Draghi and the decorrelation of alternative investment
Last thursday the European Central Bank (ECB), with Mario Draghi at the helm, lowered growth forecasts for the Eurozone by 6 tenths to 1.1% in 2019 and 1.6% in 2020, announcing that the normalisation of interest rate hikes in line with inflation will take at least until 2019 to materialise.
As for the traditional major assets, the impact on the markets was immediate. After a promising start of the year, last week both European equity markets and the Euro suffered significant setbacks.
This is the case of the banking sector, which has been heavily punished in recent months. Thus, the performance of some ‘traditional’ capital markets in Europe brings to mind the episodes experienced last year in which the only ‘traditional’ investment asset with a positive return was the dollar.
This introduction of ‘traditional’ markets leads us to talk about investment in unlisted or private markets, known as ‘alternative investment’. The main characteristic is the materialisation of the investment in the medium/long term, and the illiquidity that that these assets have for not being listed on the markets
Studies have concluded that for financial wealth, an exposure to ‘unlisted assets’ optimises diversification.
Equity crowdfunding facilitates access to direct investment
There is a wide and varied literature on the performance of alternative investments versus traditional investment products.
Although generalisations are not advisable, we can say that given their higher risk premium, alternative assets have generally been more profitable,especially in periods of greater economic stress.
Over the last few years, access to these assets for investors has improved significantly. Equity crowdfunding platforms, such as Fellow Funders, have made it easier for retail investors to access direct investment in companies and start-ups. Moreover, the increased number of private equity funds has enabled wholesale and institutional investors to invest in diversified portfolios of growth companies.
Finally, the strong implementation of SOCIMIs in Spain has allowed investors to participate in the real estate sector through tax-efficient structures with attractive levels of profitability.
Reducing capital market risks, diversification is key
To conclude, capital markets after the ECB’s latest announcements remind us that the impact on financial assets can be uneven and difficult to predict in a period of downward growth and little room for expansion in monetary policy, leading to additional volatility in the markets.