Seven things every investor should consider in 2016

The New Year is the time for a fresh start, so why not make a resolution to manage your money better in 2016?
The economic cycle that drives the stock market may be heading for a downturn, but investors with diversified portfolios will find themselves in the clear. Aly Song / Reuters
The economic cycle that drives the stock market may be heading for a downturn, but investors with diversified portfolios will find themselves in the clear. Aly Song / Reuters

The New Year is the time for a fresh start, so why not make a resolution to manage your money better in 2016? The next 12 months could be another troubled period for stock markets, so make sure your portfolio is ready for whatever the world throws at it. Here are seven things every investor needs to consider in 2016:

Job security

Job insecurity in the UAE is on the rise as oil prices fall and companies lay off workers, which adds another layer of risk to your financial planning.

Workers in the oil sector are not the only ones in danger. Insecurity has spread to banking and financial services, with HSBC, Standard Chartered and First Gulf Bank all cutting positions recently.

Losing your job can play havoc with your investment plans, as the income to fund your savings contributions dries up overnight.

Tom Anderson, an investment analyst at Killik & Co, says this is another reason to avoid locking into inflexible, long-term investment contracts.

“Too many expatriates are sold offshore bonds where they have to commit to making regular monthly contributions for five, 10, 15 years or longer,” he explains.

If you fail to make all your contracted payments you can be penalised and may get back less money than you have paid in.

“This can be a nightmare if you lose your job and suddenly have more immediate spending priorities,” says Mr Anderson.

Offshore bonds have other drawbacks, Mr Anderson says, such as hidden costs and lack of clarity over where your money is invested.

Instead, the financial analyst advises investors to remain flexible by investing in mutual funds and shares, where they can stop and start any contributions without penalty. “Also, you can get at your money if you need it, without paying hefty penalties.”

You should also keep a reserve of cash on instant access for emergencies such as losing your job, adds Mr Anderson.

Hidden fees

Every expat knows somebody who has been sold a rip-off investment plan with sky-high charges by a dodgy financial adviser.

Tom Anderson at Killik says unregulated financial advisers can do untold damage to your wealth so beware.

Before signing up to any investment, take a careful look at the charges, which may come in several layers.

“You can pay a charge for advice, a further charge to the manager running the plan and another charge for the underlying investment funds within your plan,” says Mr Anderson.

These charges can total anything between 3 and 7 per cent a year, he says. “Your investments need to grow strongly every year simply to cover your fees, otherwise you are losing money.”

The effect of low charges is far higher than many people realise. Say you invest a lump sum of US$50,000 and it grows by an average 5 per cent a year before charges.

In a fund with a low annual management fee of just 0.75 per cent it be worth US$141,538 after 25 years.

If that fee was 2 per cent a year, you would end up with just $104,689, a hefty $36,849 less.

Mr Anderson adds that you should examine what your charges add up to and be prepared to shift your money if paying too much. “But first, make sure you don’t pay hefty exit penalties for switching.”

Higher interest rates

The US Federal Reserve’s December decision to hike rates for the first time in more than nine years suggests the era of rock-bottom interest rates may finally be drawing to a close.

Higher rates may be good news for savers, as this will increase the return on cash, but bad news for those with large mortgages.

It could also mean a tougher year for stock markets, as higher borrowing costs hit company growth and squeeze emerging markets, by pushing up the cost of servicing their US dollar debts.

Keren Bobker, a senior consultant at Holborn Assets in Dubai and The National’s on your side columnist, expects interest rates to rise only slowly next year.

“Although mortgage payments may increase, most borrowers should have factored in the added cost, as the rates will still be low compared to historical averages,” she says, adding that borrowers in the UAE have added protection. “Mortgage rates will not necessarily increase, as they are already much higher than in developed countries such as the United Kingdom and United States.”

Ms Bobker says that savers hoping for a better return on their money could be disappointed. “Interest rates on cash should increase a little but may still be lower than inflation, which means the value of your money will continue to fall in real terms.”

Investors will still have to accept the greater risk of investing in stocks and shares to get a better return over the longer term, she says.

Higher interest rates should be good news for UAE expatriates, as the dirham is pegged to the dollar, which should increase their buying power relative to most foreign currencies.

Russ Koesterich, the global chief investment strategist at BlackRock, says interest rates will be good for some sectors that investors may wish to target. “Rising rates create opportunity for financial stocks, particularly banks, to improve their margins.”

Investment cycles

Stock market investments typically move in cycles, with last year’s winner often proving next year’s loser.

Europe and Japan were the top stock markets in 2015, rising 8 per cent and 13 per cent, respectively, according to figures from Trustnet.com. By comparison, global emerging markets were the big losers, falling nearly 10 per cent.

