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What to invest in next

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By Michael O’Connor

In a turnaround that seemed unthinkable as we stockpiled toilet paper and hoarded disinfectant wipes in March 2020, Global equity markets are now 24% above pre-pandemic levels.

Such an accelerated recovery against the backdrop of a persistent global pandemic has left investors fearing limited upside from here on out.

The S&P jumped 2% in July to clinch its sixth straight month in the green, shrugging off concerns about the latest wave of COVID-19.

All three major US stock indexes head into August with impressive year-to-date gains under their belts, but the question remains, Can the growth continue?

STOCKS

The Stock Market continues to focus on record-breaking Q2 earnings. At the halfway stage, S&P 500 companies have reported a 90% increase in profits from last year, making it the best earnings performance since 2009.

Takeaway: As mentioned previously, it's easy to look at record high stock market valuations and assume a bubble, but record earnings figures and improving fundamentals from the biggest hitters in the index will continue to act as a support, justifying further gains.

BONDS

The yield on the 10-year Treasury fell from 1.75% to 1.18% since mid-March as concerns about runaway inflation start to roll over.

While the downward move in rates has been somewhat surprising given the economic growth and higher than expected inflation data, it suggests the market participants view the latest inflation jump as transitory. I expect to see inflation figures subside somewhat as supply-side contractions and stimulus effects normalise.

Takeaway: With real rates likely to stay negative for the foreseeable future, investors face wealth destruction in real terms if they continue to hold excess cash and/or traditional high-quality bonds.

CRYPTO

Bitcoin Bounce

Bitcoin posted its first positive monthly gain in four months, as the cryptocurrency rallied more than 30% from $30,000 to $40,000.

J.P. Morgan's announcement that it would make Crypto Funds available to all wealth clients for the first time coincided with aggressive buying by institutional entities according to (OTC) trading volumes data. Pushing prices higher.

All eyes will now be on the remaining big banks to see if they follow suit.

Takeaway: As the Wall Street elite continue to build out their Crypto infrastructure, Institutional investors will have the opportunity to participate in the crypto space, creating further demand.

The Month Ahead

Despite the faster than expected recovery, equity indexes can move higher, driven by a combination of robust earnings growth, attractive valuations relative to bonds, and accommodative central banks.

Everything is relative

Many investors assess the various investment options available to them as stand-alone opportunities. In reality, most investment decisions are relative; thus, a great deal of the selection process is comparative.

In today's market, the negative real interest rates on offer in the fixed income market must be factored in before making any investment decision. These historically low rates are helping to moderate US equity valuations, bolstering the case for owning stocks on a comparative basis.

With this in mind, I view equities as relatively more attractive, given the potential for bond yields to rise and corporate earnings to offer more positive surprises.

For fixed income, short duration, high yield bonds are still the preferred way to generate income.

No free lunch

While this base case scenario is broadly optimistic, the potential headwinds can't be ignored. Most notably, depending on the length and severity of the recent COVID spike, Delta may prove another big test. Year-over-year growth trends across mega-cap tech companies are likely to decelerate after peaking in Q2. Supply chain snags, less forgiving comparison figures and higher expectations will make outperformance harder in the second half of this year. As a result, equity markets will need to rely on market rotation to push stock prices higher. As always, caution and patience are the order of the day.

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Lower tax rate will discourage private landlords leaving the market

By Ted Healy of DNG TED HEALY Property owner groups are pushing for a new tax rate of 25 percent for landlords to discourage them from selling up and leaving […]

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By Ted Healy of DNG TED HEALY

Property owner groups are pushing for a new tax rate of 25 percent for landlords to discourage them from selling up and leaving the market.

Currently, landlords are paying over 50 percent tax on their rental income and the Government are looking at the possibility of reducing this in the upcoming Budget.

The Irish Property Owners Association (IPOA) and the Institute of Property Auctioneers and Valuers (IPAV) have called on TDs and senators in the Oireachtas Housing Committee to back a new tax rate of 25 percent.

