The August aMAIL from Alpha Structured Investments
1. TWO TOPICS IN THIS MONTH’S aMAIL
Hi, I’m Tony Rumble from Alpha Structured Investments and thanks for your time.
This month’s short video covers two topics.
The first is why your clients should have a sensible allocation to key emerging economies in the Asian and BRIC regions in their portfolio and how two of our products, the Alpha BRIC 40 Plus and our Asian Lions POWER Shares can help. Our BRIC 40 Plus product has been an absolute stand out in a dismal year, once again outperforming Australian investments by nearly 30%, and our Asian Lions POWER Shares is also outperforming Australian investments.
The second topic is a quick update on a few Alpha initiatives.
Before we begin can I remind you that the two key elements required for a re-rating of the Australian share market have in fact started to emerge. As we predicted in last month’s aMail, signs of interest rate cuts and a good profit season will drive our share market higher – and both have clearly been seen in the last couple of weeks.
Westpac and CBA have both announced profit rises of 8% which is massive in the current economic conditions, and the RBA is clearly talking about rates declining later this year or early next year. The Aussie market is good value right now! But as we show in today’s video, it’s really time to increase client investments into the Asian and BRIC economies – there are some often ignored reasons for doing so that we’ll discuss in a minute. But first, what about the new Alpha initiatives?
2. SOME CHANGES TO ALPHA
You may have already noticed this month’s aMail has a slightly different look and feel.
More changes to the aMail and our website are coming as we strive to make to make Alpha a more useful resource to help premium advisers grow their business.
We know advisers are time poor and often bombarded with dense, written information from other product providers.
So we are innovating the aMail by making it shorter and using more video.
We want the information to be faster and more interesting to consume.
Of course, our focus is always on personal communication, but the monthly aMail, which includes performance figures, has important information for you and your clients.
So please spend a few minutes on the aMail each month when it arrives.
3. EMERGING ECONOMIES – ASIA AND BRIC ARE THE KEYS
Now to emerging economies.
Most investors understand that emerging economies can provide high returns but come with much higher risk and volatility.
A persistent problem is less regulation certainty, while a newer problem is the relatively larger effect of climate change on emerging countries than established western economies.
Despite the many challenges, Alpha believes high-net-worth investors should allocate half of their international equity portfolio to emerging economies, primarily to the sustained growth economies in Asia and the BRIC sector.
This is well above the 9% weighting of emerging economies in the MSCI World ex-Australia index, and highlights a key flaw in the MSCI approach.
The MSCI approach benchmarks country allocations by measuring the market capitalisation of country stock markets. On this approach, a country like the United States gets a 55% allocation in normal international managed funds – whether or not the US economy is growing or slowing.
In contrast, more progressive allocations rely on measuring GDP growth, and a good example of this is the Standard & Poor’s BRIC 40 Index which is compiled using GDP growth as a key measure.
Since most international equities fund managers use the MSCI approach to guide their asset allocation, no wonder most investors continue to be disappointed by their returns.
We’re not for a moment suggesting your clients should invest directly in stocks in emerging economies or as a result of the flawed asset allocation of normal international funds. We don’t see any joy for investors through managed funds either.
The risks are too high.
Alpha believes capital protection must be the starting point for any emerging economy investment and portfolio strategy.
Capital production is a certainly a feature of Alpha Power Shares – Asia Lions, launched this year to help high-net-worth investors gain exposure to the fast-growing Chinese economy without the risk of investing directly.
And it is an important feature of our popular BRIC 40 plus product, which invests in the Standard & Poor’s BRIC 40 index.
Using structured products to manage risk means your clients are better placed to participate in fast-growing emerging economies and access higher returns.
Before I make the case for emerging economies, let’s talk about the alternatives.
4. THE ALTERNATIVES
The United States economy has so far skirted recession and Alpha believes an improving housing sector should see the US economy strengthen in the 2009.
But it could be some time before the bear market in US stocks retreats.
If anything, Europe is looking even more anaemic as it struggles with rising inflation and slowing economic growth.
It too looks a difficult place to invest in the near term.
Japan is also sick at present and offer lower returns in the short-term for investors.
The Australian economy is also slowing quickly but a cash rate of 7.25% means the Reserve Bank has more room to move if economic growth continues to tumble.
And the still-strong picture for commodity demand augurs well for our country.
But local stocks, too, may provide lower investment returns over the next 12 months than investors are used to.
So even though there are more positives emerging – a lower oil price and falling commodity prices which will take some heat out of inflation are key ones – the short-term outlook for investment returns in western economies is modest.
