Volatile Times: Is it time to invest for an uncertain future?


In these extremely volatile times the future looks increasingly uncertain. There are three good reasons why it’s so important right now to ensure that your money is invested to withstand major market volatility.

negative interest rates.

Almost $13 trillion of global bonds (nearly 40%) presently offer interest rates below zero including Switzerland (-0.75%), the European Central bank (-0.45), Japan (-0.1%), Germany, Sweden and Denmark. 

What does this mean? if these bonds are held to maturity, investors will get back less than 100% of the money they invested!

This is unprecedented, and importantly raises the question, what benchmark should we use to calculate the return for other assets. Historically, long term government bonds have been the benchmark for a risk free return. If a 10 year bond is issued with a coupon (interest rate) of 2%, one can then calculate the additional return that needs to be generated, for example from equities, to compensate for the higher risk.

But if interest rates are negative, how is this calculated?

Low growth

2% is a number that is often used by monetary authorities as minimum rate of inflation needed to achieve economic growth. At present, growth in the OECD is estimated by the IMF to be 1.1%, almost half that rate. 
Central banks have been trying to raise inflation and stimulate growth by reducing interest rates to unprecedented levels (in some instances to below zero) in an attempt to get banks to lend to businesses, create jobs, generate profits and raise inflation. It hasn't worked.  

The IMF, Central Banks, and monetary authorities around the world, are in agreement that global growth over the next few years will remain low unless inflation increases.  This inevitably will lead to lower investment returns and little return from cash as interest rates remain low.

Risk of recession

A quick look at the facts:

Interest rates in major economies are either negative or close to zero. $13 trillion of global bonds are now trading at nominal negative rates (Financial Times)

The value of global derivatives ($500 trillion) is now almost 50% higher than before the global financial crisis in 2008.

The rise in the US equity market over the past 2 years has been driven by share buybacks of almost 2 trillion which has driven equity prices higher despite the fact that US corporate earnings have fallen over the last 6 quarters. 

US equities recently reached record levels. The price-to-earnings (P/E) ratio  in the S&P 500 is currently 25, almost 60% above  the long term average of 16. 

According to Robert Shiller’s CAPE ratio (the Yale economist who predicted the US real estate crash in 2007), the S&P 500 has only been more expensive in 2007, 1999, and 1929. Each of these peaks was followed by a correction.

In this environment, the risk of a recession is increasing as long term prices and valuations inevitably will revert to the mean.


Artemas Wealth Management

Timothy Donlea & Artemas Wealth Management have been providing advice to clients for over 20 years. Contact us by clicking here or alternatively by calling us for a confidential discussion on 02 9221 9699.

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