FTSE AIM index - Penny Shares

PennyTrader

gozomark wrote: »

in a falling market a more selective approach would be needed to get a decent return -agree - however, are we still in a falling market ? - that is also an unknown - all we know is that it has been a falling market, not that it will continue to be so. Assuming we are in a falling market still, how do you know the particular selective approach you pick will be the right one ?

Good question - I'm sure many people would give different answers to this one, but here's my shot at it:;)

1) Are we still in a falling market?
Yes because:
i) Retailers are struggling - which suggests a lack of consumer confidence
ii) Several major companies have gone into administration over the Christmas period. Several more are set to do so next year.
iii) Most analysts and building societies believe that house prices will continue to fall for at least the next year.

2) Will it continue to fall?
My guess would be for at least another year. If it does not fall then it will just stagnate. There is nothing that is currently in the pipeline that would improve consumer confidence. Also, complete lack of trust in the banking sector. Trust takes time to build up, so I wouldn't expect any immediate recovery. The only other event that may swing the UK market would be a general election.

3) Assuming we are in a falling market still, how do you know the particular selective approach you pick will be the right one ?
Nothing is guaranteed, but here is my current outlook:
i) Gold and precious metals are usually a good safe-haven, but I think that it is now several months too late for these. If the market were to stagnate rather than fall then you are unlikely to see much more gain.
ii) Renewable energy stocks look like a good target. They have been bashed down over the past year and now look cheap. They are important for several reasons:
- EU emissions legislation
- Barack Obama's "green revolution". He has promised heavy investment and big changes to US policy.
- Crude is running out, so demand for alternatives will grow
*Note - avoid biodiesel stocks. They look like a false economy.
**Note - I have an AIM stock in mind but am not sure if it would contradict forum rules by posting details
iii) Obama has also promised major infrastructure projects, so it may be worth looking at companies in the US that specialise in the key areas he has mentioned - e.g. Road building, Technology, etc
iv) It's a recession so pawn brokers and debt collectors tend to do very well
v) Also look at investing in firms that provide financial advice to struggling companies, etc.

Blah99

PennyTrader, you make good points but a fundamental consideration you missed is that markets discount the known information. Retailers are struggling, several major but poorly run companies have gone into administration and house prices will definitely continue to fall, but all this information is already priced in. There is generally an uptick in the market 6 - 12 months ahead of the end of a recession period, because markets are forward looking whereas (and excuse the poor grammar here) a recessionary period is "here and now". It's not as simple to define whether we are still in a falling market. My personal feeling is that, come mid 2009, we'll see a clear indication of a bull market returning, followed 6 to 12 months later by an improvement in economic conditions.

Your points under your item 3 are decent, but I think you've missed some of the underlying, slightly more opaque issues. For example, the drive for green, renewable energy has already faltered due to the reluctance of nations to impose increased burdens on their heavy industries during a recessionary period. The UK has already said that our heavy industry will be exempt from carbon emissions trading. The current economic climate is actually bad for green-style companies, especially those involved in carbon trading etc.

One other point you missed is that recessions are good for technology innovators. Big incumbents reign in spending during these economic conditions, which gives small start-ups the opportunity to innovate and make inroads to the market. That's exactly how Siebel started and became so large, back in the mid-90's.