After attending a conference of big, institutional investors, Reuters blogger Felix Salmon reveals what he’d be buying right now if he didn’t believe in a pure non-active approach for his own money.Basically, he says equities are cheap compared to credit, and that Europe and Japan are cheap compared to the US.
There’s a serious zip-code arbitrage in the world right now: multinational corporations are valued much more highly if they’re based in the US than if they’re based in Europe or Japan. That doesn’t make a huge amount of sense given how global they all are.
In general, if Japan really is managing to bounce back from its torrid 2011, then the stock market there — which is currently trading below book value — could have a lot of upside. Similarly, European stocks have suffered greatly from a decidedly pessimistic economic outlook for the continent as a whole and for the southern periphery in particular. But the continent’s companies might well make good money even if Europe as a whole isn’t growing. On top of that, any further move towards fiscal union or eurobonds could do wonders for investors’ confidence that the eurozone will navigate through this crisis intact.
The one big area to avoid, it seems to me, is any asset class which is both illiquid and expensive. I’d include private equity and venture capital in that class, as well as high-grade debt. There’s really no reason, in a highly volatile world, to be invested in something which can fall a lot and can’t easily be sold. Indeed, there’s a strong case to be made that equities are actually safer than high-grade debt, certainly if your time horizon is greater than a few years. When equities fall, they can bounce back; when rates come back from zero, they’re going to fall back again. Which means that when investors take mark-to-market losses on their bond portfolios, those losses will be permanent, rather than being on paper only.
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