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The forecast from Cornwall Insight comes after Chancellor Jeremy Hunt said the energy bill help, which was originally expected to last for two years, would be cut in April.

The UK Government said the the most vulnerable families would continue to be protected from increasing energy prices.

Hunt announced the change to the energy price support as part of measures put in place to help families save money following the big hole in the public finances the Government's mini-budget left.

The Chancellor said on Monday that "it would not be responsible to continue exposing public finances to unlimited volatility in international gas prices".

 

When 2021 ended, it was as if the whole world breathed a sigh of relief. Although we still felt the effects of the Covid pandemic, we were ready to leave the last two years behind and move on to better and brighter times. So when the news broke of Russia’s invasion of Ukraine on February 24, it sent shockwaves across the globe. 

To condemn Putin’s war, western leaders announced some restrictive economic measures to target Russian financial institutions and individuals. But as Russia is one of the leading suppliers of gas and oil worldwide, these sanctions have seen prices for these resources shoot up in the US and UK and add further pressure to the already volatile economies. In fact, the US is experiencing its highest inflation in 40 years and the UK is currently facing its worst recession since the 1970s, and many experts predict we are on the brink of the next big global financial collapse.

What does this mean for investors and their money?

During times of crisis, many will opt to put their money into investment funds, like the S&P 500, or ISAs to mitigate the risk of any major financial losses and hopefully still be able to grow their investment portfolios. But indications show that the S&P 500 is on a downward trajectory and may no longer be the most future-proof option for investors. Similarly, the money put into ISAs will lose its purchasing power as inflation levels rise.

What can investors do to mitigate the negative effects of inflation?

Enter alternative investments. Alternative investments like gold, wine, art, and real estate are examples of options that have for many years been used by investors as a hedge against inflation. Referred by many as ‘inflation or recession proof’ these alternative investments, alongside commodities and cryptocurrency, have proven to yield higher returns despite financial crises. 

To gauge how recession-proof the different alternative asset classes are, we look at their performance during historical periods of recessions or market turmoils. For example, between December 2020 to December 2021, inflation grew by 7%. Meanwhile, wine grew by 19.10%, art by 58.81% and Ethereum by a whopping 2724%. So, it is understandable why during times of crisis, financially savvy investors turn to these options for investing and to safe-up their portfolios.

However, there is a less talked about option that has been going through a revival, despite being one of the oldest forms of investment assets - coloured gemstones. In the last decade, coloured gemstones have experienced some of the biggest price jumps in history. In 2015, the world’s most expensive ruby was sold at auction: a 25.59-carat gem, known as the Sunrise Ruby, for over £22 million. Just two years later, the world’s most expensive emerald The Rockefeller Emerald, weighing an impressive 18.04 carats, was sold for just over £4 million.

Many people aren’t as clued-up on these unsung heroes of the alternative investment world and their lucrative yields. Compare it to one of the more known alternatives, gold. One kilogram of gold has a value of approximately £50,000, whereas one kilogram of fine rubies is worth upwards of £150,000,000, making it 3000 times more valuable.

Which gemstones are best to invest in?

Leading the gemstone space in terms of value and growth potential are rubies, sapphires and emeralds, which have increased in value by 5-8% per annum since 1995. And their upward trajectory continues. When re-certifying our own gemstones through Gemological Lab Austria (GLA), one ruby was valued over 19% higher in November 2021 compared to its initial valuation in September the same year.

Similarly, upon re-certification in 2021, a selected sample of sapphires experienced an average increase of 15.7% compounding annually, with a 6.1 carat Sri Lankan Sapphire at the top end of the spectrum, which had a total increase of a staggering 194.1%.

Much of the rising popularity of coloured gemstones is due to the growing awareness - primarily via the internet, social media and marketing - but also due to developments in recent years that have boosted consumer confidence, such as widespread certification, further industry transparency, and gemological analysis.

And as a result of the Covid pandemic and the economic uncertainties that have followed, more people are seeking ways to make smart investment choices that will strengthen their portfolios and make more lucrative returns in the long run. Crypto has become one of the more popular alternatives for financially ambitious investors during this time, but it’s a highly volatile space and therefore comes with a lot of risk. 

But the initial charm and excitement of investing in this space are beginning to wear off - Bitcoin for example has lost half of its value since hitting a record high in November 2021.  

Taking coloured gemstones’ growing popularity in the last couple of decades and combining it with more financially curious and risk-averse investors entering the market, we can only expect these precious gems to increase even more in value over time and become a leading alternative investment option. They really are called precious for a reason.

About the author: Dr Thomas Schröck, CEO and Founder of The Natural Gem.

Why is financial planning important?

Financial planning is a process that sets you on a course towards understanding and achieving your life goals through the proper management of your financial affairs. Financial planning is more than budgeting and cutting back, the right financial plan balances what you need and want today with the personal goals you have for the future. Comprehensive or holistic financial planning looks at the big picture to consider all relevant aspects of your life including budgeting, investing, tax, retirement, estate planning, debt or risk management

Working with a financial planner is about more than the short-term goals, it's about integrating all the financial needs of your life into one cohesive plan. Many people believe that you don’t need a financial plan until you are ready to retire, I argue that any life event that requires significant planning, a future date and significant funds requires a financial plan. Many of us have done aspects of financial planning on our own, think of planning for a wedding, or a new child, both of those things require a plan.

A Certified Financial Planner helps to integrate those plans into your larger financial picture to keep you on track for your short- and long-term goals. Canadians that work with a financial planner have told us they feel significantly more at ease with their day-to-day finances, they have more positive feelings towards handling any uncertainty that comes their way, they are better equipped to manage personal economic shocks such as job loss, divorce, illness or injury or any major family life event that can disrupt your finances.

A survey done by Financial Planning Canada indicates that again in 2020, finances are the number one cause of stress, by a big margin, outranking personal health, work, and relationships. This is particularly significant because we expected personal stress to exceed financial stress due to the pandemic.  Canadians that work with financial planners say they are significantly more likely to be shielded from financial stress and 53% of them say it doesn't impact their lives at all.

