Austerity is cool. The new coalition government and their planned budgetary cuts signal a change in direction for the UK when it comes to spending money.

Whilst you probably don’t want to go the same extremes as the rumoured government plans (slashing your monthly household budget by a quarter might pose too much of a challenge), there are some simple steps you can take to spend less each month.

1 – Cancel the satellite television subscription

Subscribing to satellite television channels is an expense that many people can live without. Freeview or Freesat both offer access to a wide range of free TV channels (you still have to pay your TV licence, unfortunately), so if you can live without the premium sports and movie channels, then there is money to be saved. Chances are, you already have the kit you need to access free digital channels built into your TV set.

2 – Swap cinema trips for DVD nights

As a committed movie fan, I know just how expensive trips to the cinema have become in recent years. It isn’t simply the ever growing ticket price. The cost of drinks and snacks purchased at the movies is close to extortionate. My local cinema charges £3 for a bottle of water! I dread to think how much popcorn and fizzy drinks would be for a typical family. Rent a movie on DVD instead and get your movie snacks from the supermarket; a far cheaper alternative.

3 – Learn to cook

The cost of ready meal and eating out at restaurants quickly adds up. There are so many benefits attached to learning to cook meals from scratch. The meals you prepare and cook yourself will be healthier, cheaper and you are bound to impress your friends with your new found culinary skills.

4 – Save up to buy the things you want

It is always cheaper to buy things by saving for them than it is to buy on impulse with credit. There are several reasons for this. When you buy something with a credit card, you are also paying for the cost of credit. Although interest rates on savings are at all time lows, you still pay through the nose for interest charges on most credit cards. Saving up to buy the things you want gives you the breathing space to decide if you really want to buy that item. It also gives you the chance to find the best deal.

5 – Review every Direct Debit

When was the last time you checked all of your Direct Debits and Standing Orders? Internet banking makes this an incredibly simple exercise. You might discover that you are paying for things that you thought you had stopped paying for months or even years ago. This quick check of your automatic spending might also identify a few areas where you can save money; either because you no longer want the thing you are paying for or because you can find a cheaper alternative.

6 – Fit a water meter

If your property does not already have a water meter, consider getting one of these fitted. This can be a great money saver, particularly if you are a small family living in a larger property. It will cost you nothing to get a water meter fitted and, once it is installed, you will only have to pay for the water you use, rather than the average cost of water use in your size of property.

7 – Start walking or cycling to work

Do you really need to get in the car for a short journey to the office? If you live within a couple of miles of where you work, you can save a lot of money each month by walking or cycling instead of driving. As well as the money you will save in petrol, you will subject your car to fewer miles each year which will reduce maintenance and insurance costs. Getting this regular exercise each day will also help you keep fit.

8 – Cancel your gym membership

Is the monthly cost of your gym membership really justified? I meet very few people who really get good value from the cost of their gym membership, particularly once they have been members for more than a few months. Start to think about the exercise and fitness opportunities available for free, rather than tying yourself to a machine indoors three or four times a week.

9 – Start using your local library

Even with the rise of discounted books from online retailers, if you are an avid reader, buying books can get expensive. There is a simple solution. Get yourself a library card and make use of their facilities. Borrow books rather than buying them. As well as the books your local library has in stock, you can usually order other titles as well. Borrowing books on a short loan period will also encourage you to read them, rather than letting your book purchases pile up.

10 – Replace CD purchases with Internet streaming

If listening to music is your thing, try using a free Internet music streaming service instead. You can listen to music for free using services such as Spotify or Last.fm. Using Spotify, you can listen to music for free as long as you are prepared to put up with occasional interruptions from adverts. Last.fm is a great option if you want to discover music you might like in the same genre as your favourite artists.

Martin Bamford is a Chartered Financial Planner and Certified Financial Planner (CFP) professional at Informed Choice; the award-winning firm of Chartered Financial Planners named IFA of the Year 2010.

Exchange Traded Funds (ETFs) continue to grow in their popularity in the UK retail investment market, with investors attracted to this low cost way of tracking the performance of a particular sector, index or region.

Of course every type of investment comes with technicalities which are important to understand. ETFs are no exception.

In this article, we look at the different ways that Exchange Traded Funds replicate the performance of their chosen index.

Physical or synthetic?

There are two main types of performance replication used by ETFs – physical replication or synthetic replication.

