Investors should adjust their risk appetite to austerity measures
Investors may not like the age of austerity, but they have no choice. In such times of stagnation, one should work a lot harder to generate a decent return. What investment options can keep you afloat?
Between 1983 and 2007 stock markets powered upwards, but since then the economic cycle toke the downturn path and that will continue for some years. Investors need to adjust their strategies to that fact.
With interest rates set to stay low, especially in the developed countries, cash is a particularly austere investment. If you have money in the bank, its value will fall in real terms. Cash is only a temporary option, while deciding where to invest next.
Investors in traditional safe investment, such as government bonds, are also backing a loser. Strong demand in relative safe havens such as the US, UK and Germany has pushed up the price of bonds and forced down the yield, the interest rate you earn, to record lows.
Given the depressed returns on cash and bonds, investors naturally turn to the stock markets. Accumulating solid, cash-rich global blue chips is a safe bet. Usually, such stocks pay steady dividends of up to 5 per cent a year. These are also relatively low-risk stocks. Investors can adjust their expectation to more modest returns.
Popular defencive stocks are also an option. These include pharmaceuticals, telecoms and utilities companies. Such companies are solid, steady and usually fail to surprise.
Some investors may still be tempted to flee stock markets altogether. However, selling after share prices have fallen is the worst thing you can do. Recessions, depressions and even austerity doesn’t last forever. If you are investing for the long term, which means at least five years, the only option is to hold.
With the West desperately trying to print its way out of trouble through repeated bouts of quantitative easing, gold is expected to shine again. The precious metal has underperformed in recent times, but it could start to move higher when quantitative easing gets sufficiently powerful. Gold acts as a store of value when central bankers cheapen their currencies by printing more money. The price recently rose above US$1,600 an ounce, but this remains a speculative investment. When the recovery finally comes, gold could quickly lose its lustre. Until then and furthermore, keep an eye on silver. Traders are waiting since long for silver to break out.
During the economic boom, real estate investment looked so lucrative that investors grossly overdid. Now there is such oversupply of property across the globe, that it will take at least a decade or two for the industry to revive itself. At present, the only opportunities for investment are in popular global hubs such as London, Paris or New York. These cities continue to attract investors seeking financial stability and long-term growth. Cash-rich investors from the Middle East and the Asia-Pacific regions are tempted by the large discounts from the market peak.
The Arab Spring has also positioned Dubai as a safe haven. The city is the region’s trade and tourism hub. Its economy has experienced some turbulence, but the government forecasts steady growth for the years to come and consumer confidence remains above average.
Every investor has to work out his attitude towards risk. Typically, a balanced portfolio combines different types of assets and should match ones attitude to risk in extreme market conditions. For most investors, this means a spread of cash, shares, property, a little gold and more silver.
