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It is more a case of ‘Which Crisis’ than ‘What Crisis’ these days.

All investors are aware of market risk

All investors are aware of market risk and most understand the effect that inflation can have on their savings. However, much less attention is paid to political risk.  This is the risk to your savings posed by political decisions. Right now these are all around us, we have the Greek Crisis, the Euro Crisis, problems in the Ukraine, a recreation of the Cold War, ISIS and we should not forget the problems in the Chinese banking systems.
Add to these low interest rates and sweeping changes to the pension system and you could be forgiven for being confused as how to make the best out of your savings.
Over the coming months I aim to shed some light on a variety of investment and financial planning topics and if there are some specific areas that you would like to see covered in these articles you can send a request by post or email.

As I am writing this piece the Greek Crisis has just been pushed into the weekend and we are all still waiting to see what will happen on July 1st. There will be many discussions about how the whole Greek issue arose in the first place, however we are where we are, and time spent sorting the issue is probably more valuable than looking into why it happened at this stage. As much as this is an issue about money, it is also a test of the competency of the EU leaders and whether they are acting on behalf of all the people of Europe or just their own countries.
The two graphs below show the relative performance of the Greek and Icelandic economies. The Greek GDP (Gross Domestic Product) is still down 25% from its high in 2008, whilst at the end of 2015 Iceland expects to be ahead by 3.5% of its most recent high. Both countries have suffered enormous financial difficulties and have taken different roads to recovery.

Greek GDP 2007-2015           

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Icelandic GDP 2007-2015

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Date source Thompson Reuters EIKON 26/06/2015


The events listed create volatility in the equity markets. This will make some investors feel uncomfortable in the same way as a heavy sea might make you feel seasick. However, a bigger boat will make the journey more comfortable and improve your chances of reaching your destination safely even if it takes a little longer to get there. The same can be said for investments. In times of volatility it is safer to be in larger and more profitable companies.
However, there is a stowaway on-board.

2008 Credit Crunch

During the 2008 ‘Credit Crunch’ interest rates fell to an all-time low. This forced many investors to find alternative investments to generate income. To start with they invested in UK Government Gilts and high quality corporate bonds. As the UK Government started buying gilts through quantitative easing, the increased demand for high quality fixed interest pushed their prices up. The result is that many people are invested in fixed interest [FI] funds, which are at an exaggerated high point in their market cycle. There is even talk of a potential liquidity crisis looming in the FI Market. The potential triggers for this are unwinding of quantitative easing and increases in interest rates.

The graph below shows how the yield of the ten year UK gilt has fallen. To bring the yield back up to the 2008 levels, the capital value of the gilts will have to fall. This could mean that investments, normally deemed as cautious, may actually have a greater risk to their capital value, which is more commonly associated with equity type investments.

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It is clear that there are difficulties ahead in both the Equity and Fixed interest markets. It is essential that portfolios remain well balanced. Neither cash nor private rental property offer a real alternative due to low rates of return, a lack of tax efficiency and liquidity.

Anyone concerned about any of the issues raised in this article should seek advice from an appropriately qualified investment adviser.

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