This time 12 months ago, those who were predicting a bubble burst in the property market and the accompanying destruction in tax revenues used to overpay the public sector were being castigated as unpatriotic pessimists. Echoes continued late in the year as the media took the blame for the events that unfolded. The Government clipped a mere half a billion off its mid-year forecast before setting off on extended holidays. Brian Cowen was inaugurated as Taoiseach, sold to us by a fawning media as a real kickass leader with lots of intellect and all that jazz. Brian Lenihan (an intellectual heavyweight, or so we were told) was taking up Finance while Mary Coughlan would keep the Foreign Direct Investment boys charmed at Enterprise and Employment. It was to be business as usual. That was up until the fiasco of the Lisbon Treaty vote as we cocked a snoot at Europe – probably the high watermark of the boom exuberance and the single dumbest thing we could have done under the circumstances. It wasn’t the only dumb thing, though – the October budget followed and the Government simply lost the dressing room.
Then came the official news that any owner of a SME could have told you in the first quarter – the economy had gone over a cliff. Caught in the trap of having brushed off the collapse as a psychological problem, the Government quickly blamed the problem on Yank banks and toxic debt. “Not our fault,” became the catch cry. Meanwhile, Irish banks that followed the Government’s fiscal lead and overexposed themselves during the last administration began to implode. The markets didn’t buy the self-serving line that boards fed investors about not needing capital. The endgame was Sean Fitzpatrick’s veneer imploding in a vacuous gas of hubris and hypocrisy, after being found to have hidden s87 million in personal borrowings.
Fitzpatrick had compounded his woes by championing lighter touch regulation and rounding on critics of development land costs and unsustainable rip-off prices. The Christmas bonus to the squalid tale came with zombie status as a failed back for Anglo, with Ireland on the cusp of deflation and a prolonged period of price falls in property and earnings. What a bloody year. So what next and where’s the hope?
What happens next ain’t pretty. The seeds of last year will yield a crop of unemployment possibly reaching over 12 per cent of the workforce and substantial numbers of business closures. Bad debts will mount as the false valuations of last year make way for the reality of cash-flow shortages. Property prices are unlikely to bottom out until reaching 50 per cent of their peak on average. In short, 2009 is going to see a shake-out of unstable businesses and individuals overleveraged or simply in the wrong place at the wrong time. Much middle class Irish wealth will be lost completely. Particularly hard-hit will be those who ignored the doctrine of diversification and chose to concentrate their investments in the same hotspot as their earnings. They include conveyance solicitors, mortgage brokers, builders, electricians, plumbers, engineers, architects, building suppliers, and the list goes on. These people are facing a sharp fall in income this year – half of what they earned last year if they’re lucky – and also face trying to finance investment property portfolios where rents are declining, vacancies are rising and opportunities for refinancing are effectively closed off despite the recapitalisation of banks.
The build up of cash worldwide is truly staggering now, reaching well above proportions predating the outbreak of war in Europe in 1939. Meanwhile, interest rates have been brough down close to zero in the US, they’re falling hard in China and set to decline further in Europe and the UK to historic lows. These many trillions of dollars, yen, pounds and euros will flood out to acquire sound assets that pay multiple returns from cash. That means high grade corporate bonds, large stocks like Intel that pay strong dividends and commercial properties with juicy tenants paying six to seven per cent on strong covenants while banks lend the finance at half that rate.
1. Get debt-light. Shed as much as you can by selling liquid assets and property if your occupation is heavily exposed to a multi-year recession. You don’t want to try to service debt from declining earnings or debt, which rises in real terms if Ireland hits a deflationary stretch.
2. Invest some money in gold, ideally up to 10 per cent of your investment assets. If we hit inflation on a global upturn, gold will rise, especially as the dollar tanks and oil prices surge. If the interest rate cuts and massive increase in government spending fails, we’ll hit a depression, another good reason to hold some gold. You can acquire Perth Mint Certs from Gold.ie or buy shares in an Exchange Traded Fund like Lyxor Gold Bullion Securities.
3. European interest rates are likely to fall even further over the next month or two. Be prepared to switch into historically low mortgage rates even in a dysfunctional mortgage market as Irish lenders recover from last year’s turmoil and normal competition resumes.
4. Lock in your cash deposits at the best 12-month rates you can get but maintain access. Avoid putting away capital for five to 10 years. Future capital guarantees won’t be worth a toss if inflation hits high single or double digits.
5. Put a few quid now into Index-Linked European Government bonds. In the retail fund market, Standard Life has an offering.
6. Energy investments have been hit by falling oil prices on the one hand and a tougher borrowing climate for capital-intensive alternative energy companies on the other. This could come around quickly on an upturn, so if you fancy a punt look to funds and stocks that give you exposure to global energy players.
7. Commercial property yields, especially in stable markets like Germany, are looking even more attractive as interest rates fall. Keep an eye out for good syndicate funds that will inevitably re-emerge this year if confidence returns.
8. There are many strong Eurozone companies with lots of cash on their balance sheets and good records in paying dividends, including utilities and even financials. You can invest in these through specialist funds like Canada Life’s Dividend Bond Fund or JP Morgan’s European Strategic Dividend Fund.
9. If you’re thinking of changing careers, consider what sectors are more recession-proof than others. It doesn’t have to be the public sector, although it does help! Look where the Government is spending money right now – training, R&D, alternative energy and infrastructure. Whoever has these contracts is pretty secure.
10. If you’re smashed for cash temporarily, there are things you can do. Look to selling assets you don’t
really need on EBay. Check out opportunities to get a second job. Don’t be slow about moving overseas to pursue your career. Commodity-rich economies like Canada and Australia are probably the best bets. Better to be elsewhere adding to your CV than unemployed at home. Remember, you can always come back for the next cycle.