Japan has had its worst recorded earthquake and Tsunami together with the problems at the Fukishima Nuclear plant. The Middle Eastern and North African population are demanding ‘freedom’ with varying success. The US Federal Reserve Chairman, Ben Bernanke, has promised to continue with loose monetary policy which is in stark contrast to the European Central Bank who have decided to tighten monetary policy and have already increased interest rates by a quarter of 1% effective 1 April.

Various economic commentators have very different views on what is going to happen next. Some believe that we are heading for inflation, caused mainly by the loose monetary policies in many countries but driven by America. Essentially these commentators believe that if you print huge sums of money you effectively devalue paper currencies and make the cost, in local currency terms, more expensive. Other commentators believe we are heading for deflation. They point to the only country where there has been a credit bubble to compare to the 2008/9 debacle and where deflation has reduced the property and share marketplace dramatically. In fact Japan is still, some 20 years after its bubble burst in the 1990’s, more than 50% down from those heady valuations. I spoke at length to a family friend who is a Hedge Fund Manager in America and he deemed himself to be ‘Cautiously Optimistic’ about the future so ‘experts’ across the industry have very different views on what will happen next.

I have to confess to being surprised at the markets strength if you consider the backdrop. Fuel prices are at all-time highs in £ terms and we still don’t know how the Middle Eastern is going to turn out. European periphery countries must be suffering with rate increases by the ECB, the UK is struggling to maintain growth with the backdrop of austerity with job cuts. America seems to me to have tackled the crisis by spending without, yet, any credible way of reducing their mounting debts as indicated by Standard & Poors recent change to their economic outlook for America to ‘negative’.

On a more positive note Company earnings and profits have been beating economist’s estimates. Non-financial companies are cash rich increasing the number of mergers and acquisitions, especially in America. Couple this with the amount of ‘cheap’ money provided by Mr Bernanke and a backdrop of historically low interest rates and you can perhaps see why share and commodity prices have been so high.

At PennyMatters we try to take what is happening in the wider world into account when deciding which funds to invest in. Our portfolio’s are designed to be continually reviewed and to include investment areas that we consider offer potential for long term growth. Unfortunately this does not mean we know what will happen but by applying common sense and looking at the bigger picture does give us an advantage over many of our competitors.

This means we include funds that invest in Agriculture, Energy and Technology. We want diversity within funds to include some fixed interest and some inflation protection via Index linked Gilts and Gold. We have included Total Return, Absolute Return and Strategic Bond funds where the Fund Manager is able to short the market (make money if the market goes down) and have much greater flexibility in where he/she can invest. We consider smaller boutique Investment Houses like CF Ruffer as well as some of the bigger investment houses like Aberdeen.

We also include traditional investments in the Western World’s stock markets together with Emerging Market funds preferring non country specific funds. Our Portfolios are put together to provide wealth protection, income and capital growth and are diverse providing our clients with long term growth potential and varied levels of protection in a downturn. Our research allows us to provide our clients with an indication of a ‘worst case scenario’ by providing details of how far any particular portfolio fell when the markets crashed in 2008. Clearly this does not in any way provide a worst case scenario going forward but we hope it at least provide an indication of the risks associated with any particular portfolio.

PennyMatters was authorised to provide financial advice on 14 January 2011. Our portfolios were set up prior to authorisation and the performances of the various portfolios are as follows

Period Ending 4th May 2011