FROM ZERO TO HERO

India has come a long way in a short time. It was only 1991 when it had to go cap in hand to the World Bank and the International Monetary Fund because a balance of payments crisis threatened the rupee and almost bankrupted the country. The reforms put in place then, in return for international help, have led to financial stability, deregulation and an entrepreneurial culture that has created a seemingly unstoppable competitive dynamic, with impressive consequences for the fortunes of the country.

For much of the past decade, India has ranked among the fastest growing economies in the world and has been propelled to become the fourth-largest economy in the world. GDP is forecast to expand by 7.7% this year1. To put that in context, it is estimated the eurozone will muster just a 1.0% expansion, with the US expected to grow by 2.7%1.

To flourish in this way, an economy needs some advantages. A strong legal system gives investors faith that they will receive a fair deal – physical and intellectual property rights will be respected. Pro-business governments provide the building blocks to growth. But more than that,
there are three key advantages underpinning the future growth of India:

-Favourable demographics -A skilled workforce -An expanding middle class

FAVOURABLE DEMOGRAPHICS

India’s 1.1 billion people are young. About 30% of them are under 15. Almost 65% are in the 15-64 years old bracket3. The end result is that the dependency ratio for India is low compared to other countries. Europe especially must face up to its ageing population, Japan likewise. Even the ‘one child’ policy in China risks its future potential – China must get rich before it gets old if it is to keep up its current pace of development.

India, meanwhile, enjoys the vast majority of its population either in, or soon to enter, the age where they will be most productive and consume most. A study in 2007 estimated that, according to demographic trends, over 100 million people will enter the Indian labour force by 20204. With more people in the economy working to support fewer older people, that bodes well for discretionary consumer spending – giving an important boost to domestic demand.

A SKILLED WORKFORCE

The other population advantage is that it is highly skilled in comparison to other emerging markets.

With fluency in English being one of the most common of those skills, this explains why so many companies have outsourced functions to India. There has been a successful reallocation of resources from low-productivity agriculture to high productivity industry and services. India’s large number of scientists, engineers, lawyers and financial managers are helping high value industries succeed and are attracting foreign investment into the country.

Foreign investors are attracted by the simple fact that it is generally cheaper to employ a skilled worker in India than it is to employ a similarly qualified person in the west.

Industry is increasingly becoming an important growth driver for the economy. More than 25% of GDP now comes from industry, while a mighty 58% is generated in the services sector5. But a quarter of services are directly linked to industry, in sectors such as trade, transport, electricity and construction. Agriculture may employ more than half of the population but it accounts for just a little over 15% of GDP5.

AN EXPANDING MIDDLE CLASS

National productivity has improved significantly already but, although India is the fourth-largest economy, GDP per capita is still just $31,005. On that measure, India ranks a lowly 164th in the world. However, better educational standards have improved the incomes of the average Indian.

A middle class has emerged in India that is set to boost – and alter – consumption patterns within the country.

If you assume that Indian consumption patterns will mirror those in the west as Indians become wealthier, the potential for consumer goods companies is huge. Few Indians have what richer countries would consider essentials: a car, TV, a PC, a mobile phone etc. Demand for consumer durables should therefore rise significantly as aspirations are more readily met as affordability increases. Innovations such as the Tata Nano car are already bringing goods that were previously beyond the reach of the average Indian worker to a much broader spectrum of buyers.

The first hypermarkets and discount stores only opened in 2001 but the emergence of an urbanised middle class has seen the Indian retail sector transformed. Organised retail still has only a 10% market share – but it was just 3% of the market five years ago6. There is still much more growth to come. Buying into companies serving the growing retail demands of the Indian population is a simple way to tap into India’s economic development.

BUILDING A NEW INDIA

A consequence of rapid economic development is invariably the growth in urbanisation that takes place at the same time. Goldman Sachs estimate that a further 140 million rural dwellers will move to the city by 20207. With the migration of the population to the cities comes new demand for housing and infrastructure. The process of building that is already apparent to anyone visiting the country.

Much of the economic stimulus applied last year was directed towards this. New roads are being laid. The utility infrastructure is being upgraded (or put in place for the first time). Slums are being cleared and replaced with new housing. As we just discussed, shopping malls have arrived.

Real-estate plays and construction companies will be the obvious beneficiaries as the young and better-off population looks to improve its living standards and quality of life.

THE RISKS FROM HOME AND ABROAD

It all sounds like the perfect investment story. And yet India’s stockmarket is still prone to bouts of high volatility. The reason for this lies in its correlation to the markets of the rest of the world.

Today, the greatest risk investors face in India is not that its economic advance may be derailed but instead, that a weaker economic picture in the west may see risk appetite wane, with a consequent slowdown in capital flows to India. As successful as it may be, India still relies heavily upon foreign investment flows to fund its balance sheet.

If the west enters a second down-wave, it is likely that we will again see assets repatriated, taking capital away from India’s economy. That capital is needed to fund a sizeable deficit. The stimulus required to see India through the economic downturn came at a cost. The fiscal deficit is forecast to be almost 10% of GDP this year8, including spending in all the local states as well as central government expenditure. In the context of a fast-growing economy like India, that is less of a threat than it is to the debt-burdened economies of the west, but it is nonetheless undesirable over the longer term and India’s government must take steps to balance its budget.

PUTTING A VALUE ON INDIA’S GROWTH POTENTIAL

After the surge in India’s stockmarket last year, it is obviously not as cheap as it once was.

Nevertheless, the market is still trading around the level typically seen around mid-way through the economic cycle. The market is aware of the risk from the west and so may be volatile in the months ahead as greater clarity about the state of the western economies emerges.

Meanwhile, earnings are improving. Earnings growth was dented by the global slowdown but is turning around and is forecast to return to more normal levels. In the years preceding the crisis, earnings growth averaged over 20% per annum9.

