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Don't panic but protecting money requires risks
Source: Agencies |
December 15, 2011, Thursday
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THE looming new year may well bring as much financial turbulence as tumultuous 2011 but global investors reckon "panic" is no longer an option and just protecting your money will require taking on at least some risk.
For all this year's left-field shocks - the euro sovereign debt and banking minefield, an unprecedented United States credit rating warning, Japan's earthquake, the Arab Spring uprisings - investors have not gone to ground in quite the same way they did at the height of the credit implosion in 2007 and 2008.
That's not to say extreme "risk off" valuations that have seen top-rated government debt yields drop below equity dividend yields have not persisted and grown, even as sovereign bonds were deemed riskier and the AAA status of the US and Germany have been threatened by credit-rating firms.
Rather this pricing has happened without the same sort of panicked market dislocation that saw a wholesale retreat from investable assets and dash for cash three years ago.
"It is frightening that these valuations can be reached in a cold and calculated manner. We have seen none of the previous panics, nor the correlations of almost all liquid and tradable assets in a scramble for cash," said Jim Wood-Smith, head of research at British wealth management firm Williams de Broe.
This shows investors need to remain invested even though nervous of macro-driven index volatility and the prospect of real losses in cash or sovereign debt over a long period.
It's one thing descending into the bunker to see out an air raid, it's quite another to live down there for a decade.
For all the stress, volatility and gloom, investors actually pulled more than US$150 billion from cash-like money market funds in 2011, according to fund-tracker EPFR. Back in 2008, almost half a trillion dollars flooded to these funds but cumulative losses since early 2009 still stand at more than a trillion.
There are two main reasons why hunkering down in "safety" is no longer an option.
One is that most traditional havens are now almost certain to lose you money in real terms over time as inflation-adjusted yields on 10-year US, German and UK government bonds - not to mention money market funds or short-term savings accounts - are all now deeply negative.
The second is the toxic mix of slow western growth, sovereign stress and high market volatility is not going to go away in a hurry and could well define the rest of the decade.
"We do not believe that interest rates will 'normalize' for years, possibly running into decades," said Wood-Smith.
As Standard Life Investments' Rod Paris told Reuters last week: "It's easy to be very risk averse and not deal with anyone or anything..."
For all this year's left-field shocks - the euro sovereign debt and banking minefield, an unprecedented United States credit rating warning, Japan's earthquake, the Arab Spring uprisings - investors have not gone to ground in quite the same way they did at the height of the credit implosion in 2007 and 2008.
That's not to say extreme "risk off" valuations that have seen top-rated government debt yields drop below equity dividend yields have not persisted and grown, even as sovereign bonds were deemed riskier and the AAA status of the US and Germany have been threatened by credit-rating firms.
Rather this pricing has happened without the same sort of panicked market dislocation that saw a wholesale retreat from investable assets and dash for cash three years ago.
"It is frightening that these valuations can be reached in a cold and calculated manner. We have seen none of the previous panics, nor the correlations of almost all liquid and tradable assets in a scramble for cash," said Jim Wood-Smith, head of research at British wealth management firm Williams de Broe.
This shows investors need to remain invested even though nervous of macro-driven index volatility and the prospect of real losses in cash or sovereign debt over a long period.
It's one thing descending into the bunker to see out an air raid, it's quite another to live down there for a decade.
For all the stress, volatility and gloom, investors actually pulled more than US$150 billion from cash-like money market funds in 2011, according to fund-tracker EPFR. Back in 2008, almost half a trillion dollars flooded to these funds but cumulative losses since early 2009 still stand at more than a trillion.
There are two main reasons why hunkering down in "safety" is no longer an option.
One is that most traditional havens are now almost certain to lose you money in real terms over time as inflation-adjusted yields on 10-year US, German and UK government bonds - not to mention money market funds or short-term savings accounts - are all now deeply negative.
The second is the toxic mix of slow western growth, sovereign stress and high market volatility is not going to go away in a hurry and could well define the rest of the decade.
"We do not believe that interest rates will 'normalize' for years, possibly running into decades," said Wood-Smith.
As Standard Life Investments' Rod Paris told Reuters last week: "It's easy to be very risk averse and not deal with anyone or anything..."
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