From the South Sea Bubble to Tulip Mania and on to the Dotcom Boom and subsequent spectacular busts, investors should have learned enough from history to be extremely wary of anything touted as the next big thing. Market trends which are based on sentiment and speculation rather than cold hard financial reality are best avoided.
“One always has to be careful about trends,” cautions Ian Quigley, head of investment strategy and financial planning with Brewin Dolphin. “Markets can get excited about them. But what wise people do at the beginning is what fools do in the end. The way we approach these things is to look at the return you are getting. Be careful about overpaying for speculative assets.”
There are some clear trends out there, of course. Quigley points to the energy transition and the digitalisation of industry as two examples. “Digitalisation over the next decade is something to consider,” he says. And there is more than one way to look at that trend. From a defensive perspective it could be avoiding companies vulnerable to change, or it could be to seek out companies which stand to gain from digitalisation or those in sectors like food and beverage which might be relatively unaffected one way or the other.
Companies developing the technology also represent a potential opportunity, according to Grant Thornton tax partner Oliver O’Connor. “The speed of technology change appears to be getting faster rather than any sign of a plateau being arrived at,” he notes. “Artificial intelligence (AI) is now front and centre of that change. Some people are likely reading this on your Apple iPhone that opened with facial recognition. This is one of the most used applications of AI currently. From an investor viewpoint, while still quite specific, the growth in companies specialising, successfully, in AI is viewed as a great investment opportunity. However, as a word of caution, the more focused the investment the greater the risk associated with it, and investors need to be very conscious of this at all times.”
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Bank of Ireland chief investment strategist Kevin Quinn points to some of the macro-economic and geopolitical trends that will underpin money-making opportunities in the years ahead. These include areas such as energy, defence, AI, food, supply chains and healthcare.
“It doesn’t take a world-leading economist to spot that difficulties with energy supply will make alternative sources more important, and companies in that space will command a premium,” he says. “We are heading into a different geopolitical framework and that and the Ukraine war will drive defence spending.”
He also believes that the lingering impact of the Covid pandemic will boost healthcare spending, while trends in reshoring and nearshoring driven by supply chain disruptions will have an impact on spending there.
While the cost-of-living crisis may be top of mind for many people at the moment the environmental, social and governance (ESG) agenda has certainly not gone away. “Companies that do the right thing are likely to benefit,” says Quinn. “That is where capital is likely to shift in the next decade.”
O’Connor agrees: “The pandemic has ignited investors’ appetite to consider and favour companies that actively discuss and address ESG causes. Typically those companies which are focusing on these issues realise that they may impact their short-term profitability, and therefore value, but believe their long-term value will be significantly enhanced by their actions on ESG. Recent research conducted on ESG companies confirms the view that they tend to be more robust and stable organisations longer term than their peers.”
He also sees a trend towards greater geographic diversity in investments. “A development arising from the financial crisis has been a greater focus on investing in worldwide markets rather than utter dependency on the local markets for investors,” he says. “Doing this through passive fund investing has become more the norm in the recent past. This continues now despite market upheaval.
“Interestingly for euro investors in the dominant US markets their returns have been less negatively impacted during the year by virtue of the currency movement between the euro and the US dollar. We are likely to see the use of passive funds continue to grow over the next period of time, and it is hard to argue against this method for buy-and-hold investors.”
Finally, Quinn points to some good news for cautious investors. “The ending of the era of negative interest rates will make things a bit easier for low-risk conservative investors. We may start to see some capital secure investments coming back on the market.”