It is a bewildering time for private investors. Financial markets are being wrenched this way and that by Covid’s earth-shaking impact. Central banks have pinned interest rates to the floor, enabling governments to cushion the economic damage by borrowing and spending as never before. In the US, especially, equity markets are surfing a tsunami of central bank stimulus and optimism about the world to come.
For people seeking a worthwhile income from their investments, low-risk options are thin on the ground. Speculators, meanwhile, are in clover.
Anyone who had a few pounds in Bitcoin a year ago has roughly trebled their money, even allowing for the digital currency’s slide from its recent high above $40,000. The pullback will tempt some to wonder whether it is not too late, after all, to get into Bitcoin. Recently, some mainstream institutions have started buying Bitcoin, so it will probably become a more common part of professionally managed portfolios over time. But even though institutional buying might help support Bitcoin’s price, this will never be a game for the fainthearted.
Equity markets in the US appear euphoric. The veteran fund manager Jeremy Grantham believes current conditions “will be recorded as one of the great bubbles of financial history, right along with the South Sea bubble, 1929, and 2000.” The Financial Times recently reported that 79 US-listed companies had seen their shares double in the past three months and were now valued at more than 10 times their annual turnover. The number of such companies has rarely reached double figures over the past decade. In the dotcom bubble it hit 120.
Revenues and profits at the world’s biggest tech companies are surging as the crisis forces us to use their services even more. Companies including Microsoft and Apple, which recently announced its first quarterly revenues of more than $100bn, are exhibiting extraordinary momentum. Tesla’s rise is dizzying.
So-called value investors, including Grantham, wince at the high prices that fast-growing companies command. His firm, GMO, points to one group of shares that still offers the prospect of reliably decent returns over the next seven years: emerging market companies that are modestly valued in terms of their earnings and assets. Several Exchange Traded Funds are available that hold broad baskets of these shares.
UK markets, too, look rather less exuberant than the US. Rising unemployment and small business failures are heading our way. High street retailers, hospitality and travel companies have all been ravaged by lockdowns and social distancing. Recovery—for those that do—will be slower than many hope. The continuing battle against emerging Covid variants is likely to mean that investors betting on a recovery in international travel later this year will be disappointed. A rebound in holiday bookings for 2022 looks more realistic.
The sale of Debenhams to Boohoo, the online fashion retailer, and the purchase of Topshop and other high street brands by Boohoo’s rival, Asos, makes the dominant trend in retail impossible to ignore. E-commerce companies have seen their development hugely accelerated by the pandemic. There is no going back—online retailing will continue to grow and there will be many more investment opportunities in this sector.
Similarly, huge sums are pouring into medical research and healthcare and these markets are set for sustained growth. The digitisation of healthcare—including remote patient monitoring and the use of artificial intelligence to aid clinical decision-making and improve the efficiency of drug trials—is a long-term trend that is still in its infancy.
But of all the trends that have gained momentum over the past year, the world’s inevitable transition to zero-carbon energy is surely the mother of them all. Again, the commercialisation of clean energy technologies including “green hydrogen” is just beginning. This represents a vast, multi-decade investment opportunity that we must all hope will accelerate from here, especially with a new US administration.
But the energy transition is not only significant for equity investors. Renewables have also become a favourite area for investors seeking higher yields than bond markets now offer. There are numerous UK-listed investment trusts that target yields of 4 per cent-plus from portfolios of renewable energy assets. These trusts sit at the heart of the “alternative yield” sector: funds that specialise in everything from infrastructure and social housing to real estate loans and music royalties. A basket of these “alternative yield” trusts is a medium-risk option that has clear merits for income seekers.
The investment landscape emerging from the Covid-19 pandemic has shifted enormously. The changes in our daily lives forced on us by the virus have upended some businesses and turbocharged others. In this unfamiliar environment it is natural to feel disorientated. But for all the destruction, the past year has brought some major, long-term opportunities into sharper focus. The most important of them will be running long after the desperate effects of coronavirus slip from our news bulletins.
This article is featured in Prospect’s new “The Road to Recovery” report, published in partnership with Lloyds Banking Group, the Government of Jersey and Jersey Finance. Read the full report PDF here.
