Handpicking the next investment winners
There are still options offering good deals in a slow economy
There is a growing consensus that global economic growth is set to slow further. A range of socioeconomic trends that has become visible in recent years are likely to contribute to this.
For one, more than 80 per cent of global GDP is generated by countries with ageing workforces. Population declines in Europe, Japan, South Korea and even China will hit both production and consumption cycles hard.
In tandem, the rise of new technologies such as Artificial Intelligence is expected to create waves of short-term unemployment as jobs are displaced, development models upended, and industrial power centres relocated. Finally, the rise of populism, the localisation of supply chains and lower cross-border capital spending have led to a concerted deglobalisation, signalling lower global trade, and, with it, softer global growth and a low-return environment for the near-to-medium term at the very least.
Negative is trending
In October, the International Monetary Fund cut its global growth forecast to 3 per cent for 2019, down from 3.6 per cent last year. It also revised its 2020 outlook downwards to 3.4 per cent, as against the 3.6 per cent projected earlier. Central bank intervention has helped; but with interest rates near historic lows, they have limited ammunition to stave off a recession.
In January 1989, the yield on 10-year US Treasury bonds was 9.23 per cent. On the date of this writing, this stands at 1.84 per cent. Returns from traditional safe-haven assets such as investment grade bonds have fared similarly for the most part.
As of this year, approximately a quarter of global government and corporate debt – bonds worth an unprecedented $17 trillion – are trading with negative yields. Public equity investments have become increasingly expensive, thanks in great measure to liquidity support by central banks – a route they opted to take to mitigate instability in financial markets.
Private markets have also been affected, but they tend to be less efficient than public markets. This very inefficiency, and the liquidity premium associated with these assets, means that there is still some value to be discovered here.
For investors with an eye on the long-term, private markets seem to hold attractive opportunities, currently driven on a two-decade-long period of sustained growth. Global investments in unlisted assets have shown strong risk-adjusted returns since 2002, and have grown more than seven-fold since, according to McKinsey data.
For instance, private real estate transactions in some developed markets continue to offer attractive returns. Large economic, technological and demographic shifts taking place in these markets mean demand is still catching up to supply, creating interesting opportunities.
The rise of populism, the localisation of supply chains and lower cross-border capital spending have led to a concerted deglobalisation, signalling lower global trade, and, with it, softer global growth and a low-return environment for the near-to-medium term at the very least.
Often, it is possible to lease property to large well-known companies at rates significantly higher than bonds issued by these same companies. Investors with the ability to invest for the long-term, especially those looking for predictable cashflows, can consider infrastructure investing. Infrastructure can be defined as a “real asset” used for building and maintaining society, such as utilities, power and telecoms, among others. Due to the nature of these investments, they tend to be relatively resilient to economic cycles, and can serve as a good risk diversifier in portfolios.
Possibilities in disruption
Direct lending is another area of interest. This asset class has generated good risk-adjusted returns in recent years, but the easy money in this space has been made for now. Aggressive yield-chasing has meant that lenders have grown progressively flexible in their risk underwriting, thereby raising the overall risk profile of this asset class.
There is still value to be obtained, but only in the hands of a very good manager.
In the Gulf, as elsewhere in the world, disruptive technology start-ups are offering fertile new avenues for wealth creation as their benefits become apparent in our daily lives.
As GCC nations embrace technologies such as AI and blockchain as a chance to leapfrog up the development table, public initiatives from the UAE, Saudi Arabia and Bahrain are spurring private enterprise and investment, with traction in areas such as fintech and proptech.
The rise of start-ups in the region is accompanied by increasing interest amongst individual investors in crowdfunding as another outlet for alternative investment.
Such choices are not without risk, however, and investors who rush in without doing their due diligence could well succumb to the very risks they were seeking to avoid in the first place. One has to look carefully to get a good understanding, not just of the investment thesis, but the governance, the mechanics, the tax and legal implications, among others.