Why alternative assets may become the 'new normal'


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When it comes to investment strategies, we are all aware that past performance is no guide to future returns. But it's easy to forget that the same applies to asset classes. Most of us have rules of thumb as to the typical returns that particular markets provide. But we need to acknowledge that future returns from those assets may be very different.

Government bonds are a case in point. Over the past 20 years, UK gilts have delivered an annual average return of 6.5 per cent. The reliability of this return explains why investors tend to be comfortable with a traditional 60:40 equity/bond split in their portfolios. But the assumption that sovereign bonds will continue to provide such returns looks unsafe. In the years since the financial crisis, we have heard a great deal about a "new normal" in interest rates: that they may be lower not just for longer, but for the foreseeable future too.

The implication of this new normal is that sovereign-bond returns will be significantly subdued. Current economic circumstances are very different to those of the decades leading up to the financial crisis. Today, the Bank of England’s interest rates are still close to zero, and the yield on the 10-year gilt is around 1 per cent. So expected returns of 1 to 2 per cent are more realistic than the 6 per cent plus to which investors have been accustomed. The logical conclusion is that a portfolio’s allocation to government bonds should be very low.

Meanwhile, after the bull market in equities since the financial crisis, stock-market valuations are looking stretched. While we see the corporate sector is in reasonable financial health and we are also reasonably optimistic on the prospects for corporate earnings, our return expectations for the next few years do not match the, in some cases double-digit, returns we have seen over the past few years.

In various regions around the world we are also seeing a “touch on the brakes” in terms of monetary policy. In some cases, such as the US, this is to get interest rates to a level that we might consider normal after the years of unconventional monetary policy after the financial crisis. In other regions, such as China, it is to rein in credit growth and to get growth rates to a more sustainable level.

All these factors suggest more modest returns from equity markets. But in addition, working-age populations are shrinking and their productivity is declining. A great demographic transition is underway, with ageing populations and falling fertility rates. This is already well established not only in the West, but in large parts of East Asia too. Both South Korea and Japan have lower birth rates than China, for example, despite the one-child policy that has only just been abandoned there.

The shift is a consequence of greater wealth, longer lives and cultural change. But it is resulting in an unprecedented situation in which working-age populations in the West and much of East Asia are shrinking, or soon will be. The net result will be much slower growth in the global economy – with obvious implications for equities.

That's not to say that there aren't still opportunities in equities: the European business cycle is showing some momentum at last, and emerging markets are still relatively cheap. But with bond returns likely to be severely constrained by the "new normal" in interest rates and equities held back by subdued global growth, some of the best opportunities in the years ahead are likely to be found in alternative assets.

So what are these alternatives? We think local-currency, emerging-market debt may offer returns comparable to those from developed-market sovereign debt in the past. Emerging-market governments have learnt from the past, and their economies are now more prudently run. Attractive returns are also likely from listed infrastructure investments in roads, hospitals and wind farms.

We also think that there are considerable attractions in private markets. Forward-looking investors are becoming increasingly open to these less liquid markets, given the higher returns on offer. The trade-off between illiquidity and long-term returns has growing appeal, especially as illiquid markets are inherently less volatile.

In the years ahead, equities and bonds will still be vital to many investors’ portfolios. But traditional 60:40 equity/bond allocations are unlikely to fare well. That model worked well when government bonds produced a 6 per cent return, but it won’t work when returns are just 1 per cent. Instead, combining equities with a diversified mix of higher-return alternative assets should offer investors better outcomes in the ‘new normal’ of low rates and slowing growth.

Craig Mackenzie is a senior investment strategist at Aberdeen Asset Management 

Tearful appearance

Chancellor Rachel Reeves set markets on edge as she appeared visibly distraught in parliament on Wednesday. 

Legislative setbacks for the government have blown a new hole in the budgetary calculations at a time when the deficit is stubbornly large and the economy is struggling to grow. 

She appeared with Keir Starmer on Thursday and the pair embraced, but he had failed to give her his backing as she cried a day earlier.

A spokesman said her upset demeanour was due to a personal matter.

Why your domicile status is important

Your UK residence status is assessed using the statutory residence test. While your residence status – ie where you live - is assessed every year, your domicile status is assessed over your lifetime.

Your domicile of origin generally comes from your parents and if your parents were not married, then it is decided by your father. Your domicile is generally the country your father considered his permanent home when you were born. 

UK residents who have their permanent home ("domicile") outside the UK may not have to pay UK tax on foreign income. For example, they do not pay tax on foreign income or gains if they are less than £2,000 in the tax year and do not transfer that gain to a UK bank account.

A UK-domiciled person, however, is liable for UK tax on their worldwide income and gains when they are resident in the UK.

