Time for a spring clean

The movers table accompanying this article details the full horror of it all, as I desperately hung on to nearly all my resource positions despite what can only be described as catastrophic losses. Highlights - or should I perhaps say lowlights - of this rout included Praetorian Resources (PRSS) which only floated a few years ago at 50p but which is now worth a grand total of 3p a share having lost 50 per cent of its value in just the past few months. Petrofac (PFC) shares also crashed in price by a stomping 26 per cent closely followed by oil equipment business Noble (US:NE) which fell 25 per cent over the past three-and-a-bit months. These whopping losses compounded some existing dogs within my portfolio, namely Agriterra (AGTA) which has fallen yet another 38 per cent since last November.

Given this tide of red ink I have to say the fact that I have managed to eke out a positive gain of 0.45 per cent is nothing short of a miracle. My portfolio's meagre advance was helped by a few standout performers, not least my investment in recently floated Allied Minds (ALM), which has doubled since I last updated readers - I have to say I'm astonished by this advance but I honestly believe there's even more good news to come so I'll hold on to my shares for the time being. Biotech Growth Trust (BIOG) has been yet another star performer, up 16 per cent over the period since November 2014, as has Sky, which is up 12 per cent.

At this point, though, I should add that that teensy-weensy 0.45 per cent profit is tiny compared with an equivalent advance of 4 per cent in both the FTSE All-Share index and the MSCI World index - my gain is also flattered by the fact that I hold a huge chunk of cash which was running at over 25 per cent back in November but is now up at 35 per cent. Still, I have to say that I am happy with the result and I have used the bloodbath in the resources sector to effect some much needed portfolio trimming.

Movers: Risers

Movers: Fallers

Heavy pruning

To this end, I have sold a very long list of stocks, some of which were complete no-hopers such as Praetorian and Agriterra as well as stocks where I felt that there was little immediate hope of recovery - I'll come back to my big picture view on energy and resources a little later. That imperative to reposition my portfolio meant selling perfectly respectable investments such as City Natural Resources High Yield Trust (CYN) and Origo Partners (OPP). I've also sold my Japan Residential Investment (JRIC) shares largely because I am not at all convinced that local Japanese equities are going anywhere anytime soon. Out too has gone Utilico Investments (UTL) which like Japan Residential put in a decent return in the last few months - Utilico was up 3 per cent since 21 November while Japan Residential increased 8 per cent over the same period.

Being honest, I needed to consolidate my portfolio, take some losses, and generally clean up my investment act. Which is what I have now done, leaving me with two new investments - the Baker Steel Resources Trust (BSRW) and Riverstone Energy (RSE) - and a stash of cash currently running at around 35 per cent of my total portfolio value. Crucially, I am in no hurry to draw down on that cash.

To understand where we may go next with my portfolio, let's start with my overall market view. In aggregate I'm still very bullish about equities for the next few years largely because I think we are nowhere near the end of the current global quantitative easing (QE) cycle. Quite whether you believe QE in the future will be a good or bad thing, I think QE4 is coming in both the US and the UK. The spectre of deflation is looming stateside and I think the strong dollar will eventually hurt local equity markets in the short term.

Many bears take the next leap and say that this spells a catastrophic financial downturn. I'm not sure I agree. I think the Federal Reserve and the Bank of England might try to raise interest rates but they'll find that the current recovery is built on flimsy foundations, lower energy prices notwithstanding. Rates may go up a smidgen but they'll come down very quickly again as growth stutters. This will be against the global backdrop of much tighter liquidity in emerging markets, in the UK where capital flows are already reversing, and even the US where corporate cash generation is slowing down.

Tipping point

My guess is that the current worries about a tipping point will take shape at some point in 2015 in a panic of some sort. Investors will worry that we are at the beginning of a new 'great global recession'. I think this view is wrong-headed but the panic it will generate will force central bankers in the US and the UK to restart their monetary intervention. At this point asset prices will rebound.

