Future Returns: Ignoring Market Noise for the Long-Term
When it comes to volatility in the stock market, long-term investors are advised to ignore the drama.
When it comes to volatility in the stock market, long-term investors are advised to ignore the drama.
Simply, short-term market reactions—justified or not—are just that, short-term. As Deepak Puri, Deutsche Wealth Management’s chief investment officer for the Americas notes, many of the issues causing the market’s recent swings—from the Federal Reserve’s decision to scale back economic stimulus, to concerns over whether Congress will lift the debt ceiling, to worries over China’s regulatory crackdown on a range of companies—are finite, and unlikely to have a long-term effect on the outlook for stocks.
“A lot of these issues we are grappling with have a finite shelf life, and if you look past that, the path of least resistance for the market is still on the upside,” Puri says. A key reason? Negative real interest rates—that is, rates adjusted for inflation— “create a favourable backdrop to own equities,” he says.
While the yield on the U.S. 10-year Treasury note has risen 17 basis points in recent days to 1.482% as of Monday’s close, rates are still relatively low, and the stock market—although expensive—still presents better risk-return characteristics than other sectors, such as Treasuries or investment-grade corporate bonds, Puri says.
“To find a better alternative for equity markets is pretty difficult at this point,” he says.
Penta recently spoke with Puri about where long-term opportunities lie, and where investors should look for value within stocks.
‘Structural Forces’ Continue to Support Stocks
The reason equity markets continue to be worth investing in despite already considerable growth is what Puri refers to as the positive, long-term structural forces “which have more sustenance” than finite concerns, such as the debt travails of China Evergrande Group, a large property developer.
Concerns over the implications of Evergrande’s inability to handle its debt burden contributed to a more than 600-point fall in the Dow Jones Industrial Average on Monday, Sept. 20—a drop that was erased by Friday, although on Tuesday, stocks were nosediving again as the 10-year yield continued to rise.
The substantive, structural forces Puri was referring to include the favourable macroeconomic environment created by low and even negative interest rates. Low rates mean investors should be much more comfortable owning stocks, he says.
As Puri explains, if investors worried about pricey stocks were to put all their money in cash and Treasury bills paying an interest rate of about 0.05%, it would take 1,000 years or more to double their money. By contrast, it would take seven-and-a-half years for investors to double their money in stocks, given equity markets historically have risen 10% a year. Even a more conservative estimate of a 5% annual rise in stock market returns would lead investors to double their money in 14-and-a-half years.
“Compare 14-and-a-half years versus a millenia if you are sitting in cash,” Puri says. “The alternatives to really challenge high-quality blue chip equities are limited at this point.”
Another structural boost comes from governments in both developed and emerging markets, which have stepped in with spending to counter the economic blows of the pandemic. Puri believes these actions point to a longer-term trend of increased spending by governments as a percentage of GDP. In the U.S., the spending began with stimulus to blunt the effects of the pandemic, and it continues with expected spending on infrastructure—from roads and bridges, to green technologies and “human infrastructure” such as spending on child care and education.
“That’s a structural shift that’s taking place that creates a favourable outlook for companies sensitive to that spending,” he says.
And, Puri notes, corporate earnings continue to grow at double-digit levels. Even though earnings growth is expected to moderate, and the stock market could swing lower should earnings growth dip, the overall outlook for earnings, and the ability of companies to pass on higher costs, remains strong.
Of course, these forces don’t mean equity markets will continue to go up in the short-term, as Tuesday’s market action shows. Bond yields are rising, the coronavirus pandemic remains a factor and could still derail growth, and the inability of Congress to address the debt ceiling could be crippling as well.
“Any sort of disappointment [about] liquidity, better economic growth, or a Covid resurgence could derail that linear trajectory we’ve been seeing in the stock market,” Puri says.
Where to Find Value
Puri says he often advises investors to look at what they own. Many don’t realize how much exposure they have to big technology names including Amazon or Alphabet, which dominate sectors such as consumer discretionary companies or communication services, for example.
Although the economy’s reopening has been delayed by the considerable setbacks caused by the Delta variant of Covid-19, Deutsche Bank expects the reopening will accelerate as vaccination rates rise, and that cyclical businesses, including banks and consumer discretionary companies, will benefit.
If investors are worried about inflation, Puri says they could consider investing in Treasury Inflation Protection Securities—bonds that adjust the principal payment according to inflation rates—or in bank loans, which, because of their short-term nature (generally one-year or less) have little exposure to interest-rate risk and can deliver slightly higher returns than Treasuries.
