The long road ahead

 British Caymanian Insurance continues its series of investment updates with a recent presentation by Michael Fleming, senior investment analyst from the Vanguard Investment Strategy Group. Business Editor Lindsey Turnbull was in attendance and reports. First in a two-part series.

At the end of last year continuing into this the financial markets have suffered an onslaught the likes of which most of us will have never experienced before. Making sense out of the current investment climate requires understanding of the unique investment challenges which lay ahead for investors. Thus it was Life Manager with British Caymanian Insurance Agencies, Ltd, Barbara Oosterwyk’s pleasure to introduce Michael Fleming to a group of curious investors at the Marriott Beach Resort, all keen to understand the nuances of asset allocation and why, in today’s climate, it is essential to get this right. In particular, the audience heard that it’s never been more important to review long-term savings plans and retirement objectives amidst the current – still – uncertain landscape.

Fleming, who is a Senior Investment Analyst at Vanguard, one of the largest investment managers in the world with around US$1.1 trillion assets under management, started his presentation by confirming that right now was an extremely trying time for investors.

“It’s important to try and step away from the present volatility if you can and take a longer three to five year view,” he stated.

Having conversed with hundreds of clients in recent month, Fleming said the three big questions on everyone’s lips were: will the moves of policymakers in the US work? What is the economic outlook? And, what are the investment implications?

Analysing the economic outlook
Fleming said that 2009 will see the global GDP contract for the first time since World War II; while a 2 per cent growth is forecast for 2010. Polling the audience for their opinion, Fleming found that most had a more modest outlook at a growth rate of between zero and 1.5 per cent growth for next year.

Having then run through a quick overview of just exactly how the US economy got into the state it did at the end of last year, Fleming went on to say that the height of market volatility was in May of this year, when the massive financial shock that hit the markets turned into panic. Yet he also said that perhaps the bottom had been reached when it came to the housing market at least, with good news revealed that very day of house prices in the US on the up for a change. House price recovery was key to the recovery in general, Fleming said. “As the pace of home price decline slows so the conditions become more favourable for a recovery,” he said.

Fleming looked at how different governments around the world reacted to the economic crisis, citing the US, Spain and China as governments which pumped money back into their economies; while countries such as the UK, India, Brazil, Mexico and Germany did not receive such a high injection of cash from their respective governments.

Massive fiscal policies in the US meant a planned US$1.9 trillion to be disbursed in various ways into the US economy (see the sidebar as to the breakdown.)
Even so, Fleming said that the US stimulus package “had not hit any meaningful magnitude as yet.”

Monetary expansion has been another move by the US government to promote growth in the economy and Fleming explained that the composition of the Federal Reserve’s assets had changed greatly this year, taking more risk and moving out of treasuries into a whole host of other investments. 

Thus, in answer to the first question on investors’ minds, Fleming felt that moves by the US government appeared to be working. “Things appear at least to have stabilised,” he confirmed. “And certainly the markets are much better today than they were last November,”

Fleming said that at vanguard the economists kept a close eye on various key economic indicators on a daily basis, a crucial step for the management of funds. He listed financial indicators such as the financial conditions index, mortgage rates and spreads and stock prices for homebuilders and bank sectors. Economic indicators included initial job loss claims, bank lending statistics and auto and home sales, while inflation indicators were principally inflationary expectations, commodity prices and wages and labour costs.

Read about the different type of recovery associated with this deep recession and Vanguard’s long term views next month.



From left, Tom Swartzendruber, Vanguard Sales Executive; Barbara Oosterwyk, Life Operations Manager, BritCay Insurance; Michael Fleming, Senior Investment Analyst, Vanguard Portfolio Review Department