PATIENCE is a great virtue for an investor but it is a discipline often hard to maintain. Barely a month into my investment trust ISA plan for 2013-14 and it is looking decidedly wobbly.
Two areas in particular have taken a hit – emerging markets and natural resources. Fortunately I had avoided Japan, thus sparing me the ignominy of three lemons in a row.
I had deliberately set out to gain some portfolio diversification, having had a very good run in 2012-13 with five defensive equity income trusts. I have retained these for income but wanted to spread my investment risk. So I opted for JP Morgan Global Emerging Markets Income Trust and BlackRock Commodities Income Trust. Both these sectors had been distinctly out of favour for months, so I reasoned that I was buying into dips in both cases.
But as is often the way in markets, the “dips” can dip a lot further than a sanguine investor reckons. In recent weeks, emerging markets have taken a battering. The experience is a sharp reminder of the mighty influence that the US economy and its central bank exercises on world markets and on the interconnectedness of things.
The story up until May was of a colossal and sustained policy of monetary easing by the US Federal Reserve to help fuel economic recovery. Bond yields fell to ultra-low levels and our appetite to take a risk with equities rose. Share prices soared around the world as investors felt emboldened to take on more risk assets. Emerging market debt offered a higher yield, while their economies were continuing to grow much faster than those in the stricken West. And the familiar emerging market story still had magnetic appeal – better demographics, lower costs, lower commitment to welfare and a strong work ethic that Britain and America have long lost.
But when US Fed chairman Ben Bernanke hinted last month that the central bank might start to taper off its quantitative easing, investors took fright. The end of money printing pointed to rising interest rates and rising yields on US government bonds, thus reducing the risk appeal of other assets. And, as always happens at a hint of slowdown, investors, like companies, cut back from the periphery to the centre. Fund flows to emerging markets fell sharply, while many took their money off this end of the table.
According to The Economist magazine, 19 of the 24 emerging market currencies tracked by Bloomberg have fallen in value against the dollar in the past month. This, coupled with renewed fears of economic slowdown in China, has led to sharp falls in emerging markets, including Brazil, Indonesia and Thailand.
Trusts and funds investing in natural resources have also been hit. And companies exposed to South Africa have been doubly hit as markets in this region, heavily promoted last year, are once again viewed as unstable and high risk. Natural resource stocks have fallen out of favour on fears that the long super-cycle in commodities has come to an end.
The combination of a weakening pace of Chinese growth and a long, slow recovery in the economies of the West points to weak demand growth for industrial minerals. Add to this concerns over labour unrest in South Africa that have hit platinum mining operations particularly, and concerns over corporate governance and transparency with several of the larger groups quoted on the London Stock Exchange and it is not hard to see why the sector has lost its appeal.
All this has cast a cloud over my two ISA selections. But my concern is mitigated for now by their continuing income appeal (Blackrock Commodities Income Trust is on a yield of 5.3 per cent and JP Morgan Global Emerging Markets on 4 per cent). And my purchases are spread over the year, with regular amounts being fed in on a monthly basis.
However, I am in this for the long haul. If I did not believe in a long-term recovery for the economies of the West, we should not be investing at all. And the US does look to be recovering. The end of emergency central bank support should be seen as a plus on any rational view.
As for Japan, while the recent shake-out has been a necessary reality check after the astonishing upsurge earlier this year, the 20 per cent fall looks overdone. Indeed, if ever there was a case for feeding in small investment amounts over an extended period, this is a good example.
The alternative in all three cases is to opt for government bonds and fixed interest. Looking at what is likely to happen with interest rates over the next two years, I am hardly convinced of the investment case for switching.
I may be lying on a bed of nails. However, the nails on the bed next door look rather sharper.