Invest / 5 March 2019, 3:00pm / Frederik Balfour, Suzanne Woolley, Edward Robinson and Simone Foxman
In the second installment of our quarterly look at ways to invest that million you just made by selling a property or betting big on China’s stock market, our panel of experts provides a diverse range of options, from Brazilian oil to New Zealand vineyards.
As always, the appeal of these investments depends on your risk appetite, but the members of our panel are a lot more upbeat than they were three months ago, and they offer such truly out-of-the box alternative investments as U.S. Civil War bond certificates and hand-crafted rocking chairs.
When I first started investing in emerging markets in 1987, they accounted for just 5 percent of global market cap, and today it’s about 40 percent. Our funds could only invest in six markets, and today it’s about 70. That makes diversification so much easier. Now is the time to buy in emerging markets, where we are seeing a terrific recovery.
Brazil is up 40 percent from its bottom, but there is still upside as every sector is going to benefit from a reform-minded government. There is a sea change in the whole political environment in the wake of scandals still being prosecuted. Take Petrobras, one of the world’s largest oil and gas companies, which is changing its whole system top-to-bottom to ensure corruption won’t happen. All companies are aware of corporate governance and making sure they are on the up-and-up. This is very positive for foreign investors. With more law and order, the consumer sector will do particularly well.
If you like technical analysis, many of the markets had a double bottom. There are still low price-to-earnings and price-to-book ratios. PE valuations in Russia are only five times; that’s below even Pakistan. The Russian market looks very, very cheap.
Based on fundamentals, we like the consumer-oriented companies in India, whose economy is looking to 8 or 9 percent growth. Software is big in India, and we like medium-sized companies in traditional industries adopting internet solutions. India’s byzantine distribution system is changing dramatically because of technology, tax reforms and the elimination of tariffs between states within the country. Despite the challenges facing them, Amazon and Walmart are forcing local companies to raise their game.
There are a lot of bad loans at big banks, and the government will bail them out and recapitalize them. That’s going to weigh on the currency. We are going to see a weakening in the rupee because of the coming election and the necessity for the ruling BJP to give farmers goodies. But this weakening is temporary, and the central bank has been good in terms of stabilizing the currency over time. I would put 30 percent of emerging markets money in India.
We also are looking at winners from the China-U.S. trade war. Vietnam stands to gain as manufacturing is relocating there from southern China. The same is true elsewhere in Southeast Asia. Mexico, which reached a trade deal with the U.S. and Canada last year, is also a beneficiary. Global trade is like a big balloon: Push one place, it goes out in another.
In completely bombed-out countries like Turkey, there will always be opportunities. The losers are the guys in debt. Those not heavily in debt will be winners, get market share and make acquisitions. It is still a manufacturing powerhouse that sells to Europe. The Turkish lira falling 70 percent is excessive. Things will be more stable and maybe have some upside potential.
The other way to play: My alternative investment idea is old bond certificates, for which there is a small but passionate following. I like the ones that capture a moment in history. For example, during the U.S. Civil War the North issued two-year interest-bearing notes with a coupon rate of 6 percent in 1861 and a face value of $50. One sold in August at an auction of part of the Joel R. Anderson Collection of U.S. Paper Money for $1.02 million, more than double its pre-sale high estimate.
Master of Wine at Heller Beverage Consultancy
As global warming produces hotter temperatures and more severe weather patterns, the wine industry is particularly vulnerable. Parts of California and Australia are particularly threatened, forcing growers to look for cooler climes by planting at higher altitudes or on cooler coastal-influenced sites, but fire risk and soil salinization are further challenges.
Because of its unique climate, New Zealand looks set for a slightly smoother ride. Not only are its summers cooler, but its vineyards’ proximity to the sea (the farthest point inland is only about 120 kilometers from the Pacific Ocean to the east and the Tasman Sea to the west) will help temper the effects of climate change. The closer you are to the water, the stronger the moderating effect of the ocean.
At the same time, New Zealand is trying to upgrade more of its wine production from ready-to-consume bottlings to fine wines that have longevity in the bottle and command a premium. A handful of wineries have started producing premium sauvignon blancs, but the potential for higher-end chardonnay is just starting to be explored on a larger scale.
In 30 to 50 years, both Australia and California may have limited sites available for the production of top cool-climate chardonnay, which is steadily gaining in popularity worldwide. Thus, I would advise picking up New Zealand land not currently under cultivation, or currently considered marginal because it’s too cool or up on hillsides.
Despite New Zealand’s 2017 law that restricts foreign investment in real estate, it is still possible to buy up to five hectares (12.4 acres) of land at a time if it is designated for horticulture. A typical parcel of unplanted land of that size, located on the fringes of top wine-producing regions Hawkes Bay and Marlborough, might only cost you $250,000. For another $750,000, you could plant and cover a few years of farming and contract wine-making costs.
Remember that Le Montrachet, the world’s most expensive cool climate chardonnay that sells for as much as $8,000 a bottle, is produced by Domaine de la Romanee Conti on just 0.68 hectares. The land I propose is far enough from urban areas that you won’t have to compete with real estate developers to buy it.
The other way to play: I love vintage fashion, especially timeless creations by Emilio Pucci from the 1970s that still look contemporary today. While you might find one of his dresses for a few thousand dollars online, celebrity clothing can go for a whole lot more. The Hubert de Givenchy black satin evening gown Audrey Hepburn wore in the film "Breakfast at Tiffany’s" sold for 467,200 pounds ($609,000) at Christie’s in 2006. A one-of-a-kind piece like this tends to appreciate.
