Reading the signs
The economic backdrop is vital in shaping our thoughts on where to invest, and on which asset classes look the most appealing. Since our last assessment of prospects for all the different asset classes, confidence has improved markedly. The key issue for investors, not just in equities, but in other asset classes, is whether the recovery since that time is 'real', or whether it’s just short-lived euphoria at the fact that a massive coordinated policy response has staved off the prospect of a deflationary depression. We explore different scenarios that might unfold over the next six months, pinpoint the safest investment areas and highlight the signals that will indicate that it could be a good time to get into a particular asset or sector.
"London shares continue to plunge as OECD warns recession will get deeper," wailed The Guardian. "Lloyds worries drag blue chips down further," lamented The Daily Telegraph. "Power drains from utilities as FTSE slides yet again," said The Times.
The above headlines come not from 1929, or 1973, or 1987, but from various UK newspapers published on 4 March 2009 – the day after the FTSE 100 ended at 3,512, its lowest close to date in the bear market that started in 2007. If those March lows marked the final trough in the bear market, it certainly wasn't obvious at the time. As HSBC organised a vast rights issue and the US government poured yet more cash into AIG, the tone in the quality press was overwhelmingly one of more woe to come.
The key issue for investors, not just in equities, but in other asset classes, is whether the recovery since that time is 'real', or whether it's just short-lived euphoria at the fact that a massive coordinated policy response has staved off the prospect of a deflationary depression. The scale of this response – coordinated interest rate cuts, huge spending packages and unprecedented expansions of the money stock – is what has differentiated this downturn from previous ones; the green shoots of recovery have been watered with the horticultural equivalent of anabolic steroids. And it's having some effect.