5. BRIC LONG-TERM OUTLOOK
The near-term outlook for emerging economies is more positive – as reflected by the almost 40% return in Alpha’s BRIC product in its first year. The second year returns for the Alpha BRIC product haven’t been as good, as global share markets cop a battering – but the 15% return in year 2 is far better than any Australian share investment has returned for the same period.
The proof is there to see – over the last 2 years, BRIC investing has strongly outperformed the Australian market, and we expect more of the same over the next couple of years at least.
Goldman Sachs, which coined the term BRIC for Brazil, Russia, India and China, has produced some fascinating research in this area recently.
In 2006, Goldman predicted the Chinese economy would overtake the US economy by 2040, but now says China will overtake the US by 2025.
That’s just 17 years away.
And by 2050, Goldman believes the Chinese economy will twice as big as the US.
Goldman also says India’s economy will be slightly smaller than the US by 2050, and the economies of Brazil, Indonesia, Russia and Mexico, will be bigger than Britain.
By any measure, this would be a remarkable outcome.
Long-term forecasts are always problematic, but it seems clear the world is on the cusp of a major change of in the global economic pecking order.
If Britain dominated the 1800s, and the US dominated the 1900s, then China and some emerging economies could dominate this century.
Some economists are even pointing to the emergence of the next eleven, or N-11 countries – another term coined by Goldman – such as Turkey and the Philippines.
Growth is expected to be fuelled by the huge populations of these countries.
So investing in BRIC economies is not just about getting higher returns.
It is about sensibly positioning your clients’ portfolios for a major change in the global investment landscape through structured products.
6. EMERGING ECONOMY VOLATILITY
Of course, it won’t be a smooth ride.
Climate change, if not addressed, could easily bring these long-term forecasts undone. The Beijing smog has been hard to hide, but it’s also impossible to ignore the massive economic and social sophistication on display in the Beijing Olympics. China will continue to grow for the next few decades at least – despite what the cynics and the media say.
And there will be many crises and huge volatility along the way – highlighting the need for structured products that offer capital protection. The chart below shows the emerging market volatility for the S&P BRIC 40 Plus index.
History is a useful guide to what might happen.
Emerging markets outperformed from December 1987 to September 1994 by 23% a year.
But from the mid 1990s to early 2000s, they underperformed world equities by more than 15% a year.
This was due to the Asian currency crisis, the US tech wreck and the Russian debt default. But since then, thanks largely to the IMF which bailed out a number of emerging economies, most now have strong national account surpluses and in fact countries like China and Russia are now net lenders to the United States.
The pendulum swung from the 10 years to May 31 this year, with the MSCI Emerging markets index returning 10.7% a year, against less than 1% for the MSCI world index (ex Australia).
Growth in Asia and Eastern Europe has largely driven the gains. The chart below shows the long-term gains in emerging economy investments as measured by the S&P BRIC 40 index.
7. EMERGING ECONOMIES – SHORT-TERM PERFORMANCE
Alpha believes the outperformance of emerging economies, particularly Asia and the BRIC sector could accelerate in the next 10 years.
The reasons are obvious: the huge urbanisation of China and India is powering their economies and creating massive demand for commodities.
Russia, a huge exporter of oil and gas, and Brazil, a dominant player in agricultural soft commodities, are exceptionally well placed to benefit.
All four economies have large populations and increasingly skilled workforces. All are benefiting from better government regulation and more foreign investment.
Of the four, Alpha is most bullish on China and expects double-digit growth rates each year to continue for some time.
Russia also looks interesting given it is less exposed to the fallout from the US sub-prime crisis than China, India and Brazil.
8. THE ALPHA BRIC PRODUCT
Clearly there is a strong case for sensible investment in emerging economies, and we believe, to use the Alpha BRIC 40 plus product as the vehicle to do so.
More information about BRIC is on our website or just clink on the link in this aMail.
Simply put:
The Alpha BRIC 40 Plus – Series one returned 38.32% in its first year and has performed well, albeit with some volatility.
BRIC 40 Plus invests in the S&P BRIC 40 index which measures the growth in equity markets of BRIC economies.
It is capital guaranteed to at least 85% to maturity by UBS Bank AG and it offers a convenient three-year term.
Series two of the BRIC 40 Plus series is open, so please call or email Alpha if you would like more information.
9. TO RECAP
In conclusion:
- There is a strong case to increase exposure to emerging economies, specifically Asia and the BRIC sector
- But clients must incorporate capital protection into their strategies
- The Alpha BRIC 40 Plus has performed strongly
- Series two of the product is now open
- Alpha POWER Shares Asian Lions is also performing strongly and is also open for investment
From myself and the Alpha team, thanks for your time and remember to keep reading the Alpha aMail for investment ideas and trends.
Have a great day.
ENDS