Canadians that work with financial planners say they are significantly more likely to be shielded from financial stress and 53% of them say it doesn't impact their lives at all.

How should people structure their portfolios during a crisis in the market?

During times of great market volatility, like we continue to see in 2020, it is important to look at your portfolio and asses if the current market swings of 5%, 10%, 15% etc. are causing you anxiety. It's one thing to not like what's going on in the news and the stock market and it's another for it to be causing you anxiety to the point where it's disrupting your sleep and your life. During a time of market volatility, it is key for me, as an adviser, to work with my clients to truly understand what their risk tolerance is. All of us, at some point or another, have overreached on our comfort level with risk and unfortunately, it is usually a market event that brings the overreach to light.

If you find that the current market rollercoaster is causing you significant worry, it is time to address what options you have to reduce the volatility in your portfolio. There are a few important things to remember:

In a financial planning context, the amount of risk that is taken on in a portfolio is generally less because the rate of return that we are trying to achieve is based on what is required to make your goals a reality; it is no longer about trying to beat an index. Portfolio construction and management are still key components and prudent management is still very important but the context of what investments are being chosen are different when the conversation is about what these funds need to do for you as an individual and a family to achieve the lifestyle you want to have.

What should people address in their plan for 2020 and 2021?

For many of the families I work with, the pandemic of 2020 has created a material shift in their priorities and goals. I recently had a meeting with a couple that were 3 years from retirement. Their goals were to travel extensively for 5 years and then settle into a routine of spending the winters in a warmer climate and the summers in Central Alberta. They planned on downsizing their home and moving into a condo so they could just lock up and drive to the airport on a whim. They were so excited about 2023. When we recently had a review meeting, they have had a significant change of heart - they really enjoyed the slower pace that the pandemic has forced on many of us. They started a garden in their back yard, they spent time working on their home and realised how much they missed seeing the grandkids. The pandemic changed their plan - now they want to retire earlier, keep their home and garden, and spend more time with family. They still plan to travel (when they can) but they plan on doing shorter trips and spending some of the funds they had set aside for travel to upgrade the home they love into a place they plan to stay in for another 20 years.

Many times, our goals and plans change and that is what causes the investments and planning goals to change. Our meeting meant starting from scratch on the retirement plan and cash flow analysis but that is why those documents are never set in stone. Financial planning is an ongoing process that changes as life changes - goals change, investments change, life happens.

Benchmark oil prices reached their highest level in five months on Wednesday as hundreds of US offshore oil facilities were closed in preparation for the arrival of Hurricane Laura.

310 facilities in the Gulf of Mexico were evacuated, effectively halting 84% of oil production in the Gulf – equivalent to a loss of 1.56 million barrels per day – and at least a third of synthetic rubber capacity in the US. The scale of the shutdown is comparable to the 90% production outage caused by Hurricane Katrina in 2005.

The news pushed oil futures contracts to their highest prices since early March, before the US and other nations first implemented lockdown measures in response to the COVID-19 pandemic.

Brent crude rose 0.4% to $46.05 per barrel in early Wednesday trading, and West Texas Intermediate rose 0.2% to $43.43 per barrel.

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According to Reuters, AxiCorp’s chief global markets strategist Stephen Innes commented: "Markets are currently pricing in a possible near-term catastrophic gasoline shortage."

Hurricane Laura is expected to make landfall on Thursday near the Texas-Louisiana border, where many petrochemical plants and refineries are situated. The National Hurricane Centre predicts that it will be a major hurricane with wind speeds of at least 111 miles per hour by time of landfall.

With the first signs of the coming global crisis rattling global markets investors are starting to swoop for opportunities that fit the new financial paradigm.

Recently we entered the eleventh straight year of a bull market, only to see a double digit slide happening just days later. Everything appeared to be relatively calm with all the main indices of the developed world touching record-highs, with interest rates and inflation low and stable. The labour market was also expanding and wages were rising. In other words, the future seemed to be very bright.

But suddenly the landscape is changing with the coronavirus outbreak making the markets sick with worry. However, many investors saw change coming and were already prepared for such an event. For those investors, the time has come to stress-proof their portfolios to suit the emerging paradigm shift in the world of investment. A period where the old familiar rules get torn up and new ones are formed. 

Were we overdue a market correction? Possibly, but it’s always difficult to predict when they will hit. Remember back in 2006 when stocks were relentlessly climbing up and up? Who would’ve thought within a year the Subprime Mortgage Crisis would hit, followed by the first Great Recession of the new century. 

The New Paradigm Shift Can Help You Weather Financial Storms

The key economic paradigm of most developed economies in the decade since the Great Recession can be characterised with two phrases: low rates and quantitative easing (QE)

To keep the economic system afloat, central banks decided to:

However, after 10 years of this strategy, we are beginning to see visible side effects:

Consequently, most assets have had more than a decade to absorb and digest the effects of low rates and QE and their valuations today are at a peak. Given that rates can hardly go much lower and QE has already saturated the market, peak asset pricing offers little upside and significant downside going forward.

Furthermore, asset price inflation, combined with automation, globalisation and tax cuts (all of which benefit corporate earnings), have significantly increased wealth inequality. This is damaging social stability and exerting political pressure on governments to alter course. Plus, the protectionist trade policies pursued by President Trump are an inherent (albeit incorrect and suboptimal) response to an electorate dissatisfied with the status quo. Going forward, we will see more and more governments with nothing more than knee-jerk responses to an increasingly disillusioned population.

All of these factors are damaging the current economic paradigm and forcing it to transform. As a result, investors who fail to get to grip with the new market fundamentals might see their portfolios run into serious trouble. Plainly speaking, now is not the time for dithering but to master a new way of investing and doing business.

The Curse of the Old Paradigm in a Brave New World

Traditionally investors favour a rather limited range of asset classes, namely: stocks, bonds and properties. Some more adventurous individuals might enter the realm of precious metals, but they are in the minority. Most investors would simply buy an index fund or ETF for their pensions and forget about it.

This approach is very dangerous, especially now.

Firstly, after a decade of low rates and QE, asset valuations are at their highest, which means investing now offers a much lower margin of safety than ten years ago. This increases the probability of permanent capital loss. 

