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Expat Investor : January February 2009
INVESTMENTS UK borrows more to combat deep recession CHRIS STEAD,HEAD OF DISCRETIONARY PORTFOLIO MANAGEMENT, STANDARD BANK OFFSHORE will be well below the average rate of growth that normally occurs. Closer to home the UK economy is looking decidedly grim with the Chancellor of the Exchequer revising his economic forecasts more significantly than any previous Chancellor. In his pre-budget announcement, he now expects UK growth to be just 0.75% in 2008 and a contraction of between 0.75% and 1.25% in 2009. On the face of it this does not seem unreasonable but on closer inspection it may prove optimistic as the highly respected National Institute of Social and Economic Research are forecasting a 2009 decline of 1.5%. The UK government has not been saving any money whilst we have been going through the good times and is, therefore, having to revert to borrowing huge sums of money in order to provide an economic stimulus. Deficits of £78bn and £118bn in 2008 and 2009 are expected. A combination of measures is proposed to put more money in people’s pockets with the centrepiece being a 2.5% reduction in VAT for a period of 13 months from 1 December 2008. It remains to be seen how successful this initiative will be but it has the potential to create a 1% advance in growth in 2009. With the UK leading the world in both fiscal and monetary stimulus Zurich Bank International Current financial market conditions are as difficult as they have ever been given the unprecedented economic circumstances which have arisen during the last 18 months. Investors are badly winded and have struggled to their feet on a compulsory count of eight but are still asking whether equity markets have now bottomed after such substantial falls from previous highs of between 40% and even 75% (in certain emerging markets). The answer is that no one really knows. It is of course pure guesswork and highly dependent on how the global economy recovers during the next two years. There is no doubt that the world economy will suffer an economic recession in 2009 and that many Western economies (Japan, Italy and Germany) are already in technical recession. Fixed Interest markets are suggesting that deflation will occur in the US over the next two years whilst ten year yields are discounting there is unlikely to be any price increases over that term. These are clearly extreme valuations and highlight the fear, pessimism and lack of confidence in the global economy and the financial investment scene at this time. It is therefore hardly surprising that any risk assets (such as equities or corporate bonds) are offering substantial intrinsic value. This value matters little whilst intense fear permeates investor minds. The implication of this is that the market is beginning to discount that the forecast recession turns into a depression along the lines of the great depression of 1929-32. This is not our base case as we expect a normal cyclical recovery to take place in the middle to later part of 2009. However, as this crisis has had the most severe impact as Banks and investors deleverage, the recovery is likely to prove rather anaemic compared with past economic pick ups. In short, it will feel like a recession even though there is modest growth taking place which *AER stands for Annual Equivalent Rate which is a notional rate illustrating the contractual rate as if paid and compounded on an annual basis. Zurich Bank International Limited, PO Box 422, Lord Street, Douglas, Isle of Man, IM99 3AF, British Isles. Telephone: +44 (0) 1624 671666 Fax: +44 (0) 1624 627526. www.zurichbankinternational.com Registered office: 43-51 Athol Street, Douglas, Isle of Man, IM99 1ET, British Isles. Zurich Bank International Limited is registered in the Isle of Man Number 22847. Telephone calls may be recorded. Licensed by the Isle of Man Financial Supervision Commission to take deposits. Fast Facts 22004 January/February 2009 ? EXPAT INVESTOR 9 There’s strength and then there’s Zurich Strength To find out more, or to request an application form call: +44(0)1624 671666 Email: email@example.com or visit our website (quoting ref no. EI02) 3.00% GROSS PA/AER* Fixed for 1 year! Secure your deposit and interest rate by opening a 1 Year Fixed Rate Bond with Zurich Bank International Limited. Backed by one of the world's largest financial services providers, Zurich Bank International is part of the Zurich Financial Services Group, which has its Group headquarters in Switzerland. The Zurich Bank International 1 Year Fixed Rate Bond (Issue 17) gives you a superb annual interest rate of 3.00% gross. • Interest rate fixed for one year from account opening • minimum balance £10,000 • limited issue. www.zurichbankinternational.com R along with the recapitalisation of the banking sector, other governments around the world will be presenting their own stimulus packages. This above all encourages us to believe that these concerted and synchronised efforts of developed and emerging economies will eventually wrestle the fear of deflation and depression from financial markets. A restoration of the present dysfunctional credit markets should also ensue and help alleviate global activity weakness and bring about a much-needed period of stability and a gradual increase in confidence. This is a pre-requisite of any sustainable return to world economic growth in the future. As for those equity investors that have suffered so much, now is not the ideal time to consider disposing of risk assets. It is far better to await an improvement in confidence before reconsidering personal risk tolerances. As Warren Buffett says ‘be greedy when others are fearful and be fearful when others are greedy’. FAST FACTS Ashburton 22130 The Fry Group For more information just enter the above numbers on the Reader Reply Service coupon on page 20 or visit www.expatinvestor.com Rensburg Sheppards 22132 Standard Bank 22131 22133
March April 2009