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Keep A Diversified Portfolio For 2015

Marc Faber is of the opinion that investors need to remain diversified across asset classes in 2015 and I am in full agreement with this opinion. I am overweight on US equities and Indian equities for 2015 while I am underweight on Chinese Equities and Euro-zone equities. US Treasury bonds are an attractive investment for 2015 along with corporate bonds that provide an attractive yield. In an interview with Bloomberg , Marc Faber opined that he expects volatility and surprises in the coming year. In line with this view, Marc Faber suggested that investors should remain diversified across asset classes in the coming year. I am in full agreement with his views and this article discusses some interesting investment options for the coming year. I want to start with relatively safe assets and my first choice for 2015 is US Treasury bonds. I must add here that I am bearish on US Treasury bonds for the long-term. However, for 2015, I believe that Treasury bonds are a “must have” for the portfolio. As the chart below shows, the global economy is on a decline and the advanced economy (excluding US) is slowing down sharply. Even China’s growth for 2015 remains uncertain with negative surprises coming from the economic data. In such a global economy outlook, it is important to own Treasuries and I believe that US Treasuries will rally from current levels through 2015. In particular, the first half of 2015 will be better than the second half. Investors can therefore consider exposure to Vanguard Long-Term Government Bond ETF (NASDAQ: VGLT ) and the Vanguard Short-Term Bond ETF (NYSEARCA: BSV ). The second investment option in my radar is the corporate bond ETF. As US markets trend at record highs and US corporate profit remains robust, corporate bond ETF’s are an exciting investment option. The interest in corporate bonds is evident with the Vanguard Intermediate-Term Corporate Bond ETF (NASDAQ: VCIT ) witnessing robust fund inflow according to this report. The intermediate bond ETF provides a healthy SEC yield of 3.16%, making it an attractive investment option when the US economy and corporate profits are likely to be strong in 2015. The Vanguard Long-Term Corporate Bond ETF (NASDAQ: VCLT ) and the Vanguard Short-Term Corporate Bond ETF (NASDAQ: VCSH ) also provide a SEC yield of 4.38% and 1.68% respectively. I believe that investors can remain invested in these ETF’s through 2015. Gold (NYSEARCA: GLD ) has been my choice among safe assets in the past. However, I am not bullish on gold for the first half of 2015. I believe that a strong dollar will keep gold lower at least in the first half of 2015. Investors with a long-term view can however consider gradual exposure to gold at current levels. While the near-term outlook is negative, gold remains a good investment and a good currency with a 3 to 5 year investment horizon. My opinion is to have limited exposure to gold in 2015 as high exposure can potentially harm the returns prospects for the portfolio. Coming to equities, I believe that US equities will continue to perform well in 2015 and I have discussed reasons in the past for my view. The primary reasons being a resilient US economy, weak Euro-zone, Japan and Chinese economies and a strong job market to add to a the robust markets. However, I must caution here that the broad index (NYSEARCA: SPY ) might not continue to provide robust returns. Since March 2009, the US index is up by 200% and I don’t expect the same rate of upside to continue in the coming year. My view therefore is to remain selective in terms of picking stocks and sectors instead of exposure to the broad based index. With oil prices plunging, there are some very attractive opportunities in the oil and gas space and I recently wrote on Occidental Petroleum (NYSE: OXY ), which is a good pick for 2015 in my view. I also remain positive on Encana (NYSE: ECA ) among oil and gas stocks in the coming year. I believe that in terms of steady performance, the healthcare sector will remain a bright spot in the coming year and investors can consider exposure to the Vanguard Healthcare ETF (NYSEARCA: VHT ). I must also mention here that the US consumer confidence is at a record high since the financial crisis on the back of a stronger economy and improving jobs markets. I believe that for the first quarter of 2015, consumption based themes will do well. I am bullish on Wal-Mart (NYSE: WMT ) for the first quarter of the year and depending on the consumption pattern and improvement in the jobs market, the stock investment horizon can be extended. Among global markets, I am most bullish on Indian equities and I believe that the Indian markets can be a star performer in the coming year. The Indian government has promised big reforms in the budget coming up in March 2015 and I believe that there is likely to be a pre-budget rally. Further, interest rates have peaked in India and with inflation cooling down; I expect a series of rate cuts in the coming year. That will provide an additional boost to the markets and interest rate sensitive sectors such as banking and infrastructure. In the banking space, my stock pick is ICICI Bank (NYSE: IBN ), which is India’s largest private sector bank. As reforms unfold and as interest rates cuts come in 2015, the bank is best positioned to benefit. Besides the option of directly investing in Indian markets, investors can consider investment through ETF’s. Considering the broad markets, iShares India 50 ETF (NASDAQ: INDY ) and iShares MSCI India ETF (BATS: INDA ) are also good investment options. While the former gives exposure to 50 largest Indian stocks, the latter gives exposure to large and mid-sized companies in India. In conclusion, 2015 is likely to be volatile and the best strategy is diversification. On an overall basis, I remain overweight on US and Indian equities and underweight on China and Euro-zone equities. However, investors need to apply bottom-up approach to investing even in attractive markets. I expect oil to remain largely in the range of $50 to $70 per barrel for the coming year. However, I do expect some oil and gas companies to perform well and I have mentioned some names in the article.

