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Investing

PIAS INVESTMENT OUTLOOK FOR Q4 2014

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PIAS INVESTMENT OUTLOOK FOR Q4 2014 1

At the time of writing, markets are undergoing a significant correction. Reasons for the market correction are plenty: worries over the internal conflicts within Ukraine, the rise of ISIS in the Middle East, the coming conclusion of the US Fed tapering, HK protests for democracy, the European economies slowdown, and the recent spread of Ebola beyond Africa. The world has seen similar issues like this before, but markets found a way to recover soon after. But is this time different? Is this correction going to be the start of a real market crisis? We think not. The likelihood that this is a new market crisis is probably 15% or less. This is because equity markets remain attractive as opposed to fixed income. Valuations for global equities are fair to slightly below fair valuations, while emerging market equities are mostly below fair valuations.

In actual fact, we have been anticipating a significant market correction such as this for the past four months. Markets have been doing rather well for a stretch of time, thus a breather to the markets is expected before the next leg up. This is quite clear when equities are up by about 25% since the last major correction which ended in late June 2013. (See chart.) That said, it is never easy to bear seeing our investment portfolios dropping by a large extent in the meantime. However, opportunists would consider this to be a possible good time to top up their investment portfolios when prices are lower.

FinancialExpress

Source: Financial Express

Table 1: Market Returns for 2014 Year to Date (end September 2014) in SGD terms

Source

The US economy continues to remain quite resilient during these past few weeks. Unemployment rates have dropped further to 5.9%, the first time it had dropped below 6% since the Great Financial Crisis. Unfortunately for Europe, recent economic indicators have weakened further. IMF now projects an almost 38% chance that the Eurozone may enter a new recession. We have to watch this more closely although we think that any recession will likely be short lived and shallow. The European Central Bank (ECB) will likely push for growth with further QE actions and will call for the Eurozone governments to stimulate their economies.

Ernest Low

Ernest Low

In Asia, despite the recent market correction, India, Indonesia, Thailand and Philippines are up at least 17% year to date (as of 20 October 2014). These countries which are more domestic driven have been somewhat resilient lately. The more open economies such as Korea, Taiwan and Singapore were impacted by the current market conditions and have practically lost all their stock market gains for the year. China’s growth rate continues to maintain above the 7% level so far this year, with the Chinese government acting whenever they deem necessary.

Recently when some of us attended an investment conference organised by Citywire, Marc Faber was a guest speaker there. Faber, also known as Mr Doom, was relatively optimistic on prospects for Asia. We found that somewhat surprising as he is usually quite pessimistic about equity markets in general. Investors should take note when Faber finds something to be positive about. He was quoted as saying, ‘If you have to invest for the next 10 years, then you will make more money investing in Asia.’ We do agree with him, but would add that investors who invest in Asia would also have to bear the greater volatility in order to reap the rewards.

As for the bond markets, they remain challenging in terms of good opportunities. Interest rates in the US are expected to start rising as early as middle of 2015. There may be still some upside potential for emerging market bonds and Asian high yield bonds. But this is meant for investors who are willing to take higher risks. Otherwise short duration bond funds and total return bonds funds remain our current favourites.

We think that after this current market correction, equity markets will continue their current bull run. We should only start to reduce our weight to equities when valuations are no longer compelling or at the start of a new crisis. Otherwise, this may be an opportune time to consider topping up your investments. If you wish to top up your investments as equities are now cheaper, let your PIAS financial consultant know.

Author | Ernest Low, General Manager, Product & Research | PIAS | 24 October 2014

Investing

Investors remain worried about COVID, but positive towards stamp duty holiday

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Investors remain worried about COVID, but positive towards stamp duty holiday 2

By Jamie Johnson, CEO of FJP Investment

The journey back to economic normality will be strenuous. COVID-19 has imbued many financial markets with a great deal of uncertainty, making accurate forecasts difficult for fear that a second spike in cases or further lockdown measures may affect market confidence at a moment’s notice.

