Monday, March 31, 2008

Good Investments for a Recession

With the problems in the credit markets and prospects of recession, a reader recently asked what would make a good investment in the current economic climate?

I don’t know whether a penniless economist is the best person to advise about investing, however, these are some of the basic principles behind the different options for investment at the present moment.

Housing Market

The housing market has outpeformed most other types of investment in recent years. I still remain a believe in the long term prospects of the housing market in the UK. However, for the next 1-2 years, I expect house prices to fall slightly. If you are thinking of investing for the next 10-20 years in the future, the shortage of supply relative to demand is likely to keep pushing prices higher. However, there is no harm in waiting for 12-18 months to see how much house prices fall. It may also become cheaper to borrow when the credit crunch ends (hopefully within 12 months) Don't Buy

Share Prices

In a recession, firms make less profits, pay lower dividends and so share prices fall. The stock market may seem like a good place to avoid, especially given recent turbulence. However, it is my belief that the impact of a recession is already built into share prices. Sometimes share prices can actually rise in the period of a recession, because analysts are already looking forward to the recovery. Investing in the stock market has given pretty poor returns in the past few years, but, I think many shares now offer good value. Bargains to be Found.

Mineral Prices

In a recession, people often resort to investing in solid products like silver and gold. It is seen as a safe alternative to market based share prices. The price of metals and other commodities are also being pushed higher by:
  1. Depreciating dollar. Because of the dollar’s weakness, gold is becoming seen as an attractive alternative. As long as the US economy is suffering falling house prices a declining economy and low interest rates, the dollar will remain weak. This will make Gold attractive as an alternative
  2. Rising Demand. Global growth, especially amongst the big two of China and India is causing rising demand for raw materials such as metals, gold and energy. There seems no let up in economic growth in India and China, however, the rising inflation rate indicates chance of boom and bust in China. Nevertheless mineral prices still offer chance for growth because of rising demand.

Government Bonds

Government bonds offer the chance to make a secure investment and stable interest rate. However, on long term bonds, the market price is inversely related to the market interest rate. If interest rates fall by more than market expectations then the price of bonds will rise. In the UK, this is a possibility, but there is a little prospect of dramatic changes in prices, it is most likely that bonds will just offer secure but steady investment

Any Currencies worth buying?

Some are touting the Euro as an alternative to the dollar as the world’s most important currency. But, I would be wary of investing in the Euro as the euro economy is doing pretty poorly. It could follow the US into recession and this would make the Euro look overvalued. If you fancy a gamble look for a currency like the Brazilian Real, which has done very well in the past 12 months (helped by G.Soros’s speculation)

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