Be a bear until the summer

One of the most amusing investment strategies that I hear today is to buy incrementally. The logic is that you won’t be able to call the bottom so invest gradually and you will at least average down if the market falls further and be in the market when the bounce happens. This investment strategy assumes firstly that the market is within 10% to 20% of its bottom and that when the bottom comes there will be a bounce of at least 20% that anyone not in the market will miss.

Anyone following this strategy should be take into account the following:

1) There is always a lag between consumer spending falls and the impact on the corporate sector except in retail. I believe that the fall in consumer spending will continue and that the worst is to come during the first two quarters of 2009. Retail will continue to be impacted and other sectors will only see the impact during the Summer.

In a lot of businesses your sales for the calender year need to be booked or at least well-qualified in the pipeline by end June. With sales cycles getting longer and customers paying later there is the risk of a double-whammy on both sales and working capital in the next 3 quarters. I expect to see the economy at its worst in early 2010 after another terrible Christmas 2009.

If this scenario is correct then the FTSE could be down to 2500 by the end of 2009, a fall of around 40%.

2) Historically a bounce after a prolonged recession has not been so quick or so significant that investors have not been able to move into the market and take advantage of the next upturn. Indeed many of the bounces post recession have been false dawns.

My advice to investors is to keep your cash for paying off mortgages, buying extra pension benefits. If things get worse then you will be grateful you did so.

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