Our view on the Euro and investment risks
Written by Professor Robert Anthony, Anthony & Cie
GGI Insider (#57), January 2012
We have written this article which is extremely a controversial subject. Whilst there is a common agreement that the probability is the euro will remain, there is a very different view inside France to outside France.
The international community especially the Swiss and the British are highly critical of certain euro zone members. Those euro zone members themselves are also reciprocally critical of those that critic them.
This is fundamentally a major issue on confidence within the banking system.
Our article below tries to highlight the current issues.
Last year, the general and financial press particularly spoiled us in apocalyptic announcements and other doomsday prognosis. What did we hear? The return of inflation, the riots in United Kingdom, the Greek crisis, the demise of the Euro, the loss (announced at least twenty times) of the French AAA rating and the dramatization of this loss… This has become a fashionable theme. Time spans and reactions have become shorter and shorter. This has resulted that there is a wild pack of wolfs edging away the rock face of certainty.
For inflation, the answer is simple. Inflation measures the rise in prices. This increase is fundamentally connected to an excess of demand over supply. At the world level, the production capacity is structurally under employed… end of the story!
For the British riots, we notice sporadically such phenomena in Los Angeles or in Paris, and many passive demonstrations elsewhere (“Los Indignados” in Spain). It seems to come in a random way as if a volcanic eruption. The result of these events is really too dispersed to come to any real effect.
For the demise of the Euro, the lobby at the end of 2011 by the international press, as well… was unbelievable! Tens of articles extend beyond one’s imagination and the advocated. The depressing end of the financial institutions!!! Everybody had forgotten that the euro today is more expensive in dollars than during its emission. There are no main headlines on the fact that the short interest rates had gone lower. Over and above there is a paradoxical sign of mistrust. Let’s try to understand why!
For the loss of the AAA French rating which has been reported several times taking a step back we can only say it is exaggerated. United States already have the notation AA+ like France, without any significant impact.
One could put forward other ridiculous ideas just as destructive. There is no smoke without fire! Will the world really end in December 2012 as the Mayan Prophecy of Doom 2012 predicts? The next episode could be the collapse of China and the loss of the AA American rating!! Do you honestly believe this?
All this would be ironic if there were no real damage caused. Unfortunately the atmosphere of this dooms day message creates a collective anxiety. The media buzz slows down the economic activity, making the crisis more acute resulting in unemployment.
For our part, as professionals, we have the necessary experience and training. Our role is to separate us and our clients from this stream of meaningless statements and to bring simple and relevant answers. We saw arriving from 2006 the financial crisis (click here to read our articles published in March and May 2006, in “Investissement Conseils”) and with responsible advice, we have from this period recommended extreme prudence. Our clients have not forgotten this advice, for a very good reason, they notice every day the consequences within their portfolios, by way of their assets values. Which are still higher than many other professional fund managers and banks providing discretionary management. This is obviously assuming our advice is taken.
Today, our position is simple; we consider that there is little visibility on the equity markets. Even if the values seem attractive, we consider that the market is going through the experience of extreme volatility. Our strong advice at the moment is to reflect on an investment in the euro fund with guaranteed capital. Obviously this is subject to exchange risk for international clients and could form part of a portfolio.
If you want to read more fiction about this just read the press!
Euro funds with guaranteed capital are emitted and managed by insurance companies. The sums paid on these euro funds are guaranteed by the insurers: they cannot fall and are revalued every year with a minimal guaranteed and protected return (the technical rate) as well as a participation in profits. At present the technical rate is situated on average around 2.5 % whereas the profit-sharing represents approximately 1 %. The total return is situated around 3.5 % a year. These rates are net returns after charges.
Life insurance companies have the obligation to establish reserves (for sustainable depreciation of the general assets of the fund).
These funds are mainly constituted by corporate or government bonds/gilts) (around 90 % of the total) with an average duration about 6 years. The 10 % of the remaining portfolio are generally invested in shares and in real estate yielding revenue.
To illustrate the Greek risk, the euro fund with capital protected from a life insurance company is invested at the moment in Greek gilts at the level of 0.22 % of the total of the fund. By imagining the very improbable scenario of a total write off of Greece debt, the impact on the fund would be just 0.22 %. This means that the return would fall by 0.22 %. In actuality the Insurance Company would have the legal possibility of mobilizing its reserves for depreciation. The final end result is there would be no customer impact as the deficit would be paid from its reserves.
Not such a bad choice in a confusing investment environment.
We would be happy to explain more on these issues on request.
Article published on 16 January 2012.
This is only an overview of the situation; it should not in any way be taken as advice, only an analysis of one’s personal circumstances will ensure a proper financial planning.
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