However, ensuring investor confidence remains high in the short-to-medium term is paramount for avoiding economic stagnation throughout the rest of 2020. Without economic stimulus, the UK’s post-pandemic economic recovery will remain delayed until the virus is contained globally; and given the uncertainty surrounding when this will be accomplished, the economic damage inflicted in the meantime could be grave.

The Government, of course, has been quick to recognise this. It has implemented numerous policies designed to coax activity back to some key markets, most notably in the property sector.

The stamp duty land tax (SDLT) holiday especially seems to be succeeding in attracting buyers back to the market, with property listing site Rightmove recording an immediate 75% increase in buyer enquiries following the policy’s implementation. Meanwhile, Halifax’s August house price index (HPI) revealed a year-on-year average house price rise of 5.2%.

After months of the government dissuading people from moving home due to COVID-19 contagion fears, it seems as though the SDLT holiday is managing to release some of the pent-up demand for property that accrued during lockdown. Domestic and international buyers alike are now compelled to take advantage of the lucrative real estate opportunities on offer, with tax savings of up to £15,000 available during the holiday.

What is crucial, however, is that this momentum is sustained. As COVID-19 case numbers begin rising once again, if people view the UK as not having a handle on the spread of the virus, they may be reluctant to make any major decisions regarding their asset portfolio.

To explore how exactly investors are currently perceiving the government’s capacity for effective COVID-19 containment, and how they are managing their financial affairs during this challenging period, FJP Investment recently commissioned an independent survey of over 900 UK-based investors. Each of the investors surveyed has an investment portfolio in excess of £10,000, excluding savings, pensions, SIPPs and residential property.

What we discovered was that, although the SDLT holiday referenced above is being positively received, there are still obstacles to overcome within the wider economic bounce-back.

Holiday time

Among those surveyed, a quarter (24%) of investors stated they are planning on buying one or more new properties to take advantage of the SDLT holiday, a figure that rises to 43% for those aged between 18 and 34.]

Given the substantial potential discounts available, it makes sense that those keen on making their first step onto the property ladder – or building a real estate portfolio – would jump at the chance while market conditions are right. With the SDLT holiday period coming to a close at the end of March 2021, buyers will be keen on finalising their transactions before this key date.

However, 43% of the investors surveyed believed that more financial incentives and support should be offered by the government. Sticking to the property sector, over half (54%) think the mortgage payment holiday relief scheme should be extended beyond its current finishing date of 31st October 2020.

Elsewhere, FJP Investment’s research showed that 57% of investors are keen to see more financial relief for businesses that have experienced disruption to their cashflow due to the pandemic.

Facilitating the strong economic recovery

More worryingly for the government, however, is the current lackluster reception of its recent public health strategy. The majority (54%) of the investors surveyed admitted they had lost confidence in Boris Johnson’s government due to their apparent mishandling of the COVID-19 pandemic so far.

Increasing case numbers and unfavourable international comparisons risk deterring both domestic and international investors away from UK property – elongating pandemic-related economic stagnation for the foreseeable future.

Ensuring the government soon regains a reputation for good governance and epidemiological competence, then, should be an absolute priority for government advisers. Prospective investors – not just in property but all manner of UK-based assets – must have confidence their assets will not undergo a surprise devaluation due to factors outside of their control.

Personally, I’m confident that the right decisions will be made and the current boom in demand for UK property will be sustained. Investors will continue to be successfully attracted back to the market, and the UK can enjoy a prosperous real estate market once again – fuelling a wider post-pandemic economic resurgence across the nation.

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Investing

Revitalising the token market

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Revitalising the token market 3

By Gavin Smith, CEO at Panxora

With interest rates near zero and fears that whipsawing stock markets are set for further plunges, many investors are turning to alternative markets in the search for returns. Money flowing into cryptocurrency hedge funds and trusts like Grayscale is at all-time highs and the large cap coins seem to be entering a bull phase, but that capital is not trickling down into new token projects. Why are blockchain token projects struggling to attract funding?

