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Making the case for alternative investments
Low interest rates pushing investors to look for assets that could offer better returns
30 Nov 2020 | Tom King

In the wake of the massive government stimulus packages to counter the effects of the Covid-19 pandemic, interest rates are likely to stay close to zero in the foreseeable future.

At a recent policy meeting, the Federal Reserve confirmed as much when they pledged to delay tightening until the US gets back to maximum employment and 2% inflation, both ambitious targets.

The low interest rates are motivating some investors to look at increasing their exposure to alternative investments. So what are the assets that could be added for a more diversified portfolio?

Gregor Gregersen, founder of Singapore-based company Silver Bullion, believes gold and silver offer an excellent way to safeguard wealth over the long term while remaining very liquid.

“People should view these metals as a long-term liquid alternative to the US dollar rather than as a short-term speculative investment. The dollar is a depreciating asset which has lost 3.2% in purchasing power on average per year since 1913,” Gregersen says. “On the other hand, gold has appreciated 4.2% per year over the same period. The Federal Reserve’s monetization of US debt with trillions of printed dollars will further accelerate dollar holders' losses. The dollar is a long-term loss guarantee; buying gold and silver is an obvious way to protect your wealth, regardless of recent vaccine and election news.”

Reinforcing his argument, Gregersen says the days of the dollar's reign as the preferred reserve currency are numbered. “The US dollar has been the reserve currency for the past 75 years, and history has shown that reserve currencies last for about 75 years on average,” he notes.

As liquid assets are of more interest, Sam Mudie, director of Southeast Asia at Cult Wines, points to the potential of fine wine.

The Liv-ex 1000 (The London International Vintners Exchange) had produced a 1.3% year-to-date return at the end of October, rebounding from a modest decline in the first half of the year when coronavirus volatility peaked. Mudie thinks this recent rebound has room to run, meaning investors can still find enough reason to buy fine wine heading into the new year.

“After demonstrating remarkable resilience during a tumultuous 2020, we are excited about fine wine’s investment potential heading into 2021. One reason why we believe it is not too late to add to portfolios is that prices have only just returned to levels seen in September and October last year,” Mudie says.

Pandemic’s impact

However, ongoing concerns over the pandemic’s impact on the hospitality sector has limited the rebound in some regions.

“Although we recognize the ongoing uncertainty stemming from the pandemic, the recent positive vaccine developments provide hope that the hospitality sector may normalize over the course of 2021,” Mudie says. “This would unleash further performance potential for fine wine investors.” 

He says the removal of uncertainty from the US elections could also boost the fine wine market, especially if a new Biden administration ends or eases the trade dispute with Europe that has seen wines of up to 14% alcohol from France, Spain, Germany and the UK hit with a 25% tariff.

“While it is uncertain if and when this will be repealed, the threat of higher tariffs on European wine should disappear as trade friction eases. This should boost US demand and support fine wine’s growth potential into 2021,” Mudie adds.

Real estate, a perennial favourite among Asian investors, is another asset class worth considering. Says Andreas Trumpp, head of research, Europe, at Savills Investment Management: “The even lower-for-longer interest rate environment leaves investors with less choices to meet their return targets. Given the challenges facing financial markets, we believe investors need to look at alternative asset classes with more attractive risk-adjusted returns.”

Real estate, he points out, has the characteristics and fundamentals to take advantage of this secular shift in capital markets. “The stable income, low volatility and relatively attractive risk-return profile of real estate strategies will help ensure that they see rising demand from both income-seeking investors and those aiming to capitalize on future capital value growth after the current phase of repricing.”

According to the Savills Investment Management Outlook 2021 report, investors are holding back their European real estate allocation plans in the short term as Asia looks more appealing. Their top picks include high-quality assets that offer stable income streams such as the Japanese multi-family residential sector.

‘Cash is trash’

The prolonged docile interest rate environment may well mean that alternative asset allocation will continue to grow in Asia.

Silver Bullion’s Gregersen thinks we are about to enter a decade of monetary and financial turbulence, driven by the recognition that most countries will try to print away their debts and unfunded liabilities.

He cites Ray Dalio, who recently coined the phrase "cash is trash" and has been writing extensively on the dangers of holding US dollars and the need to diversify into gold and silver. 

“The popularity of precious metals is set to skyrocket, and prices will go much higher as faith in the dollar falls. We are still early in the gold and silver bull markets, and demand for them will only increase henceforth,” Gregersen says.

“It might be a bumpy ride on the way to the top, but it is better to diversify into these metals now rather than later.”