The Baring Bank collapse and the danger of betting on a single market or asset

Now more than ever we are on the edge of some people’s patience, as we see a flat market for most assets but some tempting single asset performance. The portfolio Managers are modestly selling longer term fixed interest and buying good shorter-term rates but as they are short term they are not for a large part of the portfolio. It’s the same story for cash. Some indexes have done better than expected. The S&P 500 has flown but only on the back of the Magnificent Seven, the big Tech companies have outperformed everything else in that index.  We heard some potential bad news for Apple from China over the weekend, so we understand the risk of becoming too much about the US.

So, what does history tell us? Well let’s look at the collapse of a big banking institution. It was brought to its knees by one person betting on a single market.

Nick Leeson the chap in question has become infamous as that person.

Leeson was a rogue trader, operating without supervision or oversight. At the time of the loss, he was assigned to an arbitrage trade, buying and selling Nikkei 225 futures contract in both the Osaka Securities Exchange in Japan and the Singapore International Monetary Exchange, in Singapore. However, instead of initiating simultaneous trades to exploit small differences in pricing between the two markets, he held his contracts, hoping to make a larger profit by betting on directional moves of the underlying index.

This indicates that active trading with limited diversification, can create a perfect storm of loss.

I sent out the LGT comments on the Goldilocks market. I have lived through a few of those when conditions are not too hot not too cold but instead just perfect for recovery. For now I, as well as I am sure many of you, would take some positive news.

For us our House view is highly diversified portfolios still feel the safest. This downturn unlike previous crashes, has not offered a clear winner, and there is no standout asset that we can dive headfirst into. Yes, some individual assets and markets are outperforming now, but it’s a case of everything can perform well short term but over reliance on one thing can leave you high and dry.

So, our asset view.

Equities offer pockets of value. Some companies and sectors are ready to bounce hard when interest rates, and inflation return to more normal levels.

Fixed interest looks very interesting, and again should bounce on lowering interest rates.

Property (corporate / commercial) is seen as a growing positive and the fear of covid induced ‘everyone will always work from home’, has not materialised. Also change of use to residential needs has created a supply and demand advantage.

Cash – the rates are wonderful and at the moment and really worth a look for anything that is cash already and will be spent say in the next two years. Its not so easy for selling down assets or investments to get cash rates as its unclear if that will be a positive move. The fund managers are taking wins where they can in cash, but everyone is unclear on what the short-term winner will be. We know medium to long term cash has always guaranteed a loss in the past against real assets.

The best approach for now still feels like do not make any big changes and hold everything rather than create focused portfolios. But as always, we are vigilant and watchful in case this changes quickly.

Some windows of opportunity (Product).

There are some different but illiquid options now for income, such as annuities and structured products, so if you want to discuss these options please reach out to your adviser before your review as they may not be around for a long time. They will suit few people I suspect, but they are an opportunity for those who are willing to give up their capital forever or tie up their money for a longer term in exchange for income.

Communication

We are teeing up more communication on changes within portfolios to let you all have a window into the work that’s happening behind the scenes. We will also be embracing technology and creating videos to share with you all, where we will have discussions with Fund Managers and other professionals on topical subjects. We have looked at ways of communicating these and they will be available through LinkedIn our Website and Facebook. Look out for those and follow us on Facebook if you have not done so already.

So that’s all for now and I look forward to the future. The air after the rain is always sweeter.

Regards Andy