A Different Approach to Bonds
Typically, bonds serve two purposes in a diversified investment portfolio: they provide a hedge when stock markets slide and a return from the bond’s appreciation and coupon. In the past, the same security provided both, but “no longer is that possible,” Puri says.
Investors can own bonds for hedging—without expecting much in the way of returns—or they can own bonds that generate a yield (such as emerging-market bonds or high-yield corporate bonds), although the latter will behave more like risky assets, including stocks, than as a hedge.
“For most individual investors, you should have both,” Puri says. “ A fixed-income component purely for hedging—for when things don’t go well, volatility spikes, and equity markets are going down—and another part that gives you income.”
Stay Invested in China
China’s regulatory reining in of Alibaba Group Holding Ltd., the ride-hailing company Didi Global, tutoring services such as New Oriental Education & Technology Group, and debt-laden property developers such as Evergrande, raises concerns about investing in China, but Puri doesn’t advocate investors shun Chinese stocks.
For the near term, Deutsche Bank’s view is that for China specifically, and Asia in general, “it’s too late to sell, but maybe too early to buy,” considering the potential for further volatility.
Longer term, although Chinese growth prospects are down slightly, it’s important for investors with return on their investments as a primary motive to “keep China in your portfolio,” he says.
Many large Chinese companies “are big and profitable in their own regard, and are market leaders,” Puri says. “For a global investor, you need to keep your eyes open. If you are looking for return on your investment as your primary motive [for investing], keeping political and ideological views aside, then keep China in your portfolio.”
Also, the regulatory crackdown has a lot to do with China wanting more visibility into how companies do business, its desire to curtail monopolistic tendencies, and to promote Chinese family values. While the next few months could still be volatile, Deutsche Bank expects the upcoming reelection of China President Xi Jinping next year will create a more favourable macroeconomic backdrop.
Still, he notes, the country, despite its growth, is considered an emerging market. “This is a stark reminder that there are risks that are non-security specific related in these markets,” Puri says.
Following the devastation of recent flooding, experts are urging government intervention to drive the cessation of building in areas at risk.
Private club memberships and luxury cars are some of freebies on the table.
When Ryan Wolitzer was looking to buy an apartment in Miami Beach late last year, several beachfront properties caught his eye. All were two-bedroom homes in high-end buildings with amenities aplenty and featured glass walls, high ceilings and an abundance of natural light. But only The Continuum, in the city’s South of Fifth district, came with a gift: a membership to Residence Yacht Club, a private club that offers excursions on luxury yachts ranging from a day in south Florida to a month around the Caribbean. Residents receive heavily discounted charters on upscale boats that have premier finishes and are stocked with top shelf spirits and wine. Mr. Wolitzer, 25, who works for a sports agency, was sold.
“The access to high-end yachts swayed my decision to buy at The Continuum and is an incentive that I take full advantage of,” Mr. Wolitzer said. “It’s huge, especially in my business when I am dealing with high-profile sports players, to be able to give them access to these incredible boats where they experience great service. I know that they’ll be well taken care of.”
Freebies and perks for homeowners such as a private club membership are a mainstay in the world of luxury real estate and intended to entice prospective buyers to sign on the dotted line.
According to Jonathan Miller, the president and chief executive of the real estate appraisal and consulting firm Miller Samuel, they’re primarily a domestic phenomenon.
In the U.S. residential real estate market, gifts are offered by both developers who want to move apartments in their swanky buildings and individuals selling their homes. They range from modest to over-the-top, Mr. Miller said, and are more prevalent when the market is soft.
“When sales lag, freebies increase in a bid to incentivize buyers,” he said. “These days, sales are slowing, and inventory is rising after two years of being the opposite, which suggests that we may see more of them going forward.”
Many of these extras are especially present in South Florida, Mr. Miller said, where the market is normalizing after the unprecedented boom it saw during the pandemic. “The frenzy in South Florida was intense compared with the rest of the country because it became a place where people wanted to live full time,” he said. “Now that the numbers are inching toward pre-pandemic levels, freebies could push wavering buyers over the finish line.”
Kelly Killoren Bensimon, a real estate salesperson for Douglas Elliman in Miami and New York, said that the gifts that she has encountered in her business include everything from yacht access and use of a summer house to magnums of pricey wine. “One person I know of who was selling a US$5 million house in the Hamptons even threw in a free Mercedes 280SL,” she said. “They didn’t want to lower the price but were happy to sweeten the deal.”
A car, an Aston Martin to be exact, is also a lure at Aston Martin Residences in Miami’s Biscayne Bay. Buyers who bought one of the building’s 01 line apartments—a collection of 47 ocean-facing residences ranging in size from 325 to 362sqm and US$8.3 million to US$9 million in price—had their choice of the DBX Miami Riverwalk Special Edition or the DB11 Miami Riverwalk Special Edition. The DBX is Aston Martin’s first SUV and retails for around US$200,000. It may have helped propel sales given that all the apartments are sold out.
