| | | | | | | | | | | | | | | The investment climate over the past couple of years has been extremely difficult. All asset classes have suffered and more worryingly many of the rules and models of investment procedure have been proven pretty useless. The theory of risk management is based on diversification, but over the past couple of years almost all asset classes have suffered and regardless of whether one invested in property or equities, regardless of what country one invested in, investment returns would have been pretty dismal.
The fact is that the global economic and financial system has been hit with the biggest financial shock since at least the 1930s and the global banking system has been brought to its knees. Research by the International Monetary Fund on previous recessions has proven that when a recession is driven by a shock to the financial system, it tends to be deeper and more difficult to emerge from. That is exactly the case with the current global recession, which was driven by an irrational bank lending boom that has burst in spectacular fashion. The global banking system is still in serious difficulty and the recently revealed capital injection requirements for the US banking system shows that the US system is still the one in most difficulty.
The net result is that we are now in the midst of a very synchronised global economic downturn, with all of the key economic regions either in recession or slowing very rapidly.
Not surprisingly this has created an extremely difficult investment environment and cash deposits have really proven to be the only safe haven.
Table 1 shows how equity markets performed during 2008 and so far in 2009. | | | MARKET
| 2008 | JAN 1st –
May 7th 2009
| | Dow Jones | -33.8% | +1.9%
| | FTSE 100 | -31.6% | +10.9%
| | German DAX | -40.4% | +3.3%
| | French CAC | -42.7% | +4.1%
| | NIKKEI 225 | -42.1% | +2.4%
| ISEQ
| -66.4%
| +15.4%
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| | | | 2008 was clearly an awful year for all markets, but particularly for the Irish market. 2009 started off very badly but over the past couple of months there has been a very strong recovery and most markets are now back in positive territory in the year to date.
Indeed since the lows reached in the middle of March, the Dow Jones has rallied by 30%, the FTSE 100 is up 28%, the German market is up 35% and the very depleted Irish market is up by 41%.
This represents a very strong rally by any standard and has resulted in the beleaguered average Irish managed pension funds delivering a positive return of 8.7% in April, which is the strongest monthly performance in over 17 years.
The rally seen in markets over the past couple of months has to be viewed in the context of the very low base from which they are coming. Markets have been utterly decimated over the past couple of years, but at least there is now a lot of light on the horizon.
Over history, equity markets typically tend to turn 6-9 months ahead of the economic cycle. The markets are now turning because they clearly believe that the economic cycle will turn over the coming months. This belief is based on the very strong official policy response that is occurring globally through interest rates, fiscal policy, bank re-capitalisation and an increase in the amount of money in circulation.
The European Central Bank has taken rates down to 1% and is now suggesting measures to try and increase money supply in the euro area. The Bank of England is also increasing its efforts to pump more money into the UK economy and this process is ongoing in the United States. Central bankers and governments are literally throwing the proverbial kitchen sink at the global economic and financial difficulties and this is providing considerable solace to markets and investors in general. They are starting to believe that the strong medicine is beginning to work.
The ‘green shoots’ of recovery in the US are providing the optimism that the economic cycle is now bottoming out and that recovery prospects are improving. In the US, housing data have started to suggest that the savage correction is nearing its end, the Institute of Supply Management’s indices of service sector and manufacturing sector activity have stabilised, and consumer confidence is looking somewhat better. They more positive signs are very real, but it has to be remembered that the US economy is still in a very deep recession that will take some time and effort to emerge from.
The markets are happy for the moment that at least the worst would now appear to be behind us. This is good to a point, but it is still too early to call the all clear on equity markets. In every cycle, false dawns are almost always experienced and economic or equity cycles rarely move upwards in a straight line.
There may be further disappointments and blips over the coming months, but the arguments for getting gradually back into equity markets are starting to look somewhat more compelling. The Irish market is somewhat more problematical than the rest however. There is still a huge cloud of uncertainty over the fate of the Irish banks and for investors there is still a very real and high risk of full nationalisation or a high level of state ownership. This would seriously dilute or perhaps even eradicate shareholder value. Great care is needed!
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| | | | For property investors, the news is not so good. Irish house prices are still falling and look set to decline by at least another 15% before they bottom out, probably some time in 2010. Rents are also under serious pressure as the market is swamped with excess supply. On the commercial side, the latest figures show that capital values in Ireland fell by a further 10.9% in the first quarter of this year and have now lost 48% over the past 15 months. Given the very difficult environment for the Irish economy, it is hard to see any recovery on the commercial side for the foreseeable future.
In every economic and investment cycle, property tends to lag the recovery. It is hard to argue for a move back into property investment in Ireland or elsewhere for the moment given the still considerable difficulties that exist out there. |
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