Physical replication is the easiest strategy to understand. Where an ETF uses ‘full replication’, it is simply buying all of the underlying stocks within the index it aims to cover, in the right proportions. All the ETF manager then needs to do is ensure the ETF holdings continue to represent the index.

As you might imagine, with full physical replication, it is hard work for the ETF manager to mirror the index performance completely. Keeping the contents of the ETF precisely in line with the underlying index components is a near impossible task, and this results in what is known as ‘tracking error’; a difference between the performance of the ETF and the performance of the index.

Synthetic replication is a strategy that aims to achieve a fund performance closer to the actual performance of the index.

Instead of holding every stock in the index, an ETF manager following a synthetic replication strategy instead invests in a basket of stocks which provide collateral. They then swap the performance of their basket of stocks with the performance of the chosen index, through an agreement with a counterparty, typically an investment bank.

This synthetic replication method ensures that the ETF delivers a return much more closely aligned with the performance of the underlying index.

So synthetic replication is best?

If the sole purpose of using an ETF is to receive the same performance of the chosen index, without having to purchase each share individually, then it is easy to see the attraction of a synthetic replication strategy. Because the counterparty is providing the ETF with the index return, less their fee for this service, there is minimal tracking error.

Where some investors are nervous about ETFs using synthetic replication is the introduction of counterparty risk. This means that the counterparty providing the index return might not deliver on their promises. This risk has become more apparent in recent years, since the global financial crisis which highlighted the fragility of many investment banks.

One factor that reduces the level of this counterparty risk is the collateral that is held, although this does not mitigate the risk entirely. It is worth checking with your chosen ETF to what extent they rely on a counterparty for the provision of returns.

Does physical replication mean less risk?

The full physical replication method does away with the counterparty risk associated with synthetic replication strategies. There are however some other issues to consider.

Not all ETFs using a physical replication strategy will use full physical replication. In fact, when tracking a larger index, or an index which contains illiquid stocks, the ETF manager is more likely to adopt a ’sampling’ strategy, aiming to deliver a return that is close to that of the chosen index.

The right ETF replication strategy to select will depend on your priority.

For investors not prepared to expose their money to counterparty risk, the physical replication strategy is likely to appeal. For investors wanting minimal tracking error, the synthetic replication strategy will be more attractive, assuming they are prepared to accept the counterparty risk.

Regardless of which replication strategy your selected ETF employs, it is important to understand what is being used and what this means for your investments.

Martin Bamford is a Chartered Financial Planner and Certified Financial Planner (CFP) professional at Informed Choice; the award-winning firm of Chartered Financial Planners named IFA of the Year at the Money Marketing Financial Services Awards 2010.

This means that the equivalent of 3.5 million people in the UK will have no choice but to continue working until they die.

Potentially more worrying is the finding that 42% of non-retired UK adults have no set retirement age in mind. This is equivalent to 15m people who don’t have a target set for the day they plan to hang up their work shoes.

It seems that the recession has had a big impact on our collective ability to retire at a reasonable age. In 2008, before the recession hit home, all of the respondents to this annual survey were confident that they would be able to retire. Back then, only 1% did not know at what age they would be retiring.

Retirement planning is an important part of financial planning, with several steps you need to take to get on track for a happy retirement.

1 – Decide on your retirement lifestyle

Planning for a financially secure retirement requires a specific goal. It is no good simply trying to apply a rule of thumb, such as two-thirds of your current income, to your plans for retirement. Instead, think carefully about the lifestyle you want to have in later life and cost it out.

If you are in a relationship, it is important to talk to your partner and make sure your vision for retirement is compatible. There is no sense in one of you planning to sunbathe in the Caribbean whilst the other is working at Homebase.

2 – Pick a retirement age

This might sound simple, but until you decide on what age you would like to retire, it becomes nearly impossible to make your plans for retirement SMART (specific, measurable, achievable, realistic and time bound).

The traditional retirement ages of 60 for women and 65 for men are more or less a thing of the past now.

Women in the future will have to wait until at least age 65 to receive their pension benefits, with both sexes having to work for longer before they can claim their State pensions. It is likely that, in the future, the minimum State pension age will be 70 or even older.

Pick your own retirement age and then work towards it.

3 – Work out what you have already got

This means getting together up to date valuations and projections in respect of any existing pension benefits. Make sure you include any old pension plans from previous employment as well as your current pension scheme benefits.

It is also important to include your State pension figures. You can get a free State pension forecast from The Pension Service using form BR19.