The US$59 million triplex penthouse, meanwhile, is still up for grabs, and the buyer will receive a US$3.2 million Aston Martin Vulcan track-only sports car, one of only 24 ever made.
“We want to give homeowners the chance to live the full Aston Martin lifestyle, and owning a beautiful Aston Martin is definitely a highlight of that,” said Alejandro Aljanti, the chief marketing officer for G&G Business Developments, the building’s developer. “We wanted to include the cars as part of the package for our more exclusive units.”
The US$800,000 furniture budget for buyers of the North Tower condominiums at The Estates at Acqualina in Sunny Isles, Florida, is another recent head-turning perk. The 94 residences sold out last year, according to president of sales Michael Goldstein, and had a starting price of US$6.3 million. “You can pick the furniture ahead of time, and when buyers move in later this year, all they’ll need is a toothbrush,” he said.
Then there’s the US$2 million art collection that was included in the sale of the penthouse residence at the Four Seasons Residences in Miami’s Brickell neighbourhood. The property recently sold for $15.9 million and spans 817sqm feet. Designed by the renowned firm ODP Architects, it features contemporary paintings and sculpture pieces from notable names such as the American conceptual artist Bill Beckley and the sculptor Tom Brewitz.
But it’s hard to top the millions of dollars of extras that were attached to the asking price in 2019 of the US$85 million 1393sqm duplex at the Atelier, in Manhattan’s Hell’s Kitchen neighbourhood. The list included two Rolls-Royce Phantoms, a Lamborghini Aventador, a US$1 million yacht with five years of docking fees, a summer stay at a Hamptons mansion, weekly dinners for two at lavish French restaurant Daniel and a live-in butler and private chef for a year. And the most outrageous of all: a flight for two to space.
It turned out that the so-called duplex was actually a collection of several apartments and a listing that went unsold. It did, however, generate plenty of buzz among the press and in real estate circles and was a marketing success, according to Mr. Miller.
“A listing like this that almost seems unbelievable with all the gifts will get plenty of eyeballs but is unlikely to push sales,” he said. “Empirically, it’s not an effective tactic.”
On the other hand, Mr. Miller said that more reasonable but still generous freebies, such as the membership to a yacht club, have the potential to push undecided buyers to go for the sale. “A nice but not too lavish gift won’t be the singular thing toward their decision but can be a big factor,” he said. “It’s a feel-good incentive that buyers think they’re getting without an extra cost.”
Examples of these bonuses include a membership to the 1 Hotel South Beach private beach club that buyers receive with the purchase of a residence at Baccarat Residences Brickell, or the one-year membership to the Grand Bay Beach Club in Key Biscayne for those who spring for a home at Casa Bella Residences by B&B Italia, located in downtown Miami and a residential project from the namesake renowned Italian furniture brand. The price of a membership at the Grand Bay Beach Club is usually a US$19,500 initiation fee and US$415 in monthly dues.
Still enticing but less expensive perks include the two-hour cruise around New York on a wooden Hemmingway boat, valued at US$1,900, for buyers at Quay Tower, at Brooklyn Bridge Park in New York City. The building’s developer, Robert Levine, said that he started offering the boat trip in July to help sell the remaining units. “We’re close to 70% sold, but, of course, I want everything to go,” he said.
There’s also the US$1,635 Avalon throw blanket from Hermes for those who close on a unit at Ten30 South Beach, a 33-unit boutique condominium; in Manhattan’s Financial District, a custom piece of art from the acclaimed artist James Perkins is gifted to buyers at Jolie, a 42-story building on Greenwich Street. Perkins said the value of the piece depends on the home purchase price, but the minimum is US$4,000. “The higher end homes get a more sizable work,” he said.
When gifts are part of a total real estate package, the sale can become emotional and personal, according to Chad Carroll, a real estate agent with Compass in South Florida and the founder of The Carroll Group. “If the freebie appeals to the buyer, the transaction takes on a different dynamic,” he said. “A gift becomes the kicker that they love the idea of having.”
Speaking from his own experience, Mr. Carroll said that sellers can also have an emotional connection to the exchange. “I was selling my house in Golden Isles last year for US$5.4 million and included my jet ski and paddle boards,” he said. “The buyers were a family with young kids and absolutely loved the water toys.” Mr. Carroll could have held out for a higher bidder, he said, but decided to accept their offer. “I liked them and wanted them to create the same happy memories in the home that I did,” he said.
The family moved in a few months later.