Trying to take you off the Investment Roller-coaster
Stock-Markets / Financial Markets Dec 13, 2008 - 07:23 PM GMTBy: Armstrong_Davis
I have pleasure in sending you our winter 2008 Investment Report. Do have a look at he website www.ArmstrongDavis.com should you wish to view previous reports as well as our work in the national media. The website should be entirely revamped by the New Year - more user-friendly and interactive.
- Unemployment is rising more strongly than for decades.
- Sales of goods and services (GDP) are in rapid decline i.e. recession.
- Home repossessions are rising and will rise strongly in 2009 (N.B. government owned banks are delaying inevitable repossessions).
- House prices are falling at around 1.5 to 2% PER MONTH (Bank of England figures for mortgage lending are pointing to negative lending next year i.e. debts outstanding to fall which leads to even more rapid falls in house prices). From the average London house of c £325,000 the current rate of falls amounts to c £5,000 PER MONTH!
- Corporate and personal bankruptcies are rising sharply (we saw accountancy and legal firms hiking up their recruitment of insolvency specialists over the last year).
- Sterling has plummeted leading to higher import costs of food and fuel. In our view, oil has bottomed on world markets at c $45-50 and will rise from about here.
- The government announced a strange VAT cut which we do not feel will attract people to borrow more (even if banks were lending) and spend. They also told us they would be taking borrowings up to 1970s levels (and that’s only if their projections for the economy prove accurate however we feel they are highly optimistic) and our taxes will go through the roof for many years, conveniently starting from just after the next election.
Stock Market
At the lowest point, on October 10th, the stock market was down c 45% from the October 2007 highs, taking us back to 2003 levels. You will recall our extremely bearish stance. Looking out over the real economy, I’m afraid to say we’re still huge bears – the global recession is firmly in place and, in Britain, we aren’t even close to the worst of it:
What can we see longer term?
Governments all over the world are printing money like there is no tomorrow. Naturally, one can sympathise that they are trying to buy their way out of the crisis. It may look good in the polls, shorter term, further out however when we have more money in the system, without greater production of goods and services, then we will have inflation – the cost of the same item will be higher. Thus, we feel that going into 2010/11 we should expect to see the fall in inflation (dis-inflation) reverse and inflation rear its ugly head again.
As well as more money swilling around the system in order to get us out of this slump governments, including (especially) ours, will keep interest rates lower than they should do and for longer.
Of course, this is one of the reasons we are in this mess in the first place – Alan Greenspan, the previous Chairman of the US Federal Reserve, slashed rates following the Dot Com crash (2000 to 2002) and reduced again after 9/11. We all followed on this side of the pond, and elsewhere. Thus we had a house price bubble which was further exacerbated by easier and easier lending from 2005.
Enough of the history lesson because that’s…er… history. As investment advisers and financial planners, our focus is the future. So, if inflation is coming around the corner (say a year or two), what will happen to savings? In the short term with the dis-inflation that we currently have, deposit rates have fallen along with the slashing of the Bank of England rate. [First attack on savings!] Then as inflation rises savings again will be attacked [Second attack on savings!] as the purchasing power of capital and income will be severely battered. It’s been a long time since we had double digit inflation in this country (around 1990) and most folk have forgotten what it’s like. Well, they’ll soon be reminded…(Again, inflation will rise not immediately but from 2010 or 2011).
So, once more, dear reader, we strongly suggest those who have low or no exposure to commodities, in your portfolios, in your ISAs, in your pensions, in any long term funds you hold, that you review your affairs and you increase your exposure. In particular, to precious metals such as gold and silver. Our preferred route is via unit trusts of companies in these fields such as miners and oil companies. Remember how oil and gold did in the 1970s when inflation was up in the 20s%.
I’m not saying this next statement will always be the case – it won’t! – however, it is a fact that since November 26 2008, to the date of writing, December 8 2008, the US index of gold stocks have risen c 52%. Methinks the markets see inflation out there, “comin’ round the mountain…” As we have often said, markets predict the real economy. Hence, the stock market started plummeting last October before the recession took hold. Many of our clients have held gold stocks via unit trusts and recently some increased their exposure, at in our view the best value for perhaps 50 years. In case you believe that the rise has happened and there’s nothing left for you, well we see commodities on a rising trend - with high volatility - over the next DECADE or so. There’s plenty of opportunity for private investors to invest for the long term.
Here’s a thought – over the last year the stock market (FTSE 100) has fallen around 33% (year to December 8 2008) whereas gold has RISEN over 35% in Sterling terms in the same period. Perhaps the gold market is trying to tell us something…such as ‘Buy me!’
As the economy turns down sharply, as we forecasted it would, can your friends and family be sure they have planned appropriately? If you are a professional adviser, such as a private client lawyer or an accountant, can you be sure that your clients are well looked after by their financial and investment advisers?
Ask us about how we could help them.
Compare Armstrong Davis Ltd to any other independent financial adviser or stockbroker.
Jonathan Davis BA MBA FCII AIFP FPFS ,
Chartered Financial Planner
Managing Director
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