Comment: Is there such a thing as a safe place to invest?
For the past few weeks I have found myself, like many semi-retired people, searching for a “safe” asset class for some residual pension savings. For years the conventional answer has been simple: opt for “safe” fixed interest investments – gilt-edged government stock either directly or through a bond fund. I should not be investing in equities.
But of late we have entered a dark place. Across the world, fearful investors have pulled out of equities and switched into bonds. As central banks have battled to stave off prolonged recession, interest rates have been slashed to historic lows. The yield on UK ten-year gilts has dropped to just 1.6 per cent. The government hails this as evidence of our “safe haven” status. But for investors seeking protection from inflation – both immediate and prospective – there is little “safe” about it.
We are now offered a nominal return below the current rate of inflation and indeed even below the Bank of England’s target rate of inflation of 2 per cent, even assuming there is no inflation consequential from the massive recourse to monetary easing – here, in the US and across Europe.
There is nothing “safe” about bonds. As Burton Malkiel, a veteran investment commentator and author of one of my favourite books on stock market investing – A Random Walk Down Wall Street – has pointed out, the last time government bond yields were this low was in the immediate post-war era. Moderate inflation slowly reduced the real value both of the interest payments and the capital sum. Then, as interest rates rose and oil and food shocks drove inflation higher, investors suffered punishing capital losses. “Safe” investors would have been better in equities. With that discovery, “the cult of the equity” was born.
So, if we are now a similar inflection point – the Death of Bonds – should I be looking at equities? The problem here of course is that equity markets have struggled to produce a real return over the past ten years. Indeed, the prophets of “the Death of Bonds” are almost equally matched in volume by those now pronouncing the “Death of Equities”. The point of buying shares in companies was to participate in the returns from capital deployed by companies in real goods and services. But many large companies now are cash hoarders; large amounts of capital have been accumulated in balance sheets as companies are fearful of business investment at this time.
Caught between these two grinding millstones, equity investors have opted for companies that have continued to pay, if not increase, useful dividends. And dividend yields on shares are already well above bond yields.
Iain Scouller of Oriel Securities has helpfully produced a list of 31 investment trusts currently yielding 4 per cent and over. Edinburgh Investment Trust (4.6 per cent), Murray Income (4.6 per cent) and Standard Life Equity Income (4.7 per cent) are in the middle of a table that ranges from European Assets (7.4 per cent) to Temple Bar (4.0 per cent). In my younger days the joke among investment trust analysts was that Temple Bar was so dull and boring it was only for those with Complan dribbling down their chins. Has it really come to this?
Everything in markets is relative. With bond yields this low, it is tempting now to view equities as the “safer” asset class and therefore I should invest the bulk of my pension residual in equity trusts.
But the problem here is that we may now have entered a very dark place indeed, one in which no asset class may provide protection against what lies in store, let alone yield a positive return.
In recent months – despite the graphic evidence of a bond market top and the pronouncements of the “Death of Bonds” school – “safe” government bonds have continued to rise (and their yields fall) while equity markets worldwide have been knocked back.
So great is the threat now posed by Greece and Spain to financial order in the eurozone that there is talk of a co-ordinated burst of further monetary stimulus to stave off a banking panic and boost lending to both companies and households.
But this is what previous bouts of quantitative easing were designed to do, but have clearly fallen short. You cannot help but speculate how much lower the prices of equities and bonds might have fallen in world markets without resort to such emergency measures in the recent past. And if both markets are being sustained so artificially, should we be invested in them at all?
But to limit the damage of capital corrosion, we feel compelled to invest somewhere. That millions of us are in a similar position gives me little help in resolving this conundrum. I suspect I will opt for what I have done for the best part of 35 years: remain utterly undecided in the face of this conundrum, stick with cash and feed modest amounts into both assets over time, leaning towards the higher dividend or interest income payers.
I cannot remember ever doing so with so little conviction and with such low expectation that governments or central banks will resolve the problems we face without default or resort to inflation. Capital protection is no longer a baseline but the loftiest aspiration.
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Wednesday 22 May 2013
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