HOW TO INVEST IN 2019? A DRAMATIC TRANSFORMATION IS UNFOLDING…

Just a few days away from the end-of-year festivities, predictions about 2019 financial market developments are well underway. Are we heading for a boom based on the strong growth seen around the world or a recession driven by the central banks withdrawing billions in liquidity month after month? Should you prioritize the US market, to the detriment of Old Europe? Where will the value be in the bond market? In American sovereign debt?

In any event, long-term return outlooks for a balanced portfolio seem limited by some cyclical factors, high valuations and interest rates under pressure, all in an end-of-cycle economy. One thing is certain: investors will have to take more risks.

Alternative strategies offer an interesting source of diversification. Private equity, while certainly less liquid, has out-performed listed stocks for the past ten years. And for those who can, exposure to real assets allows you to generate positive returns while protecting yourself from inflation.

In a difficult environment, your wealth manager or Family Office must be more active!

Private equity

According to a study by the CFA Institute, the number of publicly listed companies has declined by 50% in twenty years in the United States, while stagnating in the eurozone and the United Kingdom. Increasingly, companies are preferring the advantages of private equity to the public markets. This change risks penalizing the average investor, who currently mostly invests in traditional listed markets, in the form of investment funds, for example. Investors will suffer because the listed markets (and indices) are more focused on old industries and less focused on growth equity.

Real Assets

The role of tangible investments is growing in the portfolios of clients managed by Family Offices. If buying works of art, classic cars and rare wines is steadily on the rise, it’s real estate, agricultural land, forests and infrastructure that are going to benefit in the coming years.

For the past 10 years, the best possible real investment by far was classic cars because—especially if they are rare, from coveted brands and in perfect condition with pedigree if possible (a prize and/or a famous driver or owner)—they are subject to speculation: between 2002 and 2014, prices skyrocketed by 396%, while art progressed by 195%, wines by 166% and watches by 76%.

When it comes to the “nectar of the gods”, according to The Wealth Report 2017, investments in bottles of wine have surpassed classic cars. This liquid asset is increasingly being considered alongside works of art and cars in the investment portfolios of wealthy families. That said, it is still a risky investment—ironically, it’s not very liquid, and it has a long-term horizon. Wine is an asset whose rarity is created by the passage of time and that has an impact on its value.

Investing in agriculture is a broad concept that includes different crops (grains, vegetables, fruit, plant fibres, etc.), and also extends to raising animals (cows, sheep, pigs, etc.) and to developing wooded land. Agriculture is certainly not a new concept, but the recent interest from wealthy clients arises from a favourable economic context and demographic trends. Investing in agriculture provides certain benefits in wealth management. For example, the correlation between agriculture and traditional markets is low (<0.30), which means that a market correction would have a limited impact on the return of an agricultural portfolio. Historically, agriculture has also provided excellent protection against inflation.

Among the alternative tangible investments that are now appearing in the portfolios proposed by Family Offices, infrastructure assets have very interesting potential. This generic term includes infrastructure projects ranging from traditional projects that facilitate transportation (roads, bridges, railways, ports and airports) to projects in the fields of health and education. As an investment, these assets all share the following characteristics: they are essential community services with natural virtually monopolistic positions, demand for them is not very dependent on the economy, and they are long-term assets with predictable costs and future returns, because they are often regulated by the government. These characteristics make infrastructure projects very attractive to investors because they offer predictable, stable returns. They also often provide protection against inflation, because service contracts are generally associated with that. By combining attractive returns, decorrelation and protection against inflation, infrastructure is an interesting alternative to bond earnings.

Bibliography:

 “Faut-il rester fidèle à la bourse?” by Emmanuel Garessus, Le Temps, December 3, 2018

“Le Private Equity croule sous les milliards” by Sébastien Ruche, Le Temps, August 19, 2018

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