UNG Is Down For December — Will Cold Weather Pull It Back Up?

Summary The extraction from storage is projected to be lower than normal again this week. The temperatures are projected to come down in the next two weeks, but this isn’t expected to bring back up UNG. Contango is likely to keep UNG below natural gas prices. The price of The United States Natural Gas ETF (NYSEARCA: UNG ) took another fall in the past week to its lowest level in recent months. The ETF did bounce back earlier this week, but is still down for the month by nearly 24%. The ongoing low oil prices may have contributed to weakness of UNG, but the main issue will remain in changes in weather expectations . The level of underground storage is also likely to play a role in the progress of UNG. This was the case last week. This week’s extraction is likely to also be lower than normal for the season. As I pointed out in the past , the changes in the weather are likely to play a significant role in the changes in U.S. storage levels. Last week’s lower-than-expected withdrawal may have contributed to the drop in UNG on the day of the publication. I say this with caution because the linear correlation between the changes in UNG and storage tends to be low. Nonetheless, there are occasions when the market seems to react to this news, as seems to be the case last week. Looking forward, the storage is expected to show another lower than normal extraction due to last week’s higher than normal average temperature, as presented in the chart below. Source of data: EIA and national climate data center The chart shows the progress of the deviation in the national weather from normal and the weekly changes in natural gas storage with respect to the 5 year average (The data only refer to 2012/2013 and 2014 winter time). Moreover, the linear correlation between the two data sets is a strong and positive linear correlation of 0.62. Last week, the deviation from normal temperatures was, on average, 4.9. So all things being equal, we are likely to see another lower than normal extraction. Keep in mind that even if natural gas prices were to recover, the ongoing Contango in the future markets is likely to result in UNG underperforming natural gas for the near term. Cold weather ahead For the next two weeks, however, temperatures are projected to fall below average temperature throughout the Northeast and Midwest. Nonetheless, on a national level, the heating degrees for this week are expected to be slightly below normal and last year’s levels. This could suggest the demand for heating purposes in the residential/commercial sectors, while may rise in the coming days, won’t necessarily increase more than normal for this time of the year. The recent withdrawal from storage was 49 Bcf, which was well below the 5-year average and last year’s extraction of 138 Bcf and 177 Bcf, respectively. The table below summarizes the changes in storage in the past few weeks and the comparison to last year and the 5-year average levels. Source of data EIA Following the recent extraction the underground natural gas storage is at 3,246 Bcf. This is nearly 5% higher than last year’s storage level and only 5% below the 5-year average. Over the next couple of weeks we are likely to see another lower than normal extraction from storage, which could fuel another fall in the price of UNG or at the very least keep it from recovering. But if temperatures start coming down to below normal levels, UNG may change course and start to rally.