It is, however, worth bearing in mind that history shows that the market multiple tends to decline when interest rates rise. Interest rates, like in so many other parts of the world, are likely to increase sometime in the not-too-distant future. Inflationary pressures are building in the Indian economy and the Reserve Bank of India is likely to be forced into action to combat these. The last time that the RBI changed its monetary stance to raise rates was 2004. Then, like today, the growth environment was very strong and the multiple decline was short lived. Investors may be justified in assuming a similar outcome this year.

CONCLUSION

An investment in India is not without risk. However, with risk comes reward and the long-term structural drivers of India’s growth look very rewarding indeed. Other emerging markets may be driven by similar investment themes but few of these alternatives can back up their claims with the demographic advantages that India brings to the table.

Change is taking place among the people of India and investors can still buy into this story at the early stages of development and at still attractive valuations, when the longer term perspective is considered.

India has come a long way already but there is much further to go. The elephant is picking up its pace again. It’s on the verge of breaking into a run. When that happens, you might not see it for dust.

This is a guest post from Tom Stevenson, Investment Director at Fidelity International. It is the fourth in a series of articles in a BRIC by BRIC mini-series, produced exclusively for BrilliantWithMoney and Informed Choice.

Past performance is not a guide to what might happen in the future. Please note the value of investments can go down as well as up so you may get less than you invested. Investments in small and emerging markets can be more volatile than other developed markets and changes in currency exchange rates may affect the value of an investment. The ideas and conclusions in Tom Stevenson’s article are his own and do not necessarily reflect the views of Fidelity’s portfolio managers. They are for general interest only and should not be taken as investment advice or as an invitation to purchase or sell any specific security.

Brazil, on the other hand, seems to be geographically off the investment radar in south America, for a long time a region that investors avoided due to concerns it was an economic and political minefield. Those investors are behind the curve; Brazil has changed dramatically in the last decade and its strong growth looks set to continue.

CHANGED DAYS: A STRONG ECONOMY IN ALL WEATHERS

Brazil was one of the first markets to recover from the western-inspired credit crunch. Not bad for a country that a decade earlier was more likely to be the cause of credit crises. Much has changed in the last decade: the Brazilian economy has produced strong and sustained economic growth and its equity market has delivered excellent returns.

Just as importantly, when the wheels came off the global growth engine in 2008, Brazil showed an ability to recover under its own steam that surprised many observers in the developed world.

The Brazilian economy is expected to grow by 6.4% in 20101, a figure that has been repeatedly revised up in recent months as more evidence of Brazil’s robust recovery has come through.

THE EMERGENCE OF A NEW ECONOMIC SUPERPOWER

Brazil is already the world’s ninth-largest economy2 and its strong growth means that it is poised to enter the top five in the world within the next fifteen years. The economy has certainly benefited from strong commodity prices, which have helped to produce trade and fiscal surpluses. However, there is more to Brazil than coffee and soybeans.

The economy is, in fact, relatively diverse compared to its emerging market peers, with large and developed agricultural, mining, manufacturing and service sectors, as well as a large labour pool.

With a population of around 198 million, Brazil is the fifth most populous country in the world and the fifth-largest by land mass3. Critically, the country is now beginning to exploit its natural resource and labour advantages, as economic growth allows investment in the corporate sector.

Brazilian exports have grown rapidly in the last two decades, creating a new generation of wealthy entrepreneurs. Major export products include aircraft, electrical equipment, automobiles, ethanol, textiles, footwear, iron ore, steel, coffee, orange juice, soybeans and corned beef. However, the economy also benefits from a relatively high and growing level of domestic consumption that is being driven by an expanding middle class.

STABLE GOVERNANCE HAS CREATED A STABLE, CAPITAL-FRIENDLY ECONOMY

Much of Brazil’s transformation can be put down to sensible macroeconomic policies on the part of the Brazilian government and central bank, which have created the right conditions for growth.

Monetary targeting, exchange rate flexibility and fiscal consolidation have brought inflation under control and created a lower interest rate environment. In turn, this has made Brazil an attractive destination for capital flows.

The election of socialist president, Luiz Inácio Lula da Silva, raised concerns in capital markets in 2002 – concerns that led to Brazil receiving an IMF rescue package of $30.4 billion to restore confidence4. The fears were ultimately misplaced as ‘Lula’s’ administration brought, first, stability and, then, growth to the economy. So much so that Brazil’s central bank paid back the IMF loan in 2005, despite the fact it was not due to be repaid until 2006.

AN ENERGY POWERHOUSE IN THE MAKING

One of the key drivers of Brazil’s growth is its emergence as an energy superpower. Brazil is currently the world’s tenth-largest energy consumer, however much of its energy comes from renewable sources. In fact, more than 80% of Brazil’s electricity is supplied by hydroelectric
projects. Brazil is also one of the leaders in bio-fuels, especially ethanol made from sugar cane.

Over 90% of new cars in Brazil have ‘flex-fuel’ engines, meaning they can run on ethanol or gasoline or a mixture of the two.

The discovery in 2007 of potentially enormous deposits of oil and gas off Brazil’s coast attracted widespread attention. Estimates put the size of the find at 80 to 100 billion barrels – enough, added to Brazil’s current reserves, to put it among the world’s top five producing countries.

Given the strides Brazil has made in renewable energy, the discovery promises to transform the country into an oil-exporting powerhouse and shake up the market for energy supply.

Brazilian oil heavyweight, Petrobras, will spend an initial $28 billion on the fields as part of its $174 billion investment programme for 2009-2013. There will also be significant spin-off benefits for the
broader economy as investment is made in the country’s shipbuilding and oil services industries.

While the fields offer great promise, there are challenges. The government’s ambition to maximise Brazil’s income from its oil wealth could create problems for foreign investors. The reserves are
7,000 metres below sea level, beneath a layer of salt and technically difficult to develop. The latter fact is likely to make international involvement inevitable and desirable. Several western companies have already formed partnerships with Petrobras to explore and develop fields in the region, such as ExxonMobil, BG, Galp, Repsol and Royal Dutch Shell.

