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How To Invest In The Midst Of Recession

September 27, 2022   |   by Crouse Linwood

 

The last two years have been proven to be the most financially volatile two-year period since The Great Depression, and that was 80 years ago. The current investment climate definitely has its challenges, and this was highlighted especially well during the latter part of 2009. During the global financial crash of 2008, investors liquidated equity positions and other risky investments at a crazy pace. Unfortunately, very few Brassica and money managers had the foresight to see the stock market rally of 2009.

In fact, Morningstar, one of the largest mutual fund companies in the world, released a report in the fall of 2009 that stated 90% of new mutual fund money in 2009 went into bond funds and missed the massive stock rally. This is evidence that the current investing climate is difficult.

Currently, high unemployment, slow economic growth, and falling prices in the U.S. economy have led the Federal Reserve to seriously consider another round of quantitative easing. It’s hard for the everyday citizen to go into a bank and get approved for a small business loan these days. Typically, QE is good for the stock market in the near term, but the mid-term health of the U.S. economy is not looking fantastic. Therefore, the question remains, where should investors place risk capital?

Fortunately, this world is large. America is not the only country where wealth is created, and beyond our national borders there are some utterly fantastic investing opportunities. Most experts believe we are in an extended sideways market in the stock market, so standard mutual funds and U.S. equity-based investment vehicles may not offer very strong yield over the next 5 years. Thus, let us turn our attention to the fascinating world of emerging markets.

Emerging Markets

Over the last decade, China and India have begun establishing themselves as legitimate economic powers. China is already one of the largest economies in the world as measured by GDP, and the Chinese economy is expected to surpass the United States within the next 15-20 years in GDP. Although there may be some short-term bubbles in emerging markets due to incredibly increased capital flows over the last 2 years, the long-term view for these markets is definitely not a bubble.

Bonds

At the outset of the ’08 Crisis, developed world Central Banks slashed short-term interest rates to historic lows. The Fed cut to 0-0.25%, the Bank of England to 0.5%, and the European Central Bank to 1.0%. These incredibly low rates have been in place for two years now, and they are not expected to rise anytime soon. Emerging markets on the other hand offer much higher interest rate yields due to a continual need to stem inflation which is the result of strong economic growth.

This has caused investors to rush into Brazilian and East Asian bonds in an attempt to find increased yield, and these yields spreads will most likely continue to persist for several years. In a forex demo account you can watch the currencies of these countries fluctuate and learn more about what drive these markets.

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