How should I secure my retirement nest-egg in the face of volatility and turmoil?
Global financial markets are in a sorry state and it is very hard to see a silver lining. The US economy is showing mixed signs, no clear trend to be seen, the European economy is flat, Japan is struggling, so is China, not to speak of Russia and many of the developing countries including South Africa and us.
The one thing these countries all have in common is a huge debt burden often substantially higher than the countries’ GDP, at historically low interest rates. China, for example has accumulated corporate debt of 171% of GDP while total Chinese debt of US$ 28 trillion, had reached 255% of its GDP by the end of 2015, an increase of 107% over the past 7 years. That is 38% of global GDP and as much as the commercial banking loan books of the US and Japan combined! The Bank of International Settlements is warning that China is facing an escalating risk of a major debt and banking crisis. The BIS is also concerned about a possible spillover from China to the global economy.
These are prevailing economic threats to the global economy. Of course with the wars going on around the Mediterranean and on the border between Russia and the Ukraine the economic concerns are reinforced by concerns about a possible major military confrontation between Russia and the US with its European allies. Interestingly in this context, recently a German Minister encouraged the German population to start hoarding non-perishable foodstuffs. I have never in my life heard such official advice before. What does all of this mean other than that we are facing major risks?
Evidently there are lots of alarm bells ringing all over in the media to make the investor very nervous indeed. No-one really knows how this state of affairs may unravel and how such unraveling will affect my retirement nest egg and other investments.
Fact of the matter is that at present savers are effectively robbed of a fair return on their savings for the benefit of borrowers paying exceptionally low interest rates, in many instances even negative interest rates. Central banks world-wide have accumulated massive debt and thereby created massive liquidity in the markets. Easy money is flowing into equities in the first instance, but also into property and various other asset classes pushing up their prices artificially to unsustainable levels. Such flows also found their way into emerging economies like SA and Namibia and have strengthened their currencies.
On the basis of fundamentals investing in fixed interest instruments would expose the investor to the risk of interest rates normalizing at some point in time, the point currently not foreseeable though. Equities are generally expensive and equally face the risk of a substantial negative adjustment once interest rates start moving upwards. Other asset classes such as property, would have benefited from the spillover of massive money flows into equities, so property is generally also expensive. In terms of conventional asset classes there is really nowhere to hide once markets start to unravel and reverse the asset bubbles blown up by the easy money policies of central banks world-wide.
What do we do if the bottom falls out of financial markets because of a major military conflict gripping world financial markets?
Gold pundits reckon one should invest in gold, but if I do, how am I going to use the gold to fund my retirement needs? Who is going to buy my gold when I need cash to pay for my groceries and hospital bills? It will not be that easy and it will definitely not be my grocer or my hospital and because it will not be so easy, undoubtedly it will be expensive to try and sell gold.
What will we really need when financial markets are dead and assets have experienced a massive decline in value. No one will want to buy what we own. What we do need is food and water to survive. So even though our assets may be unsellable, if they are productive, they should be able to generate income for me that I can use to pay for my basic needs. What about a property investment that you can rent out to generate an income?
Problem with property is that it would typically represent a relatively large investment that will depend on a tenant to pay his rent. However if the economy is in the doldrums and financial markets are dead, chances are that your tenant may lose his job and may not be able to pay your rent. Property always creates that artificial comfort that it is still worth more or less for what you bought is, but unless you actually sell it, you have no clue.
Equities in contract will be shown up in the media how much value they lost. At least you will generally be assured that you will actually be able to sell it at that value. If you are invested in a basket of shares your shares or at least some of them should be able to deliver dividends and the risk of losing a major part of your investment portfolio is much smaller, being spread much wider across different companies, unlike your investment in property.
Conclusion
With these risks the investor is currently facing, equities remain our preferred asset class. Spread the risk as widely as you can across the world. Avoid politically volatile areas. In the final instance this includes China, Japan, Korea, Russia, Turkey, central Europe and of course all other countries bordering the Mediterranean. Generally, we would believe that emerging countries should experience a revival should any major military confrontation materialize. Investment in equities should be undertaken on a very selective basis with the emphasis being on companies generating high cash flows and high yields on your investment with the prospect of high dividends yields, which is really what you need at the end of the day to survive. For those expecting Armageddon, heed the advice of the German minister to start hoarding non-perishable foodstuffs!
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