A RETAILERS DREAM?

The benefits of sustained economic growth are increasingly being felt across the Brazilian economy. Unemployment has fallen significantly and real wages have increased markedly over the last decade. Moreover, the demographics are very supportive – most people in Brazil are of working or consuming age, with relatively few older dependants to support.

Nearly 67% of people are between 15 and 64 years of age, with the median age being a relatively young 28.6 years.

This means a huge chunk of Brazil’s population are not only working but are in the consumption sweet spot.

Add to this the fact that credit markets are opening up, thanks to lower rates and more attractive loan periods, allied with the fact that Brazilians like to spend, are persuaded by quality, and are often loyal to brands and you have a consumption boom in the making. Global retailers such as Wal-Mart, Carrefour and Avon Cosmetics have not been slow to notice and have built a presence in the market.

Drinks company, Bebidas das Americas, and pharmacy retailer, Drogasil, are just two examples of Brazilian companies that have the potential to deliver to attractive earnings growth.

Clearly, the scope for product penetration and mortgage penetration in a country of this size growing this strongly is massive.

A FLOURISHING CORPORATE SECTOR AND NEW ISSUES MARKET

Brazil has been prolific in bringing new companies to market. Santander’s Brazilian subsidiary broke the country’s record for the largest IPO in September 2009, eclipsing Cielo, the Brazilian
affiliate of the Visa credit card network.

Other large IPOs have included oil company OGX and shipbuilder OSX. OSX aims to supply ships and other equipment to the oil industry at a time when Brazil’s government is keen to encourage a domestic shipbuilder to carry its iron ore exports. We can expect Vale, the country’s mining giant, to place orders for ore carriers at Brazilian ship-yards.

The impact of the oil find is already beginning to reverberate around the broader economy.

CONCLUSION

Sound macroeconomic policies, government incentive schemes and the rapid growth of the middle class have made Brazil an attractive option for investors. The foundations of that growth have now
become entrenched. The growing consensus for political stability and responsible fiscal and monetary policy should mean less crises of the type that happened in the past.

We can expect to see further strong growth as the economy benefits from the new wealth which accrues from commodities riches, while the supply of young people underpins the labour market.

Significant productivity improvements will become available as the economy generally moves towards higher value-added sectors. Brazil’s recent finds of new, possibly massive, offshore oil deposits have the potential to add another dynamic to an already diversified economy and put Brazil on an even more rapid economic growth path.

This is a guest post from Tom Stevenson, Investment Director at Fidelity International. It is the second in a series of articles in a BRIC by BRIC mini-series, produced exclusively for BrilliantWithMoney and Informed Choice.

Past performance is not a guide to what might happen in the future. Please note the value of investments can go down as well as up so you may get less than you invested. Investments in small and emerging markets can be more volatile than other developed markets and changes in currency exchange rates may affect the value of an investment. The ideas and conclusions in Tom Stevenson’s article are his own and do not necessarily reflect the views of Fidelity’s portfolio managers. They are for general interest only and should not be taken as investment advice or as an invitation to purchase or sell any specific security.

Sources:
1. Goldman Sachs, Latin America Economic Analyst, 19 February 2010.
2. GDP in purchasing power parity (PPP), according to the International Monetary Fund and the World Bank.
3. CIA: The World Factbook

But a spectacular market recovery last year and promising signs for its economy suggest that Russia should not be frozen out just yet.

DOWN, BUT NOT OUT

The financial crisis hit Russia particularly hard. The Russian economy’s reliance on the export of energy and other commodities means it rode the wave of rising prices to mid-2008, but spectacularly wiped-out when commodity prices cracked.

In 2008, Russian shares lost 72%1 and at the climax of the crisis in September and October, when stocks around the world were tumbling in the wake of Lehman Brothers’ collapse, circuit breakers on Russian markets put trading to a halt for several days.

What followed in 2009 was a deep recession that wiped 9%2 of the value of Russia’s GDP.

The economy has now stabilised and Russia’s shares are among the best performing in the world since the nadir of the crisis having returned 206%1 from January 2009 to 22 March 2010.

Could Russia silence the bears in 2010?

OVERWHELMING OIL?

There is no escaping Russia’s reliance on energy exports. For all the efforts the government makes to rebalance the economy, an investment in Russia will be dominated by the ebb and flow of oil and gas.

In 2009, Russia became the world’s number one producer of oil and gas. Its giant energy producer, Gazprom, represents more than a quarter of the Russian equity market.

History suggests the tight correlation between oil prices and the Russian market – particularly at times of stress. Although the market turned at the top and bottom before oil, the magnitude and timing of the slide is comparable.

It is therefore safe to assume that a broad investment in the Russian market requires a bullish stance on energy prices and, by implication, world growth.

THE BEAR IS NOT TRAPPED

Goldman Sachs coined the BRIC acronym in arguing that the four countries would dominate the global economy by 2050. This argument remains intact, in spite of Russia’s economic setback in 2008.

By 2050, Goldman Sachs predicts that Russia will become the largest economy in Europe and the fifth-largest in the world, behind its fellow BRICs and the US.

But this prediction is not based on wildly optimistic rates of growth over the next few decades. In fact, the highest annual growth rate used in Goldman’s projections is 4.5%. That is considerably lower than the annual rate of expansion achieved since the financial crisis of 1998. To take its place among the world’s economic elite, Russia does not need to shoot the lights out, just avoid blowing up.

CURRENT MARKET CONDITIONS

That’s all very well, but 2050 is a long time to wait for an investment to come to fruition and Russia is still licking its wounds from a bruising couple of years.

What are the shorter-term prospects for the country?

The Russian authorities are wrestling with a growing dilemma. Oil has risen 80%* in value since December 2008, carrying with it the value of the rouble.