Secondly, the shift from active management to passive has significantly expanded index-based ETFs. Many of these funds, despite the claimed diversity, run a very concentrated portfolio as a result of the capitalisation-weighted method. For example in the iShares MSCI Switzerland ETF, the top 10 holdings occupy 67% of the portfolio. This is hardly a sound risk mitigation strategy. 

Thirdly, most of these assets suffer from liquidity issues one way or another. Properties and precious metals are inherently less liquid than stocks and bonds because their trading volume is much lower. Stocks and bonds are more liquid in the sense that they trade in high volume on open exchanges. However, the proliferation of ETFs has resulted in trillions of dollars being indexed against them, a number that vastly exceeds their daily trading volume and value. This means that in the likes of the Great Recession where these capitals are getting liquidated (an event made far more likely than in 2008 through indexation and algorithmic trading), the market will simply seize up, preventing investors from exiting.

It is evident that we need an alternative approach to investing in the new era.

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Learn How to Quickly Identify Hidden Gems and Other Treasures

In the fast-paced digital world, information is both abundant and instantaneous. This means that businesses that rely solely on first-mover advantage simply will not thrive, as competition can rapidly become fierce. Instead, we need to look for the hidden gems: businesses that sail beneath the radar and yet deliver superior returns to investors.

These businesses may come in all sizes, types and sectors. However, they all share three key traits:

  1. Easy and stable business models
  2. Consistent profitability and healthy financials
  3. Fair valuation

1. The Idiot-Proof Business Model

Warren Buffett once said of his investment approach that, “I try to invest in businesses that are so wonderful that an idiot can run them. Because sooner or later, one will.” His playful remarks contain an important kernel of truth: businesses that have solid margins with reliable supply and demand are much easier to manage and far less likely to fail, especially in times of market turbulence.

This principle permeates across the macro and micro levels.

At a macro-level, investors start looking at countries that are more politically stable, fiscally conservative and sensible in monetary and regulatory terms. These are the key factors that explain why Swiss and Japanese currencies (and investments in those currencies) are perceived as “safe havens”, and why during times of economic turbulence investors flock to Switzerland for example.

Perhaps its also something to do with the fact that the alpine nation is naturally more accustomed to  navigating safely through the big peaks and deep valleys in dynamic, fast-moving landscapes, where conditions can sometimes rapidly deteriorate. However, despite the world-leading transport infrastructure that can whisk you from city to city in a flash, it still pays in Switzerland to keep fit, nimble and healthy. Like the economy. Switzerland traditionally enjoys strong GDP with low unemployment to boot. Fiscally it has a small budget deficit and an independent monetary policy set in Zurich. All reasons why so many savvy investors think it a perfect location for bankable assets. Local blue-chips like Roche and Nestle would likely agree.

At a micro-level, companies in stable sectors are far easier to manage than their more volatile peers. After all, it is far easier to make plans and forecasts when you know how the next month, quarter and year is likely to pan out. Taking the Swiss tourist market as an example, there has been positive and stable growth for the past 25 years. Remarkably, it was completely unaffected by two huge global recessions during this period. Whether in terms of finance, real estate or the tourism industry, Switzerland has always been a rock of stability during times of economic shock.

2. Rock-Solid Returns With a Rosy Financial Outlook

If a stable and defendable model is the key foundation for success, then consistent profitability is the secret ingredient.

Companies that are consistently profitable tend to be able to deliver positive cash flow, which is vital to future growth as well as the ability to withstand shocks. This is more likely if the company is stable at both the macro and micro levels mentioned above. The ability to produce positive cash flow consistently creates value and enormous benefit to shareholders.

Hundreds of successful mid-sized companies, some which have been around for hundreds of years, enjoy sustainable and high returns, thanks to the sizable domestic demand and reliable economies of scale. But despite such impeccable credentials, these types of enterprises are not always targeted by big capital, as they are neither startups that promise skyrocketing growth nor companies that can accommodate hundreds of millions of dollars investments. But they are highly efficient and profitable niche brands which can be expected to perform come rain or shine, year in, year out. Just think of Rolex.

3. Fairly and Squarely Valued for the Long Home Run

There is a saying amongst investment professionals that “timing is everything”. What this implies is that the highest asset values are usually extracted with early-bird acquisitions which can enable investors to get the most premium rates of return. In fact, veteran value investors like Benjamin Graham are vocal advocates of the concept of margin of safety. That entails acquiring assets at below their fair value and holding onto them for the long-term, also minimising the risk of catastrophic capital loss.

Unfortunately, in recent years the market has been anything but fairly valued. After a decade-long bull market, the S&P500 price-to-earnings ratio had been comfortably sitting at 24, way above the long-term average of 15. It means today that finding fairly valued assets is becoming increasingly important, but also ever more challenging.

This is primarily caused by a single factor: market crowding.

The key allure of the public market is its liquidity. Securities that are publicly traded are easy to buy and sell (which is the whole point of exchange) and therefore it improves the efficiency of capital allocation. However such efficiency can never be absolute and frequently investors are driven by their emotions and perceptions rather than objective realities. 

For example, the recent surge in popularity of ETFs and index funds led to capital being channelled into some of the largest companies (by market capitalisation) in the world, even without a serious reappraisal of their long-term viability. Until recently the market was crowded with overblown valuations, not because of any outstanding financial performance, but because excess capital is competing for an artificially limited number of stocks. The situation is further exacerbated by low rates and QE, which vastly expanded the capital pool to make such investments, resulting in grossly inflated valuations.

Be ready, but stay patient. Hidden gems are not easy to discover but you’ll instantly know when you see one.

Businesses like Le Bijou are privately owned and therefore not listed, so shares are rarely traded (hence illiquid). They often have a very small investor base (a dozen) compared to their public counterparts (thousands). They often slip under the radar because investment banking analysts don’t get to report on them every day. They are different but in reassuring ways. For example, there are none of the bureaucratic hurdles and cumbersome fixed costs of public companies. (e.g. IPO fees, Big 4 auditing fees). And naturally, they are not under pressure to disclose market-sensitive data or forecast the future to Bloomberg reporters 24/7.

