Paul Rothschild, chief financial advisor at BlackRock Asset Services, explains how financial assets will reach tipping level this year following the disruption of the pandemic. Things to expect: uncertainty, diversification and asset protection
During the last decade, we’ve experienced a forced economic market. Inflation rates have been maintained at an all-time low, causing an overvaluation of assets such as shares, real estate, and pensions.
Prices have reached higher-than-ever levels in recent times, prompting investors to ask the question: are we experiencing an asset bubble that’s about to burst, or is this just a booming time for assets?
The answer is not a simple one. The pandemic has added a layer of complexity and uncertainty to the usual cycle of global markets.
We’ve been forced to transition to a new economic environment that feels uncertain and, in some ways, too fast. The world is undergoing seismic changes, such as the breakdown of traditional business boundaries and the rapid acceleration of digital technologies. These changes may, over time, replace the need for human resources.
Such changes have been on the horizon for a while. However, the pandemic caused ripples throughout the global economy and business landscape, producing a new economic environment that we’re not used to.
Will asset valuation decline? If so, how and when? How drastic will these changes in the market be, and how will that dictate how quickly we’re going to get a revaluation of assets? Will we see the asset bubble pop due to a drop in demand, or will we see a more gradual and controlled decline of asset valuation?
Inflation is shifting in a way that investors consider abnormal, while anxiety is increasing among the high-net-worth individuals (those with $1-$30m+ of investable assets).
CNBC recently commissioned a survey from Morgan Stanley targeting E-Trade investors. The data shows that 52 percent of investors have not been this worried about the wider economy and their stock since the second quarter of 2020 with the initial Covid-19 crash and economic shutdown.
Optimism is also decreasing, with many concerned about the potential trajectory of the economic recovery in the next year. Just under three-quarters (72 percent) of HNWI in Q2 2021 reported that inflation levels will be transitory and calm down.
However, that has dropped to 53 percent since then, indicating doubt and a lack of bullishness.
According to a recent survey by the Financial Times, 60 percent of economists, asset managers and strategists believe that asset purchases should be halted now to avoid an inflation fire.
Elevated inflation isn’t confined to the US but appears to be at its most concerning there. Investors fear that a recovery driven by consumption will push economies into overdrive. Central bankers from Europe on the other hand, continue to insist this could be transitory.
Overall, signs point towards a varied economic recovery benefiting some sectors over others. However, the spectre of new variants is never far away, potentially interrupting this at any point.
Most advanced economies are predicted to reach pre-Covid levels of GDP by the end of 2022. Annual global growth rates for 2021 are expected to be around 5-6 percent and just over 3-4 percent for 2022.
However, for some countries, it’s not as clear cut. The UK has so far experienced a relatively rapid economic recovery but is still threatened by regional imbalances and sector specifics.
UK businesses face a sizeable economic adjustment, with consumer spending patterns continuing the trajectory they began during the lockdown. The economy and the future look very different for businesses compared with pre-pandemic predictions.
When you look at and combine all the new and proposed UK trade deals in the offing, they are destined to generate less than the loss in trade experienced with the EU.
In the UK, inflation is expected to increase sharply, peaking at 4.6 percent by April 2022, according to CPI (Office of National Statistics Consumer Price Index).
However, any further recovery is contorted by sector concerns. In some key areas of the economy, demand exceeds supply. In others, it’s lagging. Growth momentum will fade throughout the winter, meaning that a sustainable recovery is unlikely.
Household consumption is still 10 percent lower, while businesses in the transport sector expect sales to reach about five percent higher for the long term. Hospitality is expecting a long term four percent fewer sales.
For investors during the pandemic, there has been an increase in corporate deal making due to attractive valuations. However, the UK market is now trading at the lowest forward price-to-earnings level in 20 years. The market also offers the highest dividend yield globally for dividend yields.
Property prices boomed during the pandemic, totally contradictory to initial predictions from Savill´s (predicted a fall of 10 percent) and Knight Frank (7 percent). The Bank of England predicted that house prices in the UK would fall by 16 percent due to Covid-19.
Right now, the average house price outweighs the average income by eight times. There are warning signs from history showing us that this level of price outstripping earnings has happened twice over the last century – once at the beginning of the twentieth century and just before the economic crash.
Should action be taken to ensure there is a decline in real estate valuations – this cycle could be avoided.
Between June and August 2021, approximately 1.3 million people lost their jobs in the UK. This is tempered by record numbers of job vacancies. There is a mismatch between the industry sectors with high vacancies and high unemployment, which suggests a strong need for movement of labour.
Globally, businesses are forced to deal with rapid and unprecedented transformation. Enormous challenges face the whole economy and system: climate change, shifting political power, economic challenges and the still profound threat of another pandemic mean that businesses must adapt now.
Business operations are evolving, with businesses looking for new ways to reduce environmental costs, build sustainable business models, ensure flexibility and technological advances are embraced and more.
Finding a balance between emerging tech and human workers is another challenge. Artificial intelligence, automation, and the digital advances of the last few years mean this is now a question of not if but when. Employers then must work out how to incorporate this into their plans.
Flexibility is now absolutely vital for any business success. Remote working, the gig economy, and a transient workforce are now the norm while traditional full-time roles could be phased out.
This will lead to flatter, more agile organisations with less need for a strict hierarchy. Business leaders must make way for these changes, particularly with the need to recruit from a largely remote and more flexible workforce.
How businesses generate funding and investment is also changing. New mechanisms, cryptocurrencies, initial coin offerings (ICO), crowdfunding, tokenisation and SPACs (special purpose acquisition companies) are replacing the old vanguard. The new direction is driven by decentralised financial systems via blockchain networks and peer-to-peer networks.
Governments will need to make key decisions as to whether these will disrupt their central financial systems or whether they can co-exist, the outcome of these decisions will have a major positive or negative impact to a nation’s financial systems and to the value of decentralised financial systems.
In short, uncertainty will continue, and inflation will likely rise. And while house prices will eventually correct themselves, when this will happen depends on the decisions made by Governments and their national banks in 2022. Economists and experts are divided on what to expect this year – asset protection, portfolio diversification and flexibility have to be the key watchwords and prudent actions for all investors.
Paul Rothschild is chief financial advisor at BlackRock Asset Services, is a real estate, banking and finance expert, a UAE government advisor for regional investments and CEO at PLDD Platinum Luxury Design & Development.