Okay, there is no hiding away from it. It’s here and it is likely to stay for a while. Yes, I am talking about the one word that resonates amongst us these days – “Recession!”. Singapore, Japan and Hong Kong are already in recession, Taiwan and South Korea are teetering on the edge, and China is also slowing down. Here, we break down the 2009 investment outlook.
Allow me to skip the details of how the world got itself in this mess and instead focus on where we go from here, as there can be no harm by being more prudent and wise with our finances. More so if you are about to be, or have recently become a young parent (congratulations!).
The consensus on the street is that the global economy is likely to remain weak in 2009 and should be poised for a recovery in 2010. The recent sell-off in markets globally has indeed produced several good opportunities for longer-term investors. There are many profitable businesses which can continue to grow in their sales and earnings and at the same time, have little or no debt on their balance sheets. Such companies are probably oversold in the current environment and are now hovering at absurdly low prices. The share prices of many Asian companies are pricing up to a 60% fall in 2009 profits, which may seem excessive.
As the chill winds of the financial crisis set in, how can one potentially profit from this rare situation in the market? Well, those with a shorter-term view may be in for a rough ride as we are likely to see increased volatility in the near future. However, for those with longer holding power, this may be an ideal time to start building your portfolio.
As such, here is a quick overview on select asset classes in which you might consider monitoring and perhaps invest in.
Equities
Stocks have become cheap and many large companies are now trading at levels of their smaller counterparts. Asia is still viewed to have strong underlying fundamentals that will form the base of its future growth and amidst the wreckage will emerge gems that will power the future.
China and India, the rising behemoths in Asia, are likely to lead the pack of nations with a healthy demand for materials and energy. Rising incomes in these economies is likely to produce higher demand for healthcare and the basics such as water and agriculture. This realisation has seen several newly created funds focusing on such areas.
In terms of specific commodities, gold might be an interesting product to look out for in 2009. This precious metal acts as a store of wealth and a hedge against the US dollar, which recently underwent a drastic downward correction. With the Federal Reserve dishing out expensive bailouts and fiscal stimulus plans, the market has punished the US dollar and this could augur well for gold going into 2009.
Fixed Income
Interest rates around the world are headed towards all time lows. This has become increasingly evident with rate cuts occurring every other week in some part of the world. Given that we are likely to be in a recession for a considerable amount of time, low interest rates will be here to stay.
At the same time, corporate bonds also appear to offer good value. They have cheapened significantly because the market has priced in a very high probabiliy that the corporate will default on their debt. Fundamentally, Asian companies are still relatively stronger than their global peers. Not one bond issuer has defaulted, though we are seeing default rates rising in the US and Europe. Now, lower interest rates and a reduced pricing of default will bode well for such fixed income products.
In the corporate bond space, one can venture in either investment grade bonds or high-yield bonds. The latter, as the name suggest, gives the investor a greater return, but the bond is issued by a company that is less credit-worthy than those in the investmenr grade space. As such, they may not be suitable for all investors as they are deemed to be more risky.
Now you might ask, what about government bonds? Well, given that they are traditionally a safety haven in times of uncertainty in the financial markets, it is no surprise that demand for government bonds (such as US Treasury Bonds) have gone through the roof such that it has oversized the supply of bonds by the government. These products may therefore not provide a very compelling opportunity unless you have the view that things are going to get much worse from here.
Property
The real-estate market which had an impressive momentum going into 2008 has also not been spared. The simultaneous decline in the availability of debt and its rising cost has seen activity in the real estate market dwindle. Institutional players in this space are not active as they are either saddled with heavy losses or reassessing their portfolios. Asia is still deemed to offer attractive opportunities, with Europe and the US thereafter. Lookout for signs of large scale developers and institutional players re-entering the game as it might be a signal of renewed activity.
The above are three broad asset classes that you could focus on. The key here is to construct a portfolio that is right for your risk profile. As a new parent, you are likely to have a decent chunk of your disposable income committed to new found expenses. However, without sounding like a broken record, as a young parent you have one great thing on your side – time. Time yields the power of compounding and with compounding comes greater returns. The sooner you commit cash to an investment portfolio, your returns are likely to be exponentially better. To get started, either roll up your sleeves and get dirty with news in the markets or speak to a qualified financial advisor if you do not have the time.
Best of luck in your investments and here’s to a prosperous 2009!
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