Most of the articles you read will try to tell you what to invest, but today will share with you what not to invest.
I was inspired by this twitter post, though I cannot verify if it was indeed from a UBS report.
By now we all know what the world has become after a long period of the ultra-loose monetary policy. By pushing risk free rates to an unprecedented low level, central banks run the risk of creating a disorderly return for many assets around the world. The real danger will come when central banks start to “normalised” their policy.
Many people mistakenly take the bankers’ words for granted, such as mid-2014 or end of 2016, whatever. It may just come sooner than you can imagine.
The “Five Suspects”
#1 Risk-Free Rate
Treasuries or Sovereign Debts have departed from fundamental value. To accept a deal to lock your money for 30 years and get a 2% to 3% interest may seem insane in the past, but is a reality today.
As founder of US$21 billion Elliott Management hedge fund Singer pointed out, Fed’s monetary policies are distorting the prices of long-term bonds and the global recovery. “Everyone wants a safe haven. There is no such thing in today’s markets”.
Japan’s “to do whatever it takes” to get inflated policy just make a large sell-off in JGB (Japan Government Bond) a distinct possibility.
In desperation to search for yield, and thanks to all the brilliant bankers, junk bond is renamed as “high yield bond” and become an asset allocation” to many investors.
The junk bonds are selling at record high. on May 7, Barclays US High Yield index closed at 4.97%, the first time in market history that the average junk-bond yield has fallen below 5%. That is lower than what the Treasury’s yield used to be!
In credit space, valuations do not look unreasonably stretched but the lack of liquidity in the market could engineer an adjustment that looks like a bubble bursting.
#3 Physical Real Estate in Asia
But the problem is, will you swallow the fact that you missed the boat when your neighbour has just made $1m selling his house? Will your neighbour goes on exploring other investment opportunities when he thinks he is a property guru now?
If the bubble does not burst but just leak. People will just patch it up and think everything is going to be ok. We will see the how the great rotation of gold will end.
#4 A number of Emerging Market Equity
Namely Indonesia, the Philippines, Thailand and Mexico. I do not fully agree this part but I admit the volatility will be high just like the initial years of China’s stock markets.
I just do not think the markets have reached the hysterical level to call it a bubble.
#5 Australian Banks
I do not have much comments of the banks per se, but in general, the recent collapse of commodity price put great pressure on Australia. Australia dollar has collapsed and below US$1 now. Australia was one the few countries survived the global financial crisis well but if you read Citibank’s 145 pages report “From Commodities Supercycle to Unicycles”, you may have to worry for the Australia’s business.
Last word, take note stock markets are nearly not mentioned here.
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