Complex Made Simple

Drawing investment lessons from turbulent capital markets

Sell if you have not already done so is the only obvious message to conclude from observing last week's fragile capital markets and incredible volatility. A bear market has started with a vengeance and these beasts are best avoided entirely. The Dow Jones could return to its 2003 low of 7,000 points, and take 18 months to three years to reach that market bottom.

Actually this is not a market prediction from AME Info after observing the past seven days. It is what the 83-year old 1970s stock market guru Joseph Granville wrote to his newsletter subscribers in October last year.

The statement by George Soros in Davos last week that this would be the ‘worst financial crisis for 60 years’ also caught the headlines. But again we discussed Soros’s recession predictions two years ago. He was almost spot on then, and he may be now.

So let us see the events of last week as confirming what a few very distinguished market commentators have been expecting for sometime. Namely that the US stock market is now in a bear market thanks to an economic downturn that started with the bursting of its housing bubble, something which is ongoing and will continue through 2008 and 2009.

Bouncing back?

Of course markets do bounce and violently so, as we saw in global financial markets last week. But do not be fooled by any ‘dead cat bounce’ in these markets. The downward bear trend is now established and increasingly recognised even by former blind optimists.

How do you invest to make money in a bear market for global equities? And let us include emerging market equities in that equation as the horrible volatility in these markets last week surely established.

One approach is to get out and stay out. Capital preservation in bear markets is a winner as your cash balance will stay intact while deflation slashes the value of shares. But interest rates on cash have fallen and will fall further.

Hedge funds

Hedge funds are one answer but you will need to be very choosy. The ilk of Soros might be able to short these markets successfully. But the average fund manager may quickly get into hot water and lose your money.

Precious metals are another option. The danger here is that as stock markets sell-off, investors tend to have to sell other assets to meet margin calls, and that will include gold and oil, for example.

This happened only last week. Gold and oil prices tumbled back and then rebounded. Gold shares have not had it so good and most lost value; they might be a good buy at these levels; Granville thinks so and has posted his 14 gold tips for 2008 on his website.

However, all is not lost for investors. The cut in dollar interest rates is a powerful stimulus, and risks blowing up bubbles in some investment classes. Precious metals could be one such asset class, and property in certain cities.

For example, people are rushing to buy property in Hong Kong – with mortgage applications up 50 per cent. Singapore, Dubai and Abu Dhabi are other cities where cheap finance and tight supply is likely to spike prices higher.

See also:
Will George Soros be right about the US recession after all?
2008 outlook for currencies, stocks and commodities
How the Wall Street gloom affects the Middle East