EDITOR'S LETTERJohn Stepek
In mid-2016, just after Britain voted to leave the European Union, yields on government bonds plumbed unprecedented depths. Now, as we head for another Brexit panic, bond yields are again near record lows. Germany has just issued a bund (a German government IOU) that promises to pay the lender absolutely nothing for an entire decade. Demand was so high that it now trades on a negative yield (in other words, investors are buying it at more than its face value).
None of this has much to do with Brexit – global investors aren’t piling into “safe havens” because they fear the exact nature of any future administrative arrangements between the UK and the rest of Europe. Instead, the fear is the same one that gripped them in 2016 – that of a deflationary relapse. As the latest Bank of America Merrill Lynch survey highlights, global fund managers are still favouring “assets that outperform when interest rates and earnings fall”, while steering clear of those that are “positively correlated to rising growth and inflation”.
In other words, they like bonds, cash and US equities (which are dominated by tech stocks), while they are avoiding equities in the rest of the world, and are specifically averse to banks (viewed as a play on rising interest rates) and UK equities (that, you can blame on Brexit). Meanwhile, just 1% expect global inflation to rise over the next 12 months. That’s the lowest reading since July 2012, which was when fears over the Greek debt crisis in the eurozone reached their nadir.
These fears seemed overdone, even in 2016, but at least then we were at the tail-end of the eurozone panic, with the unexpected Brexit vote to give it all a dash of added piquancy. Today, with full employment in most major developed countries (the ongoing strength in UK labour markets, for example) and reasonable, if not spectacular GDP growth, it’s hard to understand what’s driving the big bet on bonds, other than momentum and force of habit.
With the Federal Reserve now backing down in the face of market jitters and looking almost certain to cut US interest rates this month, it’s hard to see this bout of deflationary fear lasting long. So now could be a good time to stock up on the things that global fund managers don’t currently like very much.
Among those out-of-favour assets are value stocks. In this week’s magazine I take a look at an interesting research paper that highlights how in the past value (buying cheap stocks) has underperformed growth (buying expensive stocks) for long periods during times of great technological change. It’s only when the new technology has reached mass-adoption levels that value returns to vogue.
If that’s true, then I wonder if this week’s cover story on “smart cities” is a sign of a turn. We live in an era of almost ubiquitous smartphone ownership and constant surveillance, to the point where we are now integrating these assumptions into our public spaces (privacy advocates better gear up for a hard decade). If the smart city indicates that the next phase of the internet revolution is at hand, then it could also mark a return for value investing. And if that’s the case, you might want to consider some of the global investment trusts Max King has been looking at.