Despite the fact that the UK is not currently part of the Eurozone there has been a major impact upon the UK economy brought about by the European debt debacle. Initial problems occurred back in 2008 when the US mortgage industry imploded creating a credit crunch which reverberated around the world. However, over the last few months there have been signs that some investors are now looking to take a step back into the marketplace. Which particular investment areas are they looking at?
A survey run by Barclays International showed a surprising trend for “treasure” investments – investments in precious metals, antiques, fine wines, art, and classic cars. Following on from this, we thought it would be interesting to take a look at the investment strategies and the investment intentions of expats in the UK and we received some interesting feedback.
As we touched on above, the UK stock market has been heavily impacted by the European debt crisis and indeed by the previous US problems. It is also worth noting at this point that the UK financial sector is a world leader and London is renowned within investment circles. Therefore, there has been a massive impact upon not only individual investment markets but also investor sentiment over the last few years.
The UK economy had initially seemed to fare better than its European counterparts although over the last few weeks we have seen disappointing economic data which suggest that the UK economy has slipped back into a double dip recession. This has prompted the authorities to announce a U-turn in relation to budget cutbacks and ongoing investment in the economy, in tandem with the Bank of England. The recent announcement that Chancellor Merkel has backtracked on some of her initial reservations regarding a European banking bailout has buoyed markets in the short term although we will need to see some follow-through on this particular subject.
Property (45% of the vote)
Despite the fact that the UK property market has shown little or no growth over the last few years it is still one of the prime investment areas in the minds of UK expats. The votes for the property sector amongst you get expats were head and shoulders above any other investment sector with precious metals second place with 13.75% of the board. The reality is that the UK has always been a property hotspot due to the fact that the vast majority of people have historically bought houses rather than rented them.
While this situation has changed slightly over the last few years as the cost of property moved higher and higher this has prompted significant interest in the buy to let market. As more and more people consider renting properties rather than buying them out right this is also led to a more flexible employment market which has benefited the economy. Historically there has always been an issue with supply and demand in the UK property market with demand severely outstripping supply. Various governments have promised to address this issue although so far none have come up with a workable solution which would maintain interest in the property market and secure asset valuations.
Precious metals (13.75%)
As we touched on above, precious metals is the second favourite investment class amongst UK expats and when you bear in mind they are often associated with times of trouble and seen as “safe havens” this will come as no surprise. Indeed if we look at the most popular precious metal, i.e. gold, we will see that it has risen from $300 an ounce backing 2000 to just over $1600 an ounce today. Indeed the price of gold peaked back in 2011, in the depths of another financial crisis; it is an astounding $1800 an ounce!
Gold is not the only precious metal which is attracting the attention of investors with a whole range of mining products such as iron ore proving to be particularly popular amongst growing economies. When we say growing economies in the current climate you may be forgiven for thinking they are few and far between but economies such as China and India are still growing at an impressive rate even in the current environment. One particular overseas market which perfectly illustrates the value of precious metals is the Australian mining industry which is still attracting tens of billions of dollars of investment due to excessive demand from Chinese and Indian companies.
There are many ways in which to invest in precious metals which do not involve physically buying the metals and if you are looking down this particular route you should take professional advice as soon as possible.
Stocks and shares (10%)
Stocks and shares have been ever popular in the UK since the 1980s when Margaret Thatcher introduced the UK population to British Gas which was one of many highly successful privatisations. However, over the last few years we have seen significant issues with regards to the European economy and the UK economy which has had a major impact upon the UK stock market. The value of shares has been very volatile over the last few years and while there has been a sure strength over the last few days there are concerns as to whether this will be maintained in the medium to longer term.
There is no doubt that issues in Europe and also the US have impacted UK stock markets and many people and nursing significant losses from past investments. The reality is that stock markets in the UK are central to an array of financial instruments such as pensions, loans, etc. Whether the love affair of UK investors with the stock market will be as strong in the future as it has been in the past remains to be seen. The recent banking scandal, with allegations of rate rating in the money markets, has not helped investor sentiment and many are now deeply suspicious of the financial arena.
The antique investment market in the UK has been growing for many years now and a variety of TV programmes seem to have caught the attention of private investors and institutional investors. In many ways the antiques market, along with other similar market, is based upon the rarity value of specific items although prices can be influenced dramatically by fashions and trends. It seems that the antique arena has become more popular as UK stocks and shares continue to suffer although what kind of returns investors can expect without in-depth analysis and experience remains to be seen.
Many people automatically assume that all antiques will hold their value in the medium to longer term when in reality, in line with any other investment market, their value will very much depend upon trends and fashions. Whether or not we will see a reduction in interest in the antiques market as and when the stocks and shares market recovers is also another matter to take into consideration. If you’re looking at specialist markets such as antiques market it will pay to take professional advice along the way.
Classic cars (7.50%)
The classic cars market has made a significant comeback over the last few years as a number of rare cars make their way to the marketplace. Some of the world’s most expensive cars have grabbed the headlines in recent times and seem to have ignited private investor interest in this particular arena. However, it is also worth noting that many of the more prominent classic cars are traditionally out of the reach of private investors such is they’re worth which is often based upon their rarity value.