But high interest rates (currently 8.5%*), a hangover from a long-term battle against double-digit inflation, feed a growing rouble carry trade. While a strong currency is good for importers and consumers craving foreign goods, it damages the country’s wish to diversify the economy through strengthening export manufacturing.

IF IT AIN’T GOT THAT BLING

If Russia’s economy is to stand any chance of breaking its reliance on energy exports and enjoying a more robust economic recovery, its consumers need to rediscover their (sometimes extravagant) spending habits. In the decade since the Russian financial crisis, consumer spending had increased steadily especially in luxury goods and an appreciating rouble helped boost consumer’s spending power.

At the peak of the consumer spending boom in 2008, Russia’s taste for luxury mean that Porsche sold more cars in Russia than they did in the US.

But that growth collapsed in 2009 as consumers’ growing confidence was shattered by the crisis and the rouble shed 36%1 against the dollar. Relatively few Russians own shares so, in the general population, changing trends in spending are largely connected to insecurity about jobs and wages rather than the markets.

In a survey, a third of Russians said they planned to trade down in one or more categories of goods though some people suggest certain status-symbol luxury items such as fur coats are immune in a downturn.

RUSSIAN BANKING

• Russia has one of the most profitable and underpenetrated banking sectors in the world – Sberbank is Russia’s largest bank with a 51% market share of deposits3.

• Banks are typically more conservatively run than in other countries.

• Sberbank is well capitalised (at 17.2%) and its high deposit base means a high net interest margin on lending of +7%3.

• Among other things, its strong deposit and loan business are a play on the Russian consumer.

CONCLUSION

Russia might have lost some of its shine in the past two years, but fully justifies its position among the BRICs.

In spite of the damage to the economy suffered last year, it is still on course to become Europe’s largest economy. To be bullish on Russia in the short term requires a bullish view on oil, gas and, by implication, world growth (what emerging market does not?).

The paradox is that Russia’s Achilles heel is also its trump card and, among the BRICs, its vast oil and gas industries have the power to lift the entire economy and carry its consumers and other industrial and service sectors with it.

Russia faces some tough challenges in the short term, but should reward careful, well-prepared investors over the long term.

Even though the Russian market doubled in value last year, Russian equities are still relatively well priced. Goldman Sachs analysis indicates Russian equities, priced on a 12-month forward PE basis, are cheaper than the US, Europe, Japan and all its BRIC counterparts.

This is a guest post from Tom Stevenson, Investment Director at Fidelity International. It is the second in a series of articles in a BRIC by BRIC mini-series, produced exclusively for BrilliantWithMoney and Informed Choice. You can read the first article, about China, here.

Past performance is not a guide to what might happen in the future. Please note the value of investments can go down as well as up so you may get less than you invested. Investments in small and emerging markets can be more volatile than other developed markets and changes in currency exchange rates may affect the value of an investment. The ideas and conclusions in Tom Stevenson’s article are his own and do not necessarily reflect the views of Fidelity’s portfolio managers. They are for general interest only and should not be taken as investment advice or as an invitation to purchase or sell any specific security.

Sources:
1. Datastream
2. Goldman Sachs
3. Fidelity

Since the introduction of economic reforms more than 30 years ago, China’s importance to the global economy has grown dramatically.

It has experienced rapid growth in GDP but, in per capita terms, remains a poor country. Despite the expectation that it will overtake Japan in 2010 to become the world’s second largest economy, China is yet to experience the rapid acceleration in consumption that has typically been enjoyed by developing nations with similar income per head as China has today.

We should therefore expect domestic consumption to become the primary driver of economic growth, taking over from exports and infrastructure investment.

As this happens, investors should be able to find similar stock-picking opportunities to those in the UK and Europe a generation ago; despite its growing economic influence, China’s stock markets are still relatively immature.

THE MIDDLE KINGDOM ONCE MORE

The recent rapid growth in China’s economy marks a dramatic shift from the relative introspection and international isolation of the past two hundred years. On a longer view, however, it can be seen as a return to the status quo ante.

For hundreds of years prior to the industrial revolution, China was a leading player in the global economy. In recent years, China has decoupled from the developed world, with higher overall growth and a greater resilience to the financial crisis than its counterparts in the West.

China’s GDP has grown by an average of 9.9% over the past two decades. Having contributed 3.7% to the global economy in 2000, China is forecast by the IMF to account for 11.1% of worldwide output in 2014.

Goldman Sachs has forecast that China’s will be the world’s largest economy by 2027 and other estimates see the culmination of this power shift occurring even sooner.

China’s GDP nearly quadrupled between 2000 and 2009, from US$1.2trn to US$4.7trn, while that of the US rose over the same period from US$10.0trn to US$14.3trn. As a consequence, China’s contribution to global growth was 80% of that of the US, despite starting the period with an economy one-eighth the size of America’s.

China overtook Germany to become the world’s largest exporter in 2009, accounting for an estimated 9.9% of global exports in 2009, helped by a currency which China has been accused of keeping artificially low to stimulate overseas sales.

China’s economy has moved significantly up the value chain during the past 30 years. Since 1978, the number of Chinese working in the service sector has grown from around 50 million to 300 million, while the number working on the land has remained broadly unchanged at 300 million.

The increasing sophistication of the Chinese economy is reflected in the growing importance attached to science and technology, where research spending has grown rapidly, and by a rapid increase in the numbers of postgraduate students. China is no longer just the workshop of the world but increasingly a force to be reckoned with in the industries of the future.

CHINA AND THE S-CURVE

Despite the overall size of China’s economy, in per capita terms, the country’s GDP remains well below those of many developed nations such as the UK, Germany, Japan, France and the US.

Comparisons with other developing nations suggest, however, that China’s income per head is at a level where a rapid increase in domestic consumption can be expected. History shows that countries such as Korea, Taiwan and Japan experienced rapid increases in spending on household goods and services as their GDP per capita increased from about US$5,000 to US$10,000.

