In my last article I questioned whether we were headed for a recession and said I would revisit the issue in four weeks. Well, as far as western economies are concerned, things certainly haven’t got any better. The credit squeeze is biting hard and as a result the housing market is taking a big knock in the US, the UK and parts of Europe. The financial sector has been hit hard by the billions of dollars of losses incurred by the big international banks resulting from their involvement in the sub-prime mortgages fiasco. This has already cost many jobs and thousands more could be at stake in the US and Europe. The US auto industry has also seen record losses and is likely to shed thousands of jobs over the next few months. Stock markets are down considerably from their highs of a few months ago and even energy and natural resources funds have fallen quite a bit in anticipation of a slowdown in the global economy. Anyone who invested in these funds at least a year ago however will still be sitting on handsome profits.
Is the US really in a recession?
Many commentators seem to think so and most people feel that way. Officially we will not know until all the statistics are pulled together some months from now. A recession is official only after two quarters of negative growth are confirmed. Whether or not it’s official, when people feel ill at ease over the security of their employment or the rapid rise in prices they tend to curb their spending. When that happens, businesses suffer, profits fall, more people lose their jobs and the recession becomes a self-fulfilled prophecy.
Will it spread beyond the US?
Historically this has certainly been the case and the signs are already being reflected in Europe. In the past, the impact of a recession in the West has had an even greater impact on Asia and other parts of the developing world. Since the last recession however, there has been a shifting of influence eastwards. India and China have become great powerhouses and their own domestic demand could reduce the impact in Asia. But we cannot count on that, just as we cannot count on the traditionally ‘fateful’ phrase in the financial world: ‘It’s all going to be different this time’!
OK – worst case scenario for Bali?
For those involved in the tourist industry a recession usually means people cut back on non-essentials. Holidays are one of them. The airline industry has already warned of tough times ahead. Airlines enjoyed a rare boom in 2007. This has led to record orders for new planes. But businesses don’t learn from past mistakes. They place huge orders during a boom only to find that there are no passengers for the new planes when they are delivered. In fairness, many orders are aimed at a number of years from now and there is no question that demand for travel will surge in the long term. But in the short term there could be a return to red ink and we may see less efficient airlines go under again.
If you are a small player in the tourist industry the same principles apply. A great year for a hotel or restaurant may lead the owners to embark on an over-ambitious expansion programme, only to find that customer numbers don’t rise just when you need the income to justify the expansion. Not that you shouldn’t reinvest some of the profits. But make realistic projections and tuck some of those profits away outside the business. Build up your cash reserves to cope with short term setbacks and use some of your profits to build up long term financial assets such as a pension plan.
What about export businesses?
If your markets are in the US or Europe, conditions could get tougher. Buyers are going to more demanding and competition from low labour cost countries such as China and Vietnam could get hotter. The answer may be to compete on quality if it is impossible to compete on price. Being market savvy and adapting to change can also make a big difference. Doing business successfully in the past is no guarantee to success in the future. It’s not the biggest who survive; it’s the ones who learn to adapt. Look what happened to the dinosaurs!
What about personal investments?
Almost all investments have taken a tumble and there is potential for them to fall further, as with the property market in the West. But experienced investors know this is just part of a normal cycle. The shrewd ones will not be hoarding all their cash in the bank but will continue to invest selectively and not wait until a recovery is well under way. Those who do wait invariably try to get back on the train after it has left the station. This is a time when contractual savings plans come into their own. While nervous investors look at their latest valuations and suspend their contributions, or worse, panic out of the game completely and cash in, the experienced investor keeps piling in his contributions knowing that he is now buying at a considerable discount to what will be the value when the markets recover. And recover they always do! The markets always move in cycles. This provides a great opportunity to ‘cost average’ and benefit from falling markets.
A few parting reminders
Bali may escape the worst of the recession thanks to the growing Asian market, but if things get tight there are a few good rules to follow such as:
* Don’t pour all your profits back into the business; move some elsewhere.
* Keep tucking away as much as you can for the future.
* Don’t cut corners on essentials such as insurance or service.
* Don’t put all your eggs in one basket!
Colin Bloodworth
colin.bloodworth@financial-partners.biz
