Finding an income investment that can act as a powerful hedge against inflation is not easy, but if you know where to look, that valuable combination can be found in primary sector private investments
The wholesale private investor is in a quandary right now. Selecting investments is often complex but add in a potential inflationary crisis, epidemiological pandemic and a climate change clock ticking away, the things to consider are mounting up. As we speak we are also seeing a changing interest rate environment and volatile equity markets.
There is no guaranteed successful investment, ever, but we have some talking points for investors, as to the strengths of our primary sector in relation to some of today’s challenges.
New Zealand has a global reputation for a world-class primary sector. For example, our horticultural industry is known for its passion for food safety and biosecurity. New Zealand growers are innovative, as demonstrated by how they grow, harvest, package and transport their produce domestically and to the rest of the world. Our ‘little’ country competes with its quality products over quantity, attracting premium prices, whether that is pastoral, horticulture or sawn timber.
Below we make a case for why the primary sector deserves investors' attention and respect.
Before the list begins there is a private market myth we’d like to dispel. We continue to see reports and articles that say that that liquidity is a blockade to any private market investment and has been the main deterrent to investor participation. Liquidity was once a barrier to the private market, but things have changed. An investor can now engage in an investment with the knowledge that if and when an exit is needed they have a mechanism available to them to do so; this secondary market functionality enhances liquidity as investors are brought together to trade and agree pricing. Although we at Syndex have offered the secondary market for a number of years, this has been in the form of a continuous market. New to 2021 is the periodic market - an auction or trade event that investors can participate in to buy and sell shares and that works very well in private markets. So, before we even start on the benefits of investing in the primary sector we recommend considering your later ability to liquidate your investment. If your shortlist of investments don’t include this option, ask them why! For more information on how Syndex is solving the liquidity challenge click here.
The first and most obvious reason to invest in the primary sector is simply that people have to eat! The demand exists and is only going to increase. Global populations continue to grow and every mouth joins the largest consumer market - enviable for any other industry. In recessions (and lockdowns) the food providers and producers don’t experience the downturn as others might, but the real crux here is the reduction in available land and water that will push supply and demand dynamics into action.
In regards to inflation, investors are looking for options that they think will generate high enough returns to beat it. Commodities are an option, so too is real estate. Historically, this has risen in value faster than inflation, and farmland, in particular, tends to appreciate in value significantly when the general economy is suffering. Agri/Hort investments have traditionally been sought as longer-term hedges against inflation and are often a countercyclical play to public markets or more traditional investments. When doom and gloom strikes in the public markets the equivalent investment in the private market is likely to be faring much better.
This makes a strong case for farmland as an income investment that can act as a powerful hedge against inflation. It not only retains its value in ways that other asset classes do not, but it also generates income through the cultivation and sale of crops.
Forestry is another stalwart of the primary sector, recently declared NZ’s most valuable primary industry asset and is another strong investment option. Exports were expected to increase 8.1% to $6.0 billion for the year ending June 2021 due to strong demand for logs from China and robust demand for sawn timber from the US. Importantly, the World Bank has projected that the global demand for wood fibre will quadruple by 2050. As climate issues come into sharper focus, forests offer a helping hand in sequestering carbon, as well as reducing methane emissions, building biodiversity and reducing pollution to waterways.
Adrian Orr recently said not to put all your investments into one ‘kete’. This was in reference to residential housing, but this common message is about the need for diversity in an investment portfolio. Primary sector investments could be the natural goodness that your portfolio needs in these times, noting that risks exist even in resilient markets.
See the Syndex marketplace for primary market investment opportunities.
This article was featured in Interest.co.nz. See the full article here.