By Diane Harrison
We’ve reached that time of the year again, when prognosticators are producing all manner of publications centering on how the 2019 investment landscape will likely take shape. Robeco issued a white paper in October, ‘Turbulence Ahead: Investment Outlook 2019,’ in which they state ‘…next year we expect the markets to have two faces. The bright economic picture is expected to be overshadowed by concerns that this long bull market will soon end; think rising interest rates, protectionism, Italy, Brexit. Investors would be well-advised to prepare for these concerns becoming reality. ‘
On one hand, investors are energized by the stock market’s strong moves over 2018, but concerned over the growing likelihood of higher interest rates, tariff impacts, and other hallmarks of a busier market scene. In alternatives, 2019 is likely to provide opportunities to reinforce the value add of the sector during a more volatile market. Preqin’s October 2018 survey report, "A Portfolio of the Future" compiled data which suggests that 84% of investors plan to increase their allocation to alternatives over the next five years. Their chart below illustrates just where investors are most interested in allocating their alternatives choices in the coming years: namely into private equity, private debt, real estate, and infrastructure. As investors plan to ramp up their overall commitment to alternative investments in the coming years, several segments or themes appear to take prominence in their view. The private equity and debt, hedge funds and infrastructure seem to be of most interest to investors for a variety of reasons centered primarily on the twin tenants of diversification and non correlated return characteristics. While overall, alternatives are destined to garner more attention from investors as a whole in 2019 and beyond, let’s take a closer look at some alternative themes that seem likely to play a greater—or lesser—role in the near future.
ENERGY INVESTING IS SET TO GET ENERGIZED
Oil and natural gas investments look compelling for 2019. The popular financial website Motley Fool ran an interesting piece in September, ‘Oil and Gas 2019: 3 Investing Themes You Don't Want to Miss,’ in which one of the Motley Fool energy analysts, Tyler Crowe, stated: The rapid declines in costs associated with building an LNG (liquefied natural gas) export facility and the recent discoveries of prolific gas reserves have made LNG a much more attractive energy option for high demand places like the Asia-Pacific region, especially those regions where pipeline access is limited. In 2017, LNG demand grew by a spectacular 7.2%, which is unheard of in the fossil fuel industry. The U.S. has emerged as one of the places that will benefit immensely from the boom in LNG. Shale gas is so cheap in the U.S. that it is a preferred supplier even though transportation costs to Asia are higher than other big players like Australia.
DEAL AND DOLLAR FLOW CONTINUES TO DO AN END RUN
The boom in 2018 in private credit deals is poised to continue in 2019. AIMA’s latest paper, ‘Financing the Economy 2018’ discusses their findings: Private credit managers are supporting the economy in new ways, growing in areas like real estate finance, trade finance or asset-backed lending. It is also apparent that this growth is increasingly fuelled by allocations from institutional investors, with pension funds making up the largest group. This is a significant vote of confidence in the sector and a sign that private credit managers have established themselves as a credible mainstream option for investors. In addition, the always intriguing private equity arena responsible for launching the next ‘New Thing’ looks alive and well heading into 2019. Investors looking to expand their base of direct deals are likely to increase their evaluation of and investment into both debt and equity offerings from the private sector.
THE FAST BUCK
Damn the torpedoes and full speed ahead! The stock market’s dizzying gains over the past couple of years has ignited the Gordon Gecko Greed Is Good mentality in an unhealthy amount of investors. If plain old equities aren’t tantalizing enough, there is the volatile growth of crypto currencies, and a host of new funds centered on the variety of crypto currencies continuing to come to market. While several of these are more esoteric than optimal for most investors, there’s no stopping the growing investor interest in exploring and participating in this new slice of the financial markets. The next several years will undoubtedly see more regulation and market structure centered on the crypto space. For that reason, the crypto marketplace bears watching, if not wholehearted participating, in 2019.
THE DO-GOODER FUNDS CONTINUE TO STALL
Morningstar predicted this trend of stasis at the end of 2017 in their blog post "5 Investment Themes for Advisors to Watch for in 2018," when they suggested that: ESG is not yet a growth story. Why? First, the cohort that expresses the most interest—millennials—have the least to invest. Second, the most natural place for millennials to begin to invest—their company’s 401(k) plan—is unlikely to offer an ESG option, although a few ESG target-date series have popped up. Finally, there just are not enough good options in the market, especially passive ones, to satisfy investors’ very specific values-based-investing needs. Some of these strategies do exist, but they’re hard to find. (We’re working on it at Morningstar.) Sustainable investing is ready to go mainstream, but it’s going to take a little more time for interest to become reality. It appears they were right last year, and that 2018 is going to close with much the same financial speed bumps in place for ESG offerings heading into 2019.
BY ALL MEANS, PLAY BALL IN 2019, BUT KEEP YOUR FOCUS ON YOUR GOALS
If Preqin’s survey data is accurate, and 84% of investors plan to increase their allocation to alternatives over the next five years, it is increasingly important that they understand and evaluate the growing array of options within this space. Some trends appear to offer real potential to savvy investors, while others may present more of a pitfall than a payoff. Identifying which is a personal pursuit that investors will want to identify for their portfolio goals.
Diane Harrison is principal and owner of Panegyric Marketing, a strategic marketing communications firm founded in 2002 specializing in alternative assets. She has over 25 years’ of expertise in hedge fund and private equity marketing, investor relations, articles, white papers, blog posts, and other thought leadership deliverables.