How recent market swings shed light on the importance of alternative investments.
As Indemo continues to grow and develop, it’s clear that the appetite for alternative investment products is at an all time high. We launched the Indemo platform to disrupt the P2P investment market, bringing alternative investment opportunities that are typically enjoyed by institutional players, into the hands of everyday people.
As a community, you’re probably all aware of the recent crash that’s affected the European, US, and Asian stock markets. We thought we’d team up with Aquarium Investments asset managers to shed some light on the situation, whilst providing some suggestions on how best to diversify your portfolio.
In the last five years, the financial markets have experienced what could best be described as a rollercoaster ride. The pandemic crash in 2020 quickly transformed into a period of rapid growth, boosted by ultra-loose monetary and fiscal policies in most developed countries.
As the markets reached new highs in 2021, excess spending and supply chain bottlenecks led to an uncomfortable rise in inflation, with Central Banks across the world responding by quickly raising interest rates.
Despite persistent inflation and an unprecedented rise in interest rates in 2023, the financial savings accumulated during the pandemic, combined with continued fiscal spending, propelled stock markets to new highs. The US outperformed all other major stock markets, with the brewing AI bubble and surging tech stocks largely making the biggest difference.
In the first half of 2024, the Magnificent 7 stocks accounted for roughly 30% of the S&P 500 index. Market capitalization of Nvidia alone was larger than the entire stock market of Germany. A high degree of optimism regarding the future earnings of these companies meant that investors were prepared to pay very high multiples of current earnings just to get involved.
By the middle of 2024 it became clear that the high interest rate environment was finally taking a toll on both consumers and the economy, with central banks once again failing to make accurate predictions in their resolve to fight inflation at all costs.
Macroeconomic indicators across the board flashed recession warnings. After the FED held rates at 5.5% during their July meeting, a weak jobs report shortly after was enough for the market to reassess the soft or even no landing scenario for the US economy, and instead favor a hard landing - recession.
Some bad data coming out of Japan and China, coupled with news of Warren Buffet selling a major part of his Apple stock holdings was enough to crash the market. The Volatility index VIX spiked to levels seen during the pandemic in March 2020, and the 2008 meltdown. In just over a week, the Nasdaq dropped more than 15%, with major names like Nvidia falling by more than 30% from the top. The selloff then spilled over - affecting various asset classes in markets across the world, largely because investment funds and ETFs, which control an increasing portion of the market, were forced to sell when investors withdrew their holdings.
It’s now the beginning of August, and as we look forward, the outlook for stocks for the near future is less clear than ever. On one hand, a rate cut cycle is beginning in the US, with 5-6 cuts expected to support risk assets currently priced in till the end of the year. On the other hand, policy actions tend to fall victim to considerable time lag, so there is plenty of fear that the Federal Reserve will be too slow to act to support the economy sufficiently.
In all likelihood, this will lead to a recession, which will have a profound negative impact on corporate earnings and consumer spending. The brewing geopolitical conflicts across the world also continue to pose huge risks to the financial markets. All this means that current valuations, even after the recent selloff, are extended, and downside risks are much higher than the upside potential.
The price-to-earnings ratio of the S & P index is around 26, which is considerably higher than the multi-decade average of 20. Warren Buffet’s favorite metric, which takes the ratio of stock market capitalization to GDP, is at levels not seen since the 2000 dotcom bubble. Even though stocks returned on average about 10% for the previous 100 years, buying stocks at such levels often leads to extended periods of underperformance.
For example, it took the Nasdaq 15 years to return to the levels of the year 2000, with many of the individual stocks from the index still well below those levels. Other stock markets aren’t looking much better – Europe continues to underperform, and it’s hard to imagine the situation will improve any time soon, given high energy costs, low competitiveness, internal friction, and conflict around the continent. Emerging markets in turn, depend heavily on the prices of resources, which will fall in case of a recession.
Looking at the other asset classes, there really aren’t many better options. With falling interest rates, one asset class that will benefit is investment grade government and corporate bonds. However, at these levels (5-year treasury yield is at 3.8%) the cuts are mainly priced in, and further upside is limited. This is especially true once we consider the possibility of a sticky inflation period, which always has a negative impact on bonds. The same logic applies to deposits with interest lower than real inflation.
This is where alternative assets come into play. They provide valuable long-term diversification to a portfolio because they’re not correlated to broader markets and high expected returns. For most of these assets however, there is still a price to pay: large initial investment requirements (Real estate, Private Equity, Hedge Funds), low or often zero liquidity (Real estate, Private Equity) or high volatility and credit risk (cryptocurrencies, commodities, forex). Precious metals historically do provide some protection against inflation and systemic shocks, yet offer no income.
Indemo provides investors with products which address most of these concerns, while still offering competitive and stable returns. Low loan-to-value ratios on the underlying assets guarantee security, and it would take a global depression and a financial meltdown before any of the loans become impaired. In terms of liquidity, the Notes are usually short-term with an average maturity of less than two years. The upcoming addition of secondary market functionality which concept we recently announcement means the liquidity will be further improved.
This of course doesn't mean that an entire portfolio should consist of a single asset class. Historically it’s been the case that a diversified portfolio demonstrates significantly better risk-return ratio over time. This is especially true in the current day, when a typical 60/40 portfolio strategy no longer offers the diversification benefits it used to. Alternative assets have an important part to play in reaching the ultimate goal of capital preservation and growth. Taking everything into account, a strong case can be made that an individual investor’s portfolio should have at least 20% of its value in the asset class.
As Indemo continues to make major leaps forward, the platform remains the good place to explore and invest in alternative products that provide safety during volatile times in traditional markets. Gone are the days in which the only way to become a player in the real estate investment market was to have an institution do it for you.
Thanks to Indemo, products like Discounted Debt Investments (mortgage Non Performing Loans) which have been traded for years by major players are now in the hands of the people. With a slick interface, powerful features, and a strong unified community behind you, there’s simply never been a better time to join the Indemo platform and diversify your portfolio in ways that just make sense.
We’ll continue collaborating with our asset manager partner Aquarium Investments to bring you more up to date news, opinions, and explanations on market moves in the future, so stay tuned.
This content is a marketing communication. It shall not be treated as investment advice, independent research or offer, recommendation or invitation to invest in the investment opportunities referred to herein. The content is not aimed at promoting services or products to persons based in jurisdictions where the distribution of said information would be illegal.
Investing in financial instruments involves risk, and there’s no guarantee that investors will get back invested capital. Moreover, past performance does not guarantee future returns. Indemo SIA shall not be responsible for any direct or indirect loss from using the provided information.