It’s getting very nasty out there. Most European stock markets have fallen 15% so far this year; the FTSE 100 is down 14%, and the Dow Jones is off 9%. And things are no better in Asia where Hong Kong’s Hang Seng is down 14% and the Sensex 13%*.
The plus point to this is that I won’t have to listen to many more lectures from City experts about decoupling – look at the state of emerging market indices and it is perfectly clear that no one still rates the idiotic notion that these export dependent economies can escape the carnage caused by the bursting of the credit bubble and the arrival of recession in the US.
But on the downside the fact that the theory has been so comprehensively disproved means that there is almost nothing left to be positive about buying. Outside cash I can only really think of two places where I’d fancy keeping my own money at the moment.
The first is the soft commodity markets. This is hardly an uncrowded trade (I sat next to a top hedge fund manager at dinner a few nights ago who told me he knew of at least $15bn looking for a home in agriculture) but it is I think still a good one. While they have made enormous gains in the last 24 months (wheat has risen 185%), most soft commodity prices are still trading far below their historical highs.
Yet supply is tight – there is only a limited amount of land out there – and demand, driven by biofuels, a rising Asian middle class keen to eat both more and better and a growing global population is rising fast. The very rich are buying into all this by grabbing grain growing land everywhere from the Ukraine to Uruguay but the rest of us will be better off with an simple and cheap exchange traded fund (see Why you should get into ETFs) that tracks grain prices such as ETFS Grains (AIGG).
My second pick is connected to the soft commodities boom: one of its downsides is that the high price of food across the world is bumping up inflation numbers already being hit by rising wage demands and energy costs. You can protect yourself against inflation to a degree by do buying gold but also by getting into the government bond market and in particular index linked gilts, the return on which is linked to the Retail Price Index.
You used to be able to buy these pretty simply via the post office but money laundering regulations have now made doing so a tediously admin heavy task. Luckily the exchange traded fund business has once again come to the rescue with the iShares £ Index Linked Gilt ETF (INXG) which tracks the returns from the index linked market.
If you have money to invest these are two perfectly reasonable places to put it. There aren’t many others and with recession and inflation both getting going I suspect there won’t be for some time.
*As at 21/01/08