Where are people investing their money in the current financial crisis?
The Eurozone crisis and the financial crisis generally have created some uncertainty in investing in most markets around the world. Many people are unsure what to do with their money as they fear property markets may not produce the capital growth they hope (or not even hold their value) while equally investing in stocks and shares seems particularly risky at the moment given the relatively poor returns people have generated from them over the last 15 years or so and the potential risk of losing the entire investment. In fact many pensioners who have retired in the last few years or retiring now have seen such a poor return on their pension portfolio that they are having to significantly reduce the standard of living they were expecting on retirement or sell off assets (if they are lucky enough to have any) to support themselves. So what are people doing with their money now?
Many people are still risk averse and so are putting their money into what they see as the safest place: a bank account, typically generating about 2 to 3% in a savings account which just about keeps pace with inflation (2.4% in April 2013) so in real terms not increasing in value at all. Some similar minded people also put most of their money into fixed income bonds generating a similar return. In the long term this is obviously not a great strategy if you want to make your money work for you and generate a significant nest egg for the future. So what we are seeing many wealthier people do is purchase property whether commercial or residential in prime areas of stable countries such as the UK, US, France & Germany, usually in the capital city. The main driver behind this investment is wealth preservation (and for some having a trophy asset) which at the very least will track inflation and hopefully do better and earn a rental income if they wish but often don’t require.
When you ask most wealthy people what they invest in they almost always have a significant amount of their investment in property, often about 70%. The wealthier areas of the capital cities of these countries have seen the lion share of investment, much of which has come from investors residing outside of the country. New York and particularly London have been the most sought after but Paris has also attracted much of the investment and driven prices up by around 40% over the last 5 years (source: FNAIM). The reason people keep investing as that they know that these prime properties are seen as a safe bet amongst the global elite and are considered “world cities” and as such their market does not follow the ups and downs of the economy of the country in which they are situated. A few reasons why they see these cities this way can be summarised below:
Secure legal system guaranteeing the protection of their assets
Politically stable (not run by dictators or on the brink of revolution)
Immense demand for property in the area (easily let or sold) which holds their value
You can argue that the economies of these countries are not that great at the moment but relativity is what matters here and relatively speaking to most other countries in the world the economies are secure even if growth is very slow, stagnant or even in decline and are therefore safe places to invest from a financial point of view in the medium to long term. Some people will highlight that France and Germany are part of a Eurozone which is in recession and may even break up at some point if the debts of the likes of Greece, Portugal, Spain and Italy cannot be controlled but even if the worst happened and the Euro currency did fail and each country went back to their previous currencies it is very likely that the economically strong countries like Germany and France will continue to be economically stable and powerful even if there is a brief recovery term. So in the medium to long term the Eurozone crisis should not put investors off if they are investing in the right locations at the right price.