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Expat Investor : January February 2009
INVESTMENTS The inside track on where to invest in 2009 Expat investors face their toughest year yet amidst the ongoing global financial crisis. Here, four experts predict where your investment capital could be profitably place over the coming year. nearly half of these losses, before finally collapsing from peak to trough by 86% in 33 months. So far we still favour a rather less disastrous outcome. Central banks and governments are now alive to the dangers posed by a deflationary environment, and much is being done to restore faith in the financial system. Interest rates have been slashed, and we should expect more of the same. The US Treasury has earmarked $700 billion to stabilise the financial sector, and many countries have taken significant stakes in their larger banks. The message from a recent meeting of the G20 countries was that governments were committed to maintaining free trade, and that fiscal stimuli would be implemented to support jobs and growth. The world may avoid a depression, but we are probably headed for a severe and prolonged recession. The cost of the global bailout will be enormous and will come at the expense of growth prospects for an extended period. In this uncertain and very volatile environment, this is an opportune time to explain our current equity positioning and our outlook for the coming months. In the short term we have no plans to change our conservative allocation to equities. We have limited expectations of any significant rally in share prices, either this year or in the first half of 2009. We anticipate a volatile sideways trading range for equities for an extended period, as the reality of the deep recession further dampens investors’ resolve. We would not be surprised to see markets reach new lows again and we would prefer to preserve capital rather than attempt to generate excess, risky returns. It should be noted that the worst Worst of times, best of times IAN LEVERINGTON, INTERNATIONAL EQUITY FUND MANAGER, ASHBURTON (JERSEY) “History doesn’t repeat itself, but it does rhyme”, said the estimable Mark Twain. The problem we 6 EXPAT INVESTOR ? face in trying to navigate today’s bear market is, which history? The S&P 500 index has fallen January/February 2009 nearly 50% in the last 12 months, and there are only a couple of historical precedents for this decline. The most recent is the bear market that ran between 1973 and 74, where markets fell 48% in 21 months, but then rallied hard, gaining 70% in the next two years. By contrast, the 1929–32 Great Depression bear market began with a fall of 44%, briefly recovered expatinvestor.com two bear markets of the 20th century averaged 700 days. Over the past few months, our equity exposure has moved to focus on liquid and larger capitalisation stocks with good defensive qualities. We are generally overweight in consumer staples (names like Colgate Palmolive, British and American Tobacco and Campbell Soup) and underweight in financials, in line with our cautious outlook for the global economy over the next 12 months. While we have reduced our exposure to global energy and commodity stocks significantly, we believe an opportunity to add selected exposure may present itself in due course. The sharp sell-off has driven prices below the marginal cost of production in many cases, with the likelihood that supply will be cut significantly. Given the uncertain market climate and almost complete absence of any conviction in terms of future economic growth prospects, this is definitely an area where patience will be rewarded. So, what are the themes that may eventually lead us out of recession and deflation into a brighter horizon? We are still bullish on the prospects for China and India, perhaps even more so after the scale of damage that has been inflicted on those markets. Stocks in both countries have performed badly since the turn of the year as investors have shied away from higher beta markets generally. But consider this; China will be the only major economy still growing in 2009 (probably by somewhere in the region of 5–6%); it has an enviable current account surplus, it is still a low-cost producer of inelastic staple goods to the world, it has great demographics and a five-year plan to spend billions on infrastructure, linking inland cities to the coast. Recent economic data from the PRC has admittedly been disappointing, but China is best placed of all the major economies to react to this. If the world is to avoid a depression, amongst other things it will be because central banks will flood the system with liquidity, and history teaches that they are likely to continue to do long after it ceases to be necessary. Thus any move out of a bear market after 2009 is most likely to be led by assets positively correlated to inflation, such as commodities. Pricing power is likely to be slow to emerge, though, in a global environment where consumer savings will come to the fore again. Finally, on a more positive note, we would make the following observation: for an investor with a long-term time horizon, the best year out of the last 110 years to invest your money would have been 1932, the worst year for the US economy in the 20th century. We may not be quite there yet, but opportunity awaits!
March April 2009