Investor Reactions to a Domestic Slump

Good morning and welcome to the Someplace Else Blog.

Widening Economic Gap
This week, I thought I'd briefly write about the huge and widening directions the UK & Irish economies are moving in compared to the emerging markets myself and my colleagues discuss with clients every day.

The Irish economy, as we have been constantly reminded over the last few months, is heading in a very worrying direction. Unemployment is rising fast and foreign direct investment is falling fast. Public spending is being severely curbed because government tax receipts are rapidly declining. Much of this is down to the rapid deceleration of investment in the domestic residential market, which, as the Irish Times recently pointed out, represented a completely unsustainable 13.3% of our GDP in 2006 (IMF calculates 6.5% as a sustainable rate).

The UK is also in for a rough time. According to the Bank of England, mortgage approvals for home purchases in June fell to 36,000, a mere third of what they were a year ago. The combination of a slump in the housing market, a banking trauma that refuses to end and rising inflation is starting to make life very difficult for those with high debts and low incomes.

Investor Reactions to a Downturn
Experience has taught me that there are many types of investors out there who will react to a local downturn in a variety of ways. Some will be spurred into immediate action and will hunt for opportunities that will protect and grow the assets accumulated during the boom. Others will take a more cautious route and will cancel planned investments and wait for their domestic markets to recover. Others will form a compromise strategy where they will invest a portion of their cash into areas that should perform strongly while keeping the bulk of it in a low interest (but safe) deposit account.

Whichever type you may be, myself and my colleagues are more than happy to discuss both modest (eg Berlin) and ambitious (eg Panama) investment opportunities.

Looking Ahead
Before I sign off, it is perhaps worth noting that domestic consumption in emerging markets is now rising three times faster than developed markets and investment in capital expenditure is rising an incredible 14 times faster.

As the surest residential property investments are usually those with a strong local market where banks have plenty of scope to expand their mortgage books, the people currently investing in our projects in eastern europe and central & south america have every right to be optimistic in the face of tough conditions at home.


Kind Regards

Colin Murphy
www.someplaceelse.ie