Where is the smart money going in 2008?

Equities, both local and global, look risky with a serious global recession looming, and the same can be said for normally ultra-safe treasury bonds and local sukuks.

Even if you choose to keep your money in cash then you need to be careful to avoid the ravages of devaluation - and inflation and low interest rates.

Indeed, it may be that the smartest investor in 2008 is the one who loses least, and so emerges as a relative winner.

It is not an easy year for smart investors. George Soros, who managed to bag $3.5bn from betting against sub-prime last year says he is barely breaking even. The smartest guy might be the person who just gives up in such an environment.

However, for cash a defensive mixture of Swiss francs, euros, and Australian and Singaporean dollars might be considerably better than hoping for a dollar rally.

With US interest rates probably still with lower to go, and central banks elsewhere tougher on inflation, having too much confidence in the greenback could prove expensive yet again.

Equities continue to suffer

Equities have had a rough year and the outlook is still none too good. Recessions tend to be periods of disappointing profits, more losses than expected and not a few business failures. This is a drag on share prices.

In the Middle East there is a two-way pull on local equities. On the one hand, high oil prices are good for local business and profits, even with high inflation rates. But on the other, global investors have become big players and the fear is that this hot money could be quickly pulled if international capital markets get tougher.

It is a slightly different story for treasury bonds and sukuks. Inflation is again the protagonist. High inflation erodes the capital value of bonds directly by devaluing the currency and indirectly by leading central banks to raise interest rates.

Sukuks are only bonds with Islamic characteristics and so their behaviour in inflationary times is identical.

Real estate hedge for ME investors

At the moment real estate is an excellent hedge against inflation in the Middle East as it saves on rents, which are going up, while at the same time growing in value at least in line with inflation and so providing a capital gain, and an attractive gain, against any leverage used in the transaction.

Hence the regional smart money continues to pour into property. The danger is that too much money will eventually flow into this sector and drive prices to levels that are not justified by the rental return obtainable. But this has not happened yet. Yields of 7% to 10% are high by comparison to 2% to 5% in industrialised countries.

But the brightest returns for smart investors in 2008 will probably come from continued speculation in energy and precious metals. Oil is predicted to spike to $200 within 18 months to two years by Goldman Sachs, and gold at $2,000 an ounce may well follow.