In other words, they are stealthy.

This is an enormous advantage in today’s viewing-glass world because these assets have way fewer investors chasing after them. They are hardly influenced by quantitative easing, which means their valuation is more likely to be fair and reasonable. Investing in such businesses provides for a significant margin of safety for flighty investors looking for safe sanctuaries to incubate wealth as well as benefit from healthy capital gains. 

Furthermore, these hidden gem companies tend to be run by managers with a significant stake in the business (often owner-managers) and their personal fortune is tied to the fate of the business. This means their incentive is truly aligned with other investors, rather than public CEOs who often worry about meeting earning targets, only to unlock a chunky bonus. 

Here are some new paradigm investments glittering under the radar:

1. Cadre

Projected Yield: 5-9%, up to 19% IRR

Asset description: Direct ownership in commercial real estate

Site: cadre.com

Country: United States

Cadre is a platform that makes commercial real estate accessible to ordinary investors with as little as $50,000.

Commercial real estate boasts certain advantages that can make it a highly desirable asset to own: it has a low correlation with the stock and residential real estate market, which makes it a great option to diversify the portfolio. Investing in the commercial estate was a privilege of institutions and super-rich until Cadre’s Ryan Williams raised 133M to disrupt it.

Unlike REITs, direct ownership is less susceptible to market moves and global volatility. Direct ownership also means lower liquidity, which Cadre elegantly solves by providing an internal platform where investors can trade their shares.

Another quintessential feature of “hidden gems” is their integration with so-called Opportunity Zones - Swiss neighbourhoods with the greatest potential for growth and where the government offers attractive tax cuts of up to 15%.

The third of Cadre’s advantages tells you why the firm is now valued at $800 million. The magic sauce is in the powerful data science that allows precision tracking of over 1 million assets and the utilisation of all this big data helps accurately predict capital movement and dividend gains for real estate. Cadre is truly shaking up an industry that has already given rise to more than 30% of the world's billionaires.

What are the hallmarks of this hidden gem?

What about the pros and cons?

One of the risks could be for investors whose circumstances have changed and who want to liquidate in a hurry. This would normally be a costly drawback but in this case, the risk is somewhat mitigated by the internal Cadre marketplace where investors can fairly trade without taking the kind of haircut likely in the open market.

2. Le Bijou

Projected Yield: 2 - 7% (B shares), over 7% (A shares), 3% - 6% (bonds, various issues)

Asset type: Private equity, real estate

Site: invest.lebijou.com

Country: Switzerland

You might think that developed markets in mature democracies like Switzerland are a little too stagnant for their own good. But then you probably haven’t met the founders of Le Bijou. The Swiss hoteliers' game-changing business model has ruffled the feathers of the continent’s 5-star hotel industry and recently prompted a gushing Apple Co-Founder Steve Wozniak to call his stay at Le Bijou, “the best hotel experience of my life”.

This avant-garde hotel-apartment business caters to a new type of well-heeled, artisan traveller, who wants genuine privacy and a level of control and comfort only normally possible by renting apartments, along with the special conveniences of 5-star hotels. So things like on-demand door-to-door deliveries and special catering.

Le Bijou’s customer base consists of a new breed of clientele that Airbnb, the one-time disruptor, is unable to cater for. A classic example of unbundling if ever there was one. The Swiss hoteliers also provide a range of spacious venues for corporate functions, special media events, personal celebrations and luxury brand launches. Together they provide a diverse flow of steady revenue streams that guarantee chunks of cash every single day.

Although the company is consistently profitable and large enough to run dozens of buildings in the largest Swiss cities, it is still too small to be on the radar of the big funds. Therefore it is very reasonably valued for an enterprise that regularly returns tidy sums to its investors.

With Le Bijou there’s also plenty more than first meets the eye. The owners are ambitious and envisage the business as a leading icon from a new-generation of blue-chip Swiss corporations to emerge in the coming decade.

There’s already an exclusive in-house investor community with professional workshops and Le Bijou member-only networking parties that often feature the leaders of world-famous firms like Porsche. The regular roster of community events is part of the philosophy of Le Bijou that hospitable, creative relations are an important ingredient for reliable and rewarding business.

What are the hallmarks of this hidden gem?

Possible risks and cons:

Airbnb rentals accounting for 8% of a company’s revenue may soon be banned in some Swiss cities. Company officials insist this won’t impact Le Bijou's bottom line, as the bulk of revenue comes from returning customers, from other booking agents like Expedia and Booking.com, as well as other income streams, like from hosting brand events. Some of the other disadvantages are the company doesn’t accept capital from outside of Switzerland and A-shares are rarely available - the company seems to prefer investments from a close group of original investors.

3. Horizon Equity

Projected Yield: 7 - 10%, the investment opportunity is available through brokers

Asset description: Private fund issued by a reverse mortgage provider

Site: horizonequity.ca

Country: Canada

Horizon Equity is a firm that offers “reverse mortgages”. A reverse mortgage loan is a fully-secured, non-recourse loan that enables homeowners, typically over 60 years old, to use the equity value of their home to release cash, a line of credit, a series of monthly advances or a combination of the three methods. In other words, it allows pensioners to start releasing liquidity from their homes without having to sell up.

The company raises funds to purchase reverse-mortgage portfolios and offers insurance to protect lenders against the risk that the value of the homes drops and becomes insufficient to the maturity on the loan.

What are the hallmarks of this hidden gem?

Possible cons and risks:

The risk we see comes from a possible unexpected increase in life expectancy that might drain the company’s profits.

4. Montreaux Capital Management

Projected Yield: 10%, unsecured fixed-income agreement

Asset type: Direct ownership in care homes

Site: montreuxcm.com

Country: United Kingdom

Ageing is one of the world’s most reliable business trends, something Montreaux CM was quick to spot. With the population of UK pensioners increasing from 17% in 2000, to 20% in 2020, and with another 25% increase by 2030, the demand for care homes is literally going through the roof. 

Montreaux CM offers opportunities to invest in elderly care homes. An investor can invest in something as little as a one room-unit, for a fixed-income contract with the management company. Around 80% of potential residents of care homes envisioned by Montreaux CM will be funded by the government.