Low levels of personal indebtedness compared to the developed (and especially the Anglo-Saxon world) and a high household savings rate provide a solid foundation for domestic spending to continue growing at a relatively rapid rate.

The potential for further growth is illustrated clearly by car sales data which shows that, despite recently overtaking the US as the world’s largest market for auto sales, China still has an extremely low passenger car fleet when measured per head of population.

The expectation that domestic consumption can drive economic growth in future years is further underpinned by the relatively low contribution of private consumption to overall economic output. While the US consumer accounts for around 70% of American GDP, private consumption in China is less than half of total output.

CONCLUSION: THE STOCK-PICKING OPPORTUNITY IN CHINA

The Chinese stock market is relatively immature when measured against China’s economic influence and the markets of developed countries.

Despite its high ranking in global GDP terms, China’s stock market is smaller in market capitalisation terms than those of Germany, Switzerland and even Australia.

The relative insignificance of China in stock market terms has contributed to its quoted companies being less intensively researched than those in more developed markets. This lack of research is reminiscent of the markets in the UK and Europe 20 or 30 years ago and is likely to make the Chinese stock market a more fruitful hunting ground for fundamentally-driven stock-pickers.

Research has shown, moreover, that valuation differentials have a greater influence on stock market performance in emerging markets such as China than in more intensively-researched markets such as the US. The benefit of investing in the most attractively-valued stocks and avoiding the least attractive is far greater in emerging markets where the “information advantage” is most pronounced.

This is a guest post from Tom Stevenson, Investment Director at Fidelity International. It is the first in a series of articles in a BRIC by BRIC mini-series, produced exclusively for BrilliantWithMoney and Informed Choice.

Past performance is not a guide to what might happen in the future. Please note the value of investments can go down as well as up so you may get less than you invested. Investments in small and emerging markets can be more volatile than other developed markets and changes in currency exchange rates may affect the value of an investment. The ideas and conclusions in Tom Stevenson’s article are his own and do not necessarily reflect the views of Fidelity’s portfolio managers. They are for general interest only and should not be taken as investment advice or as an invitation to purchase or sell any specific security.

You might read books, listen to the experts on the radio or chat to your buddy on the golf course. The personal finance editor of your weekend paper could have a valid opinion or your accountant might steer you in a certain direction.

Of course none of this is really investment advice. The sources described above would be better described as information or possibly guidance.

Investment advice can only come from a suitably qualified and authorised individual who fully understands your financial goals and objectives before making specific recommendations.

Assuming this is the sort of investment advice you are getting (or plan to get in the future) how can you know if it is any good?

What separates excellent investment advice from the mediocre, rubbish or downright dangerous?

Here are five important questions you can ask your investment adviser to find out if what they have on offer is any good. These questions are equally as valid if you are engaging with a new adviser or if you want to put your existing adviser through their paces.

So, grab a notepad and pen, pick up the phone (or arrange a meeting) and pose the following questions.

1 – What is your investment advice process?

The delivery of consistently good investment advice requires the application of a robust investment advice process. Without such a process, the advice you receive will be subject to the whims of your adviser on that particular day.

The existence of such a process reduces the risk that you will be exposed to the latest investment fad, simply because it is new, hip and trendy on the day you seek advice.

Receiving investment advice from an adviser working to a robust advice process does not mean the outcome from the process will be generic or any less valuable. In fact, the outcome from the process should differ for every investor. It is the process itself that should be rigid, to ensure that the way in which investment advice is delivered is entirely consistent.

2 – What is your investment philosophy?

Your investment adviser should have a written investment philosophy. This document sums up his or her beliefs about investing money. It should be a set of investment rules about which your adviser feels passionately.

There are plenty of differing views when it comes to investing money. Some advisers will claim certain approaches are superior to others. There are usually strong counter-arguments to every academically ‘proven’ approach towards investing money.

What really matters is that your investment adviser has decided in their own mind to which views they subscribe and they are prepared to share these with their clients.

3 – How will you assess my attitude towards investment risk, reward and volatility?

Getting this right is a very important part of delivering suitable investment advice. Tolerance to risk can be very subjective, so a thorough assessment is essential.

This means much more than your adviser asking you to point at your risk level on a scale of one to something. Risk assessment should involve a combination of structured questioning and more general discussions about what you are trying to achieve, your experiences and views of the world.

You might also have a different risk profile for different financial objectives. Your adviser should cater for this as well.

We still see too many investors who have been pigeon-holed into a narrow risk definition. Once established, ask your investment adviser to describe your risk profile back to you, to ensure understanding. Always get a detailed description of your risk profile in writing for future reference.

4 – What resources do you have to enable you to deliver suitable investment advice?

The consistent delivery of excellent investment advice requires substantial resources. It cannot happen as a result of one man sitting in his office reading a copy of the FT.

Ask your investment adviser to describe the investment research software to which they subscribe and how they use it. Your investment adviser should be paying for professional research tools and not simply looking at the same data you can get for free online.

Find out about the other people involved behind the scenes in the investment advice process. Ask questions about their experience, qualifications and role in the construction of advice.

5 – Once you deliver investment advice, how do you keep it under review to ensure it remains suitable?

The worst type of investment advice is delivered once and then abandoned. Excellent investments need regular reviews, conducted at least annually. These reviews are the opportunity to rebalance the asset allocation of your portfolio, manage risk levels, replace underperforming fund managers and make sure you remain on track.

If you implement investment advice with your adviser, there is a good chance you will be paying for ongoing reviews through the annual management charge you pay, as a part of this charge goes to the investment adviser each year. Ask what type of ongoing reviews you will receive, the format of these reviews and (importantly) when you should expect to receive them.

What next?

