With the US raising interest rates, slow growth in China and continued monetary easing across the Eurozone and Japan, the world’s major economies are beginning to diverge.
The global investment landscape is also changing. Financial markets are more scrutinized than ever before, whether from individual economic indicators to the frequent murmurings of Central Banks worldwide. While these analyses drive up asset prices, they also increase volatility in the markets. The 24-hour news cycle and instant communication technologies encourages rapid fluctuations in the markets and nurtures a financial culture that focuses on short-term gains. For investors who are more interested in longer-term and sustainable gains, the bigger picture is what will matter most.
China, the world’s biggest economy in terms of purchasing power parity (second only to the United States in nominal GDP), is becoming a serious concern for investors. The country may well be slowing faster than expected and its transition from a manufacturing to consumption based economic growth model will further weigh on resource-dependent economies around the world. As the world’s third-largest exporter in the last five years, with the Yuan now deemed by the International Monetary Fund as freely usable currency, China has now become a fully-fledged actor on the global financial stage. There is even an increased accessibility for foreign investors to onshore markets.
Although equity markets across the Eurozone and Japan have shown strong performance throughout 2015, especially when compared the United States and the United Kingdom, the underlying reasons need to be considered. Assets across the Eurozone and Japan are still being supported by continued monetary policy easing, currency weakness providing a boost to exporters and a lower oil price leaving consumers with more disposable income. While growth around the world last year stagnated, the Japanese economy finds itself teetering on the edge of recession. The Eurozone is also becoming less of a combined force, with differences between core and peripheral countries (Germany and Greece for example) becoming more severe. Whether or not the continued monetary easing in Europe will provide the necessary boost to regional growth and inflation remains to be seen.
The investment landscape in the United States is looking rather positive in comparison, with the Federal Reserve rising interest rates for the first time in nine years. Forecasts for growth and inflation of 2.8% and 1.4% in 2016 respectively also remain strong, despite expectations of a correction. Tighter US monetary policy is a positive move as it represents the Fed’s confident outlook for recovery in the United States.
Alternatives are also proving themselves with resilient performance in recent years. The case for increasing exposure to alternatives (and within this agriculture) rests on a wonderful simplicity – investors are underweight in these assets, just at the time when returns generated from more traditional stocks and bonds are falling. Alternatives are now forecast to contribute up to 40% of revenues for the global asset management industry by 2020, despite comprising just 15% ($14.7 trillion) of total investment industry assets.
The absolute argument for agriculture investments is being boosted by rising consumer demand which together with shrinking levels of available farmland will inevitably drive the value of farmland and food prices higher. In the decade to 2012, the World Bank Annual Food Index rose by 73%, a compound growth rate of just under 7%. Exposure to agriculture can take several forms: through a dedicated fund, individual stocks or exchange traded products. A purer play would be through a direct investment in a plantation or agricultural business, smoothing out some of the volatility that may occur in the sector.