A peculiar detail about the care home industry is that it has barriers to entry based on local economies of scale. In other words, once you open a care home in a neighbourhood, it is almost impossible to imagine another one opening across the street, as it will have tremendous troubles seducing patients to relocate.

What are the hallmarks of this hidden gem?

Possible risks and cons:

The most significant risk we see is an investor largely dependent on his fixed-income agreement with the management company, and if the latter goes bankrupt, it might be difficult to replace.

Nestle Down Under the Silver-Lined Clouds

Investors need to recognise the paradigm shift that is rippling across the global market right now. After a decade of economic recovery (the slowest on the record) where experimental policies like quantitative easing and ultra-low rates have become the norm, we are now in an age where traditional assets are becoming overvalued and lacking fundamental economic support. The smart play will, therefore, be to shift capital away from these securities and instead divert to smaller, less liquid and yet extremely profitable hidden gems.

The so-called ‘resource curse’ has reduced a once prosperous nation into a financial meltdown. The increased social and economic upheaval has sparked protests on a nationwide level and led many poor people to lose faith and withdraw their allegiance to President Nicolás Maduro. Amidst the political and economic turmoil, the EU, the US and a number of other countries across the globe have recognised opposition leader Juan Guaidó as the South American nation’s rightful interim president. In a bid to alleviate “the poverty and the starvation and the humanitarian crisis” currently gripping Venezuela and stop “Maduro and his cronies” looting the assets of the country’s people, US President Donald Trump has announced sanctions against Venezuela’s state-owned oil company PDVSA. US National Security Adviser John Bolton announced that the measure will “block about $7 billion in assets and would result in more than $11 billion in lost assets over the next year”. Effective from 29th January, the sanctions guarantee that any purchases of Venezuelan oil from US entities flow into blocked accounts and are supposed to be released only to the country’s legitimate leaders.

The situation in Venezuela has puzzled social scientists for years. On paper, oil-exporting countries and their economies are supposed to be thriving. Why is this not the case for Venezuela and what does the ‘resource curse’ have to do with it?

The Oil Curse Explained

The resource curse is a concept that a number of political scientists, sociologists and economists use to explain the deleterious economic effects of a government’s overreliance on revenue from natural resources.

In Venezuela’s case, being overconfident in its status as an oil powerhouse, the country’s socialist government became so dependent on oil production that it managed to lose track of its food production. Farms and other similar industries were expropriated by the government, which combined with the lack of private ownership due to the country’s socialist regime, led to a massive decrease in food production. Crop farmers weren’t able to acquire pesticides from now-government owned chemical companies, animal farmers weren’t able to acquire feed from crop farmers and food depleted. Nationalising businesses meant that business owners were forced to stop food production, while the government ignored food production altogether due to its full reliance on oil riches, which became the main focus.

As with any commodity, stock or bond, though, the laws of supply and demand cause oil prices to change. In 2014 for example, when oil prices were high, Venezuela’s GDP per capita was equivalent to 13,750 USD, while a year later, due to a dip in oil prices, it had fallen 7%.

This example perfectly illustrates the resource curse concept. A country, in most cases an autocratic country, becomes so dependent on a single natural resource that it disregards all other industries. The government is happy because the revenue is enough to feed them and secure their position of power. Naturally though, over time all other branches of the economy slow down to the point when the commodity prices inevitably drop, the country’s economy is not equipped for survival. According to the concept, the resource curse is an issue seen in the Middle East, however, it has never been so clearly displayed as it is now in Venezuela.

US Sanctions & their Impact

As mentioned, the oil industry is the main sector that is responsible for Venezuelan government’s revenues - for more than 90% of revenues to be precise. Before delving into the way the sanctions are expected to affect the country’s economy, let’s take a look at the country’s oil production stats. According to data from Rystad Energy, in 2013, Venezuela was producing 2.42 million barrels per day, while the output today is lingering above the 1 million mark. Production has been dropping more intensely in recent months and even without the recent US sanctions, the oil production in the country would have experienced a drastic drop due to lack of investment. Trump’s administration’s restrictions are only rubbing salt into the wound.

Even though the White House’s intention is to make oil revenues reach the people of Venezuela and bypass Maduro’s government, which owns most of the oil industry through PDVSA, the sanctions have the power to be disastrous for the country’s economy and potentially set off a domino effect in the global energy market. Two things are worth mentioning here: Venezuela used to be the fourth biggest crude importer in the US (after Canada, Saudi Arabia and Mexico), while the US is Venezuela’s number one customer. Thus, the problems that arise from the sanctions are that A) US Gulf Coast refineries are frantically looking for alternate sources for the crude oil that Venezuela has been providing them with up until now and B) Venezuela, on the other hand, is struggling to find new customers. On top of this, the US was Venezuela’s key source of naphtha, which is the hydrocarbon mixture used for diluting crude. Without it, PDVSA won’t be able to prepare its crude oil for export. Rystad Energy forecasts that some operators in Venezuela will run out of the crucial diluent by March.

However, not all hope is gone. Paola Rodriguez-Masiu from Rystad Energy believes that the impact of the sanctions will be significantly lower than Washington has predicted and says that: "The oil that Venezuela currently exports to the US will be diverted to other countries and sold at lower prices. For countries like China and India, the news was akin to Black Monday. They will be able to pick up these oil volumes at great discounts." She adds that Venezuela exports 450,000 barrels of oil per day to the US – a little under half of its total output and the amount of new oil which will flood the markets. Mrs Rodriguez-Masiu also mentions that so far, oil markets have massively shrugged off this new oversupply as investors have been pricing in the crisis in Venezuela for quite a long time.

So now what?

Although Venezuela is still seen as an oil powerhouse, especially due to its production of heavy crude (which is not widely available in the world), the oil world is expecting the historic collapse of its oil output to only intensify. The country needs to offset the effects of the US sanctions, find new financing and not let the people of Venezuela bear the brunt.

This will not be easy though. As the government desperately courts new buyers for its oil, it may find them hard to come by, with Chinese sales in a pattern of decline and new markets such as India worried about quality and transport issues due to much of Venezuela’s shipping designed for shorter distance travel. Indeed the government and prospective buyers will only be too aware that it is always harder to negotiate from a position of weakness.

