US CREDIT RATING DOWNGRADED

For the first time in its history the US has seen its rating downgraded by Standard & Poor's to AA+. This comes on top of last week's 11th hour deal to raise the debt limit to prevent a technical default and a week that saw all the year's gains in the US stock market and that of many other countries erased. The debt problem is not confined to the US. After the patching up of the debt crisis in Greece two other European countries with much larger economies, Spain and Italy, now look very vulnerable. With the loss of confidence in the ability of the US and Europe to solve their problems fears are rising of a double-dip recession. When such fears abound investors usually run for cover into Treasury Bonds. The problem this time is that we came close to a situation last week where they might have defaulted and this could undermine confidence in the future. The Chinese for their part are not going to be burying their surpluses so quickly into US bonds.

WHAT WILL BE THE IMPACT ON OUR INVESTMENTS?

We have already seen a significant drop in global markets across all sectors including energy which has invariably affected all portfolios. The fall does not compare with what we saw in 1987, 2000 or 2008 but have we just seen the start of a long bear market or will the markets brush this off and resume the recovery that began in March 2009? I wish I had the answer! The fact is, there is a lot of bad news out there but at the same time there is also quite a bit of good news. Interest rates are still very low, which is good for businesses and many companies have continued to produce very good returns. Take the huge orders Boeing has received for example. They will keep the company busy for at least a decade. Then there is the bright technology sector. Apple is reported to have more cash in hand than the US government. Profits are still rising at McDonalds!

As always, one should never panic when markets fall sharply. Stocks, like property, have proven to be solid investments when held for the long term.

However, as I have said for some time, we need to further diversify our holdings. We cannot rely entirely upon the old investment model of cash, bonds and equities. This means taking on more risk but by diversifying and carefully managing the risk the end result should translate into higher returns.

LONG TERM SAVINGS PLANS - A NEW OPTION IS AVAILABLE

Long term savings and pension plans represent an essential part of most expatriates' armory in building up long term wealth. The disciplined payment regime ensures that many can compensate for the loss of compulsory pension plans they would normally belong to in their home countries. The plans also benefit from the effects of 'cost averaging' whereby the same regular premium buys more units or shares when markets are down. However, there is a downside. Whilst the plans generally produce good returns when maintained for the full term, they do not respond well to early surrender, suspended or reduced contributions. This situation can occur for example when an expatriate unexpectedly finds himself returning to his home country on a lower salary or when some major unforeseen change in financial circumstances occurs.

Institutions have generally been reluctant to offer non-contractual plans because they are too costly to administer. However, one institution, the SFM group, which is based and regulated in Europe, has come up with a plan that gets around the commitment aspect by requiring an initial lump sum investment (equivalent to 5% of the total anticipated savings over a given term) which must remain in the plan until the maturity date. Regular contributions may be reduced or suspended at any time without the onerous penalty charges that kick in with conventional life company plans. For someone who is unsure of maintaining a certain level of income for the long term this plan could be an ideal way to invest without making an irreversible commitment. Details on request!

ACCESS TO STOCK MARKETS WITH CAPITAL PROTECTED

Everyone would like to enjoy the gains that come with stock market investments. Problem is, no-one likes the losses! And at this point in time the prospects for the markets don't look particularly good. This is where 'structured products' come into their own. They offer a partial share of stock market gains and guaranteed protection of capital in the event the markets fall. So heads you win, but not as much as if you had invested directly, and tails you get your money back plus a bit more. The downside is that your funds are tied up for a number of years. Standard Bank however has come up with a formula whereby half your money is returned after one year and with interest of 5% in GBP, USD and Euro or 12% in AUD. The other half remains invested for another four years after which the investor receives the higher of capital plus 60% of a gain in the respective index or the return of capital plus a bonus of 5%. Minimum investment 20,000 USD or AUD, EUR 15,000 or GBP10,000. It can also be accessed within portfolio bonds. Applications and investment funds must be received by August 23.

AGARWOOD - 3 AND 4 YEAR OPTIONS

For anyone who would like to get away from stock markets and invest in trees Touchwood is now able to offer semi-mature trees which will be harvested in three and four years respectively. For many this is a more acceptable time frame than the usual seven years if you buy the saplings. Prices start at $15,000 for 50 trees. Projected returns are 15% per annum. In case you haven't seen Touchwood's presentations you would physically own specific trees and if you happen to be visiting Thailand they are happy to take you to visit them.

ARGENTUM LITIGATION FUND - NEW SERIES OPEN

Finally, an investment that has no correlation with the financial markets and one which historically is not affected by stock market crashes or recessions. In short, litigation continues and can even increase during difficult times. This is perhaps one of the best recession-proof investments. It is still quite new to the retail market but it is picking up momentum. It is not surprising that many are still watching on the sidelines but when the investment becomes mainstream the interest rates are likely to be much lower and the whole asset class may be snapped up by the big institutions. The flyer below provides some basic information but let me know if you would like more details. Take note of the closing date. The last issue was oversubscribed and closed two weeks early.

Colin Bloodworth