Investing abroad - 2010 look ahead and 2009 review

Posted December 31st, 2009 by Chris Metalle

It’s that time of year again when we all wonder what’s in store and how we got things so abysmally wrong this time last year.  So I’m not going to make foolish predictions that will haunt me for the next 12 months.  Instead, I’m going to suggest our clients and visitors look at some trends and areas in detail when considering where to invest in 2010.

Financial Assets

2009 has been disastrous for many of us with stocks and shares.  I can see the market may be oversold at present and some upward correction should be expected in 2010 but this very much depends on the bad news being pretty much all behind us.  Unfortunately, the pace at which markets seem to be consolidating – especially retail and banks – suggests we could be in for a few more months of downward pressure on share values before any upturn.  Certainly, the low morale amongst market traders means any poor news is likely to be greeted with heavy selling activity.

Government bonds are always a safer haven but by their nature they did not offer great opportunities in 2009.  As the bonds are fixed interest in most cases and the face value is fixed so their value in the market moves inversely to the movements in interest rates – as market interest rates fall so the value (cost) of fixed return bonds rises to compensate.  Since we are now in a low interest environment with comparatively little room for further falls in rates the bonds, over time, can be expected to fall rather than rise in value as interest rates eventually climb again. 

Savings rates hardly look exciting at the moment either and it is doubtful that they will do much more than keep pace with inflation during the next 12-24 months.  This is doubly worrying when one looks at how many Self-Invested Pension Plans (SIPPs) have been switched largely or wholly into cash. 

Property

Most predictions for UK housing in 2010 look less bleak with falls in values of at last behind us.  With affordability, availability of credit (mortgages) and new housing starts all, it would seem, much less propitious than even during the previous recession it looks as though 2010 is unlikely to be the year for a boom in UK housing.  Investors with their sights on the longer term may not worry too much about this but it will dampen the enthusiasm of less seasoned property buyers as they see the value of their purchase fall initially.

Overseas, as you might expect, the situation is very varied with some territories (notably the previously emerging markets such as Bulgaria) looking weak whilst quite a lot of the world still shows signs of stability if not immediate growth prospects.  This has become even more the case as developers and promoters have reached out to extend the appeal of their products to greater numbers of people by packaging them up – guaranteed rental schemes, non-status mortgages and even underwritten resale values.  These will undoubtedly be the winners in these tougher times.

Location, position and package are the watchwords now, not just location, location, location. 

Clearly, no amount of packaging nor even the most delightful view will ever truly compensate for a poorly located property. If visitors face an arduous donkey-trek to reach the house (and a similarly arduous journey each time they need a bottle of milk) then the returns from renting it out will be meagre as will its value increase.  Similarly, if there are no sensible flights to the place then forget it.

This is where Cape Verde used to be until fairly recently.  It had all the views and glorious beaches any holidaymaker could desire – if they could get there.  Now that it has developed into a real destination and is growing into a popular place to spend one’s holidays property there is looking attractive.

Currency

No article on property abroad at the moment can ignore the impact of the currency swings we have seen in 2009 and the potential for more volatility in 2010.  If you had bought a home in Florida when the dollar was at $2 to £1 you would now be sitting on a property whose nominal value had increased by 25% (approx.) just due to the currency movement.  Clearly, this can work in reverse so here are some points to bear in mind when buying abroad.

•    Always use the services of a specialist currency broker.  Not only can they get you the best prevailing rates but they can advise on the best strategy for hedging against adverse movements during the period of your transaction;

•    If you already own a property abroad in a place where the currency has strengthened speak to your currency broker about using its increased value to extract funds and maybe re-invest them elsewhere;

•    Do not forget that your income from renting out the property needs to be matched to your outgoings – do not get lumbered with bills in one currency and income in another if at all possible;

•    If you are buying property then remember – it is not the short term value of the currency that counts.  If you believe the currency values are broadly correct at the time you buy then the long term returns will be influenced far more by the change in value of the property not by currency movements.

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