Things seem grim for investors looking for good returns. Interest rates are likely to be below inflation for some time, and while further money printing could boost shares, we have to admit that there are also downside risks to the stock market.
Indeed, my colleague Simon Caufield is extremely bearish. He points out that corporate profits are way above their historical levels. In the worst case, he thinks that the market could plunge by up to 70%. If you want to read what he has to say in more detail, you may want to subscribe to his True Value newsletter.
So, are there any other ways to get great returns?
Joe Roseman, a former economist at Moore Capital and owner of BMO Strategy, has some ideas. He recently sent me a copy of his latest book, SWAG: Alternative Investment for the Coming Decade. He thinks that you should focus on four key assets: silver, wine, art and gold.
It’s certainly an original idea. Regular readers will know that we’re bullish on gold. Indeed, we think that it is the best way to hedge against everything from tension in the Middle East, to the breakup of the euro. Our resident expert, Dominic Frisby also thinks that gold may be close to its technical low – and therefore due for a rally. But what do we think about the other three tips?
Silver – a buy
One tip that we agree with is Roseman’s call to buy silver. This is because the supply/demand dynamics suggest that prices are set to go up.
Up until a decade ago, the biggest use of silver was in photography. While the rise of digital cameras has hit demand for silver based film, which has fallen by over two-thirds since 2002, a large number of other uses have sprung up.
The rise of drug resistant superbugs means that hospitals need to find other ways of stopping germs spreading. Silver’s anti-bacterial properties make it ideal for use in medical instruments. There has also been a lot of interest in silver coated medical dressings.
The fact that silver conducts electricity very well means that it is used in solar panels. Of course, solar energy is expensive, even in places that get a lot of sun. We also think that schemes which attempt to promote solar energy, such as the UK government’s feed-in tariff scheme, represent poor value. However, despite this, solar energy is still a very fast growing industry.
Overall, demand is set to increase sharply. Indeed, Roseman points out that a report last year by the bank ABN AMRO predicts that overall demand is set to grow by 15% a year, while production is unlikely to increase by more than 2-3% a year.
Two ways to track silver
There are plenty of ways to invest in silver directly. Most spread betting firms let you bet on the metal’s price. (See here for more on how spread betting works.) For a less risky ride, however, you can buy an ETF, such as ETFS Physical Silver (LSE:PHAG), which tracks the price of spot silver.
Avoid wine and art
However, we think that wine and art, which Roseman also recommends, are less good investments for most of us.
His key selling point is that both have produced high returns. Indeed, one study suggests that art went up by an annual rate of 7.6% between 1980 and 2006, while top wines have increased by 250% in the last ten years. At the same time, prices have had little correlation to the stock market, so adding them to your portfolio should both improve returns and reduce risk.
However, Roseman admits that there is no single universally accepted index for the art market, so you need to know what you’re doing. One study suggests that real returns were barely positive.
Even if we assume some of the high returns quoted are achievable, they were a reflection of the fact that since the 1970s, incomes for the top 1% have gone up more quickly than for everyone else. The politicians know this. Newly elected French president François Hollande plans to raise the top rate of tax, while other cash-strapped European governments are likely to follow suit. This could cut the amount of money that is spent on high-end art. And with the Bric economies under pressure, demand could dip further.
Both are also illiquid assets that can suffer large bid/offer spreads. This means that even if you can find a buyer; storage fees (or insurance in the case of art) and dealer’s charges will eat up a large proportion of your returns. Castlestone Management runs an art fund for retail investors as an alternative, but combined management and admin fees are 2.25%, while there is a performance fee of 20%.
For those who can afford them, fine wine and art are best enjoyed for what they are, rather than being used as a hedge against volatile financial markets.