With these five questions you should be able to get under the skin of your IFA, stockbroker or discretionary fund manager. Their answers to these questions will quickly reveal their competence (or lack of it!), helping you to make the right decision about where you get your investment advice in the future.

Martin Bamford is Site Editor of BrilliantWithMoney and Managing Director at Informed Choice; the award-winning firm of Chartered Financial Planners. He is author of Brilliant Investing: What the Best Investors Know, Say and Do (£12.99, Prentice Hall).

With a new year and a new decade under way, and the economic gloom persisting, it is an appropriate time for us to consider our financial positions and for us to understand what we all need to do to determine our financial independence.

However, the road to financial independence is pitted with stumbling blocks and distractions that can divert us from our course.

Here are seven of the most disastrous financial planning perils that can befall us; call them the Seven Deadly Financial Planning Sins if you like.

1 – Apathy

“It’ll be alright in the end”, “I haven’t got time to look at my finances now, daily activities are more important”

It is easy to put your Financial Planning to the bottom of the list because the long term is so far away isn’t it?

Don’t! Do not put this Financial Planning stuff off.

Time passes quickly (the Millennium doesn’t seem like ten years ago does it?) and you may find you can’t afford to when you expect to.

2 – Hope

In life, hope is a good thing but it cannot be relied upon. Do not hope you have enough to be financially independent when you want to be.

Work out what financial independence means for you (what ‘your number’ is) and put a plan in place to attain it.

3 – Greed

This is perhaps the oldest but least heeded lesson in Financial Planning. Too many people get caught up in the fervour of a bull run only to see their hard fought gains lost during a market crash.

Don’t chase every last penny of profit; leave a bit for the next person and ensure you have enough cash to provide security in an emergency.

4 – Inattentiveness

Financial Plans are not a one off document that, once established, will see you through to the end. Personal circumstances change, investment markets and economies rise and fall, and legislation changes.

By not reviewing what you have established, you are hoping your Financial Plan will do its job when in fact it may be stalling or in fact in decline.

5 – Indebtedness

There is little point in devising a plan to have your assets work as hard a possible for you if you are increasing your bottom line costs through needless loans and credit card debt.

Run your finances as a business by keeping control on your costs and focussing on profit.

6 – Imprudence

“If it seems too good to be true it probably is.” This is another often quoted and often ignored piece of advice.

You cannot get rich quickly without taking significant risk and even then you should only risk what you can afford to lose.

Think carefully about how much risk you are willing to take with your money and understand the downsides.

7 – Hastiness

Do not rush into an investment or contract that you may not be able to reverse or may mean you lose access to your capital for too long.

Always consider what you are investing in, read the terms and conditions carefully and seek professional advice if you are not sure whether something is appropriate.

Andrew Neligan is a Chartered Financial Planner and CFP professional at Informed Choice. He was a winner at the FT New Breed Adviser Awards 2009. Andrew is a specialist in Financial Planning services for legal professionals.

During such tough economic times, it is understandable that so many people stick their heads in the sand when it comes to their money.

By considering a few simple personal finance resolutions, it is possible to transform your personal finances and get to the end of 2010 with a much healthier financial position.

Here are our eight top personal finance resolutions for 2010.

1 – Work out your budget

It continues to amaze me how many people simply don’t know how much money they spend each month (and where this money goes). Working out and sticking to a monthly budget is all about spending less than you earn. If you achieve this, month on month, you will be in a better financial position at the end of 2010 than you were at the start.

2 – Get out of the red

If you have short term debt (credit cards, store cards, overdrafts, etc) you will know that debt is a drag on your ability to meet other financial objectives. It’s also an emotional drag on your attitude towards money and personal finances. Make clearing your short-term debt a priority before starting to save for other financial plans.

3 – Make a plan

This action ties in closely with your monthly budgeting. When you are working out what you are going to spend your money on each month ensure that you prioritise debt over savings. Stop taking on more short-term debt. Mark a debt-freedom day on your calendar and stick to it.

4 – Look to the future

Starting a pension is likely to be a big priority for many people in 2010. We recently heard proposals from the main political parties on the subject of pensions, all suggesting we will need to save more and work for longer. You cannot rely on the State for a sustainable level of income in retirement and that means you need to use a pension or another investment vehicle to create your own sources of income for later life.

5 – Pay less tax

No one enjoys paying tax but many of us fail to take the simple steps that enable us to pay less tax. Each and every year we waste an average of £132 per taxpayer because we don’t take some simple planning steps and maximise our tax allowances.

The simple steps you can take to pay less tax include making sure savings and investments producing taxable income are held in the name of the lowest earning spouse and using your annual Individual Savings Account (ISA) allowance. From 6th April 2010 we can each invest up to £10,200 each year into a tax-efficient ISA.

6 – Review your mortgage

The ‘credit crunch’ has made getting good mortgage deals more challenging, yet it remains important to review your mortgage regularly to ensure you are paying a competitive rate of interest. If you are on your lender’s standard variable rate (SVR) then you might be able to access a better product, saving you money each month which can go towards your other financial objectives.

7 – Sort out your financial affairs

If you don’t have a Will, get one. You can write your own Will but there are some major risks involved with this DIY approach, so meet with a solicitor to get this organised. If you die without a Will, your estate will be distributed according to laws created in 1925. It is no surprise that these laws probably do not reflect modern thinking on inheritance! Don’t risk dying ‘Intestate’.

At the same time give some thought to family financial protection, particularly what would happen to your family from a financial perspective if you were to die, lose your income or contract a critical illness such as cancer. It is possible to insure against these risks but you need to quantify them first. If you have existing life assurance plans, review them to make sure they remain competitive and appropriately structured.

8 – Meet with an Independent Financial Adviser

Make 2010 the year that you carry out a comprehensive review of your personal finances and Financial Planning with an impartial professional who has access to the tools and knowledge needed to improve your current and future position. Most IFA’s offer a free initial consultation with no obligation so they can identify areas that they can help you with and you can grill them about their qualifications, experiences and charges.

