Interest rate differentials between the US and Australia are set to narrow further, creating Foreign Exchange opportunities for investors
With bond yields at or near record lows in many parts of the world, particularly Europe, but with share markets in the United States and Germany hitting fresh record highs, signals are mixed, so it may be time to consider alternative investment opportunities.
During February, the German government issued €3.3 billion of five-year bonds at a yield of -0.08%; the first time ever that they have sold five-year bonds at negative rates. This means investors are paying the German government to look after their money for five years. And French company GDF Suez recently issued two-year zero coupon bonds that will return just 0.13% per annum, when redeemed.
So, on the one hand we have bond yields at or near record lows in many parts of the world and at the same time, share markets in the United States and Germany are hitting fresh record highs, reflecting future revenue growth and earnings that may never materialise. Certainly equity markets valuations appear stretched when looking at historical levels, although they don’t look too bad when we assume a long period of cash and bond yields which remain near zero.
So what should investors do? Some investors may benefit from looking outside the usual areas. For example, so called “frontier” equity markets and selected emerging markets where valuations are more reasonable are one idea. Or, investors could consider out-of-favour stocks and sectors (for example energy shares that may have been oversold), second tier commercial real estate (examples include regional offices and supermarkets) and alternative “beta” or risk premium strategies which are investment strategies which may generate returns over longer time horizons and which don’t need markets to move higher. Alternative strategies include opportunities like catastrophe bonds, market or single stock trend-following, put and call option writing and currency-carry trades. Investors could also consider equity market neutral strategies that can hopefully make money in rising and falling equity markets such as buying value shares and short-selling growth shares or buying low volatility shares and short selling high volatility shares. All this means that investors cannot simply rely on equity and bond markets to move higher. They need to seek a range of alternate strategies and out of favour sectors which are not necessarily attracting large amounts of cheap capital in the current environment.
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