Unfortunately for the people of Venezuela who are struggling to get basic supplies, and are facing starvation and illness, the actions and the effects of the country’s government and the oil curse look set to reverberate for some time.

 

 

Sources: 



https://www.thetimes.co.uk/article/venezuela-frustrated-poor-losing-faith-in-beleaguered-maduro-22cf7f66z

https://edition.cnn.com/2019/02/04/americas/europe-guaido-venezuela-president-intl/index.html

https://edition.cnn.com/2019/01/28/politics/us-sanctions-venezuelan-oil-company/index.html

https://www.investopedia.com/terms/r/resource-curse.asp

https://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=IVE0000004&f=A

https://www.forbes.com/sites/ellenrwald/2017/05/16/venezuelas-melt-down-explained-by-the-oil-curse/#39dcb3d0282b

https://www.ogj.com/articles/2019/02/rystad-energy-venezuela-production-could-fall-below-700-000-b-d-by-2020.html

https://www.bbc.co.uk/news/world-latin-america-47104508

 

The study, conducted by independent survey company Censuswide asked 1,000 members of the UK public about their views on the economic outlook for 2019.

A total of 44% of respondents said they expected a financial crisis worse than 2008. Additionally, over a third of those polled (41%) said they are expecting to see a housing crash happen this year.

Only 14% of the population said they had forgiven the banks after the 2008 financial crash, according to a new poll from Spearvest, the wealth management firm.

As well as this, there is a significant distrust from consumers that banks have their best interests at heart. The survey found that over half (55%) did not believe this to be true, with only 13% believing they did.

The poll also found that consumers want banks to do more for good causes with 60% believing that banks should donate and fundraise for charities more.

Wael Al-Nahedh, CEO of Spearvest comments:“With widespread concern around the performance of the housing market and the wider economy, 2019 already looks set to be a challenging year for investors. It’s also clear that the financial services industry needs to do much more to win back trust of the public, supporting good causes and demonstrating a genuine commitment to charitable giving.”

(Source: Spearvest)

Refugee crisis, political turbulences, economic struggles brought on by austerity and Brexit. Katina Hristova explores the crisis that the European Union has found itself in.

 

"The fragility of the EU is increasing. The cracks are growing in size”, warns EU Commission Chief Jean-Claude Juncker. With Italy’s Government crisis finally being resolved and the country’s shocking rejection of NGO migrant rescue boats, it has been easy to detract from the political earthquake that the third largest EU economy experienced and the quick impact that it had on the Euro. But Europe’s problems go deeper than Italy’s political turbulences. A month ago, Spain, the fourth biggest Eurozone economy, was faced with a very similar crisis and even though the country now has a new leader, analysts believe that the Spanish instability is not over yet. With the shockwaves of both countries’ political uncertainty being felt on Eurozone markets, on top of migration pitting southern Europe against the north and as the UK marches on towards Brexit whilst Trump abandons the Iran Nuclear Deal, which could mean the end of the transatlantic alliance between the US and Europe, is the EU in serious trouble?

 

Why is it so serious?

Billionaire Investor George Soros is one of those people that can sense when social change is needed and when the current cultural and political processes are about to collapse. A month ago, in a speech at the European Council on Foreign Relations, Soros claimed that: “for the past decade, everything that could go wrong has gone wrong”, believing that the European Union is already in the midst of an ‘existential crisis’. The post-2008 policy of economic austerity, or reducing a country’s deficits at any cost, created a conflict between Germany and Greece and worsened the relationship between wealthy and struggling EU nations, creating two classes – debtors and creditors. Greece and other debtor nations had sluggish economies and high unemployment rates, struggling to meet the conditions their creditors set, which resulted in resentment on both sides toward the European Union. Back in 2012, the European countries that struggled with immense debt, malfunctioning banks and constant budget deficits and needed help from other member countries were Portugal, Ireland, Greece and Spain. In order to help them the creditors countries set conditions that the debtors were expected to meet, but struggled to do so. And as Soros points out: “This created a relationship that was neither voluntary nor equal – the very opposite of the credo on which the EU was based”.

Although Italy finally has a government, after nearly three months without one, the financial markets are apprehensive about what to expect next, considering the country’s €2.1 trillion debt and inflexible labour market. On 29 May, fearing the political crisis in the country, the Euro EURUSD, +0.6570%  slid to a six-month low, whilst European stocks ended sharply lower, with Italy’s FTSE MIB I945, +1.43%  ending 2.7% lower, building on the previous week’s sharp losses. Bill Adams, senior international economist at PNC believes that: “The situation serves as a reminder that political risk in the Euro area hasn’t gone away. Italy is not on an irrevocable road to anything at this point,” he said. “I think what is most likely is another election later this year, and what we’ve learned is that outcomes of elections are very unpredictable.”

Spain on the other hand has made huge progress since being on ‘EU life support’ when ‘its banks were sinking and ratings agencies valued its debt at a notch above junk, on a par with Azerbaijan’. Since receiving help, the country’s economy has been growing, unemployment is not as high and its credit rating has been restored. However, with the Catalonia separatism, and the parties, Podemos and Ciudadanos who have emerged to challenge the old duopoly between the Popular Party (PP) and the Socialists, the political uncertainty in the country is set to continue.

Greece has been in a permanent state of crisis for a decade now, with its current debt of 180% of its gross domestic product (in comparison, Italy's is 133%). In less than two months, on 20 August, the country is due to exit its intensive care administered by the European Central Bank and International Monetary Fund. The EU will then have to come up with a new debt relief offer on the $280 billion Greece still owes – which could be challenging, as the ‘creditors’ are not in a charitable mood.

In contrast, Poland and Hungary are financially stable, however, both countries seem to be in opposition to the EU with regards to immigration, the independence of the judiciary, ‘democratic values’ and freedom of the press. Both governments have dismissed EU plans to share the burden that the Mediterranean region carries in terms of migrants arriving into these countries. In addition to this, Hungary’s Prime Minister is promoting an ‘illiberal’ alternative to European consensus, whilst Poland has sided with the US and against its European partners on a range of subjects, including the Iran sanctions and Russian gas pipelines.

