Bring on the Good Times

There are signs of hope for investors.

Interest rates are close to being at the lowest point in the current cycle, property investors are buying again, and the share market has shown significant gains over the last quarter, bringing prices back to where they were around November last year. It would seem that the worst is over.

Timing a move back into growth assets such as property and shares is something that needs consideration, however. Impatient investors with money sitting in the bank at a low rate of interest may be tempted to leap in too quickly. A cautious approach to investing is still essential.

While there are positive signs for investors, economic news is not good, it is just not as bad as it was. There are still significant problems in the major global economies.

In the US, economic growth is still strongly negative, unemployment figures continue to grow, albeit at a lower rate, and the housing market is still in decline.

The UK economy continues to decline, although the negative growth is not as high as in the US, while Japan is reeling from a halving of its exports; a catastrophic situation for an economy that is so reliant on selling to other countries to maintain its levels of production.

In the meantime, the emerging economies such as China, Russia, India and Brazil continue to show positive economic growth, although at lower rates.

Share markets historically start their upward trend before economic growth becomes positive and the more optimistic investors may argue that the 20% rise in the US share market over the last quarter is a clear signal that we are now in a market upturn.

A more realistic view is that the doomsayers caused markets to over-react in the first quarter of 2009 and there has simply been a catch up to a more realistic level.

Historically, a bounce back of this magnitude at the bottom of a cycle has been followed by a further decline. Stronger economic signals are needed before we can confidently say the worst is over.

In such an uncertain time there are three investment strategies that are critical to success.

The first is to increase your exposure to shares gradually on a drip feed basis to avoid missing the benefits of an upturn and to minimise the risk of further decline.

The second is to diversify your investments. Picking winners in a market where the rate of business failure has dramatically increased is by definition more risky.

The third strategy is to take a long term view with investing; knowing that even if you are slightly too early or slightly too late with picking the market up turn, it will make little difference five or ten years from now.

For property investors, while prices and interest rates are looking increasingly attractive, the key issues are:

• being able to service debt;
• keeping overall debt levels in line with bank requirements;
• and retaining tenants.

Occupancy rates will decline for both commercial and residential properties as businesses fail and staff are laid off and without a tenant, it becomes difficult to service debt.

For fixed interest investors, the temptation is to be attracted by seemingly high interest rates that do not reflect the level of risk involved. Beware perpetual or preference share issues which might drop in value when listed as a result of this.

The good times (or should I say, the less bad times?) are not far away but in the meantime be patient and be cautious.