Where to Invest During the Credit Crunch
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In an interview yesterday I was asked what people should be investing in at the moment. This is a difficult question as investors are supposed to take reasoned decisions over events, as they see them, combined with the future prospects for the actions that they take.
I had to say in all honesty that how can anyone possibly make a long term investment choice on any stock in the current environment? For very long term players with huge income streams I suppose as long as you keep buying all the way down the curve you should pick the bottom at some point. But for ‘Joe Public’, whether you are spread betting, trading CFDs and/or share trading, trying to pick a few winners in the murk, what is the point?
The best place for your money, as I have commented since last year, is in cash. I have been getting around 5.7% for my funds for most of this year. A far, far, greater return than virtually all funds except for short play vehicles. My few excursions into equities have cost me dear and sad to say it is difficult to see much change now.
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As Simon Denham of Financial Spreads recently said “Oddly enough Northern Rock is now, probably, the safest place to have your hard earned in the UK”.
Analysts keep telling us what good value stocks are at the moment with p/e returns at below their median levels. But bear markets normally run until stocks become absurdly cheap not just ‘good value’. This bear phase is still quite cuddly compared with some that I have known during my 25 years in the city.
The current environment is one of quick entry decisions and even quicker exits. Only those with vast resources can sit tight when the stakes are so high. Poulson’s aggressive ploy may work but then again it may not. If it does work we can either look forward to several years of very low growth and falling margins (possibly deflation) or, if liquidity does return to the banking sector quickly, the possibility that a $700bn injection (from the US alone) sparks a huge money supply spike and thus a big inflationary bubble. Neither of these is exactly good for equities. If the whole project fails then, unfortunately, more banks will go under and at some point the governments of the western world would be forced into wholesale nationalisation (Scandinavian Style) to protect the assets of the rest of the economy.
Of course these scenarios are worst case, but investors can probably afford to sit out events over the next six months as the chances of missing a huge equity market rally are probably remote.
"Where to Invest During the Credit Crunch" last update by RThomas, 08-Oct-2008
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