Between 1980 and 2000 just about everything that could go right for equity investors went right. Since 2000, just about everything that could go wrong has gone wrong. Going forward, the question is; how can a standard investment portfolio predominantly consisting of equities and bonds be improved? What kind of assets will perform well in the current and future economic environment, and should therefore form a part of any portfolio?
1980 – 2000: Perfect Equity Environment
If one had invested in the US equity market in the late 1970s and held that investment for the subsequent twenty years, that investor would have seen a return on investment of 12.8% per annum. The returns on the UK equity market were about the same. But what exactly made equity investment so attractive during this period?
In the late 1970’s in order to fight inflation bond yields started at a generational high. For the next twenty years, as central banks took more and more control of inflation moderation, bond yields dropped consistently, making the investment environment for equities increasingly interesting.
Labour markets were de-unionised and became subsequently more flexible. Global outsourcing provided an almost unending supply of effective and cheap global labour, unemployment fell, productivity increased and demographics were supportive. In addition to that oil and most raw materials were cheap; and household and government borrowing was generally low. As a result, investors saw fantastic returns from equities over this period and the“buy-the-dip” mentality became a legitimised investment technique.
The last 10 years: When it all went wrong
Since 2000 or so, returns on equities have been amongst the lowest on record.
Where did it all go wrong?
Over the past ten years central banks have constantly lowered interest rates at the merest hint of weaker growth. Governments and households were encouraged to borrow more and more and a mentality of spending today what one might earn tomorrow became commonplace. Now interest rates are at almost zero, governmental debt is spiralling out of control and the further stimulus of reducing interest rates even further is not an option any more.
In this situation, in order to boost growth governments and central banks turned to the unconventional monetary policy in the shape of quantitative easing.
Given this backdrop it is perhaps unsurprising that investors have been looking to other areas for better returns. Property has naturally soaked up a large portion of this demand with some investors favouring precious metals, art, classic cars and of course investment wine.
Investment Wine Market Correction
The investment market for a long period up to 2011 was very good as noted above. This was followed by an overheated market driven by astronomic pricing of the very good 2009 and 2010 vintages. In 2010 Chateau Lafite was released at £12,200 per case and in 2013 this had reduced to a still unrealistic price of £3,250 per case for a wine in a very average quality year. Following the disappointments of 2011 to 2013 for the growers and investors alike, there was great optimism and relief when the 2014 and 2015 wines were released at sensible prices and made for very good investments.