And of course, let’s not forget the EU’s list of unsolved issues – the main one being Brexit. With nine months until its deadline, the terms of Britain’s exit from the EU are nowhere near finalised.

 

Make the EU an association that countries want to join again

Today, young people across the continent see the European Union as the enemy, whilst populist politicians have exploited these resentments, creating anti-European parties and movements.

Since its establishment, the EU, an association that was founded to offer freedom, security and justice without internal borders, has survived many turbulences. Although the current crisis is based on a number of deep-rooted problems, odds are that these challenges will be overcome. To save the EU, Soros believes that it needs to reinvent itself via a ‘genuinely grassroots effort’ which allows member countries more choice than is currently afforded.

"Instead of a multi-speed Europe, the goal should be a 'multi-track Europe' that allows member states a wider variety of choices. This would have a far-reaching beneficial effect."

And even though he isn’t offering a proposition for a bill that someone needs to draft and pass as soon as possible, he has opened a conversation - a conversation about moving away from the EU’s unsustainable structure. “The idea of Europe as an open society continues to inspire me”, says Soros. And in order to survive, it will have to reinvent itself.

 

Roberto di Lauro is Partner at Business Support SpA - a Milan-based boutique financial advisory with additional offices in Singapore. The firm specialises in corporate and financial consultancy services for businesses, banks and investment funds, with a special focus on the SME market. Below, Roberto - head of the Bank Agency & Financial Services practice - tells us about the restructuring and turnaround services that Business Support offers and the firm’s approach when advising clients.

Can you detail the key steps that are involved when turnaround services are required?

It is not easy for an entrepreneur to admit that his company is experiencing difficulties. The first step, when facing the process of debt restructuring and business turnaround, is to do so promptly, critically identifying the factors that led to these difficulties and evaluating every possible solution, before adopting the most suitable one.

The assessment and management of the business in distress usually follows four main phases: diagnosis, planning, negotiation, execution.

The diagnosis allows the company to learn about the genesis of the factors that caused their financial difficulties. Timeliness of intervention and absolute criticality in reading the assessments are key factors during this phase.

The business planning is the key tool of the turnaround process: through the business plan, the company reaffirms their mission, highlighting the assets that are able to generate life blood for the core business, while eliminating everything that is no longer necessary or unproductive, with extreme focus on cost savings.

Negotiation is the most delicate phase of the entire process: at this stage the company needs to convince all stakeholders and, in particular, the creditors, of the soundness of the business plan, its ability to generate income and relaunch the company.

Execution is the end of a long period of evaluation, negotiation and hard work and represents the beginning of the process of relaunching the company.

 

What are the typical timescales for restructuring/turnover plans to start to have a positive effect? How is progress monitored?

Generally, there is a 10/12-month time span between the identification of the state of crisis and the start-up phase of the turnaround plan. The turnaround plan, depending on its underlying hypotheses, can begin to demonstrate its beneficial effects almost immediately. Very often, the early stages of the plans are characterized by important transactions: asset disposals, cost savings or partial repayment of loans. All these operations aim to deflate the financial tension and allow the company to activate a virtuous cycle of positive results. The monitoring of the execution of the plan usually involves periodic detection of key performance indicators. Monitoring of results must be the compass that guides the company. Since the early performance can often fail to meet expectations, this is a very delicate chapter of the restructuring process, where it might be necessary for the company to make small adjustments to their course of action.

 

What are the refinancing options available for Italian businesses in financial difficulty?

Today, the main restructuring and turnaround operations involving Italian firms in difficulty take place within the scope of the legal framework set by Italian bankruptcy law. As such, debt restructuring is an operation in which financial creditors allow companies to review repayment plans for their loans on the basis of a business plan prepared by the company assisted by a specialised adviser. The feasibility is assessed by a chartered accountant expert and, in some cases, by the Court of Law. When the turnaround plans manage to reach specific performance targets, many firms are able to refinance their residual debt, involving in the process the original lenders or even new ones, thus completing the restructuring process and opening the full-relaunch stage.

In the last few years in Italy, investment funds specialised in Non Performing Loans (NPL) and credit securitisation vehicles have started trading on distressed debts.

 

What is your advice regarding handling financial difficulties? 

It is very important for any company to recognize early symptoms of financial distress, choosing the appropriate professionals to assess their financial soundness.

Considering that all companies and organisations are different from one another, the same goes for each crisis, turnaround process and solution. It is very difficult to create specific clusters and only a successful track record demonstrates how any consultant was actually able to make an impact, assisting the client in transitioning into a new phase of their business life cycle. Companies that have been through a turnaround process will be more likely to learn from their sorrow, gaining extensive experience and the tools to finally achieve their targets.

 

Phone: +39 346.4708468 - Tel.: +39 02.89013129

Fax: +39 02.72015926

Email: roberto.dilauro@business-support.it

Website: www.business-support.it

19th October marks the 30th anniversary of Black Monday, when in October 1987 stock markets around the world experienced a flash crash. The FTSE 100 fell 11% on the day, and then fell a further 12% the next day, wiping out more than a fifth of the value of the UK stock market in just two trading sessions.

As terrifying as these sharp falls were, hindsight tells us that for investors who didn’t panic, even a badly timed investment made money in the long run.

Laith Khalaf, Senior Analyst, Hargreaves Lansdown: “Stock market crashes are a bit like the Spanish Inquisition- no-one expects them. The 1987 crash is renowned for the speed and severity of the market decline, and undoubtedly when markets are plunging so sharply, it’s hard to keep a cool head.

“Hindsight clearly shows that the best strategy in these scenarios is to sit tight and not engage in panic selling. Time has a tremendous healing power when it comes to the stock market, and price falls are typically a buying opportunity. The stock market is an unusual trading venue, in that buyers tend to stay away when there’s a sale on.

“The Footsie has recently reached a new record high, which prompts the question of whether it’s heading for a fall. There are always reasons to worry about the stock market and now is no exception. The Chinese credit bubble is front and centre of concern, along with increasing global protectionism, and the disturbing prospect of World War Three being started on Twitter.

