Investors eyeing the increasingly volatile global economy are wise to hesitate when considering investing in any individual market. The Great Recession of 2007-2009 exemplified all that can go wrong in the housing industry. Today’s fuel prices demonstrate all that can go wrong in the energy industry. The Internet and digital programming have disrupted long-held marketing strategies, and newly emerging investment vehicles may offer — but have no history of — reliable returns.
Two traditionally sound investment avenues — stocks and real estate — have been the foundations of national and global economies for a couple of centuries. Through the years, both investment cultures have suffered from inappropriate financial manipulation, which caused millions of dollars in losses. In the absence of those nefarious activities, though, each of these investment strategies offers different risks and returns and, over time, investors have chosen one over the other, based on those differences.
- Stocks have traditionally offered faster and higher returns, accompanied by heightened risk of loss. With a stock purchase, investors have little or no control over the use of the financial asset and are subject to the whims of corporate management and relevant industry factors.
- Real estate has traditionally offered a slower, but more reliable return. Rents and leases provide a regular revenue stream and rising property prices raise the value of the initial investment as well. Property investments do incur more costs in ongoing maintenance and repair fees, which can impact ROI.
Today’s economic conditions are putting decidedly different market pressures on both investment opportunities
For decades, investors could put their money into foreign and domestic industries with a confident assurance that there would be a significant financial return over time. For 35 years, China’s explosive manufacturing sector has offered low cost, high yield investments for millions of international investors. That opportunity may be evaporating, however, as that country evolves into a more consumer-driven economy, and industrial returns reduce as a consequence.
The energy industries are equally challenging these days, with a glut of fossil fuels available and an increasing global shift to non-fossil fuels for energy production. Internet commerce has changed the way the world does business, and now-outdated systems are slowly being replaced by innovative, and infinitely more efficient, digital programming. Many of the new technologies, however, are unproven over long periods, and their sheer infancy injects even more instability into an already unstable economic world.
At the same time, national economies are becoming reliant on other national economies to remain firm. The European Union has experienced profound difficulties in the past decade as its member have grappled with uneven and disparate economic management. The national economies of Italy and Greece have dragged down the value of the Euro, even while Britain and Germany have worked hard to hold it up. Across that continent, stock investments have struggled not just because of industry factors, but also because of the connections those industries have to the economies of neighboring countries.
The resulting flux of industrial (positive and negative) activity, Internet connectedness and eroding international borders has created an environment that many consider unfavorable for traditional stock investing. As international industries struggle to find a firm and consistent economic footing, both equity and bond markets will remain volatile.
Another consequence of globally accessible information is that it creates the opportunity for finding and funding international purchasing options. In the first nine months of 2015, more than $625billion was spent on worldwide property purchases, up more than 11 percent over the same period in 2014. International investors are among the largest purchasers; Chinese nationals have bought almost $6 billion in Los Angeles alone.
The largest, most attractive locations — London, Paris, New York, San Francisco, Tokyo and Sydney — gained the highest levels of financial infusion. But, the so-called “tier two” markets, those smaller urban centers that can offer more opportunities at lower costs, are also being targeted. One study suggests that the increased attention to real property is related to six elements:
- International political uncertainties have created uncomfortably high risks in traditional equity positions.
- Global access to real estate is easier, due to both reduced border controls and increased interactions through digital portals.
- Property inventory is relatively easy to obtain and dispose of, which allows retention of investor liquidity.
- Longer term investments are believed to offer better security.
- Digital connectivity has created partnerships across borders, which encourages additional resource investment and opens new economic ventures.
- Low-interest rates encourage less equity and more debt financing, which offers smaller but more stable returns.
Both financial vehicles still offer positive opportunities
Even with the gloomy outlook on current equity opportunities, global investors continue to look to recovering economies and the emerging commercial opportunities within them. The world’s ever-evolving economies continue to offer both rich rewards and stunning defeats. Accordingly, every investment should be made only after careful consideration of all possible short- and long-term risks of loss and possibilities for returns.
A real estate investment company such as the Matterhorn Group can help guide you through the complexities of real estate investment. To learn more, call us at (708) 588-9611 or contact us online.