In memory of Dr. Andreas Höfert

Three long-term investment ideas

The European Union and the International Monetary Fund may set a new trend in forecasting. Instead of looking at the next six months, in the latest rescue plan for Greece they estimate the country’s debt-to-GDP ratio in eight years, in 2020: 120.5%.

I am thrilled by the precision of this number, especially by the 0.5%. Such a figure clearly has no meaning. We need only recall that eight years ago in 2004, any financial crisis was galaxies away from the personal radar screen.

Still, if we look beyond the usual six to twelve months of the average investor to the longer horizon, can we espy some trends, which though not certain, might yet unfold? If yes, then we might draw some conclusions on longer-term investment ideas. A word of caution: When I say “long term,” I really mean it! Hence, these investment ideas might be subject to vagaries and volatility in the short term.

Three ideas spring to mind, which I think should perform over the next decade: emerging markets, gold and equities offering high dividend yields.

The driving force behind emerging markets is the convergence phenomenon, which began for many large and important emerging countries in the early 1990s and is now in full swing. Convergence means that the wealth and income gap between poorer countries and the rich industrial countries is closing, and that the weight of emerging markets in the world economy should continue to increase from roughly 50% today to 75% by 2050, even with conservative growth assumptions. Note that the economic weight of emerging markets in the world was 75% before 1820, when the industrial revolution started kicking in. Moreover, while their current economic weight is around 50%, the market capitalization of emerging markets represents only 15% of the world market capitalization, which should give an additional boost to those growing markets. The rise of emerging markets also means that companies heavily exposed to them in developed economies should outperform those which are not.

Balance sheets of central banks are expanding – just like the universe. Since 2007, the European Central Bank has seen its balance sheet double, and that of the US Federal Reserve has tripled. The Bank of England has managed a three-and-a-half-fold increase, and the Swiss National Bank fivefold. The Bank of Japan has now also started quantitative easing measures. Many central bankers will claim that this huge money surge is under control and can be mopped up at the first signs of inflation, but I think we should be more modest and admit that we don’t know. In my view, inflation and money debasement will be the end game of the financial crisis which started in 2007. This is one means to reduce the huge indebtedness that the industrial economies are facing. In the expectation of such an environment, gold should go on performing.

With governments in industrialized countries deep in debt and interest rates extremely low, long-term government bonds have disappeared as a safe longterm investment with steady returns. Is there a long-term alternative when building portfolios? In my view, one alternative is equities of companies which have consistently delivered dividends, and will continue to do so because they are in businesses which are greatly impacted neither by the business cycle nor by extreme technological innovations. If dividend yields are currently higher than long-term interest rates, then if inflation materializes, equities are better suited than bonds to a maintaining purchasing power while at the same time delivering a steady income.