The Next 25 years in investment markets are predicted to be very different to the last 25 years.
The focus on using easily obtained borrowed funds to invest into property caused inflated valuations and price bubbles around the Western World, which contributed to the Global Recession. This was more prevalent in Europe and the USA.
Sovereign nations also spent more money than they were receiving in tax revenues to fund pensions, generous welfare and other government expenditure. This has meant that the debts have climbed, in many cases, to unsustainable levels. There are ageing populations in all parts of the world including Europe, China, Japan and to a lesser degree in the USA, Canada, Australia and the Third World. This will have a huge drain on Nations to keep up. Increasing costs to fund generous pensions, health care, pharmaceuticals and residential care accommodation is a problem for all countries.
So what has to happen? Exactly what is happening in Europe right now – a painful period of restructure and repair of the damage done in the last 25 years. Interest rates and inflation are now at uniquely historically low levels around the world. The Fixed Interest Bond investments have had great returns in recent years. However the future looks like they are likely to have poor returns in the near future.
Nichols Bratt from Lizard Asset Management who is based in New York, along with his investment team, manages the Zurich Global Thematic Fund. This week at an Adviser briefing in Perth, Nick spoke about how the Bond Market now looks very dangerous for investors in the near term, being the next 5 years. As economic growth picks up we will see rising inflation and interest rates. The global market avoided a second recession in 2008, and had the central banks not acted as they did at the time, the result may have been much worse. Now this monetary easing (governments printing money) has left a legacy of cheap money and a lot of sovereign debt.
Equities (shares) now look very attractive around the world due to valuations and also because the income or yield investors are receiving are greater than compared to the Fixed Interest Bond market. Nick said that you have to go back to the 1940’s to see a similar time when this occurred and believes Bonds are currently grossly overvalued. Some investors are buying Bonds knowing they are getting negative yields (minus interest income) just to secure their capital.
Nick said the case for Equities over the next 3 to 5 years is very strong. There have been very few periods in history where equities have had negative growth over a rolling 10 year period. The last 10 years to 30 June 2012 the return was positive 4%pa. However, the 10 year average is 12%pa. Therefore the starting point arguably is now ideal for a strong equities growth over the next 5 to 10 years.
As I have mentioned in my other Blogs, most Fund Managers are now increasing diversification of investment portfolios to minimise volatility or risk and maintain liquidity. This is done by building portfolios around 8 to 12 big ideas such as what the Zurich Global Thematic Share fund is doing. Nick Bratt said that these ideas are not highly correlated, as industry sectors tend to move together. Therefore being lowly correlated you are lowering investment risk further for investors.
The Zurich fund has 4 new themes Lizard Asset Management is looking to.
The first theme is US Renaissance. This is because of increased use of robotics and new advances in technology in manufacturing, making the USA companies more competitive compared to China and the rest of the developing world. This is particularly the case as rising labor rates in China are now occurring. The other important reason for the US Renaissance is the development of franking of shale oil which is producing natural gas. This will provide the US with cheap energy, thus moving away from coal and imported oil. The vast reserves will make the USA energy self-sufficient and a net exporter of energy. It is estimated that there are reserves in the USA to meet over 100 years of energy needs.
The second theme is the growth of the internet giants that have survived the tech bubble, including AMAZON with the increasing online shopping; GOOGLE for the search engine capability; VISA Card benefiting from online purchasing and another potential investment is FACEBOOK as a source of hundreds of millions of people’s personal information; but only if they work out how to monetarise this.
The third theme is secure streams of income from companies who are realising strong cash generation, such as industrial gases company Global French and company Air Liquid that has 22% world market share.
The fourth theme is companies who are strong in intellectual capital and can monetarise these ideas. Such as Monsanto who produce seeds and plants for food and other agriculture, and Pearson’s – a British education publication company.
Some continuing themes in the Zurich Global Thematic Fund that Nick Bratt spoke about were gold and precious metals. Sovereign governments who continue to print money are devaluing their currencies. Gold is a commodity that is holding its value, due to new resources being in scarce supply. The other theme is Japan and its equity market that is grossly undervalued. Somewhere in the vicinity of 65% to 70% of Japanese listed companies have more cash in the bank than what their market capitalisation is valued at on the sharemarket. Japanese companies are cashed up and in a very strong financial position. The huge Japanese sovereign debt, which is now over 200% of GDP, is largely owed to the Japanese people themselves in their pension funds and life companies and not foreign nationals or nations. So the sovereign risk for this debt is negated as the people own it themselves.
With the currently high Australian dollar, it is an excellent time for investing in overseas foreign investments, due to its current purchasing power. With the historically low valuation of equities internationally, the opportunities for investment is very good. By utilising the expertise of fund managers such as Lizard and managed funds such as the Zurich Global Thematic Share fund, investors get the benefits of investment diversification that produce lower risks and excellent investment growth prospects over the next 5 to 10 years.
As always, investment decisions involve a process of matching what is appropriate for the individual investor’s time frame, investment risk profile, objectives and personal circumstances. Engaging a Certified Financial Planner to provide advice in relation to your investment planning is the sensible approach to take.
If you are seeking Financial Advice from a adviser who runs their own Financial Planning Practice, and is not commission remunerated, then contact us at Benchmark Consultants on 92932922 for a complimentary initial meeting to discuss your needs.
Peter Stewart the Principal of Benchmark Consultants is a Certified Financial Planner. Benchmark Consultants has been accredited as a Professional Practice of the Financial Planning Association (FPA). Benchmark Consultants is a corporate representative #289570 of Australian Financial Services Ltd AFSL#297239
Phone: 08 9293 2922