9 tips from Peter Browns talk on investing opportunities and challenges in the current climate
We held our first webinar on Tuesday for the Smart Money Series with Peter Brown of Baggot Investment Partners giving his insights on the potential economic and investing outlook for the next couple of months. I compiled 9 quick points if you missed it (he'll also be back on Tuesday 28th - make sure to register onsite). Please note these are just my own notes, I am not a financial adviser. There will be converging and diverging opinions out there to Peter’s view but one thing all investing and economic commentators seem to agree on is that no-one is certain when the crisis, restrictions or changes to our way of life and economy may end.
Underlying issues: There were economic problems coming around the corner before covid19 reared its ugly head; these included overvalued US companies, Brexit, the Italian economic stagnation since 2009 and recurring issues in France highlighted by the disruptions caused by the ‘Gillet jaunes’. Add to that a slowdown in China and Trump’s Trade Wars.
US stocks were overvalued: there was a growing trend amongst many large US companies to borrow the cheap money which was swilling around for the last couple of years and use those funds to buy their own company stock which artificially inflated the share price. This on some occasions was done because performance bonuses were contingent on hitting a share price target. Commentators in January were arguing that there were some fairly frothy valuations for S + P 500 companies as per this MarketWatch article which argued that “P/E ratios are some 80% above the long-term norm,” and they argue this may have been caused by share buybacks designed to increase earnings per share ratios.
Shake up your pension: a significant portion of us will have company pensions which are comprised of S + P stocks, dollar exposure and European bonds. Peter suggested this is exactly the mix you should avoid right now because S+P stocks are still overvalued, The debts that were incurred to continue strategies such as the aforementioned company share buybacks, have left some companies with considerable debt which they will struggle to service with low earnings. The multi-year appreciation in the dollar looks overdone also. As we get an exit from dollar stocks and the Covid situation hits badly in the US we are likely to see a flight of capital and the dollar fall. That could be as much as 20% in the coming years. Add to that the safe part of these portfolios, namely bonds, offer no return. The impact means a large part of your pension portfolio will yield zero to negative in some cases, yet you are charged fees on the total portfolio. Without re balancing in to other asset classes these standard portfolio templates will not perform for years into the future.
Emerging markets: Following all this stimulus the market will be awash with liquidity. This money needs a return so the hunt for yield will be frantic. Emerging markets could offer an alternative location for investing instead of S+P 500 stocks. As Lazard very recently commented in a report. ‘’Emerging markets equity valuations, particularly value stocks, have come down to extremely low levels and we believe pent-up demand could lead to a re-rating if the spread of the COVID-19 virus is contained relatively quickly.’’ Gold and silver offer serious opportunity as well.
Flight risk: Peter suggests avoiding airline and banking stocks as just because they have decreased significantly in their share price doesn’t mean they offer value. Some commentators believe in the long term, certain stocks within these verticals offer value and that companies such as Ryanair with strong balance sheets, significantly more ownership of their fleet than their competitors and a robust overall business may prosper as competitors fall away post crisis. But Peter feels it is too early to evaluate the hit to the travel industry, we need to get some feel for the length of the global lockdown first.
Bricks and mortar: perhaps not unsurprisingly Peter suggested if you are looking to buy a standard investment property to put this on hold and wait, it is unlikely that house prices are going to be higher in the short term. The future is uncertain for several reasons which include not knowing what will happen with inflation considering so much money (Central Bank and Government stimulus) is being pumped into the system. Also, if the value of properties falls significantly (10-20%) we do not know whether developers will continue to build as their margin will be eroded. This may exacerbate the supply and demand problem that existed prior to Covid. However, if you are looking to buy a family home, and it's not for an investment he suggests the emotional aspect of the decision outweighs any move in the price short term. A family home is a decision about nesting and rarely about investment values.
Absence of dividends: We can't rely on dividends in this current climate from companies who need to shore up their balance sheet or are experiencing a drop in revenue. This affects share price and certain equities people may have previously purchased for their ROI in terms of dividends, will no longer be attractive. ‘Invest with your eyes’ - work out the business that will survive and grow in this new world and the ones that won’t.
De Giro: If you are looking to invest in shares, ETF’s or bonds, I don’t think anyone out there offers a lower price to trade than De Giro. You’ll have to get in line though as it seems they have a long waiting list to join right now. Make sure to read the small print for any platform you invest in in terms of regulation and protection.
Social Housing: Purchasing a property and renting it to the local authority for Social housing is a very popular investment opportunity. While the housing market does seem to have an uncertain outlook, social housing rent is guaranteed and managed by the local council from the minute you hand over the property. You can achieve a 5%+ return for up to 20 years, inflation protected. This option is very attractive to cash depositors and pension holders both pre and post retirement.
Finally, Baggot Investment Partners specialises in personalised investment strategies using the best global products. Peter is delighted to engage with anyone who has an interest in investing either with cash or through a pension structure in amounts over €100k . Peter can be contacted at pbrown@baggot.ie
He will also be back for our webinar on Tuesday 28th of April, for which you can register here.