Seed investor scepticism

Setting aside the reputational issues with mainstream investors, even those educated in blockchain tech are not signing on the dotted line. This is certainly due in part to the hangover from the early token market.

During the heady days of 2016/17, investors could buy tokens during the token sale, and if the project was legitimate – even if the business case wasn’t particularly strong – prices would soar based on market enthusiasm. Early investors purchased at a discount and cashed out almost immediately for a handsome profit – and then repeated the process again. The token sale allowed founders to amass a war chest large enough to finance the entire token project – without having to give up a large chunk of company equity. Everyone got what they needed out of the deal.

Running a token sale is far more expensive today than it was during the boom. Getting the attention of the token buying public in a market where advertorial has replaced editorial is expensive. This coupled with a regulatory framework that requires the advice of accountants, solicitors and information gathering of KYC details for investors all comes with an escalating price tag.

To accommodate the change in cost structure, tokens now need to acquire funding in two rounds. Frequently there is a first round where capital is raised from a few, large investors. This cash is then used to finance setup and marketing the main token sale. The token sale, in turn, provides the capital needed to run the entire business project.

Bridging the gap between token projects’ needs and early stage investors

To successfully get a token through the capital raising process, founders must acknowledge the risk assumed by those very early investors and reward them appropriately. And given that tokens may stagnate or fall in price post token sale means that a deep discount in token price is not necessarily attractive enough to get investors to commit.

Many tokens have turned to offering equity in the business in the effort to raise that first tranche of capital. If you look at the number of successfully concluded token sales, the downward trend has continued since Q2 2018, so offering equity is not sufficiently stimulating the market.

Two sides of the coin

So, what is the answer? It’s a complex question but one thing is certain. Any solution must be rooted in a deep understanding of what both parties need to successfully conclude the deal.

Gavin Smith

Gavin Smith

On the one hand, token founders’ needs are clear: they need enough capital to get the token ready for and through a successful liquidity event that will provide sufficient funds to build the project. The challenge lies in striking the right balance between accruing that capital and making sure not to offer so much project equity that give up either the control or the incentive founders need to drive the project forward.

On the other hand, while the needs of the seed capital investors are more complex, there are two areas of key concern: transparency and profit incentives.

Transparency can mean many things, but almost always includes providing more informative cost and profit projections, as well as answers to a whole range of questions, not least the following:

  • What happens to investor capital if the token sale event fails? Token founders must be transparent from the outset. The token market is highly speculative and early investors run the risk of losing their money should the project fail. Therefore, investors require a well-established fund governance process in place throughout the fundraising so they can make informed decisions on whether the project is worthwhile.
  • How are the assets for the entire project managed? Investors need to know that their money is in good hands and that proper treasury management techniques are being used to manage cryptocurrency volatility risk. Ideally, an independent custodian will be used to hold the funds and limit founders’ ability to draw down the capital – releasing funds to an agreed-upon schedule of milestones.
  • How are the rights of investors protected, for instance in the case of a trade sale? Investors need to know what happens if the company they are investing in is sold. What impact could this have on the value of their stake? Would a separate governance framework need to be established? These are critical questions and investors aren’t likely to settle for any ambiguity in the answers.

Profit incentives are important when it comes to encouraging early participation in a project. Investors need convincing that the proposition will keep risks to a minimum and focus on providing a strong probability of a return. This means that founders need to be able to defend the case for the increase in the value of their token.

But this isn’t the only incentive that matters. Investors can also be incentivised by preferential offerings such as early access to projects and services that might help their own business.

Let’s not forget that investors don’t support just any project. What really matters is that there is something special and unique about the business being underwritten by the token. Preferably something that could be shared upfront and directly benefit the investor – proof that the investment is really worth it.

