Multi-Unit Franchisee Magazine Issue II, 2013 | Page 74

InvestmentInsights
By Carol M. Schleif

There’s a New Environment
Dawning for Investors
Time to be nimble as markets continue to change

T

here’s an old adage on Wall Street:
When someone says, “It’s different this time,” run as far and as
fast as you can.
After surveying today’s overarching
trends, however, an important tipping point
seems close at hand; one that tees up an
investing environment vastly different than
the one we’ve known for decades. Survival
and success will require different thought
processes, strategies, and investment tactics
than those we’ve relied on before.
When I started my investment career
in the 1980s, the marginal income tax
rates for top earners had fallen from 70
percent to 50 percent, and a mere 5 percent of the population owned equities.
Bond yields stood in the upper teens/low
20s, and scores of wizened industry veterans declared they’d wait to invest until
dividend yields exceeded bond yields. The
Dow Jones Industrial Average had eclipsed
1,000 points—the first time it had traded
there since the 1960s—yet the market’s
prices-to-earnings ratio stood at seven.
In the intervening decades, bond prices
soared as yields dropped to zero (or below, if inflation is factored in). Companies
cleaned up their balance sheets with lowerrate debt, benefited from the productivity
enhancements brought by technological
innovation, and experienced the delightful
tailwinds of globalization and plummeting
commodities costs.
Those were definitely fun times while
they lasted. But change is in the air.
The new environment
• Bond bust. After sliding for 30 years,
it’s highly unlikely that bond yields can go
much lower; the end of the bond bull may
well be nigh. For the millions of bond fund
investors late to the party, the notion that
one can lose money in bond funds may

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Multi-Unit Franchisee Issue II, 2013

become as harsh a reality as 2001–02 was
to technology investors. Historically purchased for safety and yield, fixed income
investments—particularly in the form of
mutual funds—may well not offer either
in the years to come.
• Fewer players. The new laws and
regulations enacted in response to the

Growth will come
from burgeoning
middle classes
in developing
countries. By one
estimate, 3 billion
additional people
will move into
the middle class
globally over the
next 20 years.
market crashes of 2001–02 and 2008–09
put a significantly greater compliance and
infrastructure burden on purveyors. That,
in turn, has increased the cost to do business and made the barriers to entry even
higher. Realistically, given an increasingly
global and more regulated investment environment, a firm must be large enough to
support global coverage of multiple asset
classes, or be small but incredibly deep and
focused on one area of expertise.
• Inflationary pressures. In the wake
of all the money that central bankers have
printed in recent years, inflation will most
likely pick up in the not-too-distant future.

I suspect few portfolio managers know how
to invest during inflationary times—and
even fewer corporate chieftains know how
to operate amid such pressures.
• Global strength. Deleveraging among
developed countries will prompt global
companies to seek growth elsewhere.
While investors fret over political gridlock, deficits, and deleveraging woes within
developed countries, corporations based
in those same countries can now do their
business all around the world, and they
are. Furthermore, they can keep their cash
and their investments in countries that not
only offer better development opportunities but also friendlier tax policies.
• The developing middle. Growth
will come from burgeoning middle classes
in developing countries. By one estimate,
3 billion additional people will move into
the middle class globally over the next 20
years. That is good for consumer companies, commodities and infrastructure firms,
industrial/infrastructure firms, and more.
• Overseas economy. The domestic
unemployment rate may remain higher
than before, yet the economy can still do
okay. While part of the unemployment rate
likely represents the unemployed whose
skills no longer match today’s jobs, this
reality doesn