Who Gains from the Credit Crunch?

A year on from the start of the credit crunch and there are no signs of improvement on the horizon. With the UK chancellor Alistair Darling warning of the worst economic crisis in 60 years, and in the US a Federal Reserve report suggesting the country is stuck in a growth rut, it seems that everyone is feeling the pinch. Or are they? While the majority of us struggle to make ends meet and while housing repossessions and foreclosure figures continue to rise,

there are some businesses that are making large profits in spite of the economic gloom. So who are they?

LOCATION, LOCATION, LOCATION

As the availability of mortgages decreases and prospective first time buyers are forced to continue renting, buy-to-let property investors are reaping the rewards. With banks selling off repossessed properties at rock bottom prices there is huge potential for anyone with even a small amount of cash. In the US, properties are on the market in some places for an eighth of what they were just two years ago and in Britain, the government has taken steps to revive the market by suspending stamp duty for a year. For people with cash savings, this means not only being able to buy property at knock down prices but also securing a regular income from the tenants.

The very rich can buy up hundreds of properties at a time and collect massive profits from renting them out. The very rich are also doing this with businesses that at any other time would have been too expensive to consider buying. So long as they hang onto the business until the recession has passed they stand to make large profits, billions in some cases. With predictions of the growth of the buy-to-let market increasing by as much as 15 percent over the next 12 months, people who are able to invest in this area will continue to see their bank balance rise.

CALLING IN THE DEBT

Companies that deal with problems arising from the credit crunch are also seeing an increase in business and in particular, sub-prime lenders. They charge higher interest rates than banks but with banks now less enthusiastic to hand out loans, the sub-prime lenders are stepping in. Businesses that have been refused credit from banks are now seeing sub-prime lenders as a viable alternative to their credit problems.

Prosper Inc, a San Francisco based online market place for person to person lending, has taken full advantage of the credit crunch. Its backers include Accel Partners, Benchmark Partners and Fidelity Ventures. CEO, Chris Larsen, says: "Banks are retrenching so aggressively." The result has been a surge in business for sub-prime lenders as traditional credit markets become increasingly difficult to deal with. Prosper has also seen more people willing to lend money through its network, seeking higher rates than they can earn on bank deposits.

Another sector to benefit from the credit crunch is debt collecting. Intrum Justitia is one of Europe's biggest debt collecting companies with a 10 percent market share across the 22 countries in which it operates. With more consumers feeling the squeeze there is more and more business for debt collecting companies, who buy up debts and pursue them more rigorously than the original company.

Those who supply important services cheaply while still making a profit always do well in difficult economic times. Paul Dales of Capital Economics, the consultancy firm, says: `It's certainly not the case that every company in the whole economy is going to do badly. We have seen anecdotal evidence that supermarkets such as Asda, Aldi and Lidl are doing well.' Wal-Mart in the US has also been doing well lately with its shares rising as a result.

INVEST IN THE CLASSICS

Businesses in the luxury items market have continued to prosper. One reason for this is the recent increase in the number of millionaires and billionaires. But another, perhaps more telling reason, is the very rich looking to protect the value of their savings in areas that can weather the economic storm. With gold prices at a record high other luxury markets are benefitting.

Russian tycoon Roman Abramovich recently paid US$33.6m for a Lucian Freud painting and US$86.3m for a Francis Bacon work. The annual sale of Old Masters paintings at Sotheby's in July this year generated over US$100m, 31 percent higher than 2007 and an 87 percent rise on the year before. The big growth was down to investment from emerging economies such as China, India and Russia.

The diamond expert De Beers has seen a 10 percent increase in rough diamond sales ahead of last year, while the owner of Cartier says jewelry sales rose 16 percent between April and June. Michelle Ginsalves of Bonhams says: `Diamonds provide timeless elegance in a fast moving fashion area and in many instances maintain their worth.' The value of diamonds has more than doubled in recent years. Credit crunch, what credit crunch?!

THE RICH GET RICHER

So it seems that people with savings, those who need to benefit the least, are the ones who are benefitting the most and the very rich are continuing to get even richer. The notion of the rich getting richer and the poor getting poorer is nothing new, and it isn't necessarily dictated by economic circumstances. The rate at which the wealth of the world's richest people has increased recently appears frighteningly out of step with all the warnings about a global recession. According to Merrill Lynch, the number of super rich, defined as having more than US$30m excluding the value of their home, increased by 8 percent to more than 100,000 last year and the combined wealth of millionaires rose by nine percent to US$40.7 trillion.

After years of cheap credit and knowing the price of everything and the value of nothing we are now having to face up to some uncomfortable truths. It appears that those who are least able to weather the storm are those being hit the hardest. There are lessons to be learned from all this; not to look for short-term gain over long-term stability, only spend money that you have and don't rely on loans to get you what you want in a hurry. If the recession brings back the idea that you have to save for something before you can have it, maybe that's not such a bad thing. It seems the biggest lesson to learn from all this is that the only way to benefit from a recession is to be rich already!