Also consider other assets that can use to fund your income in retirement. This might include cash savings, Individual Savings Accounts (ISAs), share portfolios or the value of your business.

4 – Calculate the gap

Once you know what you need and what you have already got, you can calculate the gap between the two. This figure is the amount of income you need to accumulate between now and your selected retirement age.

Don’t be scared off this exercise when you see this number for the first time. It is likely to be incredibly daunting. In fact, there is a good chance that it will prompt you to go back to your vision of a perfect retirement and make this a little more ‘realistic’.

Alternatively, understanding the gap between where you are and where you want to be (and the cost of funding this gap) might cause you to reassess your current financial priorities. This will depend upon how important the ability to have a financially secure retirement is for you today, and whether you are prepared to make short-term sacrifices for these longer term objectives.

5 – Don’t forget the blindingly obvious

Once you have worked out your retirement planning numbers, check them again to make sure you have not overlooked anything important.

Did you include the cost of repaying your mortgage? What about the impact of price inflation, which tends to be higher for people in retirement due to the types of goods and services they typically consume? Did you think about the cost of funding long term care?

6 – Make your plan, write it down and keep it under regular review

Once you have made your retirement plan, write it down and check back on it regularly. By writing it down you are more likely to commit to the plan in the future. By checking on progress at least once a year, you can see if you are on track or need to take further action to bring your plans back into line.

Martin Bamford is a Chartered Financial Planner and Certified Financial Planner at Informed Choice; the award-winning firm of Chartered Financial Planners named IFA of the Year at the Money Marketing Financial Services Awards 2010.

One of the big new requirements is for all financial advisers to hold a much higher minimum level of professional qualification, no later than the end of 2012.

This replaces years of financial advisers only needing GCSE equivalent examinations before advising clients on often complex investments and other financial products. The new benchmark qualifications are much tougher and a far better reflection of the complexities associated with giving financial advice in the 21st century.

With the need for improved qualifications come an alphabet soup of designatory letters and exam passes. These risk confusing consumers of financial services and products, so here are three financial adviser qualifications you need to know about:

Diploma in Financial Planning

This is one of the most popular diploma-level qualifications for financial advisers. It is offered by the Chartered Insurance Institute (CII) and over 30,000 individuals have either achieved this qualification or are studying towards it right now.

Whilst the Diploma in Financial Planning (which leads to the use of the letters ‘DipPFS’) does not fully satisfy the new regulatory requirements, it is a ‘transitional qualification’ that advisers will be able to top-up with structured continuing professional development in the future.

This is a modular qualification, with advisers typically completing four modules from a choice of seven across different areas of financial planning. In addition to the 80 units (20 units per paper) the adviser must get at this diploma level, they must have another 60 units from the easier certificate level to complete the diploma qualification.

Similar qualifications include the Diploma for Financial Advisers (DipFA) from IFS Learning and the new Diploma in Regulated Financial Planning (also DipPFS).

Certified Financial Planner (CFP)

This is an internationally recognised designation, with 126,000 holders worldwide and over 900 CFP professionals in the UK. It is a challenging professional qualification which requires the completion of a financial planning case study to specified mandatory standards.

The qualification is set at QCF Level 6, which is equivalent to an honours degree in terms of knowledge requirements. Candidates have their financial plans assessed and must meet over 75% of the standards overall, making this qualification one of the toughest to complete.

Once the financial plan assessment and other entry requirements (including subscribing to a code of ethics) have been completed, candidates can use the CFP designation.

Chartered Financial Planner

This is a professional title awarded by the Chartered Insurance Institute (CII) following the completion of qualifications to the level of an honours degree.

To become a Chartered Financial Planner, individuals must hold the Advanced Diploma in Financial Planning, have at least five years of relevant experience and adhere to a code of ethics.

Whilst this is a relatively new professional title, nearly 2,000 financial advisers in the UK have now reached this level.

Martin Bamford is a Chartered Financial Planner and Certified Financial Planner (CFP) professional at Informed Choice; the award-winning firm of Chartered Financial Planners named as IFA of the Year at the Money Marketing Financial Services Awards 2010.

Edit: Thank you to fellow Chartered Financial Planner Alistair Cunningham for providing some figures to go with this blog. He recently obtained these from the CII – there are 2,041 Chartered Financial Planners and 6,634 with DipPFS designation.

