The traditional ways of preserving wealth just don't seem to work any more.
Now when markets collapse, they all seem to go down together. Markets that should be 'uncorrelated' follow the same rollercoaster ride into the Big Dipper.
So what are you supposed to do? Especially as we seem to go from one crisis to the other at an alarming pace. In 2008 it was the banks that caused global jitters. Today it's government debt.
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The good news is that some safe havens remain. In fact, you can even profit from turbulent times.
Before we discover these potential gems, let's first take a look at why the traditional wealth preservers just don't work at the moment
What's happened to the 'safe' asset classes?
During normal times, the very definition of a risk-free asset is a government bond. The theory says that governments can't go bust. But today we see Western government debt trading at levels that say it's riskier than McDonalds debt.
These are clearly not normal times!
In fact, government bonds are the root cause of recent jitters. What's more, the UK lies at the heart of the problem. Just recently Bill Gross of the world's largest bond fund, PIMCO, warned that British government bonds are "resting on a bed of nitro-glycerine." He's avoiding Britain's bonds and its currency due to the huge levels of government borrowing.
So if bonds, the classic 'risk free' investment, are looking dicey, then where on earth do we go?
The default option is cash. But with inflation back up at nearly 3% and interest rates stubbornly low, the real value of money in the bank is deteriorating. The taxman takes his slice from your measly interest, but he's got no system to recompense you for the damage wrought by inflation.
Nobody knows how long rates are staying this low. It could be a long time if Mervyn King gets his way. Meanwhile, inflation seems to be picking up pace, only making matters worse. Cash is a pretty bad place to be just now.
So if government bonds aren't safe and cash is losing its value, where do we go?
Well, there's one clear lesson from the banking panic of 2008. And that is that the sector best placed to profit (and yes I do mean profit) from financial crises are the emerging markets (EM).
How emerging markets can help guard your wealth
We all know about the shift of economic power from the West to the East.
In the East, cash has built up in the form of sovereign wealth funds (SWFs) and bank reserves. Whilst in the West, reserves have been depleted.
During the banking panic, the East's reserves provided crucial fire power that helped buttress EMs. So when the financial crisis hit, two very different stories played out in the East and the West.
As panicky Westerners sold out of emerging markets (EM)to repatriate funds home, the newly enriched East took advantage. Having built up a great war chest during the good times, they entered the markets and bought up their own debt at a fraction of face value. Effectively, foreign debt was paid off on the cheap.
Many EM companies found themselves in a much stronger financial position after the crisis.
In the West a very different story was playing out. The Western banks were in dire straits. They had lent out way too much money in a pyramid of dodgy loans. Worse, the governments and banks had already depleted their reserves. They were forced into borrowing and printing money to bail out the banks.
Western governments have gone deeply into the red and now the markets are asking questions about their ability to repay.
By contrast, EM companies capitalised on Western weakness. These companies should prove more resilient in choppy markets after all, they're the ones with the money.
EM equities are volatile, if the markets wobble again, they're likely to get hit too. EM debt is the preferred play. It's not a sector you can tackle on your own these things aren't traded on recognised exchanges. But happily there is a way in..
A fund focused on EM debt
Ashmore, the EM specialist, launched an investment trust called Ashmore global opportunities (LSE:AGOL) towards the end of 2007. Because the fund is an investment trust, it cannot advertise in the UK and flies somewhat under the radar of most investment managers.
AGOL's assets are focused on EM debt. AGOL holds the companies that are enjoying rapid growth and, more importantly, has access to the financial firepower to profit from economic instability.
It should be an excellent insurance policy against concerns over Western government debt default. Remember, the EM are where the banking reserves lie today. These are the markets that will benefit if assets get cheap again.
AGOL's net asset value (i.e. what shareholders would get back if all its assets were sold) is £8.62, yet the shares trade at £6.70. With the shares trading at a 23% discount to NAV, they look cheap.
The NAV is likely to climb as the markets price in the benefits of debt reduction and lower interest rates for many of the companies in the fund. On top of this, EM currencies are likely to continue to strengthen as fears grow about over-indebted Western governments.
As EM currencies strengthen, AGOL's results get better and better.
Goldman Sachs backed AGOL from the launch. You can say what you like about Goldmans but they're rarely criticised for lack of acumen. Their name on the share register is reassuring.
As a 'safe haven' investment, don't expect stellar returns. That said, a narrowing of the NAV discount should provide some additional upside. This stock should deliver inflation-busting returns with a free insurance policy attached.
The shares trade on London stock exchange (LSE: AGOL).
This article was written by Bengt Saelensminde and was first published in the free daily investment email The Right Side
Your capital is at risk when you invest in shares – you can lose some or all of your money, so never risk more than you can afford to lose. Always seek personal advice if you are unsure about the suitability of any investment. Past performance and forecasts are not reliable indicators of future results. Commissions, fees and other charges can reduce returns from investments. Profits from share dealing are a form of income and subject to taxation. Tax treatment depends on individual circumstances and may be subject to change in the future. Please note that there will be no follow up to recommendations in The Right Side.
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