This is how Ireland's super-rich are now investing their billions
It's exactly four-years-and-a-day since international stock markets hit rock bottom. On March 9, 2009, New York's Dow Jones Index crashed to its lowest point in 12 years. Two other major stock market indexes – the Nasdaq and Standard & Poor's 500 – also bottomed that day.
Many of the wealthy investors who were burned that day are now getting out of their bunkers.
Until recently, they had tried to protect themselves from similar stock market shocks by pouring their money into 'safe havens' such as gold, cash deposits and government bonds. The tide is now turning.
Wealthy investors are starting to lose money on traditional "safe haven" investments, such as fixed income bonds and certain government bonds. That, along with higher inflation forecasts, signs of a pick-up in the American economy and drastic falls in the interest rates that banks are paying on savings, is encouraging wealthy investors to put their money elsewhere.
"Wealthy investors have realised that we've moved on from the bleak days of 2008 and 2009 and that to protect their wealth, they need to start investing their money where it will work for them," said one wealth manager we spoke to. "They realise that they need to invest their money in something where it will beat inflation."
Johannes Jooste, chief market strategist for Europe, Middle East and Africa at Merrill Lynch Wealth Management, confirmed the trend, saying that high-net-worth individuals were starting to move their money from traditional "safe havens" to investments with a little bit more risk.
"You'll earn very close to nothing on core government bonds, such as British, US and core euro-denominated bonds," said Jooste. "When you take inflation into account, the returns on such bonds can be negative."
So what investments are the rich eyeing up now?
Wealth managers are incredibly secretive about what their well-off clients are investing in. One major Dublin wealth manager, who did not wish to be named, said the pick-up in the US economy is encouraging many of its investors to pour their money into US shares.
"As an investible market, the US remains the single most important economy in the world and stands head and shoulders above the rest," said the wealth manager.
"To put the importance of the US consumer into context: The average US worker generates €33,360 in Gross Domestic Product per head – the Chinese equivalent is only €2,306 per head. Six million jobs have been created in the United States private sector since the beginning of 2010, house prices in the 20 major cities around the US are up 10 per cent over the last year, and credit is starting to flow again to small and medium-sized business – who are the heartbeat of middle America."
As a result, wealthy investors are particularly interested in "economically sensitive US stocks", said the wealth manager. "That's essentially companies that have anything to do with an improving housing, credit and labour market such as homebuilders, banks, and even shares in automobile companies like Ford and General Motors that almost collapsed a few years back," he said.
"Investors are also eyeing up companies that have exposure to the energy boom that is taking place in the US. There's an energy renaissance taking place across America through the use of new technology like hydraulic fracking. The International Energy Agency says that America is on course to overtake Saudi Arabia as the largest producer of oil by 2025, so there's a lot of opportunity in US energy – particularly in the companies that support the energy industry."
Along with US shares, the wealthy are also investing in global brands and dividend-paying shares – that is, companies with growing and sustainable dividends, usually household names.
"Investors with a limited risk appetite often go for the more dividend-oriented, defensive shares while those with a more risky outlook will go for cyclical shares," said Jooste.
Dividend-oriented shares can include the shares of certain mining, telecom and food companies. Cyclical shares include the shares of certain energy and metals companies.
Although it was a sub-prime mortgage crisis in the United States which triggered the global recession in 2008, wealthy investors are starting to get an appetite for US property again – but they are still very cautious, according to Jooste.
"The US property market is normalising," said Jooste. "It's always been a popular destination, especially for older private investors. There is a shift into assets such as US property – but that shift is nothing like the maniac levels we saw before the recession."
Jooste said that high-net-worth individuals were either investing in US property through property funds – or by buying properties directly which they then rent out.
"There is also a bit more interest in British property than there has been in recent years – but not to the same extent as the US," said Jooste.
Irish commercial property prices have tumbled by about 65 per cent since the property market started to collapse – and this is music to the ears of many wealthy international investors who are eager to snap up what they consider to be bargains.
"International investors are looking to buy commercial property in Dublin," said the major Dublin wealth manager we spoke to. "The investment yields you can get on some Irish commercial property are attractive – particularly if you can get a 7 per cent yield."
The wealthy are cherry-picking the commercial properties they invest in however, and are primarily interested in property in prime Dublin locations, such as Dublin 2 or Dublin 4, according to the wealth manager.
Merrill Lynch's Jooste said that some high-net-worth individuals were eyeing up distressed property and distressed debts in southern Europe, such as Spain and Portugal. "Such investments are for sophisticated investors however," said Jooste. "People investing in such assets will usually do so through a fund or private equity vehicle rather than directly."
It's not just Irish property which has caught the eye of the international super-rich, said the secretive wealth manager we spoke to.
"There are a lot of international investors interested in Ireland because investments here are seen as good value," he said. "In the US, Ireland is viewed very positively (as a destination to invest in). International investors are looking for companies with direct exposure to Ireland, such as FBD and CPL."
In particular, the wealthy are interested in investing in firms in "turnaround situations" – that is, companies in trouble at the moment but with the potential to turn themselves around, he added.
The return of risk
Even products blamed for triggering or aggravating the sub-prime crisis in the US are making their way back onto the investment radar of the rich. Among these products are collateralised debt obligations – where debt is essentially repackaged and resold to investors, and shadow banks – where special purpose vehicles, rather than banks, lend money.
"New investment products which are being presented to the rich include much cleaned up versions of shadow banks and CDOs," said our Dublin Deep Throat. "Most wealthy investors will always look at taking on a risky opportunity as part of their investment portfolio."