Investment Returns: Looking Forward
Uncertain Markets and Low Interest Rates
Investors are at a crossroads, as they look forward and try to secure a sustained investment return. Since 2009, the Dow Jones Industrial Average has gone from 7.000 points to more than 18.000 in 2016. Likewise, the S&P 500 has raised from approximately 700 point in 2009 to over 2.000 this year. However, over the next six to twelve months, uncertainty will remain high and fears of a market pullback will prevail. As the global markets are affected by the world’s political situation, investors might have a hard time finding good and stable returns through traditional financial instruments. The presidential election in the United States will bring change to the country and it might take years for the economy to recover stable growth. The European and US equity markets are expected to yield an average of 4.0% and 6.5% over the next 20 years. Similarly, government securities and money market funds have such low yields that they are struggling to compensate for average yearly inflation. Therefore, there are real worries of negative returns with these financial instruments. For example, in the case of both European and US government bonds, the expected 10 to 20-year average return is approximately 2.0%. Meanwhile, the yearly inflation target for most of these economies is 2.0%.
Growth and Preservation of Capital
As individuals are living longer and needing more retirement income, stable and high-yielding investment opportunities are essential to society. Therefore, investing in real estate has become an attractive option because it represents tangible assets and lower risk. Furthermore, in the case of agricultural real estate, it has both productive value and appreciation potential. Thus, investors looking for double-digit returns, without wanting to engage in an aggressive growth strategy and high risk, should consider farmland and the food industry; particularly in regions of the world where the agricultural sector is booming. Within the food and agriculture industry, there are many attractive sectors, including supply chain integration, commodities trading, and farmland operations.
The food and agricultural industry is becoming increasingly popular and liquid across the production line, from the grocery stores to the fruit fields in Latin America. For example, Whole Foods Market stocks in the US have gone from approximately $5.00 dollars in 2009 to more than $30.00 dollars in 2016. Similarly, the amount of agriculture-based exchange traded funds (ETFs) has augmented significantly over the last years. Today in the US, there are approximately 30 ETFs focusing on agricultural commodities and approximately 5 ETFs focusing on domestic farmland real estate. The organic foods market specifically and the agriculture sector in general are relatively new within the investment world. However, their increasing popularity as consumer goods and investment vehicles will lead to greater liquidity, confidence, and economic yields in the coming years.
Investors seeking real returns on real assets should consider the food and agriculture industry both domestically and internationally. Domestically, a pattern is becoming clear, as the NCREIF Farmland index has consistently outperformed the S&P 500 for the last 15 years and is likely to continue doing so, against the backdrop of instability in the financial markets. Whereas internationally, food demand will continue growing and agricultural projects will continue developing.
(Read more on how Brexit Creates Uncertainty and Opportunity in Agribusiness.)