Where do we hide in the next crisis?
– Crises in recent years appear to be getting more severe, and the recovery time appears to be getting longer.
– Strategies are dependent on whether we’re in an inflationary or deflationary environment.
– In crises historically within an inflationary environment Government Bonds have provided a real yield, which helped equity investors reduce portfolio risk, but in real terms we now have a problem getting returns.
– In the last five years, the rally in equities has coincided with a rally in gilts. Where is the value now?
– In a deflationary world, secure fixed interest securities are very attractive. In this environment, government bond yields could fall further, and may provide a real return to help offset an equity market sell-off. However, the cost if deflation fails to materialise is high.
– We can use corporate bonds to take advantage of higher yields, reducing the impact if deflation fails to materialise
– Corporate bonds have the advantage of having structurally higher yields than government bonds in nearly all circumstances. However, even investment grade bonds fail to offset risk during times of equity market stress in order to compensate for equity volatility. Credit provides an attractive return, but not a useful risk offset.
– Corporate debt normally exhibits less volatility than equities, but fails to offset equity market risk in times of intense crisis. These assets have also seen yields fall, although some can provide stability during times of crisis.
– Alternatives: while alternatives such as property and infrastructure provide attractive yields which would be particularly attractive in a deflationary environment, these assets also fail to offset equity market volatility
– At all times, whether within an inflationary or deflationary environment, the structure of the equity portion of a portfolio and attention to the characteristics of the individual securities can help protect value in times of stress
– Cash: Interest rates usually fall during times of crisis, but (depending on the bank) cash helps reduce volatility and protects value. If we suffer a deflationary crisis, cash may also produce a real return. Even at these rates, cash is more attractive than most people think
The information provided does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor’s particular investment objectives, strategies, tax status or investment horizon. The information above relating to ‘yield’ is for indicative purposes only. You should note that yields on investments may fall or rise dependent on the performance of the underlying investment and more specifically the performance of the financial markets. As such, no warranty can be given that the expressed yields will consistently attain such levels over any given period. Where Waverton’s advice is given it is restricted to discretionary investment management services. We do not provide advice on the use of tax or financial planning products (even if the service which we are managing is held within such a product) or non discretionary investment.