Volatility across the global stock and commodities markets in the first few weeks of 2016 have set the year off to an interesting start, with a mixed outlook for the year ahead emanating from all sides. Oil prices fell to below USD30 a barrel, reflecting a drop of around 15% in 2016 to reach a 12-year low. Meanwhile, the stock markets in China – the world’s second-biggest economy – plunged, with the nation posting annual growth for 2015 of just 6.9%: still impressive but representing a 25-year low.
Other global stock markets have fallen too, with the UK, France and Japan down more than 20% from their 2015 highs. However, with the slumped commodities prices – and some analysts predicting that oil prices could further drop to USD10 a barrel – the low prices in these countries could boost the economy thanks to benefits passed on to consumers at the petrol station. Oil producers on the other hand – which include the US, Russia and Saudi Arabia – may not fare so well.
China’s slowdown has meant a huge drop in global commodity prices, with the Economist Intelligence Unit predicting low growth in raw materials for 2016, at only 3.3%. Bond yields are expected to remain lower for longer due to a reluctance by major central banks to raise interest rates, while European bonds are also projected to have lower yields due to the European Central Bank’s continued quantitative easing programme.
For investorslooking to grow and protect their wealth, it pays to understand how such economic volatility affects different investment asset classes. If we look at how certain asset classes have performed over the last decade, we see that UK property for instance has consistently fluctuated less than world commodity and equity markets.
Property in the UK also dipped less and rebounded more quickly than other asset classes following the 2008/2009 downturn, and subsequently recorded steady growth to reach historic highs in 2012. Meanwhile, commodity prices have sunk to levels lower than they were ten years ago, and the FTSE 100 has only recently returned to its pre-financial crisis levels.
Investors have become increasingly wise to this state of affairs, and the stability and resilience of property continues to drive the sector forward as a key global investment asset class.
Low interest rates are another factor driving property investment activity across many markets. Having fallen steeply in mid-2008, the Bank of England, the US Federal Reserve, the Reserve Bank of Australia and the European Central Bank have largely kept rates low and steady ever since. With low interest rates keeping the cost of borrowing down, the ability to leverage an investment with mortgage financing becomes even more important in making property a more attractive asset class for investors.
Not all property markets are equal however. For investors looking to put their money into real estate, it’s important to look to stable, mature markets such as the UK, Australia and Germany, and to consider medium-to-long-term investment cycles that offer the opportunity for steady, sustainable capital growth and yields. Real estate in safe-haven markets is particularly attractive to those living in more volatile economies such as the United Arab Emirates, where property prices have been declining for some time, and Hong Kong, which has been dominated by boom/bust cycles over the last ten to 20 years.
At IP Global, we encourage five-to-ten year holding periods in proven, safe-haven markets, a tactic which encourages growth at a sustainable pace and one that has enabled our clients to grow their portfolios during and in the years following a major global recession. When comparing asset classes they would agree – property’s potential for combining capital growth with high yields that deliver strong returns over the course of the investment makes it the safest bet of all during periods of economic volatility.