Staying ahead as an investor
Being aware of the risks allows the discerning to be better prepared
LAST year was a challenging year for investors, with US equity and government bond markets both returning less than cash.
Two factors – namely disappointing worldwide growth and less cash flowing through the global economy – were contributing factors to this negative consequence.
These factors – driven by three underlying issues – will continue to influence markets in the year ahead.
While there is no guarantee of better performance in 2019, identifying these important themes gives investors an opportunity to manage these investment risks.
There are three key themes:
Theme 1. Lower availability of cheap money exposes those reliant on borrowing
In 2019, the volume of money in the global financial system is expected to reduce.
The main reason for this is a change in the activities of major central banks. After a period of buying government bonds, the US Federal Reserve (Fed) plans to sell back some of these investments, withdrawing some cash in circulation. The European Central Bank has said it will stop buying bonds. This leaves the Bank of Japan as the only major central bank still contributing new money to the financial system (through the purchase of its government bonds).
This is important, because cheap, easy money encourages investors to take greater investment risks.
In recent years this has helped direct investment into peripheral eurozone markets (for example, Greece, Portugal, Spain and Italy), some emerging markets and also lower grade corporate credit. As liquidity is withdrawn from the system, important support for these markets disappears. The early effects of this trend were already being seen in emerging markets in 2018. In 2019 they look set to intensify.
Theme 2. The return of emerging markets
Given the above discussion, it may seem odd that he believes that emerging markets can make a comeback in 2019. This is, however, one condition that the US Fed’s policy of interest rate rises comes to a halt.
Should this happen – and we forecast one more rate rise in June, taking US rates to 2.50-2.75 percent – there is a good reason to believe the US dollar will lose some of its strength. This would provide a welcome relief to those investors that borrow in dollars – a heavyweight of whom resides in the emerging markets.
The positive effects from this development could more than offset the pressure from the withdrawal of money in the global financial system and escalating trade tensions.
Theme 3. Populist pressures mean governments turn to quick-fix policies
Without the engine of US or Chinese demand, global growth tends to slow.
The US outperformed, in growth terms, in 2018 as a result of President Donald Trump’s tax-cutting agenda. Other leaders and governments have been taking note.
In France, President Emmanuel Macron responded to weekends of riots by meeting populist demands for lower taxes. In the event of a hard exit from the EU, the UK is planning its fiscal boost. Japan may well be the exception, with an increase in a consumption tax scheduled for October. However, even here measures are being taken to offset the impact.
The approach today is to deliver a quick fix through a tax cut, increased public spending or regulation such as a rise in the minimum wage rate. Some of these measures are warranted and overdue, but others are a response by governments to populist pressure.
Being aware of these risks allows investors to be better prepared.
Keith Wade is the chief economist and strategist at Schroders. AS SOUTH Africa emerges from last year’s recession, two schools of thought are expected to drive the commercial property market this year and, as expected in an election year, political considerations are prominent.
The first school is betting on a positive election outcome. They expect a clear ANC victory to enable President Cyril Ramaphosa to navigate a tricky policy environment and attract foreign investment, which hopefully will buoy property prices late this year. These investors are taking advantage of softer property prices to add to their portfolios in the run-up to the election.
A coalition government could see a significant loss in property value as the threat of an uncoordinated “expropriation without compensation” policy becomes more likely. However, if Ramaphosa sees good support for the ruling party, it could attract investment and property values could rise on the prospect of better growth.
The second school is driven predominantly by fears that any potential post-electoral property boom is unlikely to overcome concerns around rising interest rates and increased property vacancies which are driven by a low economic growth environment. These investors expect commercial property yields to continue to soften this year and are using the pre-election period to lock in some of the incredible gains achieved in the past decade (particularly in the direct investment commercial property category) by selling down their portfolios.
We have seen yields softening over the last 18 months and believe this reflects certain sellers willing to accept less and hedge their investments elsewhere, be it in other sectors or offshore. This means that for those looking to buy, there are bargains, especially during the first part of the year. It also means properties are likely to spend longer on the market.
Our data shows that Gauteng is having the most transactions, followed by the Western Cape.
Despite these opposing outlooks, what we know for sure is that the election is unlikely to put the commercial and industrial investment market into a freeze. Instead, I believe it will generate additional churn, with the fluidity of transactions possibly exceeding any other year.
Whatever the poll outcome, the year promises to be an action-packed one for commercial property.
Some of these measures are warranted, but others are a response to populist pressure.
Keith Wade
John Jack is the chief executive of Galetti Corporate Real Estate