The Case For Maintaining A Strategic Allocation To Real Assets

As investors continue to look for ways to diversify their portfolios away from traditional long-only stock and bond investments, real assets have become a popular alternative asset class. In fact institutional investors, such as leading endowments and foundations, have long used investments in real assets such as real estate, commodities, timber and energy as both a hedge against inflation and as a core diversifier. To provide more insight into this asset class and how institutional investors are using real assets, Michael Underhill, chief investment officer of Capital Innovations and a leading manager of multi-asset real return portfolios, answers a few questions for us on the topic. Given the increase in regional conflicts and greater overall geopolitical risks today, how is this influencing your respective portfolio positioning from both a macro and micro perspective? As geopolitical risks rise we would expect higher volatility in markets, increased risk of supply shocks to key commodities such as oil and food and a discounting of potential higher inflation and subsequent higher interest rates. As a hedge to these types of macro risks, exposure to real assets, and their relative inflation hedge qualities would become more attractive. Positioning on a more micro level we are incorporating these geopolitical risks and have been reducing our relative portfolio weighting in more interest rate sensitive groups such as electric utilities and telecomm and increasing more inflation hedge real assets such as energy, timber, agricultural commodities. What are the risks that investors should think about hedging or mitigating today and why? A common mistake investors make is to extrapolate current environment out too far and become complacent. The current environment of low interest rates, low inflation, and low volatility has afforded the opportunity to hedge the risk that this environment changes over the investment horizon. Do you want to bet that this backdrop we have had since the financial crisis does not change? The ideal time to add real asset exposure is when not many are thinking about it – buy an umbrella when the sun is shining. If we examine an allocation to real assets over the past 24 years, as shown in the chart below, we can see improved portfolio efficiency, with enhanced returns and lower volatility. Historical Effect of Allocating to Commodities (January 1980- July 2014) What are the opportunities investors should be seeking exposure to and why? In 2015, we expect improved global growth and a mid-year increase in US interest rates. The ECB and the BOJ remain in easing mode, and the policy outlook in the rest of the world varies considerably. The risk that global growth remains sluggish is high, and a lack of meaningful improvement could lead to a sharp increase in the dollar and a significant reorientation of capital flows. Most regions should see decreasing growth headwinds in 2015, although geopolitical uncertainties, volatile oil prices, and moderating Chinese growth remain concerns. It is for these reasons that we continue to advocate for a diversified, tactically managed, multi-asset portfolio that seeks to generate returns in excess of the actual rate of inflation and provides managed volatility rather than a single-asset-class solution. A broad range of real asset equity securities, including emerging markets and commodities, real estate investment trusts, and directly held positions in master limited partnerships. How does a global multi-asset real return strategy fit into a liability driven investing framework? The tangible properties of a real asset allow its price to fluctuate with overall market prices of physical assets. Real assets tend to be sensitive to inflation because of their tangible nature. Examples of real assets include direct investment in real estate, commodities, precious metals, timber, energy, farmland, precious metals, commodity-linked stocks, and commodity-linked hedge funds. Most investors are more familiar with investments in financial assets, which are contractual claims that do not generally have physical worth. In an LDI platform, real assets provide potential reductions in surplus volatility to the extent that real asset movements are not highly correlated to movements of financial assets. Returns from real assets may also boost returns since real assets are generally not as efficiently priced as the more competitively priced stocks and bonds. The return potential for real assets has become especially attractive in recent years since stocks and bonds have not performed well. From a risk management perspective, a key benefit from expanding asset classes to include real assets rests on correlations. A group of assets that have high correlations with each other but have low correlations with other groups of assets represent an asset class. There tends to be much less diversification potential from combining assets within an asset class than from combining assets from different asset classes. Real assets represent such a broad asset class that a wide range of correlations exist both within the asset class and with assets from other asset classes, allowing for attractive diversification. Our clients have found that the best performance comes from avoiding the large losses that markets often impose on passive investment portfolios. This tends to be especially important for real assets. As a first step we look behind the market consensus and identify where herding and overreaction phenomena may be at work. These phenomena occur both within and across asset classes. We perform extensive modeling with sensitivity analysis to find our best risk management strategy for an LDI structure. From there we model our best set of segments within an asset class and simulate the surplus volatility and return. This is not just simple quantitative analysis because we must also build in forward looking scenario planning. We track actual LDI performance against expected LDI performance. This type of tracking is revealing in that we can review what we were expecting when the allocations were set and identify where things developed differently. This type of learning over many years of experience is very helpful in building analysis skills.