Stocks in the City – Your Recovery Position?
It certainly doesn’t feel like an economic recovery is imminent. Unemployment is high, public sector spending cuts are starting to bite, our neighbours Ireland require urgent EU-wide help to stop a complete collapse, and in general the outlook is still considered to be pretty gloomy. It’s hard to imagine investing in what is widely proclaimed as “The Age of Austerity”.
But for those of us who spend our days in the stock market, a number of burgeoning recoveries are taking place, which slip under the radar of the national newspaper stories of stalling house prices and economic uncertainty. Armed with enough information (as well as a copy of last month’s “Beginner’s Guide to Investing in Stocks”) retail investors can still find opportunities in most markets.
In a typical recession, the cure is to lower interest rates low enough to make people want to stop saving and start borrowing and spending. But as we approach the end of the year interest rates are still held at a record 0.5% (and have been since March 2009) but consumers are still worried about job security and are still not spending.
But with interest rates this low, is it really worth keeping cash in the bank where it is doing next to nothing? Instead, search out sectors, companies and countries, which are still looking strong for the coming years.
To be a successful investor, you need to think like a successful investor, which means thinking globally and strategically. The outlook for the UK might be uncertain, but what about somewhere like India? It’s the world’s largest democracy, with a young and growing population. It’s politically stable, and while most of the West was still in recession territory in 2009, India recorded economic growth of over 6% in 2009, and a predicted 8% as of the end of 2010.
So how can the casual UK based investor benefit? Looking closer at the country, you can see the strain that this growth is having on its infrastructure, as imports and exports are transported into, out of, and across the country. Traffic into India’s shipping ports has increased 13.4% from last year, and with the ports handling 95% of the country’s trade volumes you can begin to identify opportunity. Take a company like ‘SKIL Ports and Logistics’, listed on London’s Alternative Investment Market (AIM), a marketplace for smaller companies. SKIL is a holding company, which is developing a port complex in India called Karanja, designed to benefit from India’s growing globalised trade. In a situation like this, could these companies show strong returns?
Of course, no discussion about emerging global economic powers is complete without discussing China. The numbers are simply staggering, in the midst of a recession, exports up 18%, imports up 56%, industrial profits up 70%, car sales up 53%, the numbers just keep coming. With growth like this there is huge demand for the commodities needed for infrastructure construction. Take a company like Beowulf Mining, also traded on AIM. This company is looking to drill an iron-ore prospect in Northern Sweden. This is early stage exploration, so is not for the risk adverse, but high-growth countries such as China are showing huge demand for resources such as iron-ore, so savvy investors could see opportunity here.
Simplifying matters, outside of looking for high growth areas, if you really want to prepare for an economic recovery there are a number of suggestions (like anything in investing, nothing can be described as a golden rule) that keen investors can follow.
Firstly, you want to defend yourself.
Defensive stocks are companies, which produce products, which will always be in demand no matter what the economic circumstances. Look especially at larger, more stable companies. Will the healthcare industry always need pharmaceuticals? Probably, so worth looking into companies like GlaxoSmithKline. As well as this, people will always need to eat so research into the performance of supermarkets such as Tesco’s may not be time wasted. This sort of thinking can diversify your portfolio and guard it from excessive risk.
Secondly, you need to time your market entry.
It’s worth noting that stock markets anticipate a recovery six to nine months before it actually happens. This is why stock markets appear to be performing strongly at the minute despite the wider economic outlook. If you wait to invest until the whole country is showing recovery and growth is powering along, then you may have the missed the opportunity to realise significant profits. Study charts and price history, speak to your broker, and then jump in.
And finally, prepare for the future.
With interest rates this low, and quantitative easing still working its way through the economy, when the recovery gathers pace it may come with rapid inflation. This can easily erode the value of any savings of investments you have. Fortunately, you can hedge against future inflation through careful investing.
Buying government bonds is one option. Buying a government bond is effectively like lending the government money. In return for lending the money, bond holders receive a yield, the value of which fluctuates with the economy. When there is inflation, historically yields on bonds tend to rise as the Bank of England hikes rates to fight inflation. However, this is a long-term investment, typically 5, 10 or 15-year bond terms.
The other classic inflation hedge is gold. Gold stores wealth, protecting cash against inflation. The investment can be made in a number of ways, from tracking funds, which track gold price, to holding physical gold in a bank, or investing in gold producing stocks or, if you’re not risk adverse, gold explorers.
It goes without saying that none of the above should be taken as investment advice. Past performance does not reflect future performance, so the descriptions of the companies above should not be viewed as an invitation to invest in them without first obtaining advice.
The idea of investing in today’s conditions can look scary, but by getting yourself a good broker, and doing your own careful research, profits can be made in any market.