There are plenty of money saving experts out there, all with lots of different suggestions on the best ways to save money. The best ways to save money will depend on your personal circumstances and objectives in life. There is no ‘one size fits all’ approach to saving money.

If you haven’t reviewed your expenditure for a while then you are likely to be able to make substantial savings in 2010. What you do with these savings is up to you, but with analysts predicting a challenging second half in 2010, there is no harm in cutting back on what you spend and using these savings to pay off expensive debts or boost the size of your emergency fund.

Here are ten ways to save money in 2010:

1 – Review your mortgage

A mortgage is likely to be your largest item of monthly expenditure. Whilst the Bank Rate fell to the historic low of 0.5% in 2009, many mortgage interest rates remained at much higher levels. The recent partial recovery in house prices should favour those hoping to remortgage to a better deal, with the loan-to-value (LTV) making borrowers eligible for a more competitive rate.

2 – Save money on utilities

This week we saw the price of oil climb to over $78 a barrel, the highest price in nearly a month. As the world economy continues to recover, we expect to see higher oil prices in 2010 and this will result in a higher price for domestic energy supplies.

This article we published during Energy Saving Week in October described some simple ways to save money on your energy bills.

3 – Review your life assurance

The premiums you pay each month for life assurance, critical illness cover, income protection insurance and private medical insurance can quickly add up to a substantial amount. If it has been more than a couple of years since you started a protection policy, speak to an independent financial adviser to review the cover you have in place. You might discover that the cover you have in place is now redundant or that you are paying over the odds for the level of cover you have.

4 – Leave the car at home

Another, and more immediate, consequence of higher oil prices will be an increase in the cost of petrol and diesel. If you can leave your car at home more often, you will save money on the cost of fuel and also reduce wear and tear on the vehicle. You might also save money on your car insurance if you can reduce your annual mileage. And of course there are health benefits associated with walking or cycling rather than driving.

If your journey requires a car, then more fuel efficient driving practices can also save you money. Keep the car tyres properly inflated, reduce the weight carried in your vehicle, leave the air conditioning switched off and accelerate smoothly.

5 – Make a budget (and stick to it)

A great way to avoid wasting money is to have a written budget each month and make sure you stick to it. By deciding in advance where you will spend your money, you should make it easier to avoid the temptation to spend on frivalous or unnecessary items. Once you have made your budget, review it on a regular basis so you can compare where you planned to spend your money with where you actually spent it.

6 – Become a Freegan

Becoming a Freegan will not appeal to everyone, but there are money saving lessons to learn from their philosophy. At the most basic level, by living simply, reducing your consumption and sharing resources with others, you will be able to save a lot of money which can then be redirected towards other financial objectives.

7 – Get rid of your landline telephone

The newly introduced ‘broadband tax’ of 50p per month on landline telephones will make a lot of people think about the purpose of their phone lines in 2010. With low-cost mobile phone packages and free VoIP internet telephone calls (using free software such as Skype), you might determine that the few hundred pounds you spend each year on telephone line rental could be better used elsewhere.

8 – Have a water meter fitted

Speaking from personal experience, getting a water meter fitted at my house a few years ago was one of the biggest money saving items I have experienced. Rather than paying based on estimate usage, you only pay for the water you actually use.

The water regulator Ofwat estimates that getting a water meter fitted can reduce household water consumption by between 9% and 21%. On an average household water bill of £312, this is a saving of up to £66 a year.

9 – Cancel your TV subscription

For a lot of people, this money saving tip in 2010 will be a step too far, but cancelling your satellite television package subscription can save you a lot of money. The most expensive Sky TV package (Sky+HD with Sky World) is nearly £60 a month, so you will save over £700 in 2010 if you can bring yourself to live without the sports and movies they offer.

The introduction of Freesat in the UK means that, after the initial outlay for a Freesat receiver and dish, there is no need to pay monthly subscriptions to get access to a good range of satellite television channels. Add free Internet TV services such as the BBC iPlayer and Channel 4 On Demand (4OD) to the mix, and you might find the transition from paid to ‘free’ TV a little less painless than you originally expected.

10 – Always shop around

Your golden money saving rule in 2010 should be to always shop around. The Internet makes it quick and easy to compare prices on just about any product or service.

You can even use the Internet on your mobile phone handset to compare prices when you are physically in the store about to make a purchasing decision. This can be useful if you want to buy the item on the spot, but need some ammunition to haggle with the shop assistant before parting with your cash.

Martin Bamford is site editor of BrilliantWithMoney and a Chartered Financial Planner at Informed Choice. You can follow him on Twitter @martinbamford.

“In this world, nothing”, said Benjamin Franklin, “can be said to be certain except death and taxes”.

Everything else is uncertain, and therefore involves an element of risk. However, risk means different things to different people.

From the individual investor’s perspective, it can refer to the extent to which your capital might be at risk if you make an investment, or alternatively it could mean the opportunity cost of you choosing one investment over another.

Fund management companies use a range of different and frequently obscure measures to show risk within each fund that they manage. At Barings, we believe it is down to us as product providers to explain technical terms clearly for financial advisers and investors.

We don’t always get this right but, with this in mind, I would like to go through some of the most widely quoted measures of risk you might come across when looking at the performance of individual investment funds, and try to de-mystify some terminology.

Alpha

One of the most commonly used terms, but probably one of the worst examples of jargon, is “alpha”, sometimes represented by the Greek letter “α”.

The term alpha comes from the hedge fund world, and simply means the degree to which a fund has outperformed or underperformed the benchmark it is trying to outperform. This is usually taken to be a very simple measure of the skill of the investment manager, although this is not necessarily the case. While a high alpha figure should be a positive sign, it should be treated with some caution. The fund manager may be taking a lot of risk to achieve such high returns.

