This post was guest blogged by Alex.
Guessing who will score the next goal is difficult but predicting the leading goal scorer for a team by the end of a season is easy. With this thought in mind, allow me to share with you some macro investment themes that will help you position your portfolio to take advantage of the next economic growth cycle.
IS IT A GOOD TIME TO INVEST?
Historically, the highest returns are made within a day of a major rebound so if you’re not invested for the long haul, you’re at risk of losing that windfall gain. It is important to realize stock markets are not a reflection of the state of the economy. The stock markets are simply an indicator of where investors think the economy will be in 6 to 12 months.
Whether the markets will go up or down from here, no one knows. Just because markets have fallen 50% from their highs doesn’t mean there is value. Take Japan for example. In 1989 their Nikkei index was at 38,915 points. Today, 20 years later, it is only at 7,173. Yes, something was wrong in the late 80’s when a piece of land in Tokyo was valued at more than all the land in California.
P/E (price to earnings) ratios also sell the same story. They look cheap compared to a year ago but take note that the ‘earnings’ part of the ratio is based on 2008 earnings – 2009 will paint a very different picture.
So what positives do markets have going for it? For one, hundreds of billions of dollars from stimulus packages have been rolled out by governments around the world. We will soon see and hear more about their impact on economies.
WHICH SECTORS TO INVEST IN FOR THE NEAR TERM?
In the near term, you want to focus on sectors that will benefit from those government stimulus packages. They all have a common theme to use infrastructure as the key stimuli to create jobs and to increase activity in the economy. These infrastructure projects will include hospitals, schools, water projects, railroads, highways, bridges, ports, airports and energy.
One area highly investable with high growth potential is renewable energy. Over the next few years, solar, wind and hydro energy will see mass global implementation. With government funding on the line, there is a legitimate will to develop these industries.
Railroads will also come back in fashion. Urban light rail in particular will continue to grow and be integrated into national railways. If you have spent some time in Europe or Asia you will almost certainly agree North America has a lot to catch up on in making rail an efficient and popular mass transit solution.
Don’t forget heavy industries and construction firms too. They will be benefiting immensely from government spending on infrastructure projects.
WHERE TO FOCUS FOR THE LONG TERM?
The new fortunes of the future will almost certainly be made in agriculture followed by commodities and real estate. These are the assets that will float up fastest and stay there for the long haul. After the global economic downturn, the world will demand investments with more tangible assets. Obviously this is a macro overview and that local market conditions will differ from region to region. If these sectors are not favorable in your markets or is not feasible, then you can look at investments options tied to these assets through the stock markets. As with any investments, if you bring leverage into the picture by borrowing to fund your investments, then you need to carefully review if the investment still fits your risk profile.
Agriculture will see continued growth for generations to come. As developing countries like China and India with its combined 2.4 billion citizens become powerful consumers, they will demand much more produce and meats for their diets – OK, maybe no meat for India. Global population will also continue to rise and as infrastructure becomes more efficient, crops and livestock will move around more freely to help alleviate regional shortages. For the first time last year, more people in the world live in cities than in rural areas. Urbanization is a growing trend that will benefit the agriculture industry. Agriculture machinery manufacturers and other supporting sub-sectors will be part of this growth story too.
Commodities will climb back. How can commodity prices go down when there is a finite supply? What is more important is that commodities will likely become a storage of true value as inflation begins to rise globally. You should know that many of the governments have printed money not only to provide liquidity to the credit markets (otherwise known as making loans available to those who need it) but it is also to help ‘inflate their way out of debt’. If inflation kicks in, that $10,000 loan made last year will not have the same intrinsic value in the future. It is like buying a home back in 1985 and making monthly payments on it today. It wouldn’t be very much money because the loan value was based on the value at the time of purchase before inflation raised the price of the property and lowered the intrinsic value of the mortgage. By printing more money, governments want to speed this process up so those underwater with mortgage debt can make their payments easier. The trouble with this scenario will be for those who have been prudent with their money and have savings. The value of their savings and certain non-tangible assets like bonds will fall in value dramatically. The point here is that inflation is coming and only commodities will be able to store the true value of your wealth. When rampant inflation does hit the US, the value of the USD will fall and prices of most commodities (which are usually quoted in USD) will have to rise to reflect the true value of the underlying commodity – therefore protecting the value of your investment.
Real estate will return as great reliable income generating investment vehicles. After this economic downturn, people will want to make investments in things they can see, feel and use. No longer the heavy appetite for investment certificates or complex investment instruments. If you think about it, very few investments have the ability to pay you cold hard cash every month with so little risk and so much flexibility. A rental property that has been paid off is like having a self sustaining blog income but without the writing. You could also easily walk into any bank and leverage the property with a mortgage and use the equity to make another investment. These are the attributes that make real estate so expensive. Not the dirt on the ground or the cost of the structure.
You may have noticed by now that I do not provide specific investment picks. It is not what I do. The purpose of this article is to identify macro economic trends that will help you make investment decisions from a position of strength.
In these extraordinary times, it is not important whether or not you’re investment has lost value. In fact, it is highly inevitable unless you’ve long been holding select tangible assets such as gold. When even Warren Buffet and Donald Trump are losing money on deals, you can be forgiven. What IS important is that you peg your money NOW to those assets that will float up faster and higher when the storm ends. Investing is all about stacking as much of the cards in your favor as possible. By knowing and investing around those who will benefit from the government stimulus packages, you will have an advantage. And by investing in tangible assets for the long term, you will become a successful contrarian investor.