Money advice: Investment options face a new crossroads

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In our latest Money advice article Dave Deruytter gives tips on how and where to invest in today’s uncertain world.

It is not easy to read the financial markets these days. There seem to be too many uncertainties on numerous fronts to see a clear path ahead. The complex international supply chains for goods are still not fully back to their pre-Covid efficiency. The microchip market is only slowly recovering to a more normal supplydemand situation. Microchips are used in smartphones, cars, home appliances – many of the bestselling goods of the moment.

Raw materials, particularly for car batteries, are highly priced. Energy of the fossil sort, gas and oil, are very expensive. The US is facing a “Great Resignation” wave of employees and workers, who are looking for a better work-life balance and more worktime flexibility. All of this is leading to inflation levels not seen in recent decades. The Russian invasion in Ukraine does not help, and nor does the complex US – China relationship. Industry voices predict that energy costs should stay high anyway in the coming decades. Salary inflation could be a different story in the medium term because, when economic growth stabilises again at around 2% in the Western world, and further digitalisation results in less need for employees and workers, a more balanced employment market should return.

Still, for the coming year or so it will very much be an employee/worker market, not an employer one. The war for talent rages fiercely. Some companies are even paying hefty welcome bonuses to attract top talent. All in all, inflation could stay high much longer than anticipated half a year ago. If economic growth remains reasonably good, interest rates should further increase, putting a burden on highly leveraged businesses. At the same time, bond yields should become attractive again. Given the high level of uncertainty, index-inked bonds may very well return to favour, at least in the coming years.

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Indeed, this is an almost forgotten asset class amongst private investors. The likes of insurance companies have always had some of those bonds in their portfolio. The advantage of index-linked bonds is that capital loss is very rare; but the same goes for capital gain. Thus, your investment return is essentially the interest income of the bond. That interest is linked to inflation. The higher the inflation, the more interest you will receive. Real estate prices also have a link with interest rate levels. Mortgages could become much more expensive in the coming years, leaving private buyers with less money to spend. The same goes to some extent for corporate investors in real estate. All of that should have a downward pressure on real estate prices.

My money advice for this month would suggest that a true safe haven does not exist in the financial markets, but raw materials, including gold and other precious metals, should stay in demand for the foreseeable future. Crypto assets are a special category of investments that not everyone really believes in. Still, there is a market here and when that market is historically low, there could be upward potential. Bear in mind however that the real value of what you buy is at least questionable. The same can be said for investments in art for example. An artist can be “en vogue” one day and “out of favour” the next, leading to substantial movements in the price for their works.

The adage “invest in what you understand” stays valid in any market circumstance. With the drive for ESG (environmental, sustainable and corporate governance) there should be an extra innovation wave coming to drastically reduce the carbon footprint of businesses and people alike, all around the globe. This stays a very interesting focus of attention for investors, whatever other outside pressures may be around. Look for the winners through the ESG score companies get from reputable scoring agencies, then evaluate their R&D or innovation pipeline.

The “Digital Revolution” obviously has not fully run its course, particularly not on the Artificial Intelligence (AI), Internet of Things (IoT), Big data and robotics side. Agreed, many companies, directly active in those fields, are already highly priced on the stock markets. Still, more mainstream businesses may take advantage of that digital offer to substantially reduce their need for employees through robotics or digitalisation, which could sharply improve their margins.

It is believed that focusing on a combination of sustainability and innovation could very well be the right bet for the next decade. Companies that read that combination well, plus implement it swiftly in their processes or products, should outperform the market substantially. In conclusion, we cannot escape the classical advice of diversifying our investments and to invest according to our investor profile and time horizon. If the offer sounds to be too good to be true, it typically is too good to be true. Particular attention should be given to returns above the market, in distant or difficult to control or understand markets or assets. In addition, intermediaries you never heard of, or who just popped up on the internet or social media, should be scrutinised with extra care. If something appears on your screen that you neither looked nor asked for, you should be particularly on your guard.

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