Expert view: There will be plenty of opportunities to invest in 2009

By Oliver Ralph, December 18, 2008

Coming into 2008, the talk was all Cs — credit crunch, caution and a crisis of confidence were the order of the day. Analysts expected just a modest economic downturn. Going into 2009, we’ve moved on a letter and predictions focus on D — depression, deflation and the de-rating of the pound are sparking fear across the City.

The economic outlook is not good. While a recession has not yet been confirmed statistically (and won’t be until early next year), the growing reports of job losses and bankruptcies show we have certainly progressed well beyond the realms of a mild downturn.

However, despite the alarmist headlines, most economists are not expecting a repeat of the 1930s depression. The last two recessions lasted for 15 months and City forecasts are suggesting a similar timeframe this time around. Analysts at investment bank Dresdner Kleinwort expect the economy to come out of recession in the third quarter of the year.

Nevertheless, investors are in a tight spot as we go into 2009. Interest rates are low and falling so savings accounts, although offering a safe haven, are not going to increase your wealth by much. The same goes for government bonds, which are safe but very expensive. Riskier assets also have their drawbacks. The stock markets are volatile as investors fret over the length and depth of the recession. Corporate bond prices are falling as investors fret about bankruptcies. And commodity prices are falling, as investors fret about falling demand.

That said, 2009 will not be without its opportunities. The UK’s history of boom and bust has left us with plenty of pointers about what is likely to happen this time around.

The first asset class to recover could well be corporate bonds, especially those issued by large, stable companies. These so-called investment grade bonds, often seen as a relatively safe investment, have fallen in value recently but as soon as the first signs of an easing in the economic crisis start to appear, investors are likely to venture back in.

After that, the stock market could start to show some gains. Stock markets tend to bottom well before the economy does. So if the economy starts to recover in the third quarter, as City analysis expect, then the stock market could start to show some gains in the middle of the year.

When the market does turn, expect the shares that have performed worst in 2008 to show the best gains. History suggests that the construction, support services and travel sectors are amongst the best performers when stock markets start to recover. By contrast, the weakest performers in a recovery are those that have performed best during the tough times, and are likely to have performed best in the early part of the year. These include relatively safe areas such as pharmaceuticals and utilities.

Oliver Ralph is editor of the Financial Times’s Investor Chronicle magazine

Last updated: 2:50pm, December 18 2008