Chief Investment Officer, Wilmington Trust
We’re getting to the point where distressed-debt investing will become very active. We’ll start to see some companies have a tough time refinancing debt, and that’s when some private equity firms use a loan-to-own strategy. They originate loans with terms that allow them to convert the debt into equity if a company defaults. The strategy returned 15 to 20 percent historically.
An opportunity we offered clients recently was a fund that buys nonperforming loans held by European banks. It’s politically very difficult for banks to foreclose on loans, which range from residential mortgages to debt secured by factory equipment. In many cases, the borrower ceased paying interest due to financial stress, but also knows the bank won’t foreclose.
A private equity firm can buy loans at 60 to 70 cents on the dollar and immediately say to the borrower: “Pay me or I’ll foreclose.” Usually, borrowers buy the loan back at 95 to 98 cents on the dollar. Net returns could be high teens. Clients had to make a $250,000 minimum investment and be qualified purchasers with at least $5 million in other investments.
You wouldn’t want to get into this right before a major economic downturn in Europe, but a relatively run-of-the-mill recession wouldn’t be a big deal. In many cases, loans are bought and sold within 12 to 18 months, so a PE firm can have a good feel for the economic outlook when they buy them.
The other way to play: I collect the furniture of Sam Maloof, one of the primary exponents of American mid-century modern furniture. His hand-crafted pieces use beautiful wood joined without nails or metal. He’s best known for his rocking chairs. The White House arts and crafts collection has one, and so does the Metropolitan Museum of Art. I think his low-back armchairs are actually more beautiful, and are incredibly elegant. They sell for around $15,000 to $20,000.
Managing Director at Canterbury Consulting
One of my themes for this year is the future of food. People are caring more about what they’re eating and putting in their bodies, so I’m looking at food startups.
Investing in tech startups can be very capital-intensive, and it takes a long time to build something that’s very scalable. “Instant overnight successes" only took 10 years! But investing in food startups is different. The big consumer packaged-goods brands don’t innovate very effectively, so they’re looking to pick up new brands. Venture capital firm Obvious Ventures has outlined five forces driving food companies it funds: Products need to be accessible, organic, plant-based, local and fresh—though a single product may not hit all five.
There are two ways to get exposure to this trend. You could either invest in venture funds like Collaborative Fund or Obvious that have allocations to consumer brands, or you can try to invest directly, like I’ve done. I’ve found that once you discover one brand, more start coming out of the woodwork.
These new companies are able to compete against established brands either by selling through Amazon.com or going direct to the consumer through companies like Shopify and Ordergroove. They don’t have to buy all the equipment necessary to make their products; they can subcontract that out to external facilities. And you can get almost-free advertising these days by using influencers.
One of the nice things is that you don’t need a tremendous amount of capital to invest—from $100,000 to $500,000 per brand—and the time required to build a scalable business is much shorter than for other startups. Valuations might be $3 million to $10 million at seed and angel fundraising stages. Big brands are keen to pay $100 million to $200 million, or even more. It’s a nice return on capital, and I’d rather have people eat great, clean products instead of sugary, chemical-filled products.
The other way to play: My recommendation is esports, and I’d play it two ways. I’d spend 40 percent of my $1 million investing in picks and shovels—game-agnostic infrastructure that supports gaming. Some clients and I just made an allocation to a company called Discord, a chat platform for gaming with over 200 million users. The other 60 percent I’d distribute among three teams. Interesting names include Cloud9, 100 Thieves and Seoul Dynasty. The most valuable team, Cloud9, is worth $310 million, but you can access smaller teams at a much lower cost. There are also funds you can invest with. Ultimately I believe there will be tokenization and distributed ownership of these teams. The size of the industry already is incredible to me, and we’re just getting started.
Chief Investment Officer, Private Banking, Union Bancaire Privee
Whenever investors think about growth, Japan rarely comes to mind. It’s easy to see why: The real estate bust of the 1980s left the economy stagnant for decades, and big Japanese corporations didn’t have the dynamism of their counterparts in the U.S. But Japanese society is being reshaped by something new—the unprecedented entry of women into the workforce. Almost 53 percent of Japan’s labor force was female last year.
This reminds me of the big changes in the U.S. labor market in the 1970s, when the decline of manufacturing in the Midwest, wage stagnation and unemployment drove women to go out and get jobs. All that extra income stimulated the American economy, and I believe the same thing is going to happen in Japan. Think about all the ways this shift will reverberate in the economy: Families will need more child care, women will have to buy more workplace apparel and households will even eat out more when both spouses are super-busy at work.
So I’m advising clients to play this megatrend by unearthing small and mid-cap stocks that can rapidly grow as these changes unfold. That includes employment agencies that provide temporary, part-time and permanent workers, apparel makers and retail enterprises that cater to working women, and restaurant and leisure activity enterprises that thrive on discretionary income. I know it sounds hard to believe, but Japan—a market that’s so often overlooked—may finally be exciting, if you know where to look.
The other way to play: Music royalties are a really nice way to capture yield in a low-interest-rate world, and the best part is that this investment doesn’t move in lockstep with the rest of the fixed-income world. Music royalties move to the, ahem, beat of their own drummer. This isn’t exactly a new asset class; back in the late ‘90s, David Bowie issued bonds backed by revenue from his music. Investors have been buying publishing rights to hit song catalogs for ages. What’s different now is that investors don’t have to buy Lennon & McCartney tunes.
With the advent of streaming and the explosion of shows on Netflix and Amazon in need of soundtracks, even obscure songs can produce returns. There are investment trusts that buy the songs of platinum-selling artists and breathe new life into them in ads, TV and film. You can also buy song rights from the composers, rather than the recorded music. If you’d rather go it alone, you can bid for music rights put up for sale by their owners on online music exchanges that have emerged in recent years.