On the downside

by The Financial Guru 1 Nov 2011

World markets are continuing to rise and fall like yoyos, but in recent weeks the trend has been downwards. Yes, there have been times when markets have rallied, but the rallies have not been sustained. There is just too much bad news in the wider economic community for any significant rises to stick.

The unflatteringly named PIGS economies– Portugal, Ireland, Greece and Spain, although Italy can also be added to this list–have been central to the financial dramas being played out across the globe. The Greek debt crisis entered its latest phase this month as the country confirmed it would not meet its deficit reduction targets, one of the conditions under which its bailout by the EU was agreed. It means there is more uncertainty about exactly what will happen in the Eurozone, and that is causing a ripple effect of financial jitters much further afield.

The confidence of investors has suffered knock after knock this year. Iceland was the first economy to fail, but since it is not part of the Eurozone, it found itself alone in dealing with it.

But it is not just Europe that is struggling with ‘sovereign debt’. The USA was literally on the brink of not being able to pay its bills until an 11th hour deal was agreed between the Republicans and President Obama. Without this deal, the world’s biggest economy would have failed, and that outcome would have been unthinkable.

Yet there are areas of the world that are struggling less. Asia, while not immune to the financial problems being seen elsewhere in the world, is one of these areas. The key markets in Europe, America, China and Japan have all fallen sharply this year, with the most notable falls in the latter two markets. Yet both still have trade surpluses, along with Germany. But while the German government has agreed to another, bigger bailout for Greece, it is looking increasingly unlikely that it will buy much more breathing space for the Eurozone as a whole. The single currency is in grave danger of disappearing in the long term and the West, is on the brink of a double-dip recession.

If this is played out, there would inevitably be problems for investors in Asia who, either directly or indirectly, are exposed to these markets. Of course, the obvious question is to ask what you can do to protect yourself in the face of such a downturn.

Well, the first thing is not to panic. Even if your portfolio makes losses on paper, you will not actually have lost anything until you cash in your investments.

Your adviser will be a good source of information at times like these, and should be able to offer you some guidance in relation to how markets have fared in previous downturns. It is impossible to know the future–even the most experienced fund managers and economists can only make a best assumption about how the Eurozone crisis is going to play out–but they will know how your portfolio is structured, and will be keeping a close eye on what is happening.

With the markets swinging around as wildly as they are, you may even be advised to increase your investments in certain areas, if appropriate to your circumstances. Some stocks and shares are not massively affected by downturns, such as utilities and pharmaceuticals. These are things that people cannot do without and are consequently less reliant on buoyant economies, so can provide some shelter in difficult times.

Remember though, it is with hindsight that such turbulent times as these can appear to be strong buying opportunities, so there is good reason to look at whether you should invest more now, rather than less.

Some stock prices that are largely unaffected by the current economic problems will also have been tainted by a general downturn, which means you are getting such stocks at a bargain price. However, unless you are an expert, take advice on the best course of action. For the short term, it may simply be to stand still and wait for the dust to settle.

Got a question for The Financial Guru? Send it to us at editor@expatriatelifestyle.com and we’ll forward it on.

For more financial advice, visit www.infinityfinancialsolutions.com.

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