“However there are also reasons to be positive, with the global economy moving up a gear, borrowing costs remaining low, and stocks facing little competition from bonds and cash when it comes to offering a decent return.

“The market will of course take a tumble at some point, and it’s impossible to predict when. This makes being bearish an easy game, because you only have to wait so long before you are eventually proved right. The big question though, is how much you have lost out on in the meantime by sitting on your hands.

“It’s important to bear in mind that investing isn’t a one-time deal, savers typically invest at different times throughout their lives, and at different market levels, and sometimes they will be luckier with their timing than at others. To this end, a monthly savings plan takes the sting out of any market falls by buying shares at lower prices when the inevitable happens.

“The golden rule, of course, is to make sure you are investing money for the long term. In the short term the stock market is a capricious beast and can move sharply in either direction, but in the long run, it’s surprisingly consistent.”

After the crash

The table below shows stock market returns following the three big stock market falls of the last thirty years: 1987, 1999-2003 and 2007-2009.

The first column shows what you would have got by investing £10,000 on the eve of the crash, and pulling your money out at the bottom of the market. The remaining columns show what would have happened to your investment if you had held on to it. These numbers should be viewed as examples of what stock market returns have been if your timing is really pretty stinky, and you only happen to invest £10k once in your entire life, on the eve of a dramatic downdraft in the market.

In 1987 investors would have seen £10,000 reduced to £6,610 in a matter of weeks. However, if they had waited 5 years, their investment would have fully recovered, and 10 years later would be worth £32,690, with dividends reinvested. Today that investment would be worth £104,340.

Stock prices recovered pretty promptly after the 1987 crash, in contrast to the bursting of the tech bubble in 1999, which was compounded by the Enron scandal and the World Trade Centre attack, leading to a deep and prolonged bear market lasting until 2003. £10k invested in the stock market in 1999 would be worth £23,210 today, an annualised return of just over 5%.

Looking at these figures, it’s hard to dodge the conclusion that this was the worst of all three periods for stock market investors. It also contributed to the already declining fortunes of defined benefit schemes in the UK, and did huge reputational damage to insurance companies as the dreaded MVR (Market Value Reduction) became common parlance amongst hitherto happy With Profits policyholders.

The value of rolling up dividends shines through in the numbers below. Since the peak of the market in June 2007, £10,000 would only have grown to £11,890 based on stock price movements alone. But once dividends are counted and reinvested, that rises to £17,230, not a bad result given this money was invested at the peak of the market just before the global financial crisis took hold.

Is the Footsie about to crash?

The FTSE 100 reaching a new record high recently has of course prompted questions about whether it’s heading for a fall. However the level of the Footsie is not a measure of the value in UK stocks, seeing as it doesn’t take account of the level of earnings of companies in the index.

Below are two related measures of value of the UK stock market which take company earnings into account, but each give a slightly different picture of valuations in the UK stock market right now.

The headline historic P/E is elevated compared to its historic average, though still well short of the level seen in 1999.

The Cyclically Adjusted P/E Ratio, a valuation method championed by Nobel prize-winning economist Robert Shiller, takes a longer term view of earnings by looking over the last 10 year, which smooths out volatility in the one year P/E number.

On the cyclically adjusted measure, the UK stock market is trading below its historical average, and well below levels seen in both 1987 and 1999.

So which of these two measures should we believe? Well, we assign more weight to the Cyclically Adjusted P/E because it takes a longer term, more rounded view of stock market valuation. But if we simply take both measures into account in combination, together they suggest the market is somewhere in the middle of its historic range.

When thinking about the valuation of the stock market, it’s also worthwhile considering the valuation of alternative assets. The 10-year gilt is currently yielding 1.3%, and cash is yielding next to nothing with base rate at 0.25%. This contrasts sharply with 1987 when base rate was 9.9% and the 10-year gilt was yielding around 10%. So if you think the UK stock market’s expensive right now, then you have to take a really dim view of the value provided by bonds and cash.

(Source: Hargreaves Lansdown)

Retail investors withdrew £3.5 billion from UK investment funds in June, according to Investment Association data released today.

By comparison, in the worst month of withdrawals during the financial crisis, January 2008, retail investors withdrew £561 million from UK investment funds. In October 2008, just after the collapse of Lehman Brothers, retail investors withdrew £493 million from UK investment funds. Total assets under management are now around twice as high as they were back then, but June 2016 was still an exceptional month for outflows.

The exodus was led by investors in the property sector, who withdrew £1.4 billion from these funds, leading to some funds suspending trading, and others imposing hefty dilution levies on those who did want to sell.

£2.8 billion was withdrawn from equity funds across the board, with £1 billion of net withdrawals from the UK equity sectors.

£464 million was also withdrawn from ISAs over the course of the month.

Laith Khalaf, Senior Analyst at Hargreaves Lansdown comments:

‘The scale of the exodus from investment funds in June is quite extraordinary, with the Brexit vote eclipsing the financial crisis in terms of putting the frighteners on retail investors in the short term.

The property sector saw the biggest outflows, as investors flocked to the emergency exits, concerned that the economic effects of leaving the EU would damage commercial property prices. Since the vote some property funds have been forced to suspend trading because of the high level of outflows, with others imposing high transactional charges on those wishing to sell. UK and European equity funds also saw heavy outflows over the course of the month, with fixed interest and absolute return funds being the main beneficiaries.

Clearly investors were rattled by the referendum, and switched out of assets they perceived to be at risk from a vote to leave the EU. UK investors who withdrew from equity funds are probably regretting this decision in light of the performance of the stock market since the referendum, and that goes in spades for those who cashed in their ISA allowance, losing that tax shelter forever.

This demonstrates the danger of events-based investing, because even if you do happen to guess the correct outcome, you still might not be able to predict the effect on markets and asset prices.

When it comes to elections and referenda, investors are better off voting with their polling cards rather than their finances. In these situations it pays to keep a cool head, to ignore the inevitable clamour, and to take a long term view on your portfolio.’

(Source: Hargreaves Lansdown)

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