And that’s what it all comes down to. Ultimately, while token projects are having a hard time finding funds at the moment, if they can prove their worth and provide full transparency and clear profit incentives to ease investors’ concerns, the money is out there. And deals can be done.

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Achieving steady returns in challenging times for later life planning

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Achieving steady returns in challenging times for later life planning 4

By Matt Dickens, Senior Business Development Director at Ingenious

The macro-economic conditions of the last five years have presented a relentless challenge for money managers seeking to produce consistent returns. It seems an all too distant memory that UK markets were caught in a happy period of low volatility and positive growth since the recovery from the financial crisis started in 2009. Enter 2016 and we have since found ourselves in an era of exceptional uncertainty. An acrimonious Brexit referendum and the following ambiguity, pressure on sterling, repeated challenges to the UK Government, a trade war between two of the world’s super-powers and now a global pandemic. All this as the world is going through a digital revolution.

Under these exceptional conditions, many investment strategies have understandably struggled to sustain the growth that investors had previously enjoyed without taking on elevated levels of risk and experiencing greater volatility and its associated negative impact. However, Ingenious Estate Planning has been operating alternative investment strategies for several years, which have produced a steady return with low volatility over this time as they possess little correlation to the main listed markets.

Real Estate

The affordable end of the UK’s residential real estate market has proven to be extremely robust during the recent uncertainty. The market benefits from some core fundamentals that have assisted it withstanding a lot of the pressures experienced by other sectors. Firstly, a large and sustained supply deficit. In 2018 the UK built 80,000 fewer houses than the actual requirement of 300,0001. This strong, inherent demand poses a clear investment opportunity to investors who can fund construction projects in the safe knowledge that there is an established demand on completion.

Secondly, this supply deficit has been recognised by Governments for several years and there has been a raft of policies enacted, all supportive of building more houses. For instance, the Help to Buy scheme has enabled many, often first-time buyers onto the property ladder. This scheme means there is a well-established and subsidised group of buyers ready to buy whenever developers complete construction. Thirdly, and more recently, the Government has acted quickly to identify the property sector as one that is key to the UK’s recovery from Covid-19. Through relaxing planning laws and offering stamp duty holidays, both the construction and sales market are being given valuable incentives that support an ongoing return for real estate investors.

Secured lending model

Despite these positive forces however, there remain some risks with investing in the property market, so a conservative investment strategy is key to protecting investors. Rather than take a 100% equity, or ownership, position in a house-builder, developer or single property, a portfolio-based, secured lending model, has a number of clear risk-mitigating benefits. For instance, by lending to a portfolio of developers, carefully selected on a project-by-project basis, and by earning a fixed rate of interest, rather than taking equity risk, there is inherently lower volatility in returns given the protection of a senior debt position on each development. Contracts set out clear loan terms meaning that regular interest is paid on the investment and upon final sale the repayment is made in full, all with the benefit of banking-style security protections. By contrast, equity investments and associated valuations can fluctuate over time as the asset price changes and so it is far more vulnerable to market conditions and sentiment, and ultimately any drop in value is suffered by the investor. In the lending model, any loss is initially felt by the borrower.

Benefits for estate planning

Ingenious Estate Planning Private Real Estate utilises this secured lending investment strategy. The Business Relief- qualifying service is commonly used by clients planning for later life. As savers and investors reach retirement and decumulation, they present wealth managers with a unique set of investment problems. Without careful planning, the start of this phase for many could signal the end of any capital growth and herald their savings being eroded to pay for life’s needs. Any investment offering both high volatility and potential drawdowns may therefore become unpalatable. And while many would wish to gift savings to their children to mitigate the risks to their beneficiaries of paying a hefty inheritance tax bill upon their death, the thought of losing both control and access to these savings when they may still need them, means many feel uncomfortable in taking that step.

However, this does not need to be a fate accepted by savvy investors and planners who can utilise a proven trading strategy that continues to both carefully and predictably grow their investment while also providing potentially full relief from inheritance tax.

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