What looks interesting in 2014 then?

It’s still three months to the new ISA year but it’s a good point to take stock. 2013 was one of those years where pretty much whatever you invested in seemed to make money, reversion to the mean indicates 2014 may be a tough year then, and to be honest I still don’t know what the hell we are doing up here. What’s been happening then?

Developed markets, the US in particular, have done very well. Shame I got no US then[ref]That’s not strictly true as it appears I have a hefty slug of US in a Vanguard FTSE Dev World ex-UK index fund, although that happens to be outside my ISA[/ref] – it was too dear when I started looking at it and it’s still too dear. Emerging markets, pretty much anything to do with mining, and gold seemed to be the losers of 2013. Obviously he’s talking his book, but Money Observer’s Thomas Becket socks it to the Henry II in us with

2013 has undoubtedly been the year to own Developed World equities and avoid everything in the Emerging World.

which is hard to argue with. Intriguingly he also asserts

Closer to home, UK mega-caps are cheap and should benefit from a decent year for the global economy; we are currently expecting above trend growth in global GDP next year.

I own some of these guys as you’d tend to do in a HYP and I’m not so sure I’d describe them as cheap, else I’d go get me some more – in all cases bar one they’re notably dearer than when I bought ’em. Maybe Psigma has a load of UK mega-caps in the fund too 😉

Where am I now?

I pinched the principles of this article on unitising a portfolio and applied it to my own, I’ve stayed 20% ahead of the FTAS over the investing period which would probably have been my index fund of choice. Rather than run a second unit tracking for the FTAS I track this Vanguard FT Allshare accumulation fund which rolls up dividend income into the unit price, and referred it to January 2010 which is the first year I had enough performance data since I started with half a S&S ISA allocation in 2009.

I don’t think Goldman Sachs will be begging me to come out of retirement to do God’s work for them but it isn’t, so far, the usual slaughtering that seems to be expected of private investors who don’t go by the creed. I was lucky, however, to start in the investing hellhole that was 2009, 2010 and 2011. You probably don’t have to be smart to do okay from there. But you do have to start…

I am about 2/3 of the way to getting the income top-up of 5% of the ISA capital (as measured in terms of cash spent to buy it, not the dreadfully volatile market value) that I want of it by about mid 2015. As it transpires I could probably do okay without the top-up income from the ISA – you only find that out after retiring [ref]The other half of the retire early fight is reducing the crappy middle-class and work-related spending that doesn’t enhance your quality of life – note that you do increase some areas of spending. The trick is to increase spending on wants that you really want, as opposed to shit wants induced by others that don’t deliver a return in terms of quality of life. Reducing the stress and noise in your head makes discriminating between these a lot easier, but that’s a different post[/ref], which is a real bummer for financial planning 😉 So I can leave the existing investments right as they are, but maybe look further ahead. After all, if I live as long as my parents I am looking at a 40-year investment horizon from now…

What does look interesting then?

Everything that looks crap now, I guess. As everybody looked in the abyss in 2007-9 we projected our hopes and dreams onto emerging markets, and pumped them up as the Western financial model was shown to have feet of clay. We still do have very serious problems, many of which haven’t been fixed, but it survived the heart attack. Although he’s also obviously talking his book, I think Terry Smith’s outlook on the economy is more accurate.

So we generally think/feel [ref]I’m talking homo economicus – as opposed to the strivers, and the group formerly known as the middle class who are still very pissed off, as Ed Miliband correctly highlights in his cost of living crisis, though I don’t agree that nationalising energy resources necessarily means you can control the total price[/ref] everything is going swimmingly, the only way is up. So now we don’t need those damn emerging markets. The pound is also rising, which makes foreign stuff look overpriced if you bought it before the rise, etc etc.

The rising pound helps me, as a UK investor and also one with significant cash holdings. The Government has been busy destroying the value of those cash holdings through inflation, but if the pound and interest rates rise then that means I can get more Foreign Stuff for my paltry pounds. Now normally when people talk about Foreign Stuff they thing of imports, like Samsung mobile phones and cheap DVD players, but it also applies to foreign equities, particularly where those currencies are being threatened by Fed tapering.

For all that, the promise of emerging markets is still good – demographics to die for, many of these new consumers will come of age and start working when an Ermine is old enough to draw a State Pension, should it still exist at that time. 2014 looks like a good time to get to add some of this to my holdings. I only need about 10-20% in total, which will drop the effective return on capital to 4% from the 5% it has been since emerging markets don’t seem to pay dividends to any useful extent. The newsflow continues to be ghastly which is a good sign 😉

However, Emerging Markets isn’t one monolithic block. Asian emerging markets seem to be different to, say, South American emerging markets, and India, China and Russia are so very different in demography, culture and resources to each other and anything else out there that rudely lumping them in together seems wrong. Demography alone leads me to lean away from Russia and China – people say the demography of the West is rotten but it’s better than both of those.

Last year I bought a little bit of AAS at a discount, and the SP is slowly going down the toilet, so I should get a chance to buy some more at a discount this year – I will buy this in modest bits. There is a Blackrock tracker mentioned here which looks like a good one to match AAS. Finally I have a small stake in AFMF – basically Africa, which seems to be generally considered uninvestable, but from what I hear from someone I know who works in mobile telecoms out there the beating heart of capitalism seems to be stirring with  African people doing things for themselves. For all my life Africa has been considered an economic basket case, so this is a straight punt on reversion to the mean. I don’t need much EM, but 2014 is probably a good year to build this stake up.

Then there is the gold and mining conundrum. I’ll leave consideration of the merits or not of of gold to RIT, but one difference to him is that this will be a small part of my holdings, and I will hold it outside my ISA, because I can’t live with a non-income producing dead asset like that in my ISA. If it continues to tank this year I will add to that.

I don’t know what to do about mining, it might have to be filed into the too hard camp for now. I don’t have to swing for everything. I have a particularly pessimistic trigger alert set on BRWM so I will revisit that if it turns out to be a spectacularly bad year.

Of course, there are the usual stalwarts – the Eurozone crisis still hasn’t gone away, and there are of course all the unknown unknowns. At the moment emerging markets are good enough to pique an Ermine’s interest.