Fiscal View: Consider investing in equities to see growth

Equities have been on a bull run since last October, giving investors an opportunity to profit from long-term plays.

Timing is an issue, especially in the short term, but if you believe in capitalism and man’s inherent pursuit of profit, then you should not ignore the higher growth potential that is offered by equitShow more

I was invited last week to speak to members of a corporate pension plan in Dubai. Their employer had been making annual contributions on behalf of its employees at one month's pay for each completed year of employment. Most of the attendees had two or three months of salary invested on their behalf, but others had built up five or six months of salary in contributions.

I was asked to advise on how each member should invest their money. On the face of it, the task looked pretty easy. There were only three investments to choose from: a balanced US dollar multi-asset fund with about 40 per cent in equities, a growth-orientated US dollar multi-asset fund with about 60 per cent in equities and a US dollar cash deposit account.

If any of the pension-plan members had been reading my column over the past 12 months, they would have been fully aware of the advice that I was about to give:

a) If members are in a position to take a long-term view and are not too bothered about short-term volatility, then they should invest 100 per cent into the growth-orientated fund;

b) If they are concerned about short-term volatility, but are willing to take a little risk in expectation of a bit of growth, then they should invest 100 per cent into the balanced fund; and

c) If they have short-term needs (for instance, they intend to leave their current employment in the next 12 months and want to take out the money for a specific need), then they should capitalise on recent performance and switch to cash.

This advice seemed particularly appropriate since equity markets have been performing well this year. In fact, 2012 has seen the best start to a year for equity markets since 1991. There is no guarantee, of course, that this will continue, but most financial experts are forecasting more growth.

Technically, we are in a bull run because equity markets have risen 20 per cent since October last year. But in view of the inherent risks, nobody is bold enough to suggest that this impressive performance will continue at this high rate for much longer.

The euphoria in world stock markets is stoked by several factors. Improving economic data from the US, especially in regard to the creation of new jobs, has been a contributing factor. So has corporate moves in the US to deleverage and European government policies to encourage or enforce austerity.

But the key influential event has been the decision by the European Central Bank to provide cheap loans to commercial banks throughout Europe. Confidence has returned and fear of sovereign default has subsided.

Having pointed this out to the assembled attendees, I was surprised to hear how many were still concerned about the "short-term" growth prospects of their holdings.

One was so concerned that she wanted to put most of her money into the only asset class that she was willing to trust - cash - and, if at all possible, could I please arrange Swiss francs? This concern was prompted by the perceived view that investment in a blend of equities and bonds was doomed to failure.

She had been investing for five or six years and had suffered the effects of the credit crisis, when equity markets fell dramatically from their peak in October 2007 and in 2011, when equity markets fell back on fears of sovereign-debt issues in the US and, especially, in Europe.

Her 2011 contribution had suffered also from bad timing - her annual contribution was made in February, when equity markets peaked. Others in the room were happy with their investment, especially those who started in February 2009, when markets bottomed out.

Timing is an issue, especially in the short term, but if you believe in capitalism and man's inherent pursuit of profit, then you should not ignore the higher growth potential that is offered by equities - in the long term.

"Black Swan" events that are impossible to predict, such as the Japanese tsunami that shut off supply of components to the world, the Arab Spring that forced up the price of oil, the Greek debt issue, which frightened the world's banks, and the collapse of Lehman Brothers, which frightened everybody, will always be there in some shape or form and will have an immediate effect.

But in the long term, the effects of these events will diminish as the long-term trend prevails.

With regard to the Swiss franc strategy, using forecasts from Barclays on future currency exchange rates, and assuming 3 per cent inflation, I estimated that switching the member's investments to this currency would erode her purchasing power in US dollars by more than 20 per cent over the next 12 months - and that excludes the potential gain from a more sensible investment in equities and bonds.

I am happy to say that most of the members saw the logic in the arguments presented above and opted for options a or b, or a mixture of the two.

Bill Davey is a wealth manager at Mondial-Financial Partners in Dubai. Contact him at [e-mail].