As we start to come to terms with what has been a massive slowdown in the worldwide economy many people are starting to ask how the rot set it. How did property issues in the US suddenly spread all around the world and do stock markets and other investment markets dictate levels of investment in emerging markets?
The truth is that there are many issues which need to be considered when look at the rise and fall of any investment market. How strong was the base? Where did the money come from? Are asset prices viable going forward?
Background
The worldwide economy has been in the boom era for the last decade, during which Gordon Brown boasted that he had cracked the boom and bust ends of the economic cycle. The truth is that worldwide economies and more importantly stock markets will never shake off the boom and bust scenarios for the simple fact that in the good times investors take more chances as margins reduce and in the bad times those that have over extended themselves are the ones who start the rot. So why the big swings in the economic cycle?
The simple fact is that the better your business, your assets or your investments are doing the harder you need to push to grow in the future. Confidence is always a very strong factor as well because many people literally come to believe that markets are invincible and there is no reason why the property sector may stall therefore no reason to stop investing more and more money
If you take a look back at any economic cycle you will see that while the money is piling into any type of investment, whether it be property or stocks and shares, valuations gets pushed higher and higher but the sense (or non-sense) of these valuations is overlooked because the wave of money flow into the sector just keeps growing and growing. If a sector is say 10% over valued and moving higher, why not buy now and sell when it is 30% over valued, banking yourself a nice profit along the way. It is literally a ‘last out knock the lights off’ scenario, only you don’t want to be the last there when people start to leave the party.
International investment
As home markets move higher and higher you will often see some investors looking to overseas for new investment ideas. This often brings emerging markets into play, property and stock markets you would not normally look at but expect them at the very least to be pulled higher by a stronger worldwide economy and the continued increase in the main stock markets of the world.
You will see business looking to expand into new markets, take advantage of cheap property prices and a work force which can add a few percentage points to your margins. The perfect area for this type of investment is emerging markets where governments and the population are often desperate for outside assistance, desperate to give their economies a boost.
You will notice that there are very few emerging property markets which move by themselves without the traditional catalysts of international investment and international businesses added to the mix. This then creates an interest in property in the region which then has a snow ball affect with more and more investors looking at the flow of international investment and the cost of property against more traditional property markets.
In many cases this can kick start a long term property investment market such as for example the likes of Bulgarian, but for others it can literally build them up only to see them knocked back down to earth. There are four main stages to the creation of a viable long term emerging property market which are, speculative buying on the hope of increased international interest, government intervention when it becomes clear that more market regulations is required, the bailout of the speculative investors and the emergence of long term investors to the market.
Property markets
It is amazing how an untouched emerging property market can suddenly become the hot spot for international investors looking for different returns and with different timescales. As worldwide stock markets continue to pick up every one is happy, everyone is making money and looking for new and exciting markets, with property being one of the more favoured areas.
It is at this time that suddenly we realise how beautiful the country is, how distinct and interesting the culture is and how cheap the property market looks. However, when it all goes wrong, guess who is the first to suffer?
The downturn
As we have seen over the last few months, with the worldwide economic downturn kicking in, markets can and do literally change over night. International investors can look to repatriate money over night, new investors dry up and in general the more risky markets of the world are shunned with investors looking to take their money and run.
We have seen instances of this right across Europe with new members of the EU becoming the investor’s friend in the good times and shunned when times get tough. This can and does play havoc with new style governments who are often looking to create a sold a base for their growing economy only to see the rug pulled from underneath their feet.
Conclusion
International investment in the property market has a direct correlation to how well the worldwide economy is doing and how well worldwide stock markets are performing. In the boom times when core assets are doing well, you will see investors venture into relatively unknown markets in search of something a little different, maybe the new growth market of the world.
As many of these emerging countries have a relatively limited economic base the best way to gain exposure is often through the property market. Let us not forget that many of the ex-soviet union countries were literally dead on their feet with NO property market when they left to go it alone. Even years later when they look to join the EU there is still much work to be done to get there houses in order.
While emerging markets are not always the first markets to be hit in the bad times, they are very often the markets which are hit hardest. Taking away the food which has helped them grow from a very low base can have a dramatic affect and leave many back near where they started – until the next economic upturn when investors again come looking for new markets.