Investing in Alternative Assets

The coronavirus outbreak has created a climate of economic uncertainty and instability. Governments, policy makers and business owners are managing the challenge on how to reopen the economy whilst also ensuring the health and safety of people. The recent disruption to the economy has impacted traditional forms of investment. Following the outbreak of Covid19, all major stock market indices lost value (Statistia). Thus, investors are looking to safeguard investments in this challenging climate.

Whilst cash still remains king, liquid and the main medium of exchange, it is exposed to inflation risk. Over time, it will be worth less against inflation. In this unstable climate, investors have begun to look for alternative and tangible assets to protect and accumulate wealth against inflation risks. UHNWIs and HNWIs are looking to gold and ‘treasure assets’ as a ‘safe’ store for their wealth. These treasure assets included classic cars, vintage watches, art, precious metals and ultra-rare precious gemstones like pink diamonds. These ‘treasure assets’ are unaffected by the state of the economy, thus can be a valuable investment during covid19.

Whilst gold still carries risk, it has been rallying this year, up by 19% in July in comparison to the year before. (Reuters). In uncertain markets, the asset is typically viewed as a ‘safe haven’ due to the fact it is less volatile in comparison to other investments like stocks.  BlackRock iShares data shared that inflows into physical gold exchange-traded funds is approximately at $12 billion globally. Back in April, the Bank of America Securities commodities strategist Michael Widmer predicted that the surge in gold is fuelled by global uncertainty.

Yet whilst gold is one example investors can invest in as a means to diversify a portfolio, other tangible and illiquid assets are proving to be opportune. At the end of July, The Financial Times reported that property agents and jewellers have reported ‘brisk business’ in rare gems. Arpege Diamonds shared an analysis of the financial crisis back in 2008, which was then followed by a multi-year recession. Investors who kept money in solely in stocks took six years to recover, whereas investors that looked to diversify their portfolios in alternative asset investing experienced gains in the same period (Arpege Diamonds)

‘Since the financial crash of 2008, diamonds have surpassed traditional investments such as stocks and gold’ Edward Alvarado, Director at diamond dealer Diamintel confirms. The growing interest in Pink Diamonds in particular is largely attributed to the fact that the iconic Argyle mine in Australia that is responsible for producing over 90% of the diamonds is set to close later this year. The diamonds will become finite, and be limited in supply, thus their valuable might become more valuable (Arpege Diamonds). In addition to this, Precious Gem Investments reported that the value of pink diamonds has increased on average of 20% year-on-year for the last five years and as the zero-supply chain looms, their value could be set to skyrocket. Normally, investors buy pink diamonds with a view to sell them after they have increased in value to be rewarded with higher returns than seen in equity markets (Precious Gem Investments).

Given these uncertain economic times and the potential of higher returns in comparison to non-tangible assets, Harsh Maheshwari, director of Kunming Diamonds, speculates that investors could be looking to invest in alternative assets like Pink Diamonds over investing in the stock market.

According to Diamond Portfolio Australia, the market is proving to be popular in Hong Kong and Singapore. Due to their popularity amongst UHNWIs and HNWI’s, bankers, fund managers, wealth managers and family offices in these markets are increasingly advising clients to increase their exposure to this physical asset class (Diamond Portfolio Australia).

Whilst investing in alternative assets can be lucrative, like all investments, they carry risk. For tangible assets like artwork or rare gems, their liquidity can prove to be problematic if an investor is unable to sell the item with a higher return at a later date.