Fears of a double-dip have increased and stock markets have crumbled. And, there is worse to come. Private clients wishing to avoid the global economic double dip need to look for ways of profiting from the market volatility of both falling as well as rising markets.
So Who Is To Blame For The Global Double-Dip?
Banks or Governments? The policy response from governments has been almost universal – reduce sovereign debt by tackling structural spending deficits. How far and how quickly they cut is the main question. The UK has gone steep and deep, the US has taken a longer term view, while the Europeans (the indebted ones at least) have taken a more relaxed view, while angst has escalated in Germany, largely over the profligacy of their European partners.
So, how do politicians square the circle of reducing debt (keeping the bond markets happy), while trying to stimulate economic growth to ensure sustainable tax revenues and employment (keeping the stock markets happy)? Can we really blame the politicians? If we can’t then who can we blame? Banks lending policy seems to be the main culprit. The US property market being a recent example and China’s being the next. There are 64 million empty apartments in China. The next bubble is waiting to burst and it will make our current situation look like child’s play.
Stock Market Volatility
The size of the task faced by the elected elite can be measured by the volatility in the stock markets. The FTSE100 reached a high of 6105 in February this year and troughed at 4791 in August- a drop of nearly 22%, this brought it briefly into bear market territory. In between the FTSE has oscillated from around the 6050 level bouncing at the 5600 and 5670 levels – moves of around 8%.
These movements indicate the sense of fear that has gripped global markets. A fear, which is well founded as the economic signals from the USA, the UK and Europe are awful. This current crisis is so bad that one commentator has stated that it will make the post-Lehman Brothers crisis look like a Tupperware party! So we could see RBS shares back at 10p if not lower.
Take Advantage Of Rising AND Falling Markets
Rising and falling markets are an inherent part of investing. However, private clients tend not to participate in downward movements as their portfolios are long only and they miss out on returns that can be generated from sell-offs. Typically, clients have to grin and bear it as they watch their predominantly long only portfolios being battered from pillar to post. Investors have failed to embrace products such as options, futures and CFDs that allow them to hedge their portfolios or generate returns in big sell offs. Derivative products like these might intimidate investors, but they are part of the everyday arsenal of the institutional and professional investors.
These will become increasingly prevalent in the private investor sphere as the global economic double dip wakes them up to the fact that the traditional buy and hold model is now failing. As an example BP is the same price as it was in January 1998. Surely, there are better ways to generate returns to see you off into your retirement days?
This article was contributed by Andrew McLintock who has over 12 years’ investment and City experience. Andrew developed a Long/Short investment strategy focused on the FTSE 100.
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