foreign currency is not entirely fool-proof, as history has shown that the rand can experience both aggressive negative falls and dramatic pull backs. It is entirely possible that you could spend six months to a year saving in dollars or euros only to end up seeing the rand experience a bout of prolonged strengthening when you’re getting ready to take your overseas holiday. However, the safer of the two options is probably to save in the currency in which you intend spending the money, as it gives you an element of certainty that a sudden currency swing won’t leave you with less money than you anticipated.

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