Assets to hold on to in 2010
In early 2009, prices in popular tangible assets such as contemporary art and fine wine continued to weaken as the crisis took its toll. Areas like this suffered because they had been target investments for bankers' bonuses. But as stockmarkets recovered, so did prices in many tangible asset categories.
Markets with a solid base of collectors were less volatile, but not immune to the economic backdrop.
But in general the coming year looks like being a good one for tangible assets - parly because expectations that consumer price inflation may rise will boost the value of hard assets.
So, which assets will be hot during the coming 12 months?
It's tempting to see the recent buying of gold by the Reserve Bank of India as a contrary indicator. Britain sold its gold reserves at the low - Indian buying could mark a high. But many traders think gold has further to run. Even when adjusted for inflation, gold is still well below its last peak in 1980.
Further switching from dollars into gold by emerging market central banks looks possible, mine output is in long-term decline, and low interest rates have made the opportunity cost of holding gold that much less.
Unlike many tangible assets, gold has instant liquidity and buying it is easy. There is no need for special gold purchasing schemes - often a cloak for scammers. A reputable bullion dealer or jeweller will sell bullion coins such as Krugerrands at a small premium over the spot price (which is typically around 7% to 8%), allowing for exchange rates.
For most, coins have the advantage over weightier bars because of their divisibility. A one-kilo bar costs around £22,500 at the current price. Gold rises in price as the dollar falls and vice versa.
As gold is priced in dollars, for UK investors this sometimes means an adverse currency move can offset at least part of the rise in price. But the sterling price of gold has risen sharply in recent years. At the time of writing, a gold price of $1,136 translated into around £683 per troy ounce.
Like many collectables, rare coins were a two-tier market in 2009. Rarer pieces continued to attract investors and those of more mundane quality stabilised or fell in price.
However, there were strong areas, including Russian and Islamic coins, which saw good follow-through from the strength in prices seen the previous year, and gold coins that were bolstered by the strength in bullion.
Sovereigns remain a very active market, with even small local auctions seeing substantial numbers of lots for sale and eager buyers.
Ian Goldbart, managing director of large London-based coin dealer AH Baldwin, says: "Demand for high-grade rarities is still outstripping supply and the coin market, at least outside of the US, still appears to undervalue great rarities compared to other asset classes.
"While top quality, 1,000-year-old gold coins can still be bought for a few hundred pounds, there should be further opportunities for growth."
Stamps show a similar pattern. Prices hit a peak in October 2008 and since then have been patchy, with European stamps in particular showing softness in price.
The SG100 index, compiled by stamp dealer Stanley Gibbons, has been virtually static for the last year, as has its GB Rarities index of investment-grade stamps.
But in the latter case this followed price increases of close to 40% in 2008. Commonwealth stamps, however, have been affected less by the adverse economic background.
Mike Hall, chief executive of SG, is optimistic. "We are seeing the beginning of an influx of new money from investors into rare stamps," he says. "The planned launch of a rare stamp investment fund in 2010 could have a significant impact on the market. Stamps have a value that is embedded in history."
The wine market, a favourite home for City bankers' surplus cash, was hard-hit during 2008, but prices reached a low in January 2009 and have recovered steadily since then, according to Liv-Ex, a trading platform for wine merchants.
Its latest broad index of prices showed a yearly change of around 9.5% in the 12 months to October, although prices are still below the peak reached in mid-2008.
Investment-grade wine shows a similar pattern, with a year-on-year change of about 10%, but with prices still 10% down on peak levels. Blue-chip claret is up about 13% in the 12 months to October 2009.
Whether wine prices continue to hold up depends on the financial situation. The recovery in prices this past year was driven by the market bounce and the cheerier outlook of many investors now.
The doubt lies over whether the current firmness in wine prices would withstand a major correction in equity markets. Wine, like contemporary art, appears to be too closely linked to the fortunes of the financial markets to be a true diversification away from it.
In the art market, impressionist and contemporary art sales in 2008 saw prices drop sharply with many works left unsold. Some estimates claim contemporary art was then selling at prices some 75% or more below the levels seen at the peak, although more sober calculations put the fall - for better-known artists at least - at more like 30%.
As with the stockmarket, art prices dropped in the 1930s and did not recover until after World War II. Similar patterns were seen in the mid 1970s and the early 1990s, but due to the subjectivity in art, peak to trough changes in prices can be substantial; often as much as 50%.
According to data from Artprice, returns from most art categories since the peak in prices seen around 1990 have not been that good, with the exception of photography, which has increased in importance.
Nevertheless, art could be a good bet. The early years of an upswing in the cycle are generally the best time to buy and recent sales of contemporary art have seen buoyant prices for iconic works.
For example, an Andy Warhol sold at auction for double its pre-sale estimate. But hefty price tags for big-name artists need not put investors off. Studies show that lower-priced works of art can perform better than pricier ones.
Forestry, favoured by some UK investors because of its tax status, had its place in the sun until recently. The three-year period between 2005 and 2008 was the best for many years, with annualised returns around 20% on average and, in some cases, as high as 35%.
However, this is unlikely to continue. Recession in the developed world hit timber prices hard in 2009. Recent returns were generated in part by a shortage of property that pushed up woodland prices.
But more properties have since come onto the market and this, together with the fall in timber prices, is likely to depress returns for the time being.
One area that might soon spring to life is diamonds. Ironically, this is something of a 'Cinderella' market for investors who dislike its traditional secrecy and mystique. But some believe there is scope for a renaissance.
There are several reasons for this: prices have lagged behind gold in recent years; most mines are ageing rapidly; little new production is being developed; and the credit crunch caused exploration activities to be cut back.
Some even suggest that the supply of new gem-quality stones will be all but exhausted within 20 years.
The investment case is similar to gold. Diamonds are a long-term store of value in very portable form and an effective hedge against a diminution in the value of the dollar. New wealth in emerging markets has been heading into this area.
Bernard Duffy, chief investment officer of the newly established Emotional Assets Fund, rates diamonds as one of his core areas for investing, along with art, photography, rare coins and stamps.
But diamond investing is complex, because of the individuality of each stone and because there is an aesthetic aspect to their value. The value per unit of weight is not proportionate. Larger diamonds are much scarcer and command a disproportionately higher per carat value.
Liquidity can also be difficult. Dealers will offer to buy back diamonds from customers, but the bid-offer spread will be a hefty one. However, this is changing with an online diamond exchange established for less expensive stones, and a listed diamond investment vehicle established. It could be an area to watch.
This article was originally published in Money Observer - Moneywise's sister publication - in January 2010.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).
The difference between two currencies; specifically how much one currency is worth relative to each other. For example, if £1 is worth $1.50, converting sterling to US dollars, the exchange rate is 1.5. Converting dollars to sterling at those levels, the exchange rate is 0.66, so $1 is worth 66p. There are a wide variety of factors that influence the exchange rate, such as a country’s interest rates, inflation, and the state of politics and the economy in that country.
Generic, loosely-defined term for markets in a newly industrialised or Third World country that is in the process of moving from a closed economy to an open market economy while building accountability within the system. The World Bank recognises 28 countries as emerging markets, including Argentina, Brazil, China, Czech Republic, Egypt, India, Israel, Morocco, Russia and Venezuela. Because these countries carry additional political, economic and currency risks, investors in emerging markets should accept volatile returns. There is potential to make large profit at the risk of large losses.