Bonds – a minefield
Pfäffikon SZ, Switzerland – Bonds are seen by many investors as one of the safest investments there are. But after a 20-year bull market the cards have been redealt. Bonds currently constitute a minefield in your portfolio. The yield on bonds has never been so low, and in some cases it is even negative. In terms of timing, now is really the perfect time to trade in your bond portfolio for stocks.
Liquidity
The enormous amount of liquidity that has been injected into the financial system since the demise of Lehman Brothers in 2008 has led investors to seek refuge in bonds. Moreover, investors are (too) afraid of losing money and are therefore always on the lookout for so-called safe havens.
During this process, investors were willing to settle for increasingly small interest payments. As you know, the yield on a bond is inversely related to its price. Bond investors, therefore, can book sizable price earnings. The search for returns has in the mean time taken such dramatic proportions such that the Swiss Nestlé has become the first company in the world to receive money by issuing a short term euro loan.
Few options
Passive investors such as pension funds are faced with a big dilemma and have very few options. Due to various regulations their freedom of movement in the current investment climate has become minimal. Regulators would be well advised to note the changed investment climate. Some pension funds are trying to spruce up their returns with swaps, but that will sooner or later come falling down.
Some investors are fleeing into stocks because there would supposedly not be an alternative – if only it were that simple. I have taken note that the power of the current bull market in stocks has decreased 85% since 2009. The extreme euphoria on the European markets of the last several months has made yours truly very cautious and apparently I’m not alone.
Phasing out
Last week a lot of data has been published on the adjustments of several leading hedge funds and illustrious long-term investors. I will not bore you with the details but the phasing out of – mainly American – stock positions is the thread that runs through all the reporting. Some investors have even cashed up to 40% of their stock portfolios.
I just want to show that the current pivot from bonds to stocks – with some help from Super-Mario of the ECB – has this year aided the European markets in particular. The key question is if these investors are celebrating too soon. In the mean time I will continue to focus on the search for more businesses with sustainable business models and acceptable undervaluations – it is time consuming, but a very useful activity in the current unique investment climate.
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 shares and has no intention of doing so in the next 72 hours.
