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Credit earthquake 2008


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Raoul Ruiz Martinez is the resident Independent Financial Adviser for Finesco Financial Services Ltd at the offices of euroFINESCOs.a. He provides financial advice to UK and European expatriates in Portugal with a high degree of client service and total confidentiality. Finesco Financial Services Ltd is authorised and regulated by the UK Financial Services Authority (FSA)

ECONOMISTS NEVER seem to agree and, as you would expect of late, it is now getting more heated over the direction of global growth.

The market prices need to fall (deflation) while central banks across the world reduce interest rates. Lately the deflation scaremongers have been taking poll position, but plenty of analysts are speculating about an inflation comeback in the short term.

Attempting to identify where the next investment trends will be coming from, unlike any other downturn, is a dilemma of seismic proportions. Investors, however large or small, must maintain a perfect balance as we emerge from the other side. Is the ideal investment asset cash? What about others such as equities, bonds and commodities?

Even with winter having already drawn in, doesn’t last summer seem so far away? Inflation was the main issue earlier this year when oil approached 150 US dollars a barrel and petrol prices were sending us mad. Subsequently, there has been a crash in oil prices as well as all the other commodities having fallen for reasons beyond lack of demand through the global economic downturn. In reality, their demise has been simply because of the lack of credit to make any future purchases.

With most investment assets failing and a continued state of restless murmurs on the surface, it is not an easy task to get a handle on the next stage. Possibly at this point deflation appears to hold the greater risk although this should change as all the liquidity governments are flooding into the markets solidifies and inflation moves up once again.

In truth, we are still in the aftermath of the huge ‘Credit Quake 2008’ and continue to experience this on an unprecedented global scale for the duration.

If these catastrophic pretenses depicting the markets as a force of nature were not enough for us to stomach, we appear to be in another worrying post-tsunami phase of a vicious cycle.  This cycle began with the drying up of credit, which then leads to increased defaults, further to a slowing of the economy and falling stockmarkets. This chain of events in turn then makes the banks constrain their lending further, which subsequently leads to mass de-leveraging and contraction of economies, again, creating further falls in equities. It could possibly go on for some time.

Investors should not simply put their heads in the sand or run for it while the supply of credit is still sparse and reluctance to take risk continues.

So, now that you can consider taking your cash out from under the mattress, where should you put it? On a five-year view, most asset classes with a risk premium will provide a return in excess of cash, but are you prepared to take that risk? Property would be the exception to this rule and if property will be the slowest to recover, will it be the quickest to rebound?

As we all know, financials have been hit hard in the wake of Lehmans’ bankruptcy and the demise of other large financial institutions. In Europe, the UK and the US, these companies have been bailed out through government funding and, while the US are prepared to possibly do the same for the manufacturing sector, there is little prospect of such funding commitments by the European and UK governments.

In the meantime, while equities are facing a potentially severe recession, as an investment asset class shares normally rally before the economic trough appears. However, we aren’t quite there and the world will still turn with opportunities appearing in the equity markets strewn with plenty of under-valued stocks.  

It’s not easy to plan ahead but far easier to look back and wish that you had put your cash in the bank or under the mattress. As ever in chasing the proverbial investment carrot, with the lack of decent returns in cash (now the banking sector has been adequately bolstered) it is paramount that you don’t simply take a risky bet to get ruined when the next financial tornado hits.  Make use of a knowledgeable professional who has use of both economical and financial data to identify the opportunities for you that, above all, fit your appetite for risk having experienced one of the worst years for the financial world in the last 100 years.

Raoul Ruiz Martinez is based in the Algarve office of euroFINESCOs.a. as an Investment Adviser for Finesco Financial Services Ltd., Glasgow and regulated to advise on capital investments in both the UK and Portugal.

He can be contacted either by telephone on 289 561 333 or on email [email protected]