In The Face Of A Recession: Opportunity Amongst Catastrophe

10 October 2011

I can predict your first question: Are we in a recession?

A 2008 CNN article describes a recession as “a self-reinforcing downturn in economic activity, when a drop in spending leads to cutbacks in production and thus jobs, triggering a loss of income that spreads across the country and from industry to industry, hurting sales and in turn feeding back into a further drop in production – in effect a vicious cycle…To keep it simple, just look for the “Three P’s” – a pronounced, pervasive and persistent downturn in the broad measures of those factors.”

I’ll leave it up to you to judge how closely the description fits the current situation, but what can you do to keep sane in these crazy times?

To all you long-term investors out there, the absolute bottom of the market can only be seen in hindsight, and recessions are inevitable given the structure of financial markets. So while some tightly clutch their purse-strings, others lick their chops because they have the vision to invest now, knowing that the rest of us don’t have the patience or the intestinal fortitude to do the same.

Three strategies employed by these visionaries are short selling, value investing and buy-and-hold.

Short Selling

Short sellers hope for the worst by selling ‘borrowed’ shares and replacing them at a cheaper price; capitalising on a bear market. It’s recommended that you at least seek out the advice of a seasoned investor before implementing this strategy because there are risks (as with all investments). However, just as we seek out market ‘winners,’ we should be equally cognisant of ‘losers’ as well. Of course, I wouldn’t expect you to indefinitely maintain a short position since the market is cyclical and stocks, over the long run have outperformed other investments:

The idea of symmetry in terms of investment strategy must come into play, and arbitrage opportunities exist on both sides of the coin.

Value Investing

Value investing’s most renowned proponent is Warren Buffett. The idea here is that after careful research, you identify stocks or bonds that are undervalued when compared to similar entities. A distinction must be made here between cheap and undervalued. For example, the Trinidad & Tobago 5.875% 2027 bond may not necessarily be cheap at an indicative price of 106.50, but given that I’ve personally seen this same bond trade at the 109.00 handle, some may consider it undervalued with the issues of similarly positioned economies.

(Not necessarily a recommendation here – just an example. If you’d like a recommendation, contact me and let’s talk!)

Sure, some bonds or stocks may be cheap for a reason, but a well-informed view of an investment’s correlation with its peers should help reduce some of the risk.

Buy And Hold

Right, something that so many of us in the region are used to… the good old buy and hold! It’s a simple enough strategy: purchase a security, and keep it until maturity. In 2010, Barclays Wealth told clients to change from a short-dated approach to bonds and start holding longer maturities, based on a likely scenario of slow post-recession growth after a pending ‘double dip.’ That synopsis seems dead-on late into 2011 as well, given that there is very little room to cut rates and markets seemingly incapable of generating growth themselves. The most dangerous bit here is the assumption that rates won’t rise within your predicted time-horizon, because if they do, your bond portfolio will take a hit.

After having read these three strategies, you may be thinking that it’s for the crazies of the world as the sane amongst us would have reverted to cash but look: I’m not asking you to be Braveheart in these financial markets. The point remains however, that there are opportunities for success even in the worst of times. In a news-y market like the one we’re in today, appearance and reality are in effect one and the same. Take a look at the gains made by those who have gone against the tide in a sea of panic, and don’t get caught asking the market “How low can you go?” well after it has shot back up.

Gerard Stephens
Account Executive Sales

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