Could recovery be curbed until 2022?
Will 2021 bring about strong global GDP growth, with fiscal stimulation driving economic activity?
The Alternative Investments Forum covered an array of topics in the investment landscape, including portfolio construction themes before and after the global pandemic.
Alternative investments
“Alternatives can give investors a meaningful and impactful role during these critical times, by accessing opportunities unique to the unlisted markets without compromising returns. The rate at which global allocations towards alternatives has risen should catch the eye of the astute investor. South Africa’s capabilities in this space, I believe, can compete with the best internationally,” said Mervyn Shanmugam Chief Executive for Alternatives at Sanlam Investments.
There is no uniform definition of alternative investments or a definitive list of alternative assets. The four broadest categories include public equity, public debt, private equity and private debt.
According to Sanlam Investments, there has been growth and acceleration into private markets over the past three years, as pension and sovereign funds seek to exploit the opportunities of private assets in diversified portfolios.
Geopolitical tensions and economic scenarios
Looking at global geopolitical tensions and economic scenarios unfolding in a post COVID world, Charles Dumas, Chief Economist at TS Lombard said, “The C-19 crisis will curb consumer recovery globally until at least 2022; Q3-Q4 growth, but no V-shaped recovery. A vaccine is not guaranteed, and even with one, consumers will remain cautious. Sport events, theatres, bars, even restaurants are unlikely to recover fully. Many Emerging Markets are in dire trouble; multiple defaults could roil global banks.”
“China’s policy is in the lead. China has adopted uninhibited stimulus; pre-Covid debt curbs abandoned. Chinese monetary policy is supportive; bank forbearance for stressed firms. China is raising spending on infrastructure, property and construction. Chinese output recovery held back by consumer caution; exports also face recession in most of the rest of the world. Consumer caution vis-à-vis catching the virus, plus recession knock-on effects – weak personal income, capex and inventories – are slowing the recovery in much of the world, especially Developed Markets,” said Dumas.
“C-19 reinforces potential reductions in DM growth and fragmentation of globalization. Workplace effects of C-19 are also an inhibition to potential growth; the US offsets this with tech benefits, China with catch-up potential. US and China are the only major economic locomotives in the world. Europe is too dependent on exports – could be squeezed as global systems split. Chinese recovery qualified by ‘dual circulation’ policy – to cut import ratios. German accepting budget deficits is a relief for Europe – also Recovery Fund. But Italian government debt ratio could escalate well over 200% of GDP by mid-2020s. Europe badly needs domestic demand boost,” emphasised Dumas.
“Inflation lags at least a year behind the economic cycle. US and EA inflation will probably be lower throughout 2021 – market projection of rising inflation reflects false ‘V-shaped’ recovery hopes. But disappointing growth may foment discontent and budgetary stimulus. There’s serious discontent also from inequality revealed by C-19. Inflation pick-up could result during 2022, less likely in EA than US. Central banks would start to be tested if budget deficits persist for years. New policy of letting inflation remain above 2% target is probably unsustainable. Current low interest rates are the low point of this ‘long cycle’ since 1982. Other factors also may argue for higher Dollar rates as the 2020s draw on. Both stocks and bonds could face headwinds in the medium term,” added Dumas.
Real assets as an asset class
The trends in infrastructure globally driving positive investment are policy, technology, urbanization, population and sustainability.
The trends in real estate driving investment are renewed distress, the demand for new property types, continued demand for core and growing and emerging markets.
“The key issues when investing in real assets is physical ownership (downside protection and positive effect on credit risk), income generation (steady income stream and implicit inflation linkage), diversification (risk management and potential for higher risk-adjusted returns), value creation (potential for enhanced return-illiquidity premium and alpha potential through active asset management) and societal/ESG impact (sustainable infrastructure, residential strategies and low carbon funds),” said David Moore, Head: Alternative Investments at Alexander Forbes Investments.
“Africa requires more than USD100 billion annual investment in infrastructure. Nine of the 10 countries with the highest urbanization rates in the world (in 2015) were in Sub-Saharan Africa. Nigeria has a significant power deficit and a high reliance on expensive diesel generation. Africa (ex-SA) has a chronic shortage of high-quality retail and office real estate. Rental reversions, lack of available stock and increased consumerism are driving real estate development and transaction activity. The population growth is driving the need for quality real estate,” added Moore.
Niche opportunities
According to Moore, South Africa’s Renewable Energy programme is the most successful on the continent. There are positive trends in SA infrastructure development.
In terms of the different types of infrastructure investment opportunities and unique opportunities in Africa, Moore said, “Real assets comprise a broad spectrum of renewable energy assets across South Africa. A tangible example with explicit alignment to SDG 7 (Affordable and Clean Energy) and SDG 13 (Climate Action) is that of Cookhouse Windfarm which is a 139MW power plant located in the Eastern Cape. Cookhouse provides enough green, clean electricity to power c. 43,000 households for a year whilst concurrently offsetting 384 000 tonnes of Carbon Dioxide emissions typically produced by traditional fossil fuel-based power plants. Cookhouse also aligns to SDG 4 (Quality Education) via the Early Childhood Development programme it has implemented in the surrounding communities of Adelaide, Cookhouse, Bedford and Somerset East for children between the ages of 0 and 6 years old.”
“Unlisted real estate practitioners are active investors in rural retail, which despite proving resilient during COVID-19, is a highly impactful sub-asset class within the commercial real estate sector,” he added.
“Found near the remote village of Medine, in western Mali, is Albatros Energy (Albatros), the country’s first independent power producer (IPP) project to feed into the national grid. Mali’s power grid is grossly inadequate to provide sufficient, reliable power for its population. Mali is among the world’s 25 poorest countries and only 25.6% of its 17.6 million people have access to electricity, with this level falling to 15% in rural areas. Albatros, a thermal-power plant completed in late 2018, provides enough energy to power just short of one million households and represents over a quarter of the country’s base load capacity,” said Moore.
“COVID-19 has also driven the new normal of working from home/remotely leaving corporate tenants questioning the needs for large office fit outs…the rise of Residential REITS. COVID-19 has seemingly changed consumer retail behavior with convenience centers being preferred to their big box alternatives. Industrial tilted portfolios remain resilient and in-demand,” continued Moore.
“Real Assets include the social infrastructure sub asset class which includes primary and secondary schooling infrastructure across KZN, Gauteng and the Eastern Cape in South Africa amongst others to achieve commercially acceptable returns for pension fund clients whilst simultaneously creating sustainable, social infrastructure. Real Assets also include niches such as the completion of retirement villages and frail care accommodation for the elderly in urban and peri urban communities across KZN, Gauteng and the Western Cape in South Africa,” added Moore.
“ICT infrastructure roll-out across the African continent remains aggressive given the need for the continent to play catch-up developed market peers. So, what should you look for? Liquidity budgeting, portfolio design, access to high-rated managers, early bird discounts, quick decision-making, managers that have been thoroughly researched, legal and tax issues covered, investments built to target allocation and maintained, smooth drawdown processes, effective diversification of managers and clear reporting, accounting, etc,” concluded Moore.
Writer’s Thoughts:
The trends in the investment landscape provide an interesting take for portfolio construction, before and after the global pandemic. Do you believe 2021 will bring about strong global GDP growth, with fiscal stimulation driving economic activity? Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts myra@fanews.co.za.