Again, it could be argued that television programmes in the UK have fed investors hope with regards to investment in classic cars when in reality this is a very specialist market which needs particular attention. It is interesting to see that investors seem to look out with the more traditional investment markets in times of volatility and times of economic pressure although this is a market which is very difficult to predict with any great confidence.
It is worth noting that the demise of a number of prominent car companies in years gone by has led to a number of rare models being made available to investors which again seems to have fed investor demand. On numerous occasions we have seen initial value estimates thrown out the window as investors fight over one another to get their hands on historically relevant classic cars.
Fine wine (7.50%)
The fine wine market in the UK has historically attracted significant tax benefits and tax breaks although the vast majority of these have been eroded over the years. However, there is still an enormous interest in the fine wines market where the value of individual wines has risen phenomenally high in some areas.
It is no surprise to see massive growth in the number of fine wine companies operating in the UK and around the world and when you bear in mind that investors as far afield as Asia, Russia, South America and India and other prominent in the markets there is scope for further growth in the longer term. This is a market which is often misunderstood and often underestimated although as with some of the more obscure investment arenas it is not only the value of specific wines, their quality but also their rarity value which is very prominent in arriving at a valuation.
There have been a number of scams and “misunderstandings” in the fine wine investment arena and you would be strongly advised to take professional financial advice if looking to this particular sector.
The art world never cease to amaze in many ways although it is rather surprising to see this particular sector at number seven in the list of top seven investment arenas in the UK. This is a market which attracts enormous investment with some paintings going for hundreds of millions of dollars in their own right. Indeed it is estimated that the overall worldwide art market is worth in excess of AU$110 billion with Chinese investors very prominent with a market share of 30%.
It is interesting to see the private investors, in the shape of UK expat, are even considering the art market for investment purposes because it is very complicated and multifunctional. If you are looking to invest in any type of art it is vital that you do take professional financial advice from those who have a knowledge of the market. As we touched on above, many of the more obscure investment markets are more heavily influenced by fashions and trends and some of the wider market such as stocks and shares. You need to be fully aware of this before investing any of your hard earned cash into something which may be difficult to sell in the future.
Risk reward ratio
If you follow any of the investment markets are likely have come across the term “risk reward ratio” which is a way of measuring the perceived risk of an investment against the reward from an investment. In “normal markets” the risk reward ratio in the hall is relatively low over the last few years we have seen this significant increase in this ratio because of uncertainty and the potential for third parties to default on their financial liabilities.
One perfect example of an increase in the risk reward ratio can be found in the money markets where those looking to lend money to banks and other financial institutions demand a significant increase on their return because of a perceived risk of default by third parties. This ever-growing cost of finance began something of a vicious circle for the financial industry where margins were cut to the bone and indeed some financial institutions fell by the wayside during the 2008/9 crisis. Lehman Bros was a prime example of a major investment house which was effectively cut adrift and left to die in the financial markets turned downwards.
There are a number of elements of “investment risk” with the two more prominent being systematic risk, often described as general market risk, and specific risk which may be connected to an individual party or a specific investment market. These two elements play major role in dictating the price of investments and the potential return/reward ratio. In times of financial hardship investors will demand a potentially larger return because of the potentially larger risk they will be taking by investing.
Over the last few weeks we have seen signs of some movement within the European Union in relation to ongoing economic concerns. The German authorities are effectively pulling the strings of the European Union and while Chancellor Merkel was adamant some time ago that federal Europe backing for debt restructuring was not on the agenda, she seems to have changed her mind of late. Indeed there are also ongoing discussions regarding the bailout of the European banking sector and the possibility of investing directly into individual country banking systems as opposed to investing via local governments who will be forced to take on yet more debt which could impact their credit rating.
The US economy has shown signs of life over the last few months although in many ways it is being held to ransom by ongoing problems within Europe. There has been talk of a credit crunch part two of the massive investment by central banks around the world has so far seen this threat come to nothing. However, we will need to see some recovery in the worldwide economy in the short to medium term otherwise the financial implications of the European debacle in particular could be absolutely enormous.
Talk of a federal Europe continues to swell around investment markets and many experts believe this is the only real option if the euro is to be saved. Greece is literally hanging on by a thread, the Italian government is in trouble and the Spanish authorities have already requested a bailout for their banking system. There has been a short-term reprieve in the European stock markets on talk of European back the debt instruments although talk is cheap as we have seen in the past.
Yet again the property market is head and shoulders above any other property sector in the UK despite the fact that it has been depressed for some time. It seems as though the vast majority of UK expats are looking longer term in relation to their investments and see long-term value in the sector. Precious metals came in at number two, which will surprise some people, beating the traditionally popular stocks and shares into third place. It is likely that we will see an increase in the popularity of stocks and shares as the stock market improves in due course although whether the trust factor associated with the UK stock market in the past would be replicated in the future remains to be seen. Ongoing banking scandals have not helped the image of the financial sector and indeed many investors are now sceptical of UK banks and UK investment houses.
The emergence of relatively obscure market such as classic cars, fine wines, etc should not surprise investors because historically in times of economic trouble investors have looked towards these particular sectors. Whether or not they will retain their current popularity as and when the worldwide economy improves remains to be seen.