Investors, or their fund managers, may need to rethink the merits of some offshore investments that have served them well in the past decade but are unlikely to do so in the decade ahead, Marriott Asset Management says.
Duggan Matthews, an investment professional at Marriott, says two big factors that will distinguish the past decade from the one ahead are rising interest rates in the United States and China’s transition from a production-driven to a consumption-driven economy.
Rising interest rates in the US will have a profound impact on markets, because the ability to earn acceptable levels of interest on cash in the bank is likely to put upward pressure on bond yields for years to come. Therefore, it is likely that the global bull market in government bonds has ended, Matthews says.
China’s economy has grown by about 10 percent a year for the past 30 years, largely driven by massive spending on infrastructure, he says. During this period, China’s consumption of the world’s metals increased from about 10 percent to over 50 percent. Over the past five years (since 2010), China consumed more concrete than the US did throughout the 20th century.
The huge demand for commodities to upgrade property, industrial buildings or equipment resulted in commodity prices skyrocketing between 2000 and 2010. Investors who had direct exposure to emerging markets that are rich in natural resources, as well as a high allocation to mining companies, did very well during this period, Marriott says.
However, China, the second-biggest economy in the world, is transitioning to a more consumer-driven economy as the demand for new roads, factories and housing slows. This has resulted in a fall in the prices of commodities used to create infrastructure, and a sharp decline in the prices of mining companies and the currencies of countries whose fortunes are tied to commodity markets, Matthews says.
With the oversupply of almost all raw materials, investors should not in the years ahead expect superior returns from mining companies and emerging markets whose economies are based on natural resources, he says.
Marriott believes that the investment landscape over the next decade is likely to be shaped by global consumerism.
Although China’s infrastructure spend may be slowing, its household consumption is increasing as more and more people enter the middle class.
Matthews says Marriott is therefore of the view that the best and lowest-risk investments are established multinational companies that sell consumer goods to most countries. Although listed on first-world stock exchanges, these businesses transcend geographic boundaries and will benefit from the expected consumption boom in the years ahead.
These companies sell goods and services that are part of consumers’ daily lives and will therefore fare well in either a recession or growth phase of the economic cycle. Their brands are strong and trusted, and they have footholds in emerging markets.