They were driven by quantitative easing and other central banker stimulus, which forced down the value of the euro and Japanese yen and made their exports more competitive.

Luca Paolini, the chief strategist at the mutual fund manager Pictet Asset Management, expects the euro zone and Japan to continue outperforming. “Their stock markets are relatively inexpensive, and exceptionally supportive monetary policies are set to continue.”

Mr Paolini says the cycle may soon swing back in favour of emerging markets, where stocks are now trading at more attractive valuations. “Economic momentum is improving in China and there are signs this strength is filtering through to other parts of emerging Asia.”

He expects an end to the four-year decline in company profit. “With expectations for profit growth now at their lowest levels in years, emerging market stocks have the potential to surprise.”

The US disappointed in 2015 and Mr Paolini suggests the cycle continues to work against it. “Higher interest rates and slowing economic momentum will make conditions more challenging for US companies to outperform their peers elsewhere in the developed world.”

Your portfolio mix

Too many investors slavishly follow trends by piling into the latest fashionable asset, but this can easily backfire.

Investment fashions can quickly change, as investors in once-hot sectors such as gold, commodities and emerging markets can testify to their cost.

The other danger is that you end up with a seriously unbalanced portfolio, with too much exposure to just a handful of once-trendy sectors.

Ms Bobker says the New Year is a good time to restore balance to your investments.

“Everyone should review their portfolio at least once a year, to see if it still meets their needs.”

The exact mix depends on your personal circumstances, but it should include a blend of lower-risk investments such as cash and bonds, maybe some property, and stock market exposure.

You then have to decide which stock markets to invest in – the US, Europe, the Arabian Gulf region, emerging markets or specialist sectors such as technology.

Everybody needs a diversified spread of assets to reduce risk and volatility, so if one sector suffers another might offset your losses.

“There is no one-size-fits-all portfolio, as it depends how long you are investing for, whether you want growth or income, how much access you need to your funds and your attitude to investment risk,” says Ms Bobker.

She says a good financial adviser will discuss your risk appetite in detail, and make recommendations based on that.

Volatility

Many novice investors fear the volatility of the stock market, with its violent upward swings and downward lurches, but wise investors learn to embrace it. With 2016 expected to be another volatile year, this looks like the right attitude to take.

One way to turn volatility to your advantage is to invest in assets that have fallen out of favour, which means they can be bought at bargain prices. If you are patient, you can sit tight and wait for them to recover.

Adrian Lowcock, the head of investing at AXA Wealth, says that “buy low, sell high” is a well-worn mantra, but few investors actually do it. “It is human nature to avoid investing in stock markets when they have fallen or risk seems the greatest.

“When markets are low investor confidence is also low, so they do not invest until markets have recovered and confidence returns.”

By then it is too late, as you will have missed the recovery. “Don’t follow the herd. Buying when markets are low is a successful approach for long-term investors.”

Investor confidence may be low after a turbulent 2015, but paradoxically, that could make now a good time to invest.

Timing stock markets can be tricky, but you can turn volatility to your advantage by investing regular monthly sums.

That way you actually benefit if markets fall, because your monthly contribution buys more stock, so you profit when markets finally revive.

Oil shock

2015 may have been a disappointing year for stock markets, but at least they avoided outright meltdown.

The biggest single shock came on Black Monday in August, when concerns over Chinese growth rattled global markets.

The year’s biggest story was the collapse in the oil price, with a barrel of Brent crude dipping as low as $36.

This has heightened concerns over the global bond market, where some fear a debt default crisis, as the oil price slump means that shale drillers cannot service the loans they raised to fund their operations.

Greg Bennett, a fund manager at Argonaut Capital Partners, says oil stocks have remained relatively resilient because most analysts believe the oil price will rise in the near future.

Mr Bennett reckons they are wrong, as overproduction, particularly by Saudi Arabia, Iraq, Russia and Mexico, has created a global oil supply glut that will keep a lid on prices. “Once again, analysts seem to be overly optimistic in their future oil price assumptions,” he says.

Companies have issued debt and made acquisitions based on overly optimistic oil price assumptions, Mr Bennett says. “These may not be as economically viable as first thought, creating a veritable house of cards.”

Mr Koesterich also fears energy prices could fall even lower. “Given the abundance of supply and bulging inventories, we hesitate to call a bottom in oil.”

Cheap oil will be good news for western consumer countries, China and India, but could spell another tough year for Middle East oil producers. So prepare yourself now.

pf@thenational.ae

Follow us on Twitter @TheNationalPF

Published: January 1, 2016 04:00 AM

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