Juan Toro

The fears of recession in the US have been announced from a few fronts. Those fears have not attained Europe, with the exception of the UK, that shows the same softness in its economy as the US. However history tell us that there is some sinchroinicity in business cycles in the US and Europe, with the US preceding European economies in the downturn and in the booms. Recent report released by Merrill and Goldman pinpoint weakness in the US economy predicting recessionary movements within 2008. Data is still non conclusive and future economic data will tell were the main economies are heading.

In this environment it seems that investment opportunities dry out and asset allocation becomes harder. Analysts offer some receipes for this stormy times. These would be:
a) Buy utilities (defensive sector) and sell financial (most fragile sector in this time).
b) Believe in the decoupling story of emerging economies and bet on these markets. The decoupling story maintain that emerging economies have initiated a new economic era where they can live with downturns in the main economies (US, EU,…) without suffering the consequences. According to this theory current signs of weaknesss will not spillover to these economies.
c) Gold a usual is another option though it has been bid up heavily recently.
d) Last, check on some currencies such as the pound that might suffer the same rout as the US dollar.

Because of the forward looking feature of financial markets, many of these strategies have already paid off, though still there is some room for many of them. The list can still be enlarged and they all the share the same spirit, buy some protection.

Posted on 16 Enero 2008 in Financial Markets

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