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Five post-pandemic trends for your client’s discretionary investment portfolio

06 August 2020 Gareth Stokes

The way in which governments are responding to the coronavirus will ensure that 2020 goes down in the history books as a watershed year. Our trusted dictionary describes watershed as “an event or period marking a turning point in a course of action or state of affairs”. In this context, watershed refers to the acceleration of existing trends and the establishment of new trends for the next decade, brought about by pandemic. Hywel George, Director of Investments at Old Mutual Investments, urged financial advisers in attendance at the asset manager’s 23 July 2020 Investment Insights webinar, to look out for five emerging trends that will serve their clients well over the next 10 years.

His presentation, titled ‘2020: A Watershed Year’, described how the US financial markets had yo-yoed from a record market capitalisation of around US$35 trillion in early March, to a low of US$25 trillion in late March, and almost back to pre-crisis levels by the end of July. How, one wonders, can financial markets be powering ahead while a second wave of coronavirus infections threaten the United States, Latin America, and Europe? Answers to this riddle emerge by comparing governments’ economic stimulus responses to the 2020 COVID-19 pandemic to those in place during the 2008 Global Financial Crisis. The United States committed 4,9% of its GDP to economic stimulus packages in 2008 versus 12,1% today; the United Kingdom has increased its assistance from 1,5% then, to 14,5% now; and Germany has moved from 3,5% then, to a staggering 33% in 2020. 

The impact of ‘dumb money’

“The lockdowns, which were necessary, have prompted governments to support their economies in startling fashion,” said George. The global debt burden, which is currently estimated at 220% of global GDP, will have consequences down the line; but for the time being the debt is making its way into the real economy via businesses and consumers. “We are seeing [large proportions] of the stimulus ending up in equity markets with retail ‘day traders’ buying airline and automobile companies and [artificially] pushing the market up,” he said. We loved George’s cutting observation re the recent activity on the US-based S&P 500 and NASDAQ bourses: “There is a lot of dumb money going into the market right now”. 

Financial advisers and investment managers need to see through the market froth to find valuable opportunities for their clients. “From our perspective the coronavirus is accelerating existing trends in areas such as healthcare, sustainability, and technology,” said George. “And it is introducing five new investment trends for the next decade”. Old Mutual Investments offered up Healthcare, Inflation, Renewables, Space, and Technology as suitable outlets for a small percentage of investors’ discretionary funds over the coming decade. These trends, some of which we unpack briefly below, are underpinned by a combination of compounding, economies of scale, and exponential growth. 

Technology is pervasive

Many readers will be bored to death with the ‘impact of technology’ sermon; but it remains a critical component of all aspects of our life and work. It is worth considering that the technology trend is also an overlay or underpin for the healthcare, renewables, and space trends. Doctors are using technology such as artificial intelligence (AI) to assist in diagnosing a range of conditions, while augmented reality (AR) and so-called cross reality (XR) make it possible for real-time X-ray vision during medical procedures. These technologies assist us in almost every activity of daily life. Chinese police are using XR glasses that allow them to download criminal files and scan crowds using facial recognition; courts can use AI and machine learning to pre-determine the outcome of a trial; etc. 

Technology has revolutionised the investment case for renewables too. “The worldwide wind power capacity is up five times over the past decade and global cumulative solar capacity has grown 30 times between 2008 and 2018,” said George. Meanwhile, the unsubsidised cost of wind power has plummeted from US$0,57 to just US$0,03 per kwh in the US and for solar, from US$77 per kwh in 1977 to just US$0,22 today. South Africa has plenty of coastline, sun, and wind meaning that Old Mutual Investments is ready to direct capital to deserving renewable projects in South Africa. The space race underway between the likes of Boeing, Blue Origin, SpaceX, and Virgin Galactic is focused on returning mankind to the moon, from which further space exploration will be more cost effective; but it remains difficult to invest in this trend presently. 

The global inflation timebomb

George observed that a return to a global inflationary environment was inevitable given the amount of money being pumped into the real economy and the renewed focus on shortening supply chains. “Governments would [also] welcome some inflation because the easiest way to service and repay their growing debt to GDPs is to deflate this debt in real terms,” he said. Global economic activity is too weak for inflation to take hold presently; but it will emerge as a trend over the next decade. 

“Financial advisers and their clients need to get onto these trends,” concluded George, who offered up various iShares Exchange Traded Funds (ETFs) as the best way to gain diversified exposure to them. He suggested that no more than 10% of discretionary investments be redirected to benefit from these trends, with the usual disclaimer about the selections ‘not constituting financial advice’. Under the technology heading, George suggested an iShares Electric Vehicles & Driving Technology investment as a better bet than direct holdings in Tesla; he mentioned an iShares Healthcare Innovation ETF to gain exposure to technology trends in healthcare; and he advocated small holdings in agriculture, gold, real assets such as infrastructure and timber, and perhaps even crypto currencies to hedge against inflation. 

Writer’s thoughts:
We thoroughly enjoyed ‘Investment Insights 2020: A Watershed Year’ and the five investment trends identified are broadly in line with our current world view. One of our concerns, however, is with the extent to which the US financial markets appear to have overshot the real economic recovery. How are you advising clients who wish to make discretionary investments in offshore equities? And is this advice different for monthly versus once-off investments? Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts [email protected].

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