Seeking opportunities in turbulent times. This is how we like to analyse future strategies. Although seeking opportunities means exactly that – that is, making investments that carry a certain degree of risk in pursuit of the potential gains that a crisis scenario often offers. For this reason, given that inherent risk, we must seek out opportunities with caution. Without jeopardising the bulk of our assets, and using only those assets earmarked for this purpose, following a thorough analysis and planning of our PGR. Now that this point has been clarified, let’s move on.
It is quite true, however, that the times ahead may not be as turbulent or difficult as they appear today, and that many of today’s views may turn out to be ridiculous, alarmist exaggerations. Some people, in fact – mainly politicians and bankers – predict just that. It is possible that the credit crisis will be played down and that the worst is now behind us. That, through the natural evolution of social customs or who-knows-what, may time restore confidence in credit, this being the best medicine (or rather the best painkiller – which relieves but does not cure, I would say) for a return to the dangerous and fragile normality of years gone by. It is also possible that the dreaded peak oil that it is a false alarm and that, despite being unable to replace our dependence on oil with anything else, we will continue to extract barrels at somewhat more moderate prices for several decades. Or why not? Perhaps in a few years’ time we will find a viable, cheap and globally accessible alternative energy source. I, too, sincerely hope so, Fernan2. In that case, the current analyses and strategies would be useful, but we wanted this to be an exercise in reflection, considering the hypothesis that we might actually find ourselves in serious trouble.
In that potential worst-case scenario, it is wise to have at least some strategy in place to deal with the possible prolongation and intensification of the current financial and/or energy crisis. The first thing we must reconsider in such a negative scenario is the structure of our assets that need to be protected and the proportion we are willing to risk. And, of course, we must redefine our risk aversion – in fact, redefine our ad hoc risk tolerance. How would we protect the majority of our assets, and where would we look for opportunities? That is undoubtedly the million-dollar question, but we’re going to try to offer some guidance – just as you have done – which may prove useful in the process of each individual analysis. Obviously, it goes without saying that every PGR must be tailored entirely to each individual’s assets, personality, family, idiosyncrasies and circumstances. Having said that, and bearing in mind all the risks involved in offering guidelines without knowing the potential reader inside out, we are going to make some dangerous generalisations (much to the delight of some), assuming a net worth of at least €3 or 4 million:
As regards cash holdings, to begin with, the traditional reliance on banks should be reviewed in favour of a more rigorous selection of institutions and a lower concentration of risk organisation. I’m not quite as convinced as ManuelMad that tax havens are the ideal refuge, but I do agree that, in principle, they should be less affected by the credit crisis. Furthermore, the part we need to shield, one should steer clear of fixed-income securities and lean more towards sovereign bonds, with maturities not exceeding the medium term. ManuelMad commented that he would steer clear of sovereign fixed-income securities, but given such a scenario, we believe that a safe-haven currency and countries least affected by the oil shortage would be safer than corporate alternatives. Perhaps our view of both crises is less bellicose than yours. As for gold as a safe haven, which Manuel also mentions, a 40% allocation to a precious metal strikes me as an excessive concentration of assets in something whose return can only be expected from speculative appreciation. It could be a good investment, but bear in mind that we’re talking about the amounts set aside for protection; as for assets that can withstand certain risks, we’ll find significant investment opportunities (with the potential to gain or lose) in commodities, financial debt «distressed» (not to be confused with the «Distressed Wealth Strategies«), etc.
As for cash exposed to a certain degree of risk, we would consider investing in prime property in the USA. The depressed property market and an attractive exchange rate make this market one worth considering. Even today, we advise many of our clients on the benefits of selling some of their properties in Spain at market prices, in order to take advantage of these opportunities across the Atlantic. Some of you might say that to sell in Spain at the moment, you have to «to sell at a loss«. But it’s not actually that it’s cheap, but rather its actual market price – there is no other. And the opportunity cost may be much higher than the drop in price we have in mind moored. Generating rental income from property in the US $ with rates of return that we haven’t seen in Spain for many years seems to us to be a sound strategy at present, even as the financial and energy crises worsen. That is certainly true Dalamar, that the American model of typical towns The Truman Show where people used to commute 100 miles from home to work, are no longer viable for the average household. In fact, it is this type of housing that has suffered most from the property and mortgage crisis in the US. In Spain, some people will certainly feel the pinch, but we never started from such low petrol prices as they do there, and the cost of travelling by private car has always been factored in in Europe.
As for the portion of cash that is also subject to risk, we would consider investments in equities. Depending on the proportion of total assets and the level of risk we are willing to take, current options include emerging markets. But beware: in the event of a severe energy crisis, their domestic consumption (in China and India), low wages and sluggish GDP growth could take a dramatic turn for the worse. Depending on the severity of the crisis, these markets are only worth considering as long as energy costs do not skyrocket to the point of stifling them. Nevertheless, their extreme volatility should prompt us to exercise caution regarding the volumes invested at present. Another, less volatile option – and one that is indeed compatible with a world where oil is prohibitively expensive – would be the blue-chip companies Americans, but only those who are least affected by a rise in energy prices and its impact on transport costs.
Assuming fuel prices remain significantly higher than they are at present, it seems that one sector that might be spared this problem is the telecommunications or technology sector. The bubble of 2000 is now sufficiently distant and has been sufficiently deflated for the conditions to be in place for it to recur, and this time with less hype and more substance. Furthermore, the challenges facing physical transport could lead to a particular boom for these companies. A portfolio in this sector could be a sound long-term strategy in such a scenario. I agree with Alejandro and Paco, although the sector is so broad that finding the gems amongst all the chaff would not be easy. I would even go so far as to say that, given current energy prices, this investment strategy would already be advisable.
I think a lot of things would change, Tom, the needs might be very similar for a while, but what we really ought to adapt straight away is the way we meet them.
Thank you for your thoughts and analysis of this hypothetical financial and energy scenario. I hope you’ll continue to contribute high-quality content to this blog, as you always do.