Alpha can also be used in the sense that it describes the potential rewards available to a manager with skill in a particular market. Where a market is thought to be highly efficient, there may be less potential for investment managers to deliver “alpha”. The US equity market, for example, is a notoriously difficult one for active managers to beat.

Beta

In the same vein, “beta”, or the Greek letter “β”, is commonly used to show the portion of the fund return which is attributable to the market. For example, if a fund delivers 8% to investors, and the market has risen by 5%, then the alpha would be 3% and the beta could be said to be 5%.

“Beta” is also used in a second sense however, and that is how the volatility – or the pattern of performance – of the fund compares with the underlying market index.

If the returns from a fund twist and turn with the returns from the stock market, it would be said to have a beta of 1.0. It would be precisely as volatile as the market in which it invests.

If, on the other hand, the amplitude of returns was higher, and the fund tended to deliver stronger or weaker performance on a regular basis, the beta would be higher. Lower but more steady returns would mean a beta of less than one and the fund could be said to have relatively “defensive” characteristics, or at least when compared with the market it was investing in.

Tracking error

Tracking error is another term which gained currency in the 1980s and 1990s. This shows the “standard deviation” (yet more jargon I’m afraid for the non-mathematicians) of the returns between the fund and the market index over a particular period.

Standard deviation measures the degree to which returns tend to be clustered together around the average or the extent to which they are widely dispersed.

Tracking error is typically calculated to one standard deviation. This means that 67% of the time the difference between the return of the fund and the return of the benchmark index will be no greater than the tracking error.

Information ratio

Finally, another very commonly used measure of risk is the information ratio. This is an attempt to gauge the skill of the investment manager in a slightly more scientific way than simply looking at the alpha.

Calculating it isn’t difficult though. It simply involves taking the annualised relative return for the fund – the outperformance or the underperformance relative to the benchmark index – and dividing this by the tracking error.

The end figure shows how much “value” has been added by the investment manager for the risk taken. Looking at all of these various measures, the information ratio is probably the only one, where more is almost always better. All of the others simply help to provide more information about the way the fund is run.

If you are considering investing, and you discuss it with a financial adviser, you will soon see how hard they work to establish your individual attitude to risk. At the same time, it is reassuring to note that they are likely to have thoroughly researched and evaluated the individual risk metrics of a host of investment funds before recommending any products to you.

Ian Pascal is Marketing Director at Baring Asset Management in London. Ian is responsible for all marketing communications including promotion of mutual funds, alternative investments and private clients.

This means that the Office of Fair Trading will not now be able to investigate the fairness (or otherwise) of unauthorised overdraft charges.

Clearly this news is a blow for the millions of banking customers who stood to be able to reclaim billions of pounds in bank charges.

It’s also pretty bad news for the claims management firms who appear to have cropped up in recent months specifically to handle these claims, some would say unnecessarily.

Good news for some

It is good news, however, for the banks and their shareholders, which includes the taxpayer in a number of cases.

The banks stood to lose up to £2.6 billion in annual revenues from this source – a huge amount of money, but not much in the overall scheme of things when it comes to banking profits.

Barclays alone made a profit of nearly £3bn in the first half of this year and HSBC reported a similar figure. The UK banking sector makes somewhere in the region of £20bn in profits every year.

The myth of ‘free’ banking

One possible consequence of the banks losing their case this morning was an end to ‘free’ banking. Of course banking is not and never has been ‘free’.

The charges associated with using banking services might not be particularly explicit, but they certainly exist and can be substantial in some cases.

Here are just a few of the ways you pay for banking services, even if you have not suffered unauthorised overdraft charges.

1 – Fees for premium accounts

You’re probably familiar with this deal. Banks might not charge explicit fees for conventional current accounts but they do charge them if you ‘upgrade’ to a premium account.

These typically come with a bundle of services you might or might not purchase elsewhere. Often this will include breakdown cover, travel insurance, mobile phone insurance and commission-free currency exchange. Oh, and of course a shiny debit card.

If you go to the open market and research the individual cost of each service, it might look like a reasonable deal in comparison. The problem arises when you do not actually use all of the services or they are services you would not have purchased ordinarily.

For example, you might find your mobile phone is already insured as part of your home contents insurance and you can just as easily exchange your cash for foreign currency at the Post Office with no commission charges.

2 – Lower interest rates on deposits

This is a big source of profit for the banks. When you deposit money with them, either within a current account or a savings account, the rate of interest you receive will be less than the amount of interest or investment return they will earn on your money.

Apathy is an important part of this source of profit for the banks. They might attract savers with a market leading interest rate on their savings account, but then after a year or more reduce this to an uncompetitive level. They do this because they know most customers will not bother to move their money to another bank. They profit from your apathy.

The best way to minimise this cost of banking is to keep your accounts under regular review and move them when you need to move them. The more proactive bank customers become when it comes to getting the most competitive interest rates, the more competitive each bank will need to be to retain their customers.

3 – The higher cost of borrowing

As well as savings, there is a margin when it comes to borrowing.

When you take out a personal loan, mortgage or credit card, the cost of borrowing (the interest you pay on your debt) is much higher than what it costs for your bank to lend you the money.

Banks also make profits from you by charging arrangement fees and redemption fees on loans. In addition, they like to bolt-on expensive insurance policies when selling debt.

4 – Uncompetitive financial products

Perhaps the least explicit way in which the banks made money from their customers is through the sale of uncompetitive financial products. This includes protection policies (including life assurance) with uncompetitive premiums and investment products with high charges and poor performance.

Banks typically offer financial products from one provider or, at best, a limited panel. Because of this, the terms available on these products are unlikely to be the best across all areas. The only way to ensure you consistently get the best terms is to use an independent financial adviser, or at least shop around to get the best deal.

Martin Bamford is site editor of BrilliantWithMoney and a Chartered Financial Planner at Informed Choice. You can follow him on Twitter @martinbamford.