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.

The Upside of a Downturn

There seems little doubt that the New Zealand economy is in recession. You only have to look at the huge discounts being offered by retailers and the discounting of residential properties on the market to sense the pain that is now being felt.

Money is tight, households have stopped spending on all but essentials and some are taking mortgage payment ‘holidays’ to give them some breathing space.

Jobs don’t appear to have been lost yet, but it may take more than tax cuts and a change of government to avoid job losses as the recession bites in.

This is all bad news. The thing is though, recessions are part of the natural economic cycle. Without recessions, we wouldn’t have growth; without the bad times, we wouldn’t have the good times. Every downturn has its upside.

The good news about a recession is that it forces you to focus on what is really important and to review just about every aspect of your life; from what you eat, to what you drive, where you live and how you earn your living.

A recession is a time of re-evaluation that allows you to improve your life.

Starting with the basics, review what’s in your grocery cart. Now is the time to leave out expensive processed foods and go for a natural diet. There’s a noticeable trend towards people growing their own vegetables and becoming more self sufficient. Not only will this save you money, but your health will benefit too!

Trains and other forms of public transport are noticeably more crowded since petrol prices went up. Walking to and from stations and bus stops or even walking or cycling to work are not just opportunities to save money but opportunities to improve your fitness.

One of the best features of a recession is that the pace of life slows down.

When the economy is booming, there’s a rush to be first. If you don’t act quickly, you miss out on job opportunities, the beautiful house you wanted to buy or the business opportunity you thought no-one else had spotted yet.

In a recession, it’s as if everything is in slow motion. You can take your time putting an offer in on a house because you know there isn’t a queue of potential buyers and you can research your business opportunity before you take the plunge.

If you have skills in marketing, management, financial analysis or other specialist fields you will be in demand by businesses looking to improve their sales and efficiency.

Businesses that employ smart people will emerge from a recession as the winners, so update your CV and sell your skills! Not only could you potentially increase your pay, but by working for a switched on company your job may well be more secure.

Recessions are full of opportunities to invest and get ahead. If you’ve been thinking about moving to a more expensive house and you can afford to upgrade, now is the time to consider it. You may be able to pick up a bargain if you are a good negotiator.

Investment properties are looking a lot more attractive for the long term investor, with property prices and interest rates trending down and rents trending up.

Share prices are also looking good when compared with expected future company earnings. If you have joined KiwiSaver, your regular monthly contributions will be allowing you to buy a lot more units for your dollar, which you will get the benefit of when unit prices increase over the next year or two.

The next few months will be a bargain hunter’s paradise, so make the most of it and get all the upside you can out of the downturn.