This will incentivise landlords to stay in the rental market and “support new investment”, according to chairperson of the IPOA Mary Conway.

“The private investor is taxed at a marginal rate of up to 55 percent whilst the private equity fund/REIT pays zero percent tax on rental profit, once they exit the market within a defined period.”

Private non-developer landlords provide 94 percent of rental accommodation in the State with 70 percent of these landlords owning five properties or less.

Inheritance tax also plays a role in encouraging landlords to leave the rental market due to their age.

“75 percent of landlords are above the age of 50 and 48 percent are above the age of 60. This is important to note as taxation issues around inheritance are another contributor to landlords leaving the market.”

Meanwhile, Housing Minister Darragh O’Brien has said he wants to see measures in the Budget to help “good landlords” and keep property owners from quitting the private rental market.

Since 2016, there has been a loss of up to 8,000 landlords, representing around 44,000 tenancies, from the sector.

Mr O’Brien said landlords have been “demonised” and must be kept in the market while the State increases its stock of public housing. He said a record 25,000 social houses will be delivered this year.

The murmurings are that measures will be taken in the upcoming Budget that will help to maintain as many of those private tenancies as possible whilst building up the public housing stock, the mechanism remains to be seen.

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Predicting the future

By Michael O’Connor I received some bad news over the last few weeks, and it has changed my perspective on a few things. One thing I realised is that it’s […]

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By Michael O’Connor

I received some bad news over the last few weeks, and it has changed my perspective on a few things.

One thing I realised is that it’s the things you never see coming that truly impact your life.

We spend our days worrying about the obvious risks, and then our lives are upended by an event we could never have predicted.

This is true across so many aspects of life.

Investing is no different.

Much of my day job is focused on what happens next.

Are we headed for a recession, will the stock market crash, and how much will property prices fall?
These are all pressing questions, but these attempts to predict the future can be soul-destroying when the future is so hard to predict.

History is an endless stream of reasonable predictions upended by unforeseeable surprises.

In 2001, as we focused on the debt crisis in Europe, two planes struck the Twin Towers. In less than 90 minutes, the world changed in a way that was simply impossible to predict.

In 2020, as we focused on the implications of Trade Wars, a virus shut down the global economy, and 20 million Americans lost their jobs in a single week.

And on and on.

Paying attention to the known unknowns is essential, but it’s risks that we don’t see coming that truly define us.

No preparation, no protection, maximum destruction.

So, if the surprises are what really move the needle, why do we spend so much time trying to predict the future?

Simple put, it helps us worry less.

Building a vision of the future and convincing ourselves it will play out offers unrivalled piece of mind – a sense of control in an entirely uncontrollable world.

The warm cozy hug of certainty is hard to resist.

Despite the allure, however, we must ask ourselves; why obsess over predicting the exact path when the probability of us getting it exactly right is so low? Surely this is an obvious waste of time and resources?

So how can we better allocate resources?

Focus on the bigger picture

Instead of arguing over the minutiae, we need to focus on the bigger picture.

So many risks could play out over the short term.

Inflation runs higher, and interest rates pull down stock market returns.

The real estate market falters, creating economic ripple effects;

Energy shortages
A new COVID strain

The point is, there is always risk.

History is just one thing after another.

There is never a utopian state of calm, but over the long run, humans have prevailed.

In the face of wars, depressions and pandemics, people have become more productive.

We have continued to innovate and create products and companies that are more and more profitable over time.

This is the detail we often fail to see – the glimmer of light in a dark room.

Our ability to adapt and overcome over time is undisputed.

So, instead of trying to predict exactly what happens next, trust that we will prevail over time and focus on the larger trends.

What innovations will inspire the next generation of profitable companies? How will changing demographics change the world?

You will never get it 100% right but focusing on the stuff that really matters certainly improves your odds.

To learn what companies to invest in and to get direct access to my personal investment portfolio go to www.theislandinvestor.com.

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