21 Oct

Pink diamonds to benefit from capital rotation

In less than two weeks, the United States is set to go to the polls, with the outcome of the upcoming US Presidential Election set to shake up global financial markets.

Whilst the polls suggest Joe Biden and the Democratic Party will be victorious, betting markets are getting a little tighter, indicating there is some chance current US President Donald Trump will win a second term.

No matter who wins the election, investors will need to position their portfolios to protect and ideally grow wealth against a backdrop of several major trends that will play out in the years to come, irrespective of who ends up in the White House.

Three of those key trends include:

  • Substantial increases in fiscal stimulus, with the US set to pass a package of more than USD $2 trillion in the aftermath of the election. Government debt levels will skyrocket as a result of this.
  • A continuation of low to negative real interest rates, and direct central bank monetisation of government debts, as the co-ordination of monetary and fiscal policy continues to increase.
  • A continued reluctance from the private sector to engage in meaningful capital investment, as high private debt levels, low to negative real wage growth and rising unemployment all limit demand.

All these trends combined can be expected to limit real growth in financial markets, and lead to investors increasing their holdings of alternative assets that are best suited to prosper in the difficult macroeconomic and monetary environment we face.

Pink diamonds are one such asset class investors will turn too, with the warning signs of a speculative mania currently engulfing financial markets encouraging savvy investors to make the switch now.

Pink diamond

Signs of a speculative mania in the markets

Readers of our market updates know we have great concerns about the health of the underlying economy both in Australia and overseas, and even more so, the health of global financial markets, with both kept aloft by printed money and low interest rates.

Risk is everywhere, from collapsing levels of economic output, to rising unemployment, to a cascade of small business failures, to public debt levels that are going parabolic all around the developed world.

Over the next five to ten years, we think the risks that are evident in financial markets will spill over, meaning it is likely that investors in traditional assets like shares and bonds are going to get much lower if not negative real returns on their investments over this time period.

To that end, we were very interested in a great article published on Livewire Markets on October 16th, by Andrew Clifford of Platinum Asset Management. The article warned of the multiple indicators that suggest markets are in a speculative mania. The warning signs, according to Clifford, included the following:

  • A buoyant market for new listings with companies often debuting on the market at prices as high as 50% or more above their issue price.
  • High levels of retail investor activity, not just in shares but also in the options market.
  • The stories of fortunes made and lost overnight by small investors that are regularly shared on internet blogs and even in the traditional financial press.
  • Every good bull market needs an innovative financing vehicle and this time we have Special Purpose Acquisition Companies (SPACs). The premise here is that investors invest their cash in a SPAC and the promoters will find a great company to buy from the private markets with the funds.

That’s quite the list of warning signs for investors to be aware of. Any balanced observer can see that there is trouble on the horizon. The question is – what do you do about it?

Whilst we don’t interpret the above as a reason for people to rush out and sell all their shares, or their property, or take their money out of the bank straight away, we do see it as a good reason to begin diversifying a portfolio, and looking to increase exposure to discrete hard assets.

Pink diamonds to benefit from capital rotation

As more and more investors come to realise the risks in financial markets, and the opportunity that hard assets offer, it is only natural that demand for pink diamonds will increase notably.

Given the supply constraints, this increased demand, which will see capital rotate from expensive financial markets into this unique asset class should see prices for pink diamond prices increase accordingly.

Our personal view is that the return outlook for pink diamonds in the decade ahead is at least as good if not better than it was over the last fifteen years, where prices increased by more than 10% per annum.

It promises to be an exciting time, and we look forward to seeing the market progress in the coming years.

As always, we hope you’ve enjoyed this week’s edition of “In the Loupe” and look forward to any questions or comments you may have.

Share this