I'm still marking time, waiting for Mr Market to work out which way he wants to go. I've had some rather nasty surprises over the last four weeks, mainly connected to the banks. I do have very small exposure to the banks via an investment in RBS which is now in tatters and via Halifax (now Lloyds) Prefs which have slumped by more than 40 per cent in the last month.
I should have applied a strict stop loss on the RBS shares (I only invested £600) but I foolishly hung on in the vain hope it might get better – it hasn't but I've decided to just carry holding the shares in the forlorn hope they might be worth something later in the decade. I'm slightly more bullish about the prefs – I still take the view that the government will not renege on the outstanding prefs issued by banks that it now in effectively controls. With yields for the Lloyds prefs now in the mid teens I might start buying some more although even I can't quite stomach going near the prefs issued by RBS or the Irish owned financial institutions. I think that Lloyds will be keen to preserve its private ownership and its reputation for paying its bonds but there are no guarantees.
My other big disappointment has come from the utilities funds that I hold – via Ecofin for developed world stocks and Utilico for emerging markets, which comprise 9 per cent of my portfolio. At this point in the investment cycle, utilities should be offering investors defensive qualities but sentiment in the sector has been unsettled by regulatory changes, inspired in part by a government keen not to see any more prices rises inflicted on the poor consumer. In the long term though I think that this is still a great story and I might start taking my exposure to this sector above 10 per cent in the near future.
Long in cash, short the FTSE
Overall, I'm still weighted 22 per cent in cash and in the investments I'm heavily biased towards bonds (16 per cent), hedge funds (34 per cent) and, crucially, shorts on the FTSE 100 which comprise 33 per cent of my investments (bought at around 4200 for the FTSE). I've got a long list of ideas that I'd like to start buying in 2009 but I think that I'll be able to buy at much cheaper prices later this year as the FTSE slumps past 4000 and then starts to test 3700 and 3500.
I'm structuring my short and bond positions to liquidate one third at every 7 per cent decline in the FTSE 100 from 4200 – so I'll sell one third of my holding when the FTSE 100 hits 3900, then another third at 3600 and the final lump at about 3300. Crucially I won't hold the cash at these levels and I'd aim to be piling quite aggressively back into equities at all points below 3900, progressively building up steam as the descent continues. I'll outline my recovery strategy next month.
I'm also fairly cautious about my bear strategy – I've already seen one spike for the FTSE back up to 4600 and I'd expect to see another Obama-induced rally back up to this level and possibly beyond with the FTSE hitting 4800. My policy on shorts is to sell out the FTSE shorts at any point above 5000 at which point I'd restart my position and also look at buying some more aggressively geared covered warrants that increase my returns on price falls.
I think that markets will rebound in the short term but like Simon Thompson I think that the rebound will be short-lived. We’ve still got some painful readjustment to come as investors realise that this is a severe global recession which will be made much worse by serious problems in China. A recent note from my favourite economist Albert Edwards at SocGen said that demand for electricity (a prime lead indicator) has dropped very sharply alongside Japanese and Korean imports into China. I sense that there's really big trouble ahead in China and that this will un-nerve global equity markets which were hoping that China might be the engine that powers us out of this recession.
I'd also note an Economist magazine economics focus that drew extensively on a a research paper - "The Aftermath of Financial Crises" by Carmen Reinhart and Ken Rogoff - and examined the cumulative change and duration of 14 global banking crises since 1930. Reinhart and Rogoff's key finding was that house prices fell on average 36 per cent (so there's another 15 to 20 per cent to go) and that equities fell 56 per cent (another 20 per cent to go in the UK) with bear markets lasting an average of 3.4 years. I may be overly bearish but I can't ignore the numbers which are universally bad. Now is not the time to be increasing equity exposures.
Portfolio summary
| ASSET CLASS | HOLDING £ | HOLDING % |
|---|---|---|
| EQUITIES | 28,237 | 77.50% |
| CASH | 8,190 | 22.50% |
| TOTAL | 3,6427 |
Portfolio detail
| Stock | Units held | Price (p) | Value (£) | Cost (£) | Gain/Loss (£) | Gain/Loss (%) |
|---|---|---|---|---|---|---|
| HEDGE FUNDS - 34% | ||||||
| Matrix Ascension Fund | 5,150 | 158.76 | 8,176.14 | 5,000.00 | 3,176.14 | 63.52 |
| BH Macro Ltd Ord NPV GBP | 115 | 1,300.00 | 1,495.00 | 1,497.30 | -2.3 | -0.15 |
| SHORTS - 35% | ||||||
| DB X-Trackers FTSE 100 Short ETF | 752 | 1,335.00 | 10,039.20 | 9,988.95 | 50.25 | 0.5 |
| UTILITIES - 9% | ||||||
| Ecofin Water & Power Opportunities Ordinary 0.1p Shares | 682 | 121.5 | 828.63 | 998.51 | -169.88 | -17.01 |
| Ecofin Water & Power Opps Capital Shares 1p | 200 | 477.5 | 955 | 143.37 | 811.63 | 566.11 |
| Utilico Emerging Markets Ord GBP 0.10 | 873 | 88.75 | 774.79 | 960.03 | -185.24 | -19.3 |
| PREFS AND FIXED INCOME - 16.5% | ||||||
| Lloyds Banking Group plc 9.25% Non-Cum Irrd Pref Shares GBP0.25 | 1,210 | 46.5 | 562.65 | 999.95 | -437.3 | -43.73 |
| iShares II Plc Ishares FTSE UK All Stocks Gilt | 397 | 1,029.50 | 4,087.12 | 4,023.84 | 63.27 | 1.57 |
| ORDINARY SHARES - 4.6% | ||||||
| Royal Bank Of Scotland Ordinary 25p | 519 | 13 | 67.47 | 599.14 | -531.67 | -88.74 |
| South African Property Opportunities PLC Ord 1p | 1,139 | 42.5 | 484.08 | 512.36 | -28.29 | -5.52 |
| Tepnel Life Sciences Ordinary 1p Shares | 6,392 | 12 | 767.04 | 799.96 | -32.92 | -4.12 |
| 28,237.11 | 25,523.41 | 2,713.70 | 10.63 | |||
