Covid-19 pandemic has exacerbated volatility and elevated uncertainty across global markets. The equities market, industries, including hospitality, aviation and petroleum, have been greatly affected. In currency (FX) markets, the Sterling has fallen by as much as 15 per cent against the US dollar since the beginning of 2020, whilst Bank of England analysis reveals huge uncertainty jumps across economic sectors in response to the coronavirus.
To mitigate the financial repercussions of this volatility and uncertainty, the British government has adopted Keynesian expansionary fiscal policies, including a £30 billion stimulus package, followed by £350 billion in guaranteed loans to businesses. Monetary policy similarly has been countercyclical, with low-interest rates being maintained to encourage investment. Yet whilst these measures have been effective in reducing the amplitude of the economic cycle, an emergent concern is that of inflation. The 2008 financial crisis is the most recent example where the Keynesian approach yielded inflation in 3.2 per cent excess of the UK’s 2 per cent target at the 5.2 per cent record level.
Given the erosive nature of such inflation, along with the downside risks inherent in highly volatile and uncertain markets, safe-haven assets, which enable capital preservation, such as Gold, have flourished. Yet with 60 per cent of bond globally yielding below 1 per cent, and over $14 trillion having negative yields, according to the Financial Times, investors are motivated to procure diversified assets with a history of strong returns, low volatility as well as offering the ability to hedge against inflation.
A recent capital report from Knight Frank posits that direct real estate assets have elicited higher returns over the last two decades (relative to downside risk) than global large and mid-cap equities. From a diversification perspective, the Active Capital report goes further, predicting that the focus of cross border capital flows will principally be between liquid, global safe-havens such as the UK, US, Singapore and Germany. With ongoing lockdown induced evisceration in demand for oil causing price slumps from $60 a barrel at the start of the year, down to $40 as of October 2020, the deployment of capital from oil-dependent countries into such assets is likely to accelerate - further supporting growth.
The UK housing market has demonstrated remarkable resilience through 2020, with Savills upgrading its forecasts to anticipate 20.4 per cent growth over five years up to 2024. Predicated on significant demand, government stimulus such as the Help to Buy scheme and Stamp Duty cut, as well as historically low-interest rates, there are unique opportunities in real estate for long term investors to maximise returns whilst mitigating downside risk as conditions evolve.
Covid-19 has plunged the world into one of the most uncertain periods on record. Gold has hit record highs, equity volatility is elevated and government bond yields around the world remain low. Yet against this backdrop, we predict that real estate investment will remain attractive, thanks to lower volatility than other asset classes, a history of strong returns through longer-term direct investment, and, crucially, its ability to generate income in a world where 60% of bond yields globally are below 1% and over $14 trillion have negative yields, according to Knight Frank.