The cue for this might be another precipitous fall in the price of oil. I think the recent rally above $60 for Brent is a suckers rally and we'll see downward pressure on prices through the spring and the summer. This will reinforce investors' worries about deflation and slowing global growth. I still think oil prices will hit $40 or maybe even $20, which means that I am in no hurry to buy back into the resources space. But I do believe that, as volatility intensifies and everyone sees that oil at sub-$60 a barrel is with us for a long term (which in market terms is probably a year or two), there will be a veritable flood of M&A activity, deals done and projects emergency funded.

This is a positive environment for a hard-headed private equity-focused energy operation such as Riverstone, where a mountain of cash is sitting on the fund's balance sheet ready to deploy to those projects where the price is right. Cue my purchase of shares. The same will also be true for the mining sector, which is why a canny operation such as Baker Steel and its resources trust should be able to start cleaning up with new financing deals for smaller businesses.

Buying opportunity awaits

Stepping back from this resources-focused viewpoint, my bottom line is that at some point we'll be presented by a great buying opportunity for equities - just not now. As oil and commodity prices drift lower again I'll probably continue to add more money to my Baker Steel and Riverstone holdings as well as Anglo Pacific (APF), which I think continues to represent a quality business in a difficult space. I'd also quite like to add to my BG (BG.) holding as I continue to believe that this UK business is a world-class owner of great strategic reserves despite a long series of management disasters, and under its new (very well paid) leadership it should rediscover its mojo at some point in the next few years. At any price below 850p a share I'll be a willing buyer of BG's shares.

Back in the world of mainstream equities I think I'll continue to deploy money into the technology space, but fairly sparingly at this stage - ditto for media businesses which should benefit from resurgent consumer demand. One business I am increasingly drawn to is ITV, which I have been watching for quite some time - it's not cheap at current prices but it is a quality global content business that still has a stranglehold on a vital route into the mass consumer market.

Gold will glister again

One other theme is beginning to enter my decision-making process - gold and precious metals. I am absolutely no fan of the shiny stuff but even I am forced to accept that if further iterations of QE are seen to be on their way (and unlikely to work) gold could have another day in the sun. One scenario keeps playing out in my mind, which goes something like this.

We're quite conceivably stuck in a lower-growth world where many people and institutions are trying to wean themselves off debt. This coincides with an ageing society where surplus capital is now being drawn down. The deflationary drumbeat keeps pounding away, helped along by China's desperate need to keep exporting at ever lower prices. Interest rates have to stay low and central bank balance sheets extended to help cope with the liquidity tightening.

QE goes through various versions but in essence what we need are new sources of growth be they from technology, or new foreign markets. But these also need to be helped along by massive investment in new public capital - new housing, new factories, education - that should be funded by the government. Yet governments won't use the opportunity of incredibly low interest rates to fund the productivity advances of tomorrow.

So we bump along with more and more QE and then the markets lose faith in the impact of the resulting asset binge, causing real panic. What can bankers and governments do next? I'd like to think those economists arguing for massive capital spending now will be listened to but my gut says they'll be ignored. Interest rates can't go any lower, central bank and government balance sheets hit their limit, the business cycle inevitably turns again and a recession comes long. At this stage there are no more weapons left in the armoury and we go through a massive wave of creative destruction, with immense job losses and huge volatility. At this point gold begins to look interesting again, and leveraged gold miners even more so.

Hopefully, I am wrong - I think so - but what's the downside for gold even if economies are stronger than my worst-case scenario assumes? The shiny metal held remarkably steady at a level above $1,100 per ounce, so if leaner mining producers can adapt to this price point they might thrive even if gold doesn't massively shoot up as a consequence of my nightmare scenario. This all leads me to my next plan, which is to work out how best to play any move back into gold in a leveraged fashion, hopefully by investing in gold stocks that also pay a dividend.

David's Sipp portfolio

Infrastructure and utilities

Developed world equities

Emerging markets equities

Hedge funds

Resource stocks

Bonds