A new landscape for investors – Part 1

Greece’s recent default on its outstanding €1.5 billion loan has caused one or two historical and marked events. The main headline read it was the first time since the IMF’s inception after the Second World War that an advanced economy has missed a payment to the IMF, which may well have put the credibility of the grand European Union project into reverse.

Yet as journalists and financial commentators were undecided and European ministers, politicians and bureaucrats still contemplated their response, what does this mean for investments in the future?

It is almost seven years since the global financial crash and five years since it was discovered that the Hellenic State (with the help of a US investment bank) had managed to hide her growing monstrosity of uncontrollable national debt since entry into the Euro in 2001. However, the past is the past and cannot be changed and, contrary to conspiracy theories, we are in unchartered territory. No-one has a crystal ball that provides clear and certain outcomes.

Whilst there will be numerous events since the writing of this article, the future is what concerns global markets the most. It is the unknown and, in this instance, a new chapter. So, how can individual, everyday investors move forward in this unchartered territory? Where are the investment opportunities?

You must, as always, go back to basics. Starting with the essentials of cash (the lifeline for the enduring Greek public) as the basis of finance is as necessary as understanding the fundamentals of investing.

With interest rates in Europe at historical lows, helped along by the ECB printing more money on a grand scale, it forces savers to move cash into other assets they are worse off, keeping their cash on deposit.

Even after establishing what cash you have available, you must ensure that you have in reserve a healthy amount for emergency purposes. The old saying “cash is king” is just that because it can provide so much in a heartbeat from covering horrible events such as a serious accident, the inability to work and the overnight loss of household income to keeping you and your household going, to hedge your investments from plummeting or even to buy other investments or property when prices have dropped or crashed.

To cover short-term liabilities and for emergency requirements, keeping cash in reserve must be accessible and, therefore, means achieving little or no return. For this small sacrifice, your life could be considered safer and secure and, as a result, you must avoid committing these funds to anything other than an instant access or notice cash account.

If you are an individual who simply does not feel at all comfortable with the vagaries of the stock markets, you will be hard pushed to find alternatives. Usually government bonds can provide a useful low-risk alternative where you are effectively lending your money for an extended period of five or 10 years in return for a nominal annual rate of interest, usually higher than a return on a deposit in cash. The longer the term the higher the rate of interest you could achieve.

If you want to release your capital earlier, unlike a fixed account at the bank, you can sell your bond to a secondary market. Also the safety rating of the institution, referred to as the default risk, will determine the level of interest.
However, will the borrower be able to pay your money back at the end of the term? This is what the IMF, the most senior lender of the Troika, has been faced with when it bailed out Greece but Greece failed to pay them back at the agreed time.

The concern for everyday investors is that if now a senior lender has not been paid back, could bonds now be perceived as loss-making investments like cash has become for smaller, junior lenders such as you and I?

The most common fear about investing in the stock market, by and large equities or shares in companies, is that the market can fall or crash after you have bought your stock. But that, my intrepid readers, is something I will save for next time.

This article is intended to provide a general review of certain topics and its purpose is to inform but NOT to recommend or support any specific investments or course of action.
Past performance is not necessarily a guide to the future. You may not get back the full amount of your investment.

By Raoul Ruiz Martinez
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Raoul Ruiz Martinez is a resident and independent consultant for Finesco Financial Services Ltd., Glasgow and advises clients on private financial matters in both the UK and throughout Europe under the MiFID regulation. Finesco Financial Services Ltd is authorised and regulated by the Financial Conduct Authority (FCA). Some of the services provided are not regulated by the FCA because they are not included within the Financial Services and Markets Act 2000. | 289 561 333