Podcast 25th September 2015
The year 2015 will go down as one of the worst years for any kind of investment. Equity markets are down, government bond yields are flat, credit spreads are up, commodities are down and real estate is down and still unaffordable.
Normally when one asset class is looking negative, other asset classes will look positive. For example if equities are down on worries of economic growth and lack of inflation, bond yields should come down. On the other hand if bond yields are trending higher, it would mean improved economic growth prospects and rising inflation expectations that would lead to equity markets rising. Gold is seen as a safe haven asset in times of financial market stress.
Why have all markets turned volatile at the same time? One of the reasons is the unprecedented liquidity infused by central banks globally with the top four central banks of Fed, ECB, BoJ and PBoC taking up balance sheet size by 3x to 4x to collectively touch USD 4 trillion. This liquidity found its way to perceived higher returns, taking up equities to record highs and lowering bond yields and credit spreads. When markets found that pace of economic and business expansion did not keep pace with rising equity and debt valuations, the long unwinding commenced.
In this current market conditions is it better to safeguard my money and keep it in cash or invest my money, as it requires to grow if I have to build a good corpus for my financial security post retirement?
Cash is a good option if one is uncertain on where to invest. Cash earns extremely low returns and is held in times of high risk aversion. Unless cash is put to use, investments do not grow and that will compromise my financial security down the line.
I would look to invest to grow my savings. How and where do I invest given all this uncertainty surrounding the markets? I would first see if there are any positives on the horizon given that negatives are being priced into the markets. If I do see positives and if I am confident that the negatives are not too bad and asset prices are reflecting those negatives then I will invest.
Where do I invest now? On the positive side I do see that there is very low leverage in the world economy at present as banks have turned extremely risk averse post 2008 financial crisis. I also see governments keep a wary eye on debt given the sovereign bond issues that hit the PIIGS countries. Central banks are keeping rates low and pumping in liquidity that will at some point of time filter into consumption demand. Inflation is not a concern given that oil prices are kept down on rising supply and other commodity prices are kept down as China the largest consumer of commodities is facing the after effects of over investment.
I also see that the business climate is changing with companies that are able to innovate and leverage technology surging forward. Given all this I will invest my savings in selective equities and a small part in long dated government bonds on expectations of interest rates coming off.
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