Eugene Botha | Deputy Chief Investment Officer | Momentum Investments | mail me |
‘When one door closes, another one opens,’ as the saying goes, and this is particularly true when it comes to investments.
Economic recovery is on the horizon, and while it is expected and somewhat priced in by present market activity, investors are more interested in looking at what lies ahead. And here there may be some opportunities.
The ongoing pandemic has amplified the growing calls for resilient and adaptable infrastructure that can effectively operate during moments of crisis.
Given this significant opportunity, investors must embark on infrastructure and non-traditional investment programmes and initiatives that strive to provide the growth that is sustainable, technologically advanced, and resilient.
Beyond the shorter-term focus on infrastructure, however, investors are cautioned not to focus excessively on the current environment.
Broad macroeconomic and market evolutionary themes also have an important role to play, especially when considering medium and long-term investment trends that stand to be both profitable and resilient in and beyond times of crisis.
Megatrends will drive growth
From an investor’s perspective, I believe there are a number of what he calls ‘megatrends’ that will drive growth over the medium and long term.
These future trends will shape and influence the pace of economic development, as well as the trajectory of the global economy, and include:
- Structural trends that could have a long-term impact on growth in a rapidly transforming world;
- technological innovation across sectors, industries, markets and economies that are likely to shape economic activity for years to come (e.g. robotics, digitalisation, remote working and software solutions);
- environmental, sustainability and global warming trends – especially surrounding alternative sources of energy;
- population growth and urbanisation is a trend that will also disrupt traditional value chains;
- the rise of the emerging market consumer and the resultant shift in economic power; and
- General healthcare and genetic engineering will drive demographic change.
But you can’t eliminate risk
But, of course, any investment comes with a measure of risk. In these unpredictable times, diversification through allocation to various asset classes is extremely important.
Asset allocation and investment decisions should span wider than the traditional asset classes like equities, bonds and cash. Geographical diversification across asset classes, non-traditional assets and currencies are also equally important.
The key to getting this diversification right lies in having an asset allocation mix that assumes an investor doesn’t know what the future is going to hold. The future is the ‘big unknown’ – and that’s about the only prediction you can count on, but with informed knowledge and detailed research, one can form an understanding of what drives risk.
There are some risks that an investor should factor into any short, medium, or long-term investment activity, I have identified these:
- Inflation – This will always remain an important risk to factor in. In a world of structural lower than expected returns, inflation will erode your purchasing power and real growth much quicker.
- Behavioural and emotional risk – This is not something that can be whispered and ignored in corridors any longer. Our research suggests that behavioural risks are detrimental to investment performance, delivery of your goals and impact on your retirement savings. It should always be actively addressed and managed.
- Interest rates – Depressed rates with the risk tilted towards them increasing, will change the risk profile and volatility of fixed income returns.
Over and above the mentioned risks, some factors point to a rising probability of pullback or correction in equity markets in the second half of 2021. This is a short to medium-term risk but should be short-lived as massive policy stimulus and liquidity support are still prevalent in the financial system.
Expected returns
The question about where I should invest my money to gain the highest return, is asked way too often and with a skewed focus as returns are more often not within your control.
I regard the question of expected returns as scientifically accurate as ‘crystal ball gazing’, but notes that there are broad predictions that can be surmised. In the short term, I expect single-digit returns across all asset classes.
With added environmental risks, equity is expected to lead the pack with strong fundamental profit support for the equity markets. Unfortunately, property fundamentals remain weak and are not a preferred asset class in the short term.
The recent unrest in South Africa is another reminder to us that anything can happen in this world, and that anything could affect your investments.
There is only so much that can be predicted, but this is why we strive to diversify and approach investment with a high degree of caution and control over elements that we as investors can actually control.
If you’re unsure, I recommend consulting a financial adviser experienced enough to provide you with the right advice on your journey to success.
