Just when everyone believes this rollercoaster ride of a recession is over; the economy seems to plummet in to a new trough.
For months, analysts, economists, and pundits have forecast green shoots only to see them wither away.
The problem is no one has any constants to cling to – every few days another variable seems to blitz the economy like a hurricane and resets everything to zero.
Most experts have experience of the previous boom and bust cycles and know what doesn’t work to bring an economy out of recession – the trouble is none of them know what does.
Investment and business in a recession needs a new mindset. The toolkit that fixed breakdowns a year or so ago does not work any more and governments the world over quickly needs to put a new one together that does or the slide in to deflation and more financial misery will continue.
Managing in a recession is managing change
Investors and managers must understand that guiding a business in recession is managing change.
A recession is not the end of the world, just a reorganization of the arbitrary financial systems people have imposed on it.
Shareholders and investment fund managers need to look at radical, lean, and mean companies who are thriving in difficult trading conditions and understand their business model and what makes them a success in markets where big, long-established firms are falling by the wayside.
Influence of emerging economies
The rise of the BRICs nations – Brazil, Russia, India and China – and other emerging markets in the Far East is having a big impact on global business and finance. The leaders of these countries are trying to move away from a US dollar dependent world economy.
Their factories are efficient, labour is cheap, and the younger population is well educated. Recession has hit this countries, but nowhere near as hard as the US and Europe. Perhaps the recession is a tipping point for the world economy and the rise of a new star in the east.
China’s influence on the global economy and markets is becoming overwhelming – the consumption of resources is immense, including pulling in workers from all over the Asia Pacific rim. In 2009 alone, six million Chinese graduated from universities but this still leads a shortfall of 70,000 experienced managers and executives.
So how will companies in the US and Europe fare as they pull free of recession?
The triple challenge of rising unemployment, huge debt, and rising interest rates are waiting to drag down those who hesitate. Companies will have to learn to make money in a slower growing economy with less staff and less borrowing.
The answer everyone wants to hear is that the worst of the recession is behind us and the global economy simply needs time to heal. That would indeed be good news, but the BRICs economies will be faster out of the blocks than many others, burdened with less debt and demerged from the US dollar.
What happens then is a two lane global economy – with the US, Britain and Europe motoring on the inside land while the emerging economies gallop past on the outside.
Investment strategy for a recession
Investors have to keep the long term in mind and this probably means basing portfolios in equities. The Price Earnings Ratio (PER) has served as a reliable indicator here. PER stands at a good value now and an attractive entry point for investors, hanging just shy of the double-digit return on UK stocks and shares.
The other mainstay of the investment portfolio: bonds. A basic measurement of bond performance is current return of a 10-year gilt, which is about 3% before taking inflation and the unknown effects of quantative easing in to account.
Commodities look to have an underlying strength that these emerging markets will boost as they grow.
As the markets stand, the best strategy looks like planning investments for the long term and waiting for the market cycle to start moving onwards and upwards again, as it surely will.
Other factors to take in to account include the growing intergovernmental regulation of tax havens and the banking system. Finding tax friendly environments to shield investments is going to become harder as the UK and USA lead the way in pulling back the curtains that hide financial transactions in tax havens.