Investors were let off lightly in the end, with only a few minor changes to the CGT rules. In this article we provide a simple guide to Capital Gains Tax.

What is it?

Quite simply, Capital Gains Tax is a tax you pay on…capital gains! It is the tax you pay when something you own makes a profit. You pay capital gains tax on this profit, when you sell or dispose of an asset.

CGT is a tax that becomes payable if you sell a piece of taxable property or if you no longer own it because you gave it away, transferred it to someone else or swapped it for something. Just because you don’t receive any payment for the asset, doesn’t necessarily mean you avoid being taxed on it.

Most of the things you might own are liable to CGT. This counts for assets in the UK and overseas, if you are resident in the UK for tax purposes.

How much does it cost?

There are two main rates of Capital Gains Tax. The main rate is 18% and a new higher rate was introduced in the June Budget at 28%.

If you are a trustee or a personal representative (dealing with the proceeds of an estate) then only the higher rate of 28% will apply.

There is also a 10% rate of Capital Gains Tax which applies to entrepreneurs under certain circumstances. This can apply when you dispose of all or part of a business. The first £2m of these gains during your lifetime are taxed at 10%, rather than 18% or 28%.

For this Entrepreneur’s Relief to apply with limited company shares, you must own at least 5% of the company and have been working there or be a director during at least the twelve months leading up to the sale.

Are there any exceptions?

Individuals get an annual exempt amount for CGT purposes. In the 2010/11 tax year, the first £10,100 of any capital gains are free of tax. If your capital gains in a tax year are less than this annual exempt amount, they are tax-free.

If you are a trustee, you only get half of the annual exempt amount to apply to any capital gains within a trust. This means that trustees have an annual exempt amount in 2010/11 of £5,050.

Does CGT apply to everything I own?

Whilst Capital Gains Tax applies to most assets, there are some notable exceptions.

Some assets are completely exempt from CGT. These include your car, personal possessions worth up to £6,000 each, investments held within Individual Savings Accounts (ISAs) and Gilts.

If you are in the business of buying and selling things, and you pay income tax on the profits, then generally you do not have to pay Capital Gains Tax as well.

Most property is subject to CGT, apart from your main home. There is no need to pay CGT on the ‘profit’ you receive from selling your main home when you qualify for Private Residence Relief.

Private Residence Relief is available on your home when it has been your only home or main residence and you have used it solely as your home.

You can also apply this relief if you did not move into your home immediately when you bought it, for as much as the first twelve months of ownership. The final three years of ownership will also be treated as if you had lived in the property.

What if I lose money – do I get a tax refund?

If you have lost money when you sell an asset, it is usually possible to count this loss against other gains made, either now or in the future. The rule of thumb to consider is that if you would have paid CGT on a capital gain from the asset, you can offset a loss from that asset against other capital gains.

The length of time you get to make use of a capital loss depends on whether you had to complete a self-assessment tax return in that tax year. If you have declared a loss on your tax return, you get four years from the end of that tax year to claim the loss.

What if I give an asset to my husband or wife?

CGT is not payable if you make a gift to your husband, wife or civil partner, as long as you have lived together for at least part of that tax year. If your spouse or civil partner sells the asset in the future, they will have to pay capital gains tax for the entire period of ownership, including the time when you owned the asset.

How can I pay less capital gains tax?

Paying less Capital Gains Tax is all about careful planning. It is important to use all available allowances and deductions. This means reducing the value of the gain by the cost of any fees or expenses you incurred when buying and selling the asset.

Some people consider gifting an asset to their spouse or civil partner before disposal, to maximise their own annual exempt amount in addition to their own. By working together like this, your annual exempt amount effectively doubles to £20,200 of gains.

You can also reduce CGT by spreading the sale of an asset over two tax years. This can stretch the annual exempt amount of a married couple further still, to £40,400 under current rules.

Really extreme CGT planning involves moving abroad for an extended period to become non-domiciled for UK tax purposes. There are several tax planning schemes being promoted that might also help to reduce the cost of CGT, but many of these are expensive and opaque in nature, so proceed with caution.

Capital Gains Tax is one of the most complex, if not the most complex, form of tax. If in doubt, seek professional tax advice and invest the time to get your tax calculations correct.

Martin Bamford is Site Editor of BrilliantWithMoney and Managing Director at Informed Choice; the award-winning firm of Chartered Financial Planners named IFA of the Year at the Money Marketing Financial Services Awards 2010.

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).