Investors need to focus down road rather than gaze into rear-view mirror
Consider sustainability of assets when making investments,
“Tomorrow belongs to those who hear it coming.” — David Bowie
As an investment professional I’m often asked what is the most common and costly mistake that people make when investing. Hands down, I would have to say sustainability. That’s because many of us remain so focused on the here-and-now instead of asking whether something is truly sustainable.
This is the one trait that today’s most successful investors and entrepreneurs such as Warren Buffett, Bill Gates or even Elon Musk have. They are true visionaries given their keen sense of their surroundings, focus on the bigger picture and lack of fear when it comes to challenging the norm. Combine this with the rapid growth of new technology and you have a truly disruptive force to the status quo.
However, the majority of us make our decisions looking in the rear-view mirror, enticed by what has worked in the recent past. Consequently, we find safety in following the herd and doing what everyone else is doing.
There are plenty of examples of this, but we believe the two most influential factors in today’s environment are low oil prices and low interest rates.
New drilling and competing technologies have been a real game changer in the oil market, sending oil prices down to levels not seen since the 1990s. However, this isn’t necessarily good news as low oil prices are destabilizing the world and providing the wrong kind of motivation to consumers.
Civil unrest in the Middle East is spreading at unprecedented levels due to collapsing oil revenues. As a result, millions of people are leaving these countries with the EU member states receiving over 1.2 million asylum applications in 2015 alone.
Some consider the European migrant crisis to be the driving force behind the Brexit vote with the U.K. deciding to leave the European Union. This in turn is going to have all kinds of economic repercussions both good and bad.
Then there is Venezuela, a country that is in complete chaos with its citizens facing a humanitarian crisis. We wonder why no one is talking about the potential effect especially to its neighbouring South American countries.
Besides geopolitical instability, low oil prices are also driving consumer behaviour.
Global sport utility vehicles sales have soared 23 per cent over last year with China accounting for 36 per cent of total sales in Q1, according to a recent report by JATO Dynamics. Companies such as General Motors Co. are having a banner year beating Wall Street expectations due to strong demand for both pickup trucks and large sport utility vehicles. GM said it had the highest secondquarter demand for mid-size retail pickup sales in 11 years.
There is now a situation in which major supply nations for crude oil are facing heightened instability while major consuming nations are ramping up their purchases of gas guzzling vehicles. One has to wonder just how sustainable the current oil price environment truly is.
Next up you have record low interest rates. According to the Citi data, one-third of global government debt now has a negative interest rate. Investors have reacted by buying longer-term bonds, chasing capital gains on the premise of rates continuing to fall farther.
Low rates are also fuelling pockets of asset inflation. For example, in Canada a falling loonie and two rate cuts by the Bank of Canada have added rocket fuel to our real estate market that it accounted for nearly one-third of Canada’s annual GDP growth in the first quarter, according Statistics Canada data and a recent BNN report.
In Denmark, households are now being paid to borrow with negative floating rate loans. Not surprisingly, Danish apartment prices are now up over 50 per cent from their 2009 lows, according to Nordea Kredit and a recent Bloomberg report.
Just how sustainable is this situation? What will happen to these longer-term bond holders if rates ever increase? Also, what would be the effect to housing and other areas inflated by record low rates?
During times like these it’s important to keep a firm grip on the wheel and remain focused on the road ahead instead of continuing to look in the rear-view mirror and reacting to what’s behind us.