Investors Are Getting Roasted
Pfäffikon SZ, Switzerland – The financial landscape has become increasingly complex over time. Meanwhile we’re living in an era of 0% interest rates where many investors forget that it has become the benchmark for returns on capital. It’s unfortunate the Dutch tax man doesn’t hold the same opinion. It’s understandable that some investors become disturbed when some central bankers are unclear about their future steps. The pursuit of investment returns has become a precarious task, especially for institutional investors.
Parameters
Several parameters are showing that the stock market is still attractive in comparison to the bond market. A rough rule of thumb is that bonds become attractive at interest rates of about 4.5%. We’re not nearly there yet. At this time stock valuations are simply too low in relation to the 0% interest rate era. In my view there is still enough upward potential in stocks. Speaking in terms of the Dutch AEX only at 530 points would there be a representative valuation of stocks in general. It also still holds that the bond market is comparatively expensive. Take a look at the negative interest rates in the attached graph.
Fragile
It goes without saying that the world has become a fragile place for investors where humbleness is justified. Returns are no longer self-evident, they require a lot of hard work. When you look at the recent developments of your pension assets, you’ll know what I mean. Pension funds are doing outstanding work but these are challenging times which require a different investment style. It is no coincidence that there was an increase in volatility this summer.
A remarkably large amount of fund managers have recently thrown in the towel – investing is a difficult craft and not a science. In this context overconfidence is a known problem. Putting together a decent bond portfolio for instance is a task which is surrounded by landmines. I would attribute the perception that an obligation is a safer investment than a stock which ecompasses a lot of hidden value, to the realm of fiction. Today bonds are an illusion of safety, save some exceptions.
Roasted
Namely the Fed has over the past seven years slowly pushed (bond) investors into a certain corner of the investment spectrum. It looks like the ECB is going to walk the same path. The Fed’s and ECB’s grill has been simmering for years but the moment that you as investor will end up on the smoldering rack is coming closer every day. Institutional investors have profited from 30 years of decreasing interest rates in the form of price gains on their bonds, but this party is slowly coming to an end. The Fed is ready to slowly but surely roast these investors.
It remains for me to wish you a good weekend.
Jan Dwarshuis is a senior asset manager at Thirteen Asset Management AG, where he is responsible for the Thirteen Diversified Fund. Dwarshuis writes his columns in a personal capacity and is not paid for them. Nor is he paying for his columns to be placed. Professionally, he holds positions in major European, American and Russian stock funds. The information in his columns is not intended as professional investment advice or a recommendation to make certain investments. At the time of writing, he has no position in the above mentioned shares and has no intention of doing so in the next 72 hours.
