Sunday 19 November 2017

Have you planned your escape in case the Euro blows its top?

IT'S been one hell of a year for countries in the eurozone -- and we're not out of the woods yet.

"Anything is possible where we are," says Patrick Lawless of Appian Asset Management, who helps high-net-worth types and institutions invest.

"We think the chances of a break-up of the euro have increased towards the 50 per cent level," he adds. Earlier in the year he would have put it at 30 per cent.

So as we mark the anniversary of our IMF rescue with the cordite whiff of a eurozone explosion in the air and the shock failure of a German bond auction, we can see how the impossible can swiftly become possible. With that in mind, we've looked at some ways to invest that try to protect against the worst, both long and short term.

There are the usual suspects but also some less explored anti-armageddon investment options.

Treasury inflated protected bonds (TIPs)

These are a type of US government treasury bond. Linked to inflation and generally considered low risk, you can invest as little as $100 (€75) for five, 10 or 20 years.

"They've rallied by 25-30 per cent since May this year," says Mr Lawless. "We feel that as a long-term theme, given the amount of quantitative easing in the US -- about $3trillion -- inflation will have to grow. We feel comfortable to hold these."

Blue chips

Big brands with very sensible balance sheets, low gearing, good dividends -- the likes of Nestle, IBM, Microsoft, Pfizer, Unilever are unlikely to sink in the current storms.

"In the companies that we've invested in, over 50 per cent of their turnover is in emerging markets, so you're getting further diversification," according to Mr Lawless.

The head of Smith & Williamson's Irish investment house, Chris Kenny, agrees with investing in "good-quality mainstream global companies -- Coca-Cola, Diageo, ones that will benefit from growth where there is growth, such as in the emerging markets, where there's an emerging middle class".


Speculation about a bubble keeps mounting but gold keeps growing. Having somewhere between five and seven per cent in shares or bullion is suggested.

"We hold gold in event of an armageddon situation," says Mr Lawless. "It's not a hedge against inflation or anything, it's a hedge against fear. Is it in bubble territory? It's obviously gone ahead substantially but I think if this crisis continues, gold could continue to go higher."

Mr Kenny notes: "Central banks around the world have begun to increase their allocation to gold amongst their foreign currency reserves. And gold is normally priced in dollars, so that's also a diversification." Gold is also a hedge against quantitative easing.

Foreign deposit accounts

Mr Kenny recommends the dollar. "The majority of the investors in the world are in the US. When things become uncertain they tend to take their money home to be safe and they buy up dollars. The safe-haven currency remains the dollar and it tends to outperform when asset prices fall."

As long as you accept the circa 10-15 per cent risk attached to currency fluctuations, these accounts can be opened through several Irish banks and institutions.

Irish bank deposits

After all, we have the "best capitalised banks in the world" and God knows we're paying enough for that guarantee. So how safe is it to keep some money in Irish banks?

"For an Irish investor who is going to spend most of their life in Ireland, there's an awful lot to be said for being an investor in your own bank and avoiding having to move currencies around the world," says Mr Kenny.

"It means you should always have a cash fund near at hand that will always be accessible. For longer-term investments, you can probably afford to take a bit more risk on that front, but the further afield you go, the riskier it gets.

According to Mr Lawless: "If you have no liabilities in different currencies you could just keep your money at home.

"If there is a break up it could be devalued but you're still shopping in effectively Irish punts."

The hope would be that costs would ultimately fall in line with any devaluation.

The sun

Some 47 countries currently incentivise green energy through guaranteed government subsidies to builders of solar and wind infrastructure.

It happens through what are called Feed in Tarriffs (FiT). On all electricity bills in participating countries (including Ireland) consumers pay the FiT levy.

"We get an ongoing income stream, which is guaranteed in law," says Michael Bradley CEO of Solar21, a fund that is investing in solar farms in Germany and Italy sold through Davy Wealth Management and Wealth Options. In Germany, it's backed by a government-owned German bank.

"Every watt of electricity they produce is sold into the grid and has to be purchased by local energy companies at a guaranteed price. They have to buy all our electricity and they have to buy it at a price that's fixed in law by the government of that nation, guaranteed for 20 years.

"Say you're self employed, have a personal pension, you've possibly lost 10-20 per cent of your money or are just breaking even, I would say this is a viable alternative.

"This is a long-term investment for up to 20 years but there's annual cash of 8.5 per cent of the investment via a coupon, so as each year passes you're de-risking out of the fund," he adds.

Solar21 expects to grow from the current €100m to €500m in the next 18 months.

Hospitals, roads, police stations, street lights

"We have quite a lot of interest in listed infrastructure funds building government-backed development that is not linked to the economy," says Mr Kenny.

These specialise in building public infrastructure, such as schools and roads everywhere from Finland to Canada. Possible targets include FTSE 250 investment trust HICL Infrastructure or the John Laing Infrastructure Fund. HICL has returned 35.6 per cent over the past three years.

Sovereign bonds

Despite Germany's shock bond auction failure last month, German sovereign bonds are still a good bet when pitched against, say, Irish deposit accounts, Mr Lawless says.

His company has developed two investment funds aimed at minimising eurozone collapse fallout and assigns a portion of client portfolios to 'tier one' German, Dutch, Austrian or Finnish government bonds.

While you might be getting three per cent on an Irish savings deposit, the Appian Liquidity Fund will this year will return around 1.1 per cent after costs.

"So you could miss out on up to two per cent you'd get on a savings deposit, but your downside in the event of a devaluation could be 20 or 30 per cent," he argues.

"You basically own a German asset and a Dutch asset and so you get your money back in those currencies in event of a euro break-up."

Sunday Indo Business

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