The economic outlook for 2009 is as bad as it gets. But that doesn’t mean investors are bound to suffer. World markets have tanked so badly that there are bargains everywhere, including golden ones.
The first bear market I experienced was 1973-74, when not only did the stock market fall by two-thirds but inflation was roaring away at over 10%.
Then, as now, the banks were bust (property lending was the cause) and every day from mid-1974 onwards rumours circulated about one or other blue-chip company that was about to go bust.
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Swept under the carpet
In fact, they didn’t, the bank bust was swept under the carpet by the Bank of England (it had the power to do that in those days) and in January 1975 the stock market index almost doubled.
Anyone who bought blue-chip shares in the autumn of 1974 and hung on to them made three or four times their money over the next few years.
Of course this time it’s different. In some respects, it always is. Every boom and bust have their own specific causation.
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Fear stalks the streets
What doesn’t change is the psychology and the pattern of market behaviour - which means collective investor behaviour. We are now in the ‘funk’ stage where fear stalks the streets and people are prepared to believe the worst about anything.
Take the economy. Yes, the UK economy (and every other economy) will be bad in 2009, but all this focus on the GDP numbers is highly misleading. We’ll see unemployment soar towards 10% and companies go bust.
But people in work – still the vast majority - will see their real incomes rise by 10% or more over the year thanks to lower mortgage payments, and declining petrol, fuel and food prices.
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Negativity rules
Because we all get infected by the blue mood, we’ll all go on believing we’re worse off for many more months. It probably won’t be till late summer that we realise that we actually have more money in our pockets than we did in 2008.
And we probably won’t feel like spending it till 2010. By that time, we’ll have paid down a big chunk of the ‘debt mountain’, which will disappear from the media and turn out to be not that important after all.
Where it will get worse
So, what about the financial markets? And here the key question is: Could it get worse? In some areas, yes. Clearly a lot of small companies will go bust just because they can’t get credit.
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Banks not out the woods
Whatever governments do, it’ll come too late to save a lot of them. So wherever you look, I’d avoid investing in small companies in 2009.
The banks, too, are not out of the woods despite all the government bail-outs. Many analysts are already saying they will need to have more capital injections before they can lend as much as businesses and consumers need.
I’d steer clear of bank and other financial stocks in 2009 too.
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Shelter from the storm
In other areas, though, it may not get worse. Big blue-chip companies with lots of cash don’t suffer from the credit crunch. If they’re supplying power, food, consumer staples, drugs and medicines, they won’t see much fall in demand.
So their profits may fall but not by much. Yet their shares have tanked along with everything else. So companies like GlaxoSmithKline and AstraZeneca, Cadbury, Unilever and BAT could be among the earliest to recover.
A second group of UK shares that ought to do well is businesses that sell a lot in Europe and the US. Their profits in euro and dollars are now worth 20% more than they were last year.
For big exporters like Rolls-Royce and BAE and lots of middle-sized engineers, the fall in the pound is a get-out-of-jail card and should mean a boom in sales and profits once a recovery starts.
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Target stable businesses
A third group of shares that are likely to do well worldwide are soundly-financed, stable businesses paying good dividends to shareholders. With interest rates headed to zero, anything that pays a decent income is going to become a lot more attractive.
So my favourite funds for 2008 are those investing globally for high dividends, such as JP Morgan Global Equity Income and Schroder Global Equity Income.
Here, the point to remember is that you’re getting an income of 5% net of tax and this should rise over time - not in 2009, when economic conditions are tough, but over a 5-year period dividends usually rise somewhat faster than inflation. So for the long term these funds look a very attractive choice.
On that income theme, I’ve previously featured funds investing in investment grade corporate bonds.
You can still collect an income of 7.5% from these funds and unless the entire world economy melts down, I’d expect gains of at least 10% over the next year in this sector.
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Which foreign market?
Overseas markets are tricky. The US economy will probably be the first to recover, but shares there aren’t as cheap as those elsewhere.
Shares in Europe are screamingly cheap, but because of the European Central Bank’s insistence on fighting the last war (the one against inflation) its economy will probably see the biggest deterioration on 2009 and that will send many European investors running for cover.
As for the emerging economies, the news is going to go on getting gloomier as exports fall and they discover they do have knock-on problems from the credit crunch.
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Target Japan
The only world market I can get keen on is Japan, where there may be a decline in GDP but far smaller than in the other big countries.
They missed the credit boom, their banks are OK and local investors, after years of borrowing yen and buying abroad for income, have been burned by the rise in the yen and are bringing their money home to invest in shares that give them dividends of three times what they get from a bank deposit.
Since the yen looks likely to rise further against the pound, there’s a good chance you could get the magic combination of a rising stock market and a rising currency from Japan in 2009. My favourite funds there are Jupiter Japan Income and JP Morgan Japan.
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A golden speculation
Finally, an investment for more speculative, growth-seeking investors. Gold has made a comeback from its mid-year low of $700 to a recent $850 per ounce but is still below the $1000 per ounce it achieved in January 2008. A weak dollar normally sees the gold price rising. And turbulence and fear on a global scale should give it a boost in 2009.
You can buy gold simply and cheaply using an Exchange Traded Fund (ETFS Physical Gold, PHGBP). But 2009 could be the year for gold shares. They currently stand at their lowest-ever level in relation to the gold price after a dismal 2008.
Yet when the price rises, gold mine profits soar - typically a 10% rise in the metal price is good for at least a 20-30% rise in mining profits. If we do get a real surge in the gold price, gold mining shares could easily show gains of 50% or more in 2009. Get a stake with the Blackrock Gold & General fund, which holds a wide spread of world gold mining shares, with an emphasis on those in secure places like Canada and Australia.
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Important risk warning - please read
The value of your investment and the income from it can go down as well as up and you may not get back a significant proportion of your investment. Past performance is not an indication of future performance. If you are in any doubt as to the suitability of an investment, you should seek independent financial advice.
