Top Dollar

It’s only March, and already the world has gone through a massive series of turning points. We’ve already seen several world records falling at the Winter Olympics. SpaceX launched the most powerful rocket in the world. Black Panther has defied the odds to become Marvel’s third-highest grossing movie of all time.

With so much change in the air, one can’t help but wonder if similar upheavals will occur in the worlds of finance and investments. There were signs of turbulence last month with the global stock market turmoil. So if you’re keen on tweaking, expanding or diversifying your portfolio – whether with equities and real estate, currencies (crypto included), or venture capital and bonds – here’s what you should be considering this year.

Equities

There’s no knowing if there will be a major market correction this year. Many analysts have predicted this since early 2016. But if you had ignored them and invested fully since, you would probably be quite satisfied with the results today. Despite this, if markets do eventually return to their historical valuations, a correction is probably inevitable.

As an alternative to the more difficult question of market timing, consider looking for growth industries. What’s going to do well, rain or shine? In fact, many growth stories of the early 2000s, e.g. Chinese eCommerce, ended up dwarfing the major market corrections of their time.

Technology and emerging markets are two promising areas to look for growth ideas.

Technology

On the tech front, the 2000s have evolved in vastly different ways.

First came social media and the sharing economy. Now, we’re concerned with robotics and artificial intelligence. Throughout this metamorphosis, companies with traction on the mass market, direct to consumer products and network economies of scale have done well.

Peering into the crystal ball for 2018–2019, there is a potential maturation of the sharing economy (Uber’s new CEO has indicated a desire to conduct an IPO before 2019). Meanwhile, upcoming new areas may include a new emphasis on hardware (drones, wearables) to a renewed focus on cybersecurity.

Emerging markets

Stock market correction (or not), emerging markets are going to keep developing over the next several decades.

There is still a large gap in living standards and costs of doing business between developed and emerging economies. As this gap narrows, emerging market citizens may also start closing the spending gap with their developed world counterparts.

There is already early evidence of this, especially in China. Its retail market is now worth around US$4.9 trillion (RM19.2 trillion), the largest in the world.

On the mass market automobile front, China sold 23 million units in 2016, a staggering 30 per cent of the global total. And in terms of enjoying the fruits of their labour, its citizens made more than 500 million trips by air in 2017. This number is the second largest in the world by country, the first the US.

The same potential is true of India, South East Asia and Latin America. And even if there is a temporary market correction, the number of consumers across the developing world will continue to increase. This can be attributed to a combination of demographics, catch-up GDP growth and technological transfers.

Industries that are set to benefit include travel, automobiles, luxury goods and electronics.

Venture Capital

While governments in emerging economies have largely been supportive of grooming startups – providing a large array of grants and supportive regulations to assist local entrepreneurs – it is nevertheless a truism of new ventures that they could almost always use more financial capital. While somewhat insulated from typical market cycles, startups do involve long gestation periods and high failure rates.

On the upside, rewards for successful ventures are usually outstanding. Startup investing is usually via either angel investing, or venture capital. Angel investing, which involves direct investments in startups often allows for earlier exposure while saving on venture capital fees.

On the other hand, placing funds with an established venture capital firm makes it far easier to develop exposure to a diversified startup portfolio. Such diversification is important because of high attrition rates.

With a smaller AUM (Assets Under Management) and limited time, one might therefore consider the latter. Many of the hottest startups for 2018 are still consumer technology focused, although medical applications and transportation technology are emerging.

Bonds

As one’s ability to absorb risk falls, allocation to bonds and other fixed income instruments should increase.

For example, if significant expenses are expected soon, or near-term liquidity is otherwise needed, such as with impending retirement.

This old adage is complicated by the spectre of inflation starting to rear its head in early 2018, as well as US Treasury rates being at a 12-month high. Nevertheless, suitable instruments may include short maturity bonds or inflation-protected instruments.

Currencies

What currency should you store our investments in?

The US dikkar has been weakening steadily against major Asian currencies including the Malaysian ringgit since early 2016. With a new Federal Reserve chairman, stable rattling on both sides of the Pacific regarding various trade disputes, one cannot rule out additional currency volatility.

When making a long term, multiyear investment in another currency (e.g. buying equity investments in US$), consider hedging currency exposure.

On the topic of cryptocurrency, it will be interesting to see how this US$500 billion (RM1.96 trillion) story ends. In late 2017, any company with the slightest association to the words ‘blockchain’ or ‘crypto’ would see their stock fly overnight.

To this author, there are parallels to the wild, wild west days of 1999, where firms, business plans, or scribbles on napkins with the magic words ‘.com’ instantly acquired billion-dollar valuations.

Most remember the subsequent crash, but it is worth pointing out that many household names today (e.g. Amazon, Google) also came of age in those good old days.

One way to address crypto is to ask if there are genuine structural and value differences among the plethora of new currencies.