For the global economy, 2008 was an “Annus Horribilis” . But Paul Taylor, managing director at Worcestershire IFA, says the recession still offers good opportunities for investors.
What has surprised most of us about this last few months is the extent of volatility in the markets. Banks quickly stopped lending to each other, accelerating the downturn in economic demand.
Lower interest rates have reduced savings rates and property prices have fallen dramatically. The Government has spent heavily to prop up the banks but they still seem to be concentrating on repaying debts and remain unwilling to provide liquidity to the markets.
It is likely that hedge funds, which we have long since warned against, have sold off holdings at any price to obtain cashflow and settle their positions; yet some have not yet been able to unwind completely and might collapse, leaving some wealthy individuals much less wealthy than they thought.
In the last year, we have also seen the collapse of Lehman Brothers and AIG, a slump in the motor industry and the end of High Street names like Woolworth.
The professional services sector has been hit as a result of the slowdown in the property market while house prices continue to fall.
Perhaps the full extent of adjustments will have been seen by the end of 2009 and at that stage, opportunities to buy property at low prices will arise for those with cash and limited borrowing requirements.
So what of the future? Where do investors go from here?
The most respected and successful investors see such periods as opportunities as they know that over the longer term, this is the most likely time to make gains; when prices are low, rather than when markets have recovered and prices have risen.
It is important that investors do not miss out on the upswing as markets move ahead of events, often by six or 12 months. Anthony Bolton, president of investment at Fidelity International, has pointed out that the markets fell before the recession hit the real economy and that the markets should recover before the real economy does.
Waiting for unemployment to fall and production to rise again, means potentially missing out on the best buying opportunity.
Most commentators believe that the markets will recover. If retail figures continue to dip, or there is more bad news from the banks, some believe that the FTSE 100 will fall to 3500 or below, but most expect the market to recover from there and by the end of 2009, it may be well above current levels.
My view is that for those investing for the longer term, now is as good a time to buy equities as you are likely to get; You should then hold those equities and funds invested in equities, in order to take advantage of the upswing.
Gilts and fixed-interest investments are fully priced and now is not the time to buy unless you are looking for low-risk income, rather than gains. As the markets recover, cash will move back to equities and gilts and fixed interest will become more sensibly-priced again. Selling now where gains have been achieved would be prudent.
Property is over-priced and cash should be retained to buy into this sector when stability appears to have returned. Commentators are estimating further price falls of between five and 20 per cent in some areas.
Equities will prove the best source of income in the short term, as yields are high with prices low, but care is needed to buy into cash-rich companies in defensive sectors where the impact of recession is likely to have less effect.
As with corporate bonds, the key sectors are utilities such as Centrica and the key players will be non-financials with strong positions, such as Tesco.
Cash should be retained in the short term to meet emergency needs, to hold cash to take positions in low-risk Gilts and bonds as prices and supply improves and to buy property funds once the market becomes more stable.
Long-term holding of cash is unwise, as real value is falling.