Why Alternative Assets May Become the “New Normal” for Investors
By Saghir Aslam
(The following information is provided solely to educate the Muslim community about investing and financial planning. It is hoped that the Ummah will benefit from this effort through greater financial empowerment, enabling the community to live in security and dignity and fulfill their religious and moral obligations towards charitable activities)
When it comes to investment strategies, we are all aware that past performance is no guide to future returns. But it’s easy to forget that the same applies to asset classes. Most of us has rules of thumbs as the typical returns that particular markets provide. But we need to acknowledge that future returns from those assets may be very different.
Government bonds are a case in point. Over the past 20 years, UK gilts have delivered as annual average return of 6.5 percent. The reliability of this return explains why investors tend to be comfortable with a traditional 60:40 equity/ bond split in their portfolios. But the assumption that sovereign bonds will continue to provide such returns looks unsafe. In the years since the financial crises, we have heard a great deal about a “new normal” in interest rates: that they may be lower not just for longer, but for the foreseeable future too.
The implication of this new normal is the sovereign-bond returns will be significantly subdued. Today the bank of England’s interest rates are still close to zero, and the yield on the 10 years gilt expected returns of 1to 2 per cent are more realistic then the 6 percent plus to which investors have been accustomed.
Meanwhile after the bull market in equities since the financial crises, stock market valuations are looking stretched. While we see the corporate sector is in reasonable financial health and we are also reasonably optimistic on the prospects for corporate earnings, our return expectations for the next few years do not match the return we have seen over the past few years.
In various regions around the world we are also seeing a “touch on the brakes” in terms of monetary policy. In some cases, such as the US, this is to get interest rates to a level that we might consider normal after the years of unconventional monetary policy.
All these factors suggest more modest returns from equity markets. In addition, working age populations in the west and much of East Asia are shrinking, or soon will be. The net result will be much slower growth in the global economy-with obvious implications for equities. That’s not to say that they are not still opportunities in equities. The European business cycle showing some momentum at the last, and emerging markets are still relatively cheap. But with bond returns likely to be severe constrained by the “new normal”, some of the best opportunities in the years ahead are likely to be found in alternative assets.
So what are these alternatives? We think local currency, emerging market debt may offer return comparable to those from developed market sovereign debt in the past. Emerging market governments has learned from the past, and their economies are now more prudently run. Attractive returns are also likely from listed infrastructure investments in roads, hospitals and wind forms.
We also think that there are considerable attractions in private markets. Forward-looking investors are becoming increasingly open to these less liquid markets, given the higher returns on offer. The trade-off between illiquidity and long-term return has growing appeal, especially as illiquid markets are inherently less volatile. In the years ahead, equities and bonds will still be vital to many investors’ portfolios.
(Saghir A. Aslam only explains strategies and formulas that he has been using. He is merely providing information, and NO ADVICE is given. Mr Aslam does not endorse or recommend any broker, brokerage firm, or any investment at all, nor does he suggest that anyone will earn a profit when or if they purchase stocks, bonds or any other investments. All stocks or investment vehicles mentioned are for illustrative purposes only. Mr Aslam is not an attorney, accountant, real estate broker, stockbroker, investment advisor, or certified financial planner. Mr Aslam does not have anything for sale.)