Other workplace saving schemes
  • The UAE government announced a retirement savings plan for private and free zone sector employees in 2023.
  • Dubai’s savings retirement scheme for foreign employees working in the emirate’s government and public sector came into effect in 2022.
  • National Bonds unveiled a Golden Pension Scheme in 2022 to help private-sector foreign employees with their financial planning.
  • In April 2021, Hayah Insurance unveiled a workplace savings plan to help UAE employees save for their retirement.
  • Lunate, an Abu Dhabi-based investment manager, has launched a fund that will allow UAE private companies to offer employees investment returns on end-of-service benefits.
COMPANY PROFILE

Name: Xpanceo

Started: 2018

Founders: Roman Axelrod, Valentyn Volkov

Based: Dubai, UAE

Industry: Smart contact lenses, augmented/virtual reality

Funding: $40 million

Investor: Opportunity Venture (Asia)

MOUNTAINHEAD REVIEW

Starring: Ramy Youssef, Steve Carell, Jason Schwartzman

Director: Jesse Armstrong

Rating: 3.5/5

UAE currency: the story behind the money in your pockets
MIDWAY

Produced: Lionsgate Films, Shanghai Ryui Entertainment, Street Light Entertainment
Directed: Roland Emmerich
Cast: Ed Skrein, Woody Harrelson, Dennis Quaid, Aaron Eckhart, Luke Evans, Nick Jonas, Mandy Moore, Darren Criss
Rating: 3.5/5 stars

UPI facts

More than 2.2 million Indian tourists arrived in UAE in 2023
More than 3.5 million Indians reside in UAE
Indian tourists can make purchases in UAE using rupee accounts in India through QR-code-based UPI real-time payment systems
Indian residents in UAE can use their non-resident NRO and NRE accounts held in Indian banks linked to a UAE mobile number for UPI transactions

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Starring: Brad Pitt, Damson Idris, Kerry Condon, Javier Bardem

Director: Joseph Kosinski

Rating: 4/5

'Saand Ki Aankh'

Produced by: Reliance Entertainment with Chalk and Cheese Films
Director: Tushar Hiranandani
Cast: Taapsee Pannu, Bhumi Pednekar, Prakash Jha, Vineet Singh
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Our family matters legal consultant

Name: Hassan Mohsen Elhais

Position: legal consultant with Al Rowaad Advocates and Legal Consultants.

Know your camel milk:
Flavour: Similar to goat’s milk, although less pungent. Vaguely sweet with a subtle, salty aftertaste.
Texture: Smooth and creamy, with a slightly thinner consistency than cow’s milk.
Use it: In your morning coffee, to add flavour to homemade ice cream and milk-heavy desserts, smoothies, spiced camel-milk hot chocolate.
Goes well with: chocolate and caramel, saffron, cardamom and cloves. Also works well with honey and dates.

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Scoreline:

Barcelona 2

Suarez 85', Messi 86'

Atletico Madrid 0

Red card: Diego Costa 28' (Atletico)

Best Academy: Ajax and Benfica

Best Agent: Jorge Mendes

Best Club : Liverpool   

 Best Coach: Jurgen Klopp (Liverpool)  

 Best Goalkeeper: Alisson Becker

 Best Men’s Player: Cristiano Ronaldo

 Best Partnership of the Year Award by SportBusiness: Manchester City and SAP

 Best Referee: Stephanie Frappart

Best Revelation Player: Joao Felix (Atletico Madrid and Portugal)

Best Sporting Director: Andrea Berta (Atletico Madrid)

Best Women's Player:  Lucy Bronze

Best Young Arab Player: Achraf Hakimi

 Kooora – Best Arab Club: Al Hilal (Saudi Arabia)

 Kooora – Best Arab Player: Abderrazak Hamdallah (Al-Nassr FC, Saudi Arabia)

 Player Career Award: Miralem Pjanic and Ryan Giggs

Abu Dhabi Card

5pm: Maiden (PA) Dh 80,000 1,400m

National selection: AF Mohanak

5.30pm: Handicap (PA) Dh 90,000 1,400m

National selection: Jayide Al Boraq

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National selection: Rocket Power

6.30pm: Abu Dhabi Championship Listed (PA) Dh 180,000 1,600m

National selection: Ihtesham

7pm: Wathba Stallions Cup Handicap (PA) Dh 70,000 1,600m

National selection: Noof KB

7.30pm: Maiden (PA) Dh 80,000 2.200m

National selection: EL Faust

MATCH INFO

Everton 2 Southampton 1
Everton: Walcott (15'), Richarlison (31' )
Southampton: Ings (54')

Man of the match: Theo Walcott (Everton)