Tuesday, December 30, 2008

Good Investments for 2009

As an economist I usually understand why things occur, but, when it comes to making predictions and forecasts I feel pretty useless because it is often hard to predict what will happen. At least, I'm not alone. When oil prices were $150 a barrels, many started predicting the $200 barrel. Now that oil prices have fallen to $40, people are now predicting $25. It reminds me of the joke about the economists on a hiking trip in the Alps. Looking at a map, one economist says, according to my calculations, we are standing on the mountain 10 miles over there.

So I'm sure, in 12 months time, people will be able to come and have a good laugh at these predictions But, anyway, with all the necessary caveats, pre-emptive excuses and waivers, what could do well in 2009?

Gold. Traditionally does well in times of uncertainty and recession. With people looking for safe investment, gold fulfils that need. The slowdown in global growth has caused slower demand from countries like India. But, with continuing uncertainty in finance markets gold should continue to do well and what is best to avoid?

Oil. Oil is a tricky one. It has shown to be tremendously volatile. The slowdown in global growth has led to lower demand; but this small fall in demand has led to a huge fall in the price. Some oil analysts predict oil could fall to $25. But, I can't help feeling at $25 the price oil is hopeless undervalued for the long term. The IEA have changed their predictions and stated that oil supplies will fall quicker than anticipated. As the global economy recovers (and this may not happen until late 2009, we could easily see oil prices return to early 2008 levels. Oil seems more volatile than the stock market. But, for a long term investment buying at these levels could give a really good return in a couple of years.

Housing. In 2009, I see no end to the fall in house prices. Analysts predict house price falls of between 10 - 30%, and I would agree with the median of these forecasts. With rising unemployment, and continued shortage of mortgages I can't see a change in the short term future of the housing market. In the long term, I believe UK house prices will recover - there is simply a long term shortage of supply compared to demand. But, there is a very powerful negative momentum which will not be broken in 2009.

Stock Market. Price to earnings ratios have fallen considerably, meaning that shares are offering better value than for a long time. However, it has proved difficult to call the bottom of the market. 2009, could lead to more bad news for the financial markets as the credit crunch and recession continue to cause problems for firms. One is tempted to say, that the stock market has priced most of the bad news about the economy into prices. If we avoid more financial meltdowns, such as Lehman Brothers declaring bankruptcy then maybe shares will be able to recover in 2009. But, this raises the great uncertainty of 2009 - will we see more banks on the brink of collapse as banks suffer from more repossessions?

Mattresses. With deflation and negative interest rates on US treasuries, Warren Buffet has been advising a buy for firms selling mattresses - a great place to hoard all your cash.

Pound Sterling. The Pound has had a miserable year, falling from 1.4 to the Euro to achieve parity. I don't think the decline will continue into 2009. I think the Euro is starting to look overvalued. The UK is not alone in having high public sector debt and falling interest rates. Mind you, I already said that the pound would stop falling a few months ago, and it is very nicely ignored my predictions so far.

Dollar. The dollar is a really difficult one. Some are confidently predicting its ultimate collapse and demise on the back of accelerating money supply and increased national debt. Yet, the dollar has proved remarkably resilient with people switching to dollars as a means to hoard cash and get out of emerging economies. I can't see US interest rates increasing in 2009. On purchasing power parity levels, the dollar is not overvalued, and it is difficult to know who it would collapse against. The strength of the Euro, belies the fact the Eurozone is also in a deep recession with high levels of debt.

Other Predictions for 2009

Unemployment. Unemployment will increase in the UK and the US. Alas, this is the easiest prediction to make. It can be made with great assurance, because unemployment is a lagging indicator. The fiscal injections could take upto 8 months to have an effect. By, that time, unemployment will continue to rise.

End of recession. I think this will be a pretty steep and long lasting recession. The government's fiscal response and interest rates cuts will slowly start to have an effect. But, it is likely to take over 6 months.

Inflation As I write this in December 2008, inflation is 4.5%, but, this is almost certain to fall in 2009. The big question is how much? The MPC say there is no danger of deflation; but it remains a fear nevertheless.

1 comment:

Memory Foam Mattress said...

Hello Economic Essays
Thank you for your forecasts for 2009 and the heads up on good investments like Gold